The McClatchy Company Q4 2007 Earnings Call Transcript

The McClatchy Company (MNI)

Q4 2007 Earnings Call

February 6, 2008 12:00 pm ET

Executives

Elaine Lintecum - Treasurer

Gary B. Pruitt - Chairman, President and Chief Executive Officer

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

Frank Whittaker – Vice President, Operations

Lynn Dickerson – Vice President, Operations

Robert Weil – Vice President, Operations

Christian A. Hendricks – Vice President, Interactive Media

Analysts

Alexia Quadrani - Bear Stearns

Craig Huber - Lehman Brothers

Karl Choi - Merrill Lynch

Peter Appert - Goldman Sachs

Paul Ginocchio - Deutsche Bank

Thomas Russo - Gardner Russo

Trent Spiridellis - Avenue Capital Group

Fred Searby – JP Morgan

John Janedis - Wachovia

Scott Marchakitus - Goldman Sachs

Ken Silver - Royal Bank of Scotland

[John Disher] - Pinnacle

Scott Schiffman - Lehman Brothers

[Bill Green - Clarion Assets]

Tom Kerr - Reed Conner

Presentation

Operator

Welcome everyone to the McClatchy fourth quarter 2007 earnings call. (Operator Instructions) I will now turn the call over to Ms. Elaine Lintecum, Treasurer at McClatchy.

Elaine Lintecum

Thank you all for joining us today for our fourth quarter conference call. The call is 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 Presidents of Operations, Lynn Dickerson, Bob Weil and Frank Whittaker; our Vice President of Interactive Media, Chris Hendricks; and our Vice President and CFO Pat Talamantes. We are all available for questions at the end of Gary’s remarks and I’ll also be available after the call. You can reach me at 916-321-1846.

Our release and statistical reports were issued this morning before the market opened, and they are posted on FirstCall and on our website for your convenience. The company’s fiscal 2007 reporting period is a 52-week year compared to a 53-week year in 2006, and as a result our fiscal fourth quarter includes 13 weeks compared to 14 weeks in the 2006 fiscal quarter.

Unless otherwise noted, we will be discussing comparisons of the 2007 13-week quarter to a like period in 2006 on this call. Reconciliations of non-GAAP amount to GAAP reported amounts can be found on the company’s website on our Investor Relations page.

And finally, 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 the call.

Now here is Gary Pruitt, our CEO.

Gary B. Pruitt

Today we reported preliminary fourth quarter 2007 earnings from continuing operations of $33.2 million, or $0.40 per share, subject to an anticipated non-cash charge to GAAP earnings for impairment of goodwill and long-lived assets. Preliminary 2007 fourth quarter results include income tax expense of $7.5 million, or $0.09 per share, related to changes in prior period estimates.

We estimate that income from continuing operations was higher by approximately $5.3 million in 2006 because of the additional week reported last year. For this call, we’ll focus on the 13-week comparable trends.

Our results reflect the continuing tough revenue environment. They also reflect our continued response, strong cost controls to help offset the revenue decline. In the fourth quarter, we reduced cash operating expenses by 9.1%, and we will continue to seek ways to reduce them.

Our advertising revenues from continuing operations in the fourth quarter were down 9.3% from advertising in 2006 and circulation revenues were down 7.8%. The decline in circulation revenues reflects in part a reclassification of $2 million in delivery expense, which reduces both revenues and expenses. Excluding the impact of this reclassification, circulation revenues were down about 5%.

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 fourth quarter revenues, but account for 58% of our ad revenue decline.

While improving somewhat from the second quarter and third quarters, these regions are still seeing the largest declines in all categories of advertising. Meanwhile, advertising revenues in our other regions combined were down 6.2% in the quarter, slightly worse than the previous two quarters.

Let’s look at revenues by category, starting with retail. Retail advertising was down 2.7% during the quarter. The declines in our newspaper advertising were partially offset by strong growth in online retail advertising, which was up 36.6%, and to a lesser extent 1.8% growth in preprint advertising.

Classified advertising revenues declined 20%, and here is a review by category. First, employment, in the fourth quarter employment advertising declined 24%. Print employment revenues were down 28.3%, while online revenues were down 15%, reflecting the close tie between print and online up-sell advertising in the employment category.

Automotive advertising was down 13.3%. Our print advertising was down 19%, while our online auto advertising was up 30.5% in the quarter, reflecting the success of our cars.com product.

Finally, real estate, real estate advertising was down 30.9%, with 64% of this decline coming from California and Florida. Print advertising was down 32.7% and online real estate advertising declined 6.5% in the fourth quarter.

Turning next to national, national advertising declined 6.8% in the fourth quarter. Our performance continued to be hurt mainly by losses in telecommunications.

While online advertising revenues were included in the results just discussed above, we wanted to give you a sense of how our online advertising is performing. Online advertising increased 5.2% compared to fourth quarter of 2006.

We have inconsistent data in the second half of 2006 due to differences in what Knight Ridder considered online advertising, the way they accounted for Real Cities’ ad network revenue sold on behalf of third parties, and purchase price accounting adjustments for some CareerBuilder revenues.

We’ve attempted to factor out the impact of all of those differences. And if we did, we believe that our online revenues were up in the mid-single digit range for 2007. We expect to return to our historical strong growth rates in online advertising in 2008.

Online categories that are less reliant on up-sells from print advertising are doing quite well. For instance, online retail advertising was up 52.6% in 2007 and automotive advertising was up 20.1%.

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 advertising revenues as a percentage of total advertising at 8.6%. We expect that percentage to continue to grow over time and we’re excited about our Internet investments and online business.

Turning to circulation, in the fourth quarter daily circulation declined 3.5% and Sunday was down 4.0%. As we’ve mentioned before, this year we made a decision to scale back certain marketing programs that advertisers told us did not have much value. We believe these strategic reductions account for approximately a third of our declines. As we cycle over these decisions, we would expect circulation declines to lessen in the second half of 2008.

Our strategy is to grow and retain quality circulation at our newspapers, while rapidly expanding the audience we serve online. So we’re pleased to note that the most recent ABC report of audited audience data showed that our combined, but unduplicated, reach of print and online in almost all of our major markets is greater than 70%, 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 $41.3 million, or 9.1%, as we continue to reign in cost during this tough revenue environment. Compensation costs were down 4.5%, salaries declined 5.4% and FTEs were down 7.7%. Newsprint and supplement costs were down 25.2%, reflecting in equal parts lower newsprint prices and lower usage. All other expenses decreased 6.4%.

Net interest costs from continuing operations were $46.4 million. Our effective borrowing rate in the fourth quarter was about 6.4%. We are seeing lower rates on our bank debt since the Federal Reserve’s actions last month. And this impacts about $1 billion of our debt.

Our operations continue to produce significant cash, which we are using to pay down debt. Debt was down approximately $805 million since the end of 2006, to $2.47 billion at the end of 2007. We announced the sale of SP Newsprint Co. a couple of weeks ago and expect to use the after-tax proceeds of about $40 million to reduce debt when it closes.

In addition, we expect to receive roughly $200 million of tax refunds related to the sale of the Minneapolis Star Tribune newspaper. We also expect to complete the sale of land in Miami this year, with after-tax proceeds of approximately $115 million. With these transactions and our substantial cash flows, we expect our debt balance at the end of 2008 to be approximately $2 billion.

Looking forward, while we did see a slight improvement in advertising in the fourth quarter compared to the second and third quarters, the advertising environment in 2008 does not appear to be improving. In fact, in January we’ve seen headwinds from a worsening national economy.

We now expect advertising will likely be down in the low double-digit range in the first quarter of 2008. As the year progresses, we expect advertising revenue trends to improve somewhat from the first quarter, but we don’t have sufficient visibility to be more specific.

This recessionary outlook, coupled with the continued decline in our stock price since the end of the third quarter will likely result in an additional impairment charge in the fourth quarter. It’s important to understand that this non-cash charge does not reflect our view of the long-term health of the newspaper industry or McClatchy.

In fact, if we were able to base the valuation on our discounted cash flow analysis and recent transactions, our current level of goodwill would be sustained. But GAAP requires that we reconcile the value indicated by our publicly traded stock with our stockholders equity.

We believe investors should focus on the more important fundamentals of our business. We continue to produce strong cash flows and are quickly moving to become a successful hybrid print and online media company.

We are focused on four major areas: driving new revenues, with a particular emphasis on online advertising; focusing on growing total audience; providing high quality public service journalism; and reducing our cost structure. We will continue our cost restructuring and expect cash operating expenses to be down in the high single digit range in the first quarter. Interest expense is expected to decline, reflecting both lower interest rates and our continued focus on repaying debt.

Periods such as these require sound business judgments and focused steadfast execution. We are determined to remain the leading local media company in some of the best growth markets in the nation. Recessions by definition are followed by economic expansions, and we’re working hard to position the company to benefit from a stronger economy once it turns.

Now, we will be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Alexia Quadrani - Bear Stearns.

Alexia Quadrani - Bear Stearns

The weakness you commented on in January the first quarter, is it predominant again in the worst hit markets, California and Florida, or are you seeing the rest of your properties weaken significantly also in Q1?

Gary B. Pruitt

The worst declines remain in California and Florida, but we have seen some weakening in the other regions as well.

Alexia Quadrani - Bear Stearns

On newsprint pricing any insight there, some recent newsprint prices have really increased at stock. How high do you think are newsprint pricing or how are you budgeting newsprint pricing for 2008? And then secondly, I know it’s really early, but I’d be interested in your comments, if you think that any change of ownership in Yahoo! may impact your alliance with them in terms of your newspaper consortium?

Gary B. Pruitt

As far as the Yahoo! deal goes, Yahoo! has reassured McClatchy, and I guess all of the newspaper consortium members, that the Microsoft offer does not change their plans with regard to their relationship and their deal with the newspapers, and they plan to move forward with it. And we are pleased with the preliminary results of that relationship, so we expect it to go forward.

Patrick J. Talamantes

Certainly, Alexia, pricing is currently trending upwards, and that’s based on capacity reductions and higher input cost, but demand is weaker too, and that’s a more recent phenomenon. We expect to offset some of those increases at McClatchy through lower usage and web reproduction but beyond that we wouldn’t really want to speculate on where newsprint prices may be going.

Alexia Quadrani - Bear Stearns

Your expected tax rate for ‘08, what should we be using?

Patrick J. Talamantes

The rate was higher this quarter, because of adjustments to our prior period estimates that were made more complicated by having two companies’ tax filings to reconcile to, as well as adjustments to our estimates for divestiture tax accounting. We don’t expect similar issues in 2008, and so the good news is that we do expect the effective tax rate to return to the 39.5% to 40.5% range in 2008, absent changes to tax reserve positions during the year.

Operator

Your next question will come from the line of Craig Huber - Lehman Brothers.

Craig Huber - Lehman Brothers

Gary, can you just speak a little bit about your advertising rates, what you have done with them for this year for your newspapers?

Gary B. Pruitt

It’s difficult to generalize, because it varies so dramatically by paper, by markets, by category. But, in general, the rates have gone up in the low to mid-single digit range on the print side, with some contract rates actually moving down in terms of revenue saving and revenue holding contracts.

Online prices have actually gone up fairly significantly as the value proposition changes with more people going online. For instance, our online audience last year grew 25.3%. So as a result of that online advertising is more valuable, and we are seeing steeper price increases there.

Craig Huber - Lehman Brothers

Along those lines, were there any of your newspaper markets where you were not able or you didn’t raise your average rate for this year?

Gary B. Pruitt

I think every paper had some rate increases. How the average rate ends up, I am not exactly sure where it will be, because it will be a question of what the advertising mix was and how many contracts there were. So, I think, there certainly will be papers where average rate was flattish to up a little, but I can’t be any more specific than that.

Craig Huber - Lehman Brothers

And then along those lines at least one of your peers, Journal Register lowered its ad rates this year like 3% to 4% average across its newspapers. What is your thought, if you actually lowered your rates would you make up for on the volume front, as you think out here, a couple of years?

Gary B. Pruitt

We have had some papers in the past that haven’t taken rate increases, and it’s been a big debate as to whether that was useful or not. There wasn’t a clear consensus of opinion. I think we let our advertising executives and publishers in the markets that are closest to it generally make those decisions in consultation with corporate, and there are often volume contracts that can reduce rates that we think are a good deal.

But on average the mix is that they are achieving low-single digit increases on average. And I think that’s probably appropriate.

Craig Huber - Lehman Brothers

On your circulation revenues, this $2 million reclassification for the revenues and the corresponding cost, it looked like this is the first quarter you did that, so should I assume this will continue for the next three quarters, until it annualizes.

Patrick J. Talamantes

No.

Craig Huber - Lehman Brothers

Is it a one-time shot?

Gary B. Pruitt

Yes. And that adjustment, just to clarify, of course, doesn’t affect cash flow. It’s affecting both expense and revenue.

Operator

Your next question will come from the line of Karl Choi - Merrill Lynch.

Karl Choi - Merrill Lynch

Could you update us on your expectations for equity income, now that you are selling your stake in SP Newsprint? And if you can remind us about your debt leverage covenants, and if I am not mistaken it’s going to go down by the end of this year, any plan to seek some sort of amendment to give yourself some more wiggle room.

Patrick J. Talamantes

I think it might be useful to start, in answering your question about 2008 equity income, Karl, by talking about where we were in the fourth quarter just as a backdrop. In the fourth quarter, Internet equity income was $1 million. And from the newsprint investments, we had a $9 million loss.

All other equity investments had $1 million of income, and depreciation and amortization relating to those investments that’s running through that line was $1.3 million of expense, for a total equity loss of $8.3 million.

So as we look at 2008, we will see continued losses in the first quarter from newsprint. We will have SP for the first quarter, and although prices are changing with newsprint, input costs are still a challenge, so that will make our first quarter equity loss a little higher than prior year, all told. After the first quarter, it really depends on the timing of the sale of SP.

For the full year, we expect a slight loss from Internet investments as these companies reinvest for growth and the D&A in our equity line will likely be down from prior year at $5.2 million. All together, assuming the sale of SP, we expect some improvement in the equity loss, but not as much as we would have gained had we been able to sell SP, say at the beginning of this year.

As far as regards the debt outlook, we are in fine shape with our covenants. Debt-to-EBITDA on a GAAP basis was 4.3x at year-end. It was slightly below 4.5x based on the bank definition. We are expecting to reduce debt by approximately $500 million this year, which allows us to weather the downturn well, and one of the reasons we have always had a conservative debt posture is for times like these, and we are seeing that pay off today.

Operator

Your next question will come from the line of Peter Appert - Goldman Sachs.

Peter Appert - Goldman Sachs

Gary, you have done incredible work on the cost side of the equation. And, we already know about newsprint, so the real question is always how much is there left to do? I know you will respond there is always more to do. But specifically you have done so much on the headcount front, I am just wondering when you run out of flexibility in terms of the ability to take more bodies out of the business?

Gary B. Pruitt

We think cash expenses, as I said in my notes, will be down high-single digits in the first quarter. We think that they will be down at least mid-single digits for the year.

Peter Appert - Goldman Sachs

And that’s factoring in the higher newsprint, correct?

Gary B. Pruitt

Yes.

Peter Appert - Goldman Sachs

Which really implies pretty dramatic reductions then in the other cost components?

Gary B. Pruitt

Yes. It remains to be seen what the newsprint prices will be, and what the newsprint expenses will be. So each person, I know, has their own forecast of that market. But as we said immediately we expect the cash expenses down in the mid-single digit range. We can’t predict the newsprint market with precision, but we do think expenses will be down.

We do think there are additional savings in these kind of difficult revenue environments. Our papers are making only essential hires, and the technological advancements allows us to centralize and operate in a more efficient way to take advantage of synergies and scale that don’t require each job to be staffed locally, and over time the same technology that may be challenging us on the revenue side is giving us relief on the expense side.

Peter Appert - Goldman Sachs

And should we be anticipating then the same sort of FTE reduction in ‘08 that we saw in 07?

Gary B. Pruitt

Yes, in that range, yes.

Peter Appert - Goldman Sachs

Gary, could you give us any color on sort of the components of retail revenues by category for the fourth quarter, and if that changes meaningfully in the first quarter?

Gary B. Pruitt

No. I don’t think we have all of that data certainly for the first quarter and how that’s going to trend and we don’t necessarily regard this first quarter as the bellwether, certainly not January is the bellwether for the year. We have a lot of sort of Christmas overhang.

Peter Appert - Goldman Sachs

I was particularly just interested in knowing if there are any particular components of the retail category, where you are seeing relative strength or weakness?

Frank Whittaker

Speaking for both California and Florida, we are continuing to see weakness in three major retail categories, which has a pretty good correlation with what’s going on in the real estate market and that would be in the areas of home furnishings and some department store activity, and then also some furniture stores. It makes sense of course that people are tightening their belts in one area, those areas are going to suffer as well.

On the upside, we have seeing some improvement in some of the financial categories, and we have had some good opening schedules from a couple of major retailers like IKEA. And then I think another good news trend would be some of the major drug stores like Rite Aid and Walgreens during the last periods in ‘07 were starting to have a stronger ROP schedule.

I would say though that as you look ahead to retail in the early part of ‘08, two cautionary notes. We had two very good one-time events last year. In Florida, they had the Super Bowl, and so we had roughly $2 million of retail advertising in January of ‘07 we’ll be going up against, and The Sacramento Bee celebrated its 150th anniversary, and had about $350,000 of one-time retail advertising in January of ‘07.

Gary B. Pruitt

And I would add, Peter that we expect to see and continue to see the follow through of strong double-digit online retail advertising growth. And even later this year, we’ll be picking up all of the local inventory for Yahoo!’s websites, and we will be selling that locally as well, and that’s mainly retail.

And so I think, we are going to see strong retail growth online throughout ‘08 and flowing into ‘09 in numbers that will significantly help our online efforts. And that will be a big focus for us in ‘08 and ‘09.

Operator

Your next question will come from the line of Paul Ginocchio - Deutsche Bank.

Paul Ginocchio - Deutsche Bank

If you had seen with the declines in ad rev, a spiking or an increase in turnover in your sales force.

Gary B. Pruitt

Kind of usual turnover, nothing extraordinary, and it’s a tough time when you have revenue declines, but McClatchy is one of the best newspaper companies, and it’s a good place to be in good times and bad times. And I think that we are holding our own.

We are committed to making sure that our ad sales positions are filled. We have FTE declines, but we don’t want to sacrifice the revenue generating capabilities and abilities of the company. And we are looking at, and in fact, we are increasing resources with regard to training especially online sales training, and looking at a restructured incentive system to focus on online, and make sure we have the right incentive system throughout the company for advertising sales.

Paul Ginocchio - Deutsche Bank

Is there anyway if we look at the FTE declines to kind of say rough percentages of what divisions they are coming out of?

Patrick J. Talamantes

I think I would just follow on to what Gary just said, which is in the sales, newsroom, and online areas we are trying to hold the line there as best we can. And it’s really in the circulation, production, finance, G&A areas that we are trying to look for those efficiencies and continue that trend into 2008.

Operator

Your next question will come from the line of Thomas Russo - Gardner Russo.

Thomas Russo - Gardner Russo

Pat, the cash flow from operations that you referred to for debt pay down or suggested by your debt pay down this year would seem like cash flow from operations of roughly $150 million plus or minus, is that ballpark correct.

Patrick J. Talamantes

We wouldn’t want to give a cash flow forecast, but I think Gary has given some of the components of what we are seeing this year in terms of one-time items.

Thomas Russo - Gardner Russo

We sort of get $350 or $360 million of one-time items, and if the debt number at the end of the year is $500 million lower, it leaves a approximate number, and I am just trying to check and see if that’s approximately great math.

Gary B. Pruitt

Tom, not to put too fine a point but we have given you the inputs that we can give you for that calculation.

Thomas Russo - Gardner Russo

Then, Pat, Gary mentioned that the bank lines exposure are around $1 billion. What is the amount of your term debt, I recall that Knight Ridder may have had something like $2 billion of term debt when you acquired it, and with $1 billion exposure on the bank line area, how does the structure now work out?

Patrick J. Talamantes

The structure right now is that we have got $1.5 billion in bonds maturing at various times. We have got $550 million in a bank term loan, and we have got about $504 million at the end of the year under our revolving credit, and the size of the revolving credit is $1 billion.

Lynn Dickerson

And neither the term loan nor the revolver have any required amortization prior to 2011.

Gary B. Pruitt

And the next bond due is in the spring of ‘09.

Patrick J. Talamantes

April of ‘09, that’s $200 million, that’s a nice piece of paper to take out at nine and seven/eights.

Thomas Russo - Gardner Russo

Gary, on the impairment question, you mentioned that based on net present value and based on recent transactions you would not be inclined other than if the accounting rules require this charge. What were the recent transactions that you might look at to come up with that reference?

Gary B. Pruitt

Well, actually we looked at every recent transaction, looking at Tribune and as a large transaction but then also looking at some of the more recent single paper transactions over the year. So, we kind of looked across the board to see what the going rate was of public trade, private multiples when the newspapers were sold.

Thomas Russo - Gardner Russo

Peter Appert was asking a question about discounts on ad rates, I think and one question comes up with other papers, whereby in the classified area particularly there are free offers for personal items. There are free offers for less than three lines if it runs certain amount of time, with a goal of creating a must-visit sense about the classified section.

To what extent have you used that which are either beyond rate discounts or actually some free space just to create a compelling need to go to the paper?

Gary B. Pruitt

We have done that. We think it is smart in the low cost and shorter ads to create that sense of marketplace and to maintain and grow audience, so we think that is a good strategy.

Robert Weil

I would just say it only really applies to private party advertising and that’s only in a few categories to help us become more competitive with competitors like craigslist.

Lynn Dickerson

And typically it’s for merchandise under a certain dollar amount.

Thomas Russo - Gardner Russo

Frank, I was surprised to hear that the drug stores are coming back to ROP and what do you make of that?

Frank Whittaker

Well we saw these schedules leading into the holiday season. So, we are not sure whether they are going to continue or not, but it seems that they were increasing their merchandise mix and really trying to get into sort of the holiday gift area and I think they were reacting on the fly. They realized ROP gets them a lot more promotional opportunity and these were nice schedules to see that we haven’t seen before.

Operator

Your next question will come from the line of Trent Spiridellis - Avenue Capital Group.

Trent Spiridellis - Avenue Capital Group

Can you comment on any adjustments that were made to the carrying value of the investment portfolio at the end of the quarter? And are you or perhaps in conjunction with your partners Gannett or Tribune contemplating any ways of monetizing any of the commonly owned investments, namely CareerBuilder or Classified Ventures?

Gary B. Pruitt

We are very pleased with our Internet assets and was one of the important pieces of the Knight-Ridder deal to pick up a valuable stake in CareerBuilder which is now the leading online job site in the country. And we now own over a quarter of Cars.com, Apartments.com and Homescape.

We like those products. We think they are very valuable. We think they are hidden gems in value on McClatchy’s portfolio. But we don’t have any plans at this time for an IPO or any other sale. We would be open to that long-term but we don’t have any plans at this time.

Patrick J. Talamantes

We have not taken any changes or charges to our investment portfolio in the fourth quarter.

Operator

Your next question will come from the line of Fred Searby – JP Morgan.

Fred Searby – JP Morgan

Can you just talk, Gary in terms of your expectations of the new CareerBuilder, how much of a material impact do you think it can have this year? And secondly what you are thinking in terms of the Yahoo! deal again, in terms of whether of a material lift, as the expectations were when you were forging the deal with last year?

Gary B. Pruitt

As far as Yahoo! goes we do think it will have a significant impact to our online revenues. We think that most importantly picking up the Yahoo! inventory in each of our local markets gives us vast new ad avails to sell and we have a revenue split arrangement with Yahoo! but that should workout well for both of us.

And we also will be using their superior graphical ad serving technology which will allow us more power in sales and they will be selling on to our websites and splitting that revenue with us. That would be good, we’ll pick up some search revenue and we’ll pick up new audience with greater displays on Yahoo! of our content and headlines on Yahoo! pages.

So we remain just as optimistic as we were when we signed up for the deal. We think we will not see material impact from the deal until late ’08. But in late ‘08 and through ‘09 we think it will have a significant lift to our online revenues and we are focused this year on growing our online revenues. So, it is a significant priority for this company even in a difficult revenue environment.

And as far as CareerBuilder goes I don’t know exactly what you mean by the new CareerBuilder. But we’ve had a difficult year rolling over some contract arrangements where CareerBuilder had more advantageous arrangements for the papers when Knight Ridder owned it then when we owned it.

And we’re working past that and getting past that so we expect that the CareerBuilder arrangements will help us going forward and even in the weak economy, even with unemployment growing we think that CareerBuilder can give us growth in the employment category and expect that it will in 2008.

Operator

Your next question will come from the line of John Janedis - Wachovia.

John Janedis - Wachovia

Gary, someone mentioned this but your comping against double-digit declines in California and Florida in the first quarter and I am just wondering do you expect advertising there to improve somewhat as your other markets deteriorate or do you think the fundamentals of those two markets are deteriorating further?

Gary B. Pruitt

I still think we will see our biggest declines in California and Florida. But they will have the easiest comparisons going forward and the whole company has easier comparisons going forward. So, we expect advertising trends to improve through the year but really can’t give much more perspective or don’t have any more visibility than that. But still California and Florida are our weakest regions.

John Janedis - Wachovia

You just mentioned the re-negotiated CareerBuilder deal but have you seen any benefit yet on your recruitment line as of now?

Christian A. Hendricks

What we’ve seen is enough new product that were brought to the marketplace. We are seeing some sales in those categories. But there are products that really there is a small set of advertisers that buy them so from a material standpoint no, but it has improved the sales capacity for us.

John Janedis - Wachovia

Pat, what is your weighted average cost of debt and then also should we expect to see you attempt to divest Ponderay as well?

Patrick J. Talamantes

Our weighted average cost of debt in the quarter was 6.4%, with the Fed actions this quarter we’ll see that come down somewhat, although we obviously have more bonds outstanding that are fixed rate and un-hedged then we do bank debt. So, we’ll get some lift but not a lift to the entire amount of debt that we have.

In terms of Ponderay, we are open to looking at that sort of opportunity the general partner is AbitibiBowater and we have other newspaper companies as partners in that venture and at the right time we will be looking at that.

Operator

Your next question is a follow-up question from the line of Craig Huber - Lehman Brothers.

Craig Huber - Lehman Brothers

CareerBuilder in the fourth quarter, I am just wondering how the revenues as a percent change there for the quarter and for the year, please?

Christian A. Hendricks

Yes, I can’t break out just CareerBuilder because we have one category called employment but the change in the fourth quarter overall was down 15% online. As far as entire employment category, entire was down 24% in the quarter for print and online combined.

Craig Huber - Lehman Brothers

Obviously you have an equity interest in CareerBuilder. I was just curious what the percent change was on that property in the quarter and the year?

Christian A. Hendricks

We don’t disclose that number publicly.

Gary B. Pruitt

CareerBuilder is doing well, but we don’t disclose their numbers publicly. One of our problems in the employment online site is that we are still too heavily tied to the print up-sell. And so when the number of print ads decline especially in a weakening economy then we have fewer online ads. And so over time we’ll be less tightly aligned there and it will be a more independent number but it is still down in the quarter.

Patrick J. Talamantes

Just to add some color to that is that employment category is the category with the least amount of online only revenue associated with it. Gary said 26% of the employment category’s revenue is online only where the total company average is 45%, for its online. So, it is a significant tie to print and we’re working hard to move the online-only needle in that category.

Craig Huber - Lehman Brothers

And then while we’re on the subject, online help wanted, you’ve changed the contract here over the last year or so with CareerBuilder. So, your anticipation is your numbers will look better particularly because you have changed the contract with CareerBuilder, but when exactly does that annualize though?

Patrick J. Talamantes

The contract was changed in August of 2007 and we’ll roll over it fully in 2008 obviously, but it was a small change to the contract and given the economy as it is right now, the material nature of that I would be hesitant to say that it’s going to drive significant gain just from that particular change.

Gary B. Pruitt

It’ll help us somewhat with easier comps but really doesn’t help us until this year in ‘08.

Operator

Your next question comes from the line of Scott Marchakitus - Goldman Sachs.

Scott Marchakitus - Goldman Sachs

With regards to your debt reduction plan, you mentioned earlier you had about $1 billion in debt outstanding on your bank line, about $1.5 billion with the bonds. And I am just wondering, I think you said that 2009 bond would be something that you potentially would like to take out.

Could you consider buying back any intermediate bonds? They are trading in the high 60s, low 70s that seems like a pretty good use of capital compared to paying back bank debt at such a low LIBOR rate?

Gary B. Pruitt

Sure, we certainly are aware of that.

Patrick J. Talamantes

We look at those numbers all the time, at present we haven’t done anything about that primarily because particularly on the 9-7/8%, what people want to be taken out at 9-7/8% paper is too expensive and so we’ve sat back at this point.

If we had to pay up for it, it wouldn’t be as attractive, just looking at that headline coupon. So, we look at it all the time but we haven’t made any decisions or don’t have any plans at the moment to do anything on that.

Scott Marchakitus - Goldman Sachs

Is there anything preventing you from just buying back bonds in the open market or would you actually have to make a tender for it?

Patrick J. Talamantes

We have no restrictions on our ability to buy back bonds in the open market.

Scott Marchakitus - Goldman Sachs

You don’t have like the $500 million in proceeds and free cash flow that you’re generating this year to reduce debt, you don’t have to reduce your bank debt, that’s correct right? There are no requirements to pay down the term loan before anything else?

Patrick J. Talamantes

That’s right, that’s correct.

Operator

Your next question is a follow-up question from the line of Thomas Russo - Gardner Russo.

Thomas Russo - Gardner Russo

Chris, for you if you have the opportunity now or soon to sell Yahoo!’s avails, frame the amount by which their avails locally exceed what you’re currently selling. And then will you have the manpower able to sell that and then what might the price improvements be if with local sales efforts you’re able to sell that excess inventory relative to the price that Yahoo! is currently getting?

Christian A. Hendricks

Okay, the scope and size of the opportunity from local inventory compared to their local inventory around 10:1, the inventory that’s available. Our ability to sell that inventory, we are addressing right now through hiring of more sales people and also training of the existing sales force to go out and sell that inventory. We believe there will be a significant lift in our CPMs as a result of being able to use the behavioral targeting aspect of the Yahoo! ad platform.

Thomas Russo - Gardner Russo

And that will affect both your own direct sales as well as your pricing for the avails that you sell off of Yahoo!?

Christian A. Hendricks

That’s correct.

Thomas Russo - Gardner Russo

And you don’t believe that, I presume that the merger of Yahoo! and Microsoft would give them a sufficiently greater resource base to create a duplicate sales force to try to go into major markets that you might currently consortium with them on and staff up their own local force given that they have two presences in the market instead of just one each?

Christian A. Hendricks

Well, I can tell you from the Yahoo! perspective they have no intent to go into the local marketplaces, they don’t have any scale. I can’t speak for the Microsoft side of that, but I can say that we do see an opportunity in the Microsoft side of it. Could be that we would eventually get some Microsoft inventory in the local marketplace itself if we’re doing a good job which would advantageous.

Gary B. Pruitt

Our perspective is we like to use their technology and speaking at least for Yahoo! they didn’t want to hire a big local sales force to sell. They were happier with the split of ad revenue which works out well for them as well because local ad revenue and those rates are typically higher than national online rates.

Operator

Your next question will come from the line of Ken Silver - Royal Bank of Scotland.

Ken Silver - Royal Bank of Scotland

Can you just review how much newsprint do you consume a year?

Robert Weil

We consume approximately 350,000 tons per year.

Ken Silver - Royal Bank of Scotland

And previously you’ve talked about share buybacks. What’s your current view on buying back the stock?

Gary B. Pruitt

Our current view is that we talk about it. What we’ve talked about it in the past and really our position hasn’t changed and that is that currently we’re focused on paying down debt and over time we do plan on balancing debt repayment with share buyback, but especially in these operating conditions we think it’s best to focus first and foremost on debt.

Ken Silver - Royal Bank of Scotland

Is there a contract that you have or anyone else has with Yahoo! that would travel, if Yahoo! were acquired?

Gary B. Pruitt

We have a contract with Yahoo! and if things went in a bad direction as a result of any deal that Yahoo! might do, if they’re acquired by anybody, we would have the right to terminate that contract. We hope that doesn’t happen we hope the deal goes forward as planned and Yahoo! has reassured us that that is their expectation.

Ken Silver - Royal Bank of Scotland

So would you have the right to enforce the contract if Yahoo! was acquired?

Gary B. Pruitt

We can get back to you on that, I am not exactly sure what their rights are in terms of termination.

Ken Silver - Royal Bank of Scotland

Can give us a little more color as to by what kind of assurances Yahoo! gave you that you mentioned before?

Gary B. Pruitt

They gave us assurances that this was a high priority for them and they like the relationship. Saw it is beneficial and wanted to follow through. And in fact our meeting with representatives from all of the newspapers that they’ve signed up with this week to talk about the progress and the rollout plan and what is going on. So, it is moving forward as planned.

Operator

Your next question will come from the line of [John Disher] - Pinnacle.

[John Disher] - Pinnacle

What was the number of full time equivalents at year-end??

Patrick J. Talamantes

We have it here FTEs, full time equivalents at year-end, 14,307.

[John Disher] - Pinnacle

For the quarter I think you said newsprint lost about $9 million. What was the split between SP and Ponderay?

Robert Weil

We don’t disclose it by company.

[John Disher] - Pinnacle

Do you anticipate still getting the $200 million tax refund in the second quarter of this year?

Patrick J. Talamantes

Yes.

[John Disher] - Pinnacle

And $120 million for the sale of Miami real estate in the second half of this year.

Patrick J. Talamantes

Yes, we have an after-tax number on that of about $115 and we expect it to close in the second half of this year.

[John Disher] - Pinnacle

Can you tell us whether you think it might be third quarter or fourth quarter?

Patrick J. Talamantes

We don’t know. It’ll be up to the buyer. The buyer has an incentive to close early financially under the deal but we don’t know which quarter they’ve planned to close the deal.

[John Disher] - Pinnacle

So neither of those tax refunds or the Miami land proceeds has been pushed back at all?

Patrick J. Talamantes

No, they’ve not been pushed back.

[John Disher] - Pinnacle

In the release it says due primarily to decline of the company’s stock price since the end of the third quarter, the company expects to record a non-cash impairment charge. Which assets are tied in value to increases or decreases in the company stock price?

Robert Weil

This is really a goodwill impairment test, and so that’s where we expect between goodwill and assets that’s where we would expect to have that charge taken.

Gary B. Pruitt

It’s just a differential with a carrying value of stockholders’ equity on our books is about $1.8 billion. Our market cap is I don’t know right now between $800 and 900 million. And our accountants are intensely focused on that GAAP.

[John Disher] - Pinnacle

It’s a little bit strange because I would have thought impairment would be driven by either a decline in the earnings potential of those assets or a decline in the appraised value of those assets. I am not familiar with assets being written up or down depending on how the stock price moves.

Gary B. Pruitt

Yes, the accounting rules ask you to look at fair value and certainly stock price is an important measure of fair value. It’s not the only measure, but that GAAP is certainly one of the measures.

[John Disher] - Pinnacle

So, stock price determines the fair value of the assets?

Patrick J. Talamantes

According to GAAP it’s the leading indicator of what the fair value of those assets are.

Gary B. Pruitt

Yes and it’s not as if they’re absolute on it, but they do say that’s the best indicator of fair value. They’re not the only and there can be short-term dislocations or perceptions that cause different valuations. There can be other issues to look at, but they regard it as the best measure of fair value.

Operator

And the next question will come from the line of Scott Schiffman - Lehman Brothers.

Scott Schiffman - Lehman Brothers

Gary, could you offer any insights into what McClatchy family is thinking here? Just given the share price decline, so any perspective on whether they would like to increase, decrease their stake or the general frustration level here just any perspective would help. And then, secondly, just on the acquisition front assuming you had the financial flexibility would you consider certain Internet acquisitions if they did make strategic sense?

Gary B. Pruitt

The McClatchy family is extremely disappointed in the stock price and frustrated by the stock price and hopeful and inquiring about how the stock price can recover. And so, we likewise at management feel the same way and are focused on that as well. But the McClatchy family remains committed to keeping the company independent and feels very good about it’s growth prospects and the prospects for the stock.

So much so that the family also feels very favorably towards the stock buyback, but thinks at this time it is wise to first and foremost focus on debt. So, long-term I think there is probably a great deal of alignment among public and private shareholders to build stockholder value, shareholder value through a mix of paying down debt and buying back stock and we expect to see that payoff over the coming years.

And as a result, you should not expect McClatchy to do any major acquisitions, however you mentioned the Internet side and that would be an area where we may make some investments or acquisitions over time. Probably not large, but investments that might further our partnerships within the important classified categories. And the real estate area or in other categories that we feel will further our operating strategy being the leading local internet business in each of our markets.

So, I don’t think you should expect us to do any big newspaper deals, I think we will focus on doing small to medium-size Internet deals over time that will further our operating strategy. Other than that, a vast majority of our cash will be going to paying down debt and buying back stock.

Scott Schiffman - Lehman Brothers

If the Board and the family are reasonably confident that the business will show some signs of a turnaround, whether it’s the coming 12 months or next couple of years. Why wouldn’t you take advantage of the stock price weakness now, and again I am talking about the family, to buy in more shares?

Gary B. Pruitt

There certainly have been discussions about that and we look at this trade-off all the time and the odds probably favor that it’s a good time to buy and to do exactly what you said. But we are erring on the side of caution in a difficult ad environment and want to be conservative with a company that’s 150 years old and make sure we are more comfortable first and foremost on the debt side and then turn our attention to a balanced attack of buying back stock and paying down debt.

It’s something we monitor all the time and I think over time you can expect that we will enter the market, but we don’t have plans at this time to do so.

Operator

Your next question will come from the line of [Bill Green - Clarion Assets].

[Bill Green - Clarion Assetss]

You believe there’s no restriction on your ability to enter the secondary market to buy back bonds. I was under the impression that your credit agreement mandated all asset sale proceeds were used to prepay the term loan, is that not correct?

Patrick J. Talamantes

That was correct when we had a sort of an acquisition credit facility on the acquisition term loan on the announcement date of the deal or on the closing date of the deal but we paid that off and so that restriction doesn’t exist.

[Bill Green - Clarion Assetss]

So it does beg the question what I believe the margin on the loan is LIBOR plus a 100 or 125, why you would choose to prepay that debt at par rather than repurchasing your bond debt which is changing hands at mid $0.60 on the dollar?

Patrick J. Talamantes

Sure, so it’s an analysis that we look at all the time, we have also got to factor liquidity needs into that. It’s more complicated than just looking at an NPV analysis and so we’ve got to weigh a number of different factors.

[Bill Green - Clarion Assetss]

But if you can repay $1.00 of debt for $0.65, why would you chose not to do that and choose to prepay a dollar debt for $1 when it is no requirement, no amortization schedule as you pointed out, to I believe it’s June 2011?

Patrick J. Talamantes

Some of the debt that you are talking about trading at that those prices is out in 27 and 29 in terms of maturities and it’s at attractive rates. We tend to like that. And so again as I said it’s just an analysis of looking at the favorable economics vis-à-vis liquidity needs. The bonds that are closer in aren’t trading at such attractive discounts and so again it’s just a balance of liquidity.

Operator

And today’s final question will come go the line of Tom Kerr - Reed Conner.

Tom Kerr - Reed Conner

Can you go back just for a second to the California and Florida real estate issue but it is still principally new homes that’s the problem, whereas existing home sales part of the mix or something else? Because it seems like new home supply is going up in some market. Would that have a positive affect ever?

Gary B. Pruitt

Well, it is both new homes and resale. There’s really is a weakness across the board but just to give you a sense of the trending. We’re still trending worse in California and Florida seems to be leveling, would that be accurate, Frank?

Frank Whittaker

The ‘07 numbers appear to be leveling except the comparisons got markedly easier at the end so on a two-year basis I am afraid the trend is still heading down.

Gary B. Pruitt

Florida is not worsening right now or it’s leveling. California still it’s showing some degree of decline. New homes are generally not being built very aggressively in either market.

Frank Whittaker

And there’s a lot of inventory on the market and now of course you got major builders that are either out of business, bankrupt or just rescinding any new construction.

Tom Kerr - Reed Conner

Do you think that larger supply of existing homes, resale homes would offset some of the effect?

Gary B. Pruitt

Yes I think it will eventually do that I think that’s the way the market will work through it. And perhaps Florida is getting near that bottom now at least our California markets haven’t quite gotten there. It’s Florida went down earlier, that strength. So the comparisons are little easier in Florida than they are in California. So I am hopeful that we’ll see the numbers bottom in Florida in ’08. But we are still seeing some big negative numbers.

Gary B. Pruitt

That wraps it up for us, so I wanted to thank all of you for your attention and questions. And as we mentioned at the beginning, if you have follow-up questions you can call Elaine and we’ll try to be as responsive as we can be. Thank you for your interest. We look forward to a good ‘08.

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