Journal Register Company Q4 2007 Earnings Call Transcript

Journal Register Company (JRC)

Q4 2007 Earnings Call

February 1, 2008 11:00 am ET

Executives

Jim Hall - Chairman and CEO

Scott Wright - President and COO

Julie Beck - EVP and CFO

Analysts

Craig Huber

John Janedis

Charles Strauzer

Edward Atorino

Alexia Quadrani

Presentation

Operator

At this time, I would like to welcome everyone to Journal Register Company's fourth quarter and full year 2007 earnings call. (Operator Instructions)

I would now like to turn the call over to Chairman and CEO, Jim Hall. Please go ahead, sir.

Jim Hall

Thank you, Christie. At my side again today are President and Chief Operating Officer, Scott Wright; and Chief Financial Officer, Julie Beck.

Shortly, Scott will address certain operating matters and Julie will speak to our fourth quarter and full year 2007 financial performance, including the goodwill impairment charge.

We hope you have had a chance to review our release announcing our fourth quarter and full year 2007 results, which we issued before the market opened this morning. For your convenience, these releases are available on our website at www.journalregister.com. Additionally, the webcast of this call will be archived on our site for the next seven days.

This conference call may contain forward-looking statements that are provided for by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ from those indicated due to risks, uncertainties and other factors as detailed in our 2006 annual report and our other SEC filings.

In discussing our financial results, we will refer to certain non-GAAP financial measures. Information concerning these non-GAAP financial measures and reconciliation to GAAP are provided in the earnings release.

2007 has been quite a year. Newspaper industry trends and economic conditions have been challenging. Pundits have been almost completely negative, and we have experienced major changes in accrue and at the helm of Journal Register Company.

My first order of business after taking over as Chief Executive Officer in the fall was to continue getting our housing order, including the repositioning of its resources. Times have changed, so we are changing the company.

With the arrival of Scott Wright in October, JRC's ability to execute operationally improved considerably. Scott is a very proactive individual who follows up and follows through on initiatives with our field operations, applying the appropriate amount of pressure in order to enable our publishers to implement their respective business plans.

This includes instilling in all of our newspapers and digital operations a strong appreciation for a need to adapt to current business conditions and ensuring accountability and contribution from everyone throughout the organization.

In December, the company, through the efforts of Julie Beck, successfully negotiated an amendment to our bank credit facility to provide greater operating latitude and financial flexibility to the company. Julie continues to focus on ways for JRC to better manage our working capital, liquidity and asset resources. More from Julie later.

I would like to note that during 2007, our relatively high bank debt level was reduced by $105 million from $730 million to $625 million via property asset sales, sale of other redundant and unused assets and through generated free cash flow. Of course, debt reduction remains a major goal for JRC in 2008.

Following the credit facility amendment, management attention turned completely to operations. On our third quarter call, which we touched on some other important changes occurring at JRC, some of these came to fruition during the fourth quarter With the understanding that nothing has [set accomplice] at this moment.

We did succeed in refining communicating to our employees our vision of both the new JRC as well as our evolving business model, which is already shifting to become faster, more productive and more effective. Simply stated, our vision is to be the leading entrepreneur-driven multimedia company in our local markets.

We will do so by providing customers with creative, integrated state-of-the-art print and digital products that satisfy their need for information; news, sports, business, advertising, lifestyle and entertainment.

What we really mean by entrepreneur-driven? It's in reference to any size enterprise led by an individual who takes measured risks to create value and grow his or her enterprise. We have asked our publishers to be more entrepreneurial in running their properties and are convinced that this model is the way to continue to improve performance going forward.

Other key parts of our business model call for a renewed emphasis on new product and new customer initiatives, a strong focus on sales and salespeople and improved process speed, so that the corporate offices less the source of change and more of a facilitator of change.

Of course, we will continue to exercise our well-known discipline in terms of managing costs and expenses. In addition to the aforementioned initiatives, the new JRC is also striving to create a culture, an image and a set of values that can be characterized by the following five words: "a good place to work".

In order to make those words true, we have made a number of internal changes and improvements that we expect to payoff throughout 2008.

Regular meetings at all levels have improved communication throughout the company. We have found that this encouraged the people to share different perspectives and allow us for an open flow of revenue producing and efficiency enhancing ideas, as well as intelligent, healthy dissent.

In order to ensure that we have the right people on the rights jobs at this important time, we have made several changes at the management group level. The new faces and new talent in key positions have roused energy and enthusiasm across the company.

Overall, I believe employees are more confident, have a better attitude, are working hard and are focused on producing results that will indicate a turnaround in revenues and cash flow.

As I mentioned earlier, comprehensive change that takes time to trickle down into and through an organization. But this so called soft stuff, vision, culture, values and elements of our business model is what enables us to effectively communicate to each and every employee of the company what is expected of them and what hard stuff we expect them to do for the benefit of Journal Register Company.

As mentioned earlier, some patience in ongoing refinement is going to be required before we can say any of it is done. JRC held its Annual Publishers' Conference in mid-January. This gathering allowed each publisher the opportunity to present the business plan for their property to the management group and their peers for comment and constructive cretinism.

We know from that conference while it is clear that our industry is no longer a business as usual business, publishers clearly understand what needs to be done, and they know how the strategic and tactical plans, including the authority to adopt and make decisions, to make it all happen.

We have asked our publishers for steady development and progress in 2008. In spite of the pressure and frustration that challenging in difficult times create, they must be resilient and dedicated, use the talent they have at their disposal and run their business as well as entrepreneurs.

I would like to take this opportunity to briefly address the impact of industry trends and the economy on our company. In short, and as you know, the newspaper industry is in upheaval with the climbing revenues and cash flow alongside the increasing need to make investments in digital technology and people.

We are facing the biggest, fastest moving communications revolution in human history. On a daily basis, new forms of digital technology are being deployed with the goal of taking our customers away from us. Of course, the backdrop to these industry challenges is in economic situation that becomes more negative and turbulent everyday.

One consequence of all of this that forecasting revenues and other financial objectives with any degree of assurance is more difficult today than at anytime in the recent past. As a result, our industry in under a lot of scrutiny, and it should be.

To paraphrase Hemingway, it would be pretty to think so to see this is less than a very difficult and complex time for the newspaper business. But that is simply not true, and we think 2008 will be an extremely interesting and rewarding year as we take on the challenges.

That said, JRC's management group and publishers are hard at work to securing our strongly held view that the best managers and employees can handle any state of turmoil and that are our core products are quality products.

From this turmoil will come new digital and print product and property acquisition opportunities for which JRC is positioning itself to take full advantage. Our principle goals and higher priorities for 2008 revolve around revenue and cash flow improvement.

Our plans include accelerated digital development and growth, new product, new customer and other organic growth initiatives such as other market revenue promotions, creative niche, publications and certain win-win collaborations, revamped incentive compensation plan at all levels of the company, the pruning of unprofitable products, the sale of redundant and unused assets and the paging or sequencing of certain projects to reduce costs and help extend our cash flow glide path.

We are cognizant that to cut expenses too deeply is to risk destroying the quality of our products, and as a result, customer loyalty. Therefore, we plan to continue to invest in quality people and product improvement to protect the company's value.

In summary, we've already begun, and in some place it's completed, a lot of work to make the changes necessary to compete in this difficult environment. And we recognize that there is a lot more to do. 2008 will require constant innovation, reinvention and fortitude on part of all of our employees. And I believe they will live up to the challenge.

Scott Wright will now speak to you about some operating matters. Scott?

Scott Wright

Thank you, Jim, and good morning. I'll briefly comment this morning on five areas: advertising revenues, our digital online business, the Michigan cluster, human resources and editorial.

Advertising revenues in the fourth quarter were down 8.6% on a comparative basis, which represents at least a statistical improvement over the previous three quarters. We attribute this modest improvement to our publishers, to our advertising directors and sales persons for keeping their shoulders to the wheel in spite of the industry trends and the economy that's not making their jobs any easier.

Not to be forgotten is our ongoing sales training, which is improving our ability to sell both print and digital products. While sales growth expectations for 2008 are tampered by a very challenging selling environment, we are confident that our people in the field are doing everything they can do to improve our overall revenue performance.

Our confidence here is in part based on a balance of our entrepreneurial model with improved accountability in terms of monitoring regional standards of performance and productivity, including the status and progress of the publishers' 2008 business plan.

The idea here is not to inflict cumbersome reporting in the field, but to ensure that revenue-producing activities are resulting in sales and that we are staying within our cost disciplines.

While our digital/online business is not yet where we want it to be, progress is being made in integrating our digital product offering with print. JRC newspapers on a comparable week basis finished the year 8.1% up in page views and 10.2% up in unique visitors, which we understand is ahead of the industry average audience growth rate of 6%.

Total online revenue, including jobs in the US and the newspaper division, on a comparable week basis increased 24.3% overall. Measured separately, newspaper online revenue increased nearly 28% on a comparable basis, largely as a result of our Yahoo! HotJobs initiative, which was a bright spot for this company in 2007.

Yahoo! HotJobs, Kaango Classifieds and Travidia are important to our efforts to increase online revenues in 2008.

As is well known, our Michigan cluster continues to suffer from an overly challenging economic outlook. Our action plans to stabilize performance include: continue to upgrade and train staff at the field level, so that we have the best people possible selling to our customers; either closing our consolidating certain money losing complications; and utilizing our new press facilities in Macomb County to control production costs, while producing a much better product.

In the course of 2008, economic outlook for Michigan is difficult to predict. Our focus is on doing the best job we can given the circumstances, and we believe and expect our people are up to that task.

In terms of human resources, I'm pleased to report that we have recruited several seasoned people at both the management group and publisher levels over the past quarter. These qualified leaders wanted to join JRC. More [good hires] are anticipated over the next few months.

Finishing up on the good news front, Journal Register Company continues to be a leader in editorial excellence, winning hundreds of state and national awards each year for its local news, sports and entertainment coverage as well as niche and especially publications.

This was highlighted by the results of the annual Suburban Newspapers of America Editorial Contest announced last week, in which JRC newspapers won 142 awards, more than any other media company in the country, for the fourth year in a row.

And now, over to Julie Beck. Julie?

Julie Beck

Thanks, Scott. Good morning. Our fourth quarter and full year 2007 financial results continue to reflect a challenging advertising environment. Our fourth quarter results in 2006 reflect an extra week that is 13 weeks in the fourth quarter of 2007 and 14 weeks in the fourth quarter of 2006.

The highlight of the fourth quarter and the year was our online operations, which continued to perform exceptionally well, and we expect that performance to continue in 2008. We are confident that the significant investment we have made and continue to make in our online operations will accelerate our online growth.

We have presented our advertising revenues were noted on a continuing operations basis, which assumes that all properties currently owned or owned in both the current and prior year period and the result of operations of our Massachusetts and Rhode Island newspapers are classified under discontinued operations for all periods presented.

The financial highlights for the fourth quarter are as follows. Our diluted earnings per share for the fourth quarter was a loss of $3.78 per share. Excluding the impairment charge and charges for certain items, 2007 net income would have been $3.9 million or $0.10 per diluted share for the fourth quarter.

Our results include a non-cash intangible goodwill and masthead write-down of $181.3 million or $150.9 million net of tax. The charge reduces the value of the intangibles on our balance sheet in accordance with Statement of Financial Accountings Standards 142. This charge does not in any way affect our cash flow, debt covenants or liquidity.

In order to move forward and support the change described by Jim and Scott and to prepare for the multimedia future, we took the following actions that resulted in charges in the fourth quarter as follows: A $7.2 million or $4.2 million after-tax charge for severance related to former executive management; $2.1 million or $1.3 million after-tax charge for the amendment of our credit facility; a loss of $0.7 million or $0.4 million after-tax for the cancellation of our corporate jet lease.

In addition, we negotiated a favorable state tax settlement of $3.0 million in the quarter, and we sold our Middletown, Connecticut, building which resulted in a gain of $2.6 million, $1.5 million net of tax. The total of these items combine to have a negative after-tax impact of $1.4 million or $0.04 per diluted share.

Our EBITDA was $14.1 million for the fourth quarter. Adjusted for these items I just described, our fourth quarter EBITDA was $21.9 million. Our adjusted EBITDA margin was 19%.

Our free cash flow for the quarter from continuing operations was $8.4 million or $0.21 per diluted share. Our online advertising revenues continue to grow rapidly and were up 29.9% on a comparable week basis for the fourth quarter as compared to the prior-year quarter.

For the year, our financial highlights were as follows. Our loss per diluted share for the full year was $2.62. Excluding the impairment charges, the gain on the sale of our New England properties and other previously identified charges, 2007 net income would have been $15.3 million or $0.39 per diluted share.

On that same basis, our EBITDA was $90.3 million for the year and our EBITDA margin was 19.5%. We again reported significant free cash flow from operations in 2007, which was $22.5 million or $0.58 per diluted share.

As I mentioned earlier, the fourth quarter last year had an extra week versus the same quarter this year, 14 weeks in 2006 compared to 13 weeks in 2007. We did not have a formal book cutoff, so it is hard to precisely quantify the effect of the additional week. However, we have made some estimations to allow for meaningful comparisons. The following comparisons exclude the additional week in the quarter and full of 2006.

Advertising revenues trends improved for the second straight quarter. Total advertising revenues on a comparable 13-week basis were down 8.6% compared to the fourth quarter of 2006.

Excluding the extra week, our results for the quarter by category were as follows. Retail revenues were down 6.1%. We saw weakness in the financial insurance and the department/discount stores advertising revenue categories and strength in the political and government advertising revenue category. Total classified advertising revenues, excluding the extra week, were down 12.4% for the quarter. And excluding our Michigan cluster, classified advertising revenues were down 9.7%.

Classified employment advertising revenues were down 11.2% for the quarter. Classified automotive revenues were down 17.7% for the quarter. Excluding our Michigan cluster, classified automotive revenue advertising was down 11.5%. Classified real estate advertising revenues were down 21.8% for the fourth quarter. And excluding our Michigan cluster, real estate advertising was down 20%.

Real estate advertising performance was weak in all of our clusters as the housing market deteriorated throughout the year. Classified other revenues were up 1%. Three of our six clusters were up in this category, which encompasses private party, legals and obituaries. The other classified category has been our best performing print category all year.

Excluding the extra week, national advertising revenues, which represent approximately 4% of our total advertising revenues, were down 8.4% for the quarter with particular softness in the telecommunications category.

As I said earlier, online revenues for the fourth quarter continue to perform very well. Our websites produced revenues of $4.6 million for the quarter, up 29.9% on a comparable basis as compared to the prior year quarter.

Our local website continued to generate increases in page views with 91.8 million page views for the fourth quarter. The number of unique visitors continues to be very strong with 3.5 million in the period 12. We firmly believe that our successful local online strategy will be a key driver of our future success.

As Jim mentioned, in 2007, we have invested over $16 million in cash operating expenses and capital in our multimedia platform. Our new award-wining websites have been deployed in our Philadelphia and Connecticut daily newspapers. In 2008, we will deploy these technologies throughout JRC, and other enhancements will be added to increase our audience and advertising revenues.

The company continued to demonstrate industry-leading circulation revenues. Circulation revenues for the fourth quarter as compared to the 2006 fourth quarter were down 0.3% on a comparable week basis. Increases in rates essentially offset the decreases in subscribers.

For the year, our advertising revenues were down 8.9% on a comparable week basis and were down 7.5% excluding Michigan. By category, on a comparable week basis, retail revenues were down 7.3% for the year and down 6.5% excluding Michigan. Classified revenues were down 9.8% for the year. Classified other was down 0.9%. Employment was down 5.7%. Automotive was down 16.7%. And real estate was down 17%. National revenues were down 20.1% for the year.

Online revenues were $18 million for the year, up 24.3% and were 5.1% of total advertising revenue and it generated $386.1 million page views. Circulation revenues for the year were down 0.4% on a comparable week basis. Again, our circulation performance continues to lead the industry.

Our same-store non-newsprint cash operating expenses were down 2.4% for the year, excluding the items I described earlier. Excluding our significant investment online and those aforementioned charges, our non-newsprint cash operating expenses for the year were down 3.3%. Our headcount is down approximately 11% from prior-year level. Our ability to control expenses without lowering the quality of our products continues to be one of our strengths.

For the fourth quarter of 2007 as compared to the fourth quarter of 2006, newsprint expense on a same-store comparable week basis was down 25%, resulting from a decrease in unit cost of approximately 15% and a decrease in consumption of approximately 12%.

Our capital expenditures for 2007 were $26.4 million, including $11.8 for Macomb plant, which became operational in August of 2007 and $5.6 million for online technologies. For 2008, we are projecting lower full year capital expenditures of $18 million as our investment in online operations will continue and our Macomb facility is complete.

We recorded tax income of $34.8 million in the fourth quarter due to a favorable state tax element of $3 million and a $30.4 million deferred tax reversal due to the impairment charge. Our effective tax rate for the year was 40.8% and 44.1% from continuing operations.

Our net debt outstanding, including cash, as of December 30th, 2007, was approximately $620.6 million, down $18 million from the end of the third quarter and down $105 million from the end of 2006.

We also successfully amended our credit facility in December of 2007 to give the company a greater flexibility and liquidity in these difficult times. Our net debt amortization payment is not due until the second quarter of 2009.

Although 2007 has been a challenging year for JRC and the industry, we continue to remain positive on our outlook for success and plan to capitalize on the company's strength and potential in the multimedia environment.

Thank you. Jim, Scott and I will now take your questions.

Christie?

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Craig Huber.

Craig Huber

Yes, good morning. A few questions. Can you discuss how your operations did add revenues in the month of December? Was it significantly worse than the whole quarter is the first question?

Jim Hall

Craig, we've stopped providing monthly revenue sometime ago.

Craig Huber

I realize that, but I was just curious. I'm asking the question, because the peers out there had a significant downturn in the month of December. Obviously, I wonder if you guys have the same thing. If the fall off in December was worse than October, November is my question.

Julie Beck

Yes. The decline in December was about 1.5 point worse than the previous two months.

Craig Huber

Okay. I appreciate it that. And then can you just comment if you would on what you're seeing in January? Was January down similar to what December was? That's what your peers sound. I won't ask the same question.

Jim Hall

Well, I think we have to go with what we've said before, which is we're not going to provide monthly revenues. It's just not very helpful to do it. And we feel that on a quarterly basis, you get a better snapshot of what's going on.

Craig Huber

Okay. How about interest rates for a second? For the first quarter, what should people be modeling in for the interest rate on your debt, please?

Julie Beck

I think we should be putting in about 6.2%.

Craig Huber

And just remind me how much of your debt right now is variable.

Julie Beck

70% of it is hedged, so 30% variable.

Craig Huber

Okay. And then I missed what you were saying about your non-newsprint cash costs. What the percent change was? Taking out these so called one-time items, what was the percent change there in the quarter?

Julie Beck

Well, for the year, we were down 2.2%. And we were down 3.2%, excluding the investment in online.

Craig Huber

What about including the investments?

Julie Beck

Including the investments, down 2.2%.

Craig Huber

For the quarter?

Julie Beck

For the year.

Craig Huber

Do you have it for the quarter, please?

Julie Beck

Hold on.

Craig Huber

Thanks. Making on your money today.

Julie Beck

Yes. Okay. Same-store non, they are up in the quarter by 2.2% overall, which includes some significant investments in online in the fourth quarter of about $2 million as well as some timing differences and some accrual reversals, but they are up 2.2% in the quarter.

Craig Huber

Okay. So, it is down 3.2 excluding the internet investments?

Julie Beck

For the year. And up for the quarter, 2.2, including the investment in online.

Craig Huber

Okay. Thank you.

Julie Beck

Thank you, Craig.

Operator

Your next question comes from John Janedis.

John Janedis

Hi. Thank you. Good morning. Jim, I am sorry if I missed this, but has employee retention changed given some of the things you've talked about and will comp change in '08 relative to '07?

Jim Hall

Well, employee retention doesn't seem to be a problem right now. We're always looking to upgrade where we can, but we are not having problems getting people to stay with us. That's for sure. And I am sorry, the other side of your question was --?

John Janedis

Just in terms of on the compensation side, are you going to be giving similar increases to what you have historically or maybe a little bit more given maybe some underinvestment in the past?

Jim Hall

Well, there is always places here and there where you have to give certain individuals that have been lagging a bit of a bump outside of the pool that's been allocated across the company. And we have a modest increase this year of 3% and a change in the sales commissions.

John Janedis

Okay, all right. Thanks. And just one last question. I am sorry if I missed this, but can you give us your update about some Michigan, how much has the mall helped on the ad side? Thanks.

Jim Hall

I'll turn that over to Scott.

Scott Wright

Well, the grand opening, which reported on the last call, and since then, we are expecting about $100,000 revenue in glossy publications, and outside of that, spot advertising here and there from some of the stores within the mall. The other thing that we can't discount that sometimes we can't a number on it very easily is what that mall has done to initiate spending by other advertisers in the market that wouldn't normally spend.

John Janedis

Have you seen an increase in the number of advertisers? Is that a [read-through].

Jim Hall

Yes, in that particular geographical area, particularly, John, I think that it has initiated some activity by advertisers that were apathetic in the past.

John Janedis

Okay. And on the $100,000, is that a number for a '08 1Q the full year or is that 4Q?

Scott Wright

That's for full 2008 glossy publications at Partridge Creek.

John Janedis

Okay, great. Thank you.

Operator

Your next question comes from Charles Strauzer.

Charles Strauzer

Hi. Good morning.

Jim Hall

Good morning.

Charles Strauzer

A couple of questions. The first question is I think it shouldn't be minimized. I think actually the positive in the renegotiation of your debt I think is actually pretty significant. And I would like to kind of get a standing of the conversations you had with your lenders and the types of questions they asked you and how they got comfortable with granting you flexibility?

Jim Hall

Well, I think Julie should really answer most of that. But let me say this that it was pretty hard to get an amendment done until a decision had been made as to what the CEO position was going to be going into the future. So, it's kind of coincidence that we didn't get it until December.

As you would know for sure, the banks were having their problems, and a lot of people that you might have been talking to before were no longer around. So, that didn't help in terms of getting the process going quickly, but we got it done. And I'll let Julie comment regarding your question.

Julie Beck

I think that the business continues to generate some positive strong EBITDA margins despite the difficulties and the decline in revenue. And there is a new management team in place, and it was a difficult negotiation, but we got it done. And we are still generating some positives, like I said, EBITDA margins and cash flows.

Charles Strauzer

Well, beyond that, Julie, I mean obviously, the banks are [pricing]. If you will, let's take a look at your plan long term and get us comfortable with the fact that these margins are going to keep deteriorating to the point where you have to come back to us maybe in six months or 12 months. What were the types of things that you guys discussed that that really got them over the hurdle?

Jim Hall

Well, how do I know what it was that got them over the hurdle? I am not in their heads. We went in, Julie, Scott and I and presented to them in math and answered all their questions and gave a pretty comprehensive presentation as to what was going on and what our plans were. And I guess they were happy with what they heard.

Charles Strauzer

Okay, understood. And when you're looking at the topline and you talk to advertisers who are not advertising today, but have been in the past, what's the main reason that you are hearing from them for them holding of an advertising? Is it really just their lack of extra marketing dollars or is it just their trepidation of the spending money in the newspaper avenue or is it really just a combination of both and what' going to get them back to advertising in newspapers again?

Scott Wright

I think it's a combination of both, but a lot of budgets have been slashed during these times, and we are seeing a lot of that. And I think to get the people back in the print, we're going to have to offer cross-medium between that and our online and diverse and be more creative than we've ever been before.

Charles Strauzer

And what's the early reaction for some of the initiatives that you're putting forth out there from some of your customers.

Jim Hall

Well, let me give me you one just in print. We put together a program for print delivery inserts that really drives down to the local, local level, the smaller advertisers. And as a company, the first week, we did $30,000. And that was in one week of selling.

And I think getting back to the basics, offering tra media online advertising, we are seeing our take rate go up, meaning putting more display ads into a marketplace online. We see that getting better each and every month. And we are also seeing some nice gains in the other small advertiser programs.

We do have the unenviable task of trying to overcome major account losses. And it certainly takes a lot of small advertising programs to dent that, but that's what we are trying to accomplish.

Charles Strauzer

Okay, thank you very much.

Jim Hall

Thank you.

Operator

Your next question comes from Edward Atorino.

Edward Atorino

Hi.

Julie Beck

Hi, Ed.

Jim Hall

Hi, Ed.

Edward Atorino

I think for your $0.10 a share, does that include the $1.4 million loss on the debt? No, right?

Julie Beck

That excludes the $1.4 million.

Edward Atorino

So, that adds about $0.04 as I figure it?

Julie Beck

Yes, that would. That would add that cost of $0.04 a share in the write-downs of --.

Edward Atorino

Second, can you look at '08 for further debt reduction at this stage or is that sort of depends?

Jim Hall

Well, of course, it depends. And I can on the one hand say how difficult it is to forecast right now and then give you some guidance on that. But it's certainly our top priority, and we'll be working on it everyday, every week, every month and every quarter.

Edward Atorino

Last question. Do you sort of pro forma interest expense for '08, given the new rate that ended at $36 million annual rate, but it may just going to be higher in '08, correct?

Julie Beck

With the declines in the rates announced, we expect our effective rate to be in about 6.2% based upon the next year.

Edward Atorino

6.2%, okay. I'm walking out. Thanks.

Julie Beck

Okay.

Operator

Your next question comes from Alexia Quadrani.

Alexia Quadrani

Hi, thank you. Just a question on your relationship agreement with the Yahoo!, print part of the Yahoo! Consortium, do you know if there is a change of ownership across there in the sense that if the Microsoft, Yahoo! deal happens, can Yahoo! back out of the agreement with you?

Jim Hall

It's way too soon to even speculate on what might happen there. There is just an announcement this morning, but there is no reason for us to think that anything will change. By coincidence, I'll be meeting with the Yahoo! people next week, and maybe we'll learn something more from them then.

Alexia Quadrani

Okay. Thank you.

Operator

Your next question comes from Craig Huber.

Craig Huber

Yes, hi. Just a follow-on question. What did you guys do this year for your advertising rates on average for your retail store category placement?

Julie Beck

For retail store category?

Craig Huber

Yes.

Julie Beck

I am not sure if I can find that quick enough for you here. I will call you back with that number. Okay.

Craig Huber

Okay. I guess a same question I was going to ask about for auto classified and [help wanted], if your guys were cutting more deals there potentially for this year on the rate side to give more volume?

Julie Beck

I can tell you the advertising rates in general. Overall, I am just get down 3% or 4%, but I can't tell you by category right now this morning right at the moment.

Craig Huber

I am sorry, down 3% to 4%, is that across all your categories?

Julie Beck

Yes. And the specific categories, I'll have to get back to you, Craig.

Craig Huber

That's quite a difference vis-à-vis you've done in the past obviously, right?

Jim Hall

I believe that we are more inclined to put programs in place now to be more competitive, because rates are getting cut in the marketplace all over, Craig.

Craig Huber

Okay. So it's down 3% to 4% now across all your categories. Okay. Thank you very much.

Operator

Your next question comes from Edward Atorino.

Edward Atorino

Just a follow-up on FTEs for '08 versus '07.

Julie Beck

The FTEs for '08, just a second. I think we have the FTEs coming down about 2% or 3% in '08 in our budget plan.

Edward Atorino

Thanks.

Julie Beck

Okay?

Edward Atorino

Right.

Operator

Your next question comes from Charles Strauzer.

Charles Strauzer

Julie, one quick follow-up on the NOLs. Without the moving pieces in the write-offs and things like that, can you give us an update there on what's changed with the NOLs and do you expect those to stretch out any further than they had previously?

Julie Beck

No, where we had the gain on the New England property, so we are utilizing that NOL on the gain of the properties this year. And our NOL, we have about $8 million to $9 million or so. I mean I'm not obviously done with the return yet for '07, but somewhere around $8 million or $9 million to use in '08.

Charles Strauzer

Got it. And then one question I have been hearing that some of the television stations like ESPN, et cetera, are looking to some of the newspapers to get some of their staffers on board for both online and for behind-the-scenes content work. Are you seeing any competition coming in, taking quality reports from you?

Jim Hall

No, we haven't seen that.

Charles Strauzer

Okay. Thanks.

Jim Hall

Thank you.

Julie Beck

Thank you.

Operator

You have a follow-up from Edward Atorino.

Julie Beck

Hi, Ed.

Edward Atorino

Sorry to do this one at a time, but…

Julie Beck

Okay.

Jim Hall

It makes it more fun.

Edward Atorino

I was looking to details on the income statement. There was a jump up in SG&A and salaries and employees a little bit higher than I thought. Was that just a seasonal thing or anything in there that accounted for the increase?

Julie Beck

It depends upon which you are comparing. On a same-store basis, salaries and benefits are down. I think it was 4.7% for the quarter, but there were some charges in there for severance, et cetera, that we are backing out on the same-store comparisons that there are in the release. We get 7.2 for beyond severance charges that we back out.

Edward Atorino

7.2 million?

Julie Beck

Yes.

Edward Atorino

In the $53 million, is $7.2 million in charges?

Julie Beck

Yes.

Edward Atorino

Okay. And SG&A has a similar accounting adjustment in there?

Julie Beck

Are you looking for SG&A?

Edward Atorino

SG&A was 21, up from 18, and it was 17 in last year. That's pretty --.

Julie Beck

In the quarter?

Edward Atorino

Yes.

Julie Beck

Okay. In the quarter, we invested significantly more online. As we said, that's the major thing there, but some of the other special items that we had would have gone through that with regard to the SG&A line as well.

Edward Atorino

If I did a run rate or salaries, I shouldn't use the $53 million? I should use the lower number.

Julie Beck

Yes, the adjusted number. Yes.

Edward Atorino

And same with SG&A?

Julie Beck

Yes.

Edward Atorino

Okay. I'll talk to you later about that. Thanks.

Julie Beck

Okay. Thanks, Ed.

Edward Atorino

Bye, bye.

Julie Beck

Good bye.

Operator

At this time, there are no further questions.

Jim Hall

Thank you, everybody. We'll see you next quarter.

Julie Beck

Okay.

Operator

And this concludes today's conference call. You may now disconnect.

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