The McClatchy Company F3Q08 (Quarter End 9/28/08) Earnings Call Transcript

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The McClatchy Company (NYSEMKT:MNI) F3Q08 Earnings Call October 21, 2008 12:00 PM ET

Executives

Elaine Lintecum - Treasurer

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

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

Christian A. Hendricks - Vice President - Interactive Media

Robert J. Weil - Vice President - Operations

Frank Whittaker - Vice President - Operations

G. Lynn Dickerson - Vice President - Operations

Analysts

John Janedis - Wachovia Capital Markets LLC

Peter Appert - Goldman Sachs

Alexia Quadrani - J.P. Morgan

Craig Huber - Barclays

David T. Clark - Deutsche Bank Securities

[John Cornright]

Barry Lucas - Gabelli

John Deysher - Pinnacle

Edward Atorino - The Benchmark Company

Catriona Fallon - Citigroup

Bill Green

Operator

My name is Kristi and I will be your conference operator today. At this time I would like to welcome everyone to the McClatchy third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions)

Ms. Lintecum, you may begin your call.

Elaine Lintecum

Thank you all for joining us today for our third quarter conference call. It’s also being webcast at www.mcclatchy.com and the webcast will be archived for future reference. Joining me this morning is Gary Pruitt, our Chairman and CEO, our Vice President of Operations, Lynn Dickerson, Bob Weil and Frank Whittaker, our Vice President of Interactive Media, Chris Hendricks, and our Vice President and CFO, Pat Talamantes. We will all be available for questions at the end of Gary’s remarks. We’ll be sticking to the one question per participant rule but I’ll be available after the call for follow up questions and can be reached at the following phone number: 916-321-1846.

Our earnings release and statistical report were issued this morning before the market opened. The release includes a summary of unaudited results and the full text of our release and statistical reports are posted on First Call and our website for your convenience. Reconciliations of non-GAAP amounts to GAAP reported amounts can be found on the company’s website on the Investor Relations page.

As a reminder this conference call will contain forward-looking statements that are subject to risks and uncertainties including among others those described in the company’s 2007 annual report on Form 10K filed with the SEC. Actual results may differ materially from those described during the call.

Now here’s Gary Pruitt, our CEO.

Gary B. Pruitt

Today we reported income from continuing operations of $4.2 million or $0.05 per share for the third quarter. Excluding various unusual items, which are detailed in our earnings release, adjusted earnings from continuing operations in the third quarter were $10.4 million or $0.13 per share. These results reflect the continuing economic downturn. Our advertising revenues have been down in the high teens for the last four months. We continue to respond to this recessionary climate by intensifying both our pursuit of new revenue opportunities and cost control initiatives.

In the third quarter despite dramatic increases in newsprint prices, we reduced cash operating expenses by 11.8% excluding severance costs. We will continue to seek ways to reduce costs and I will speak to our outlook for the fourth quarter shortly. But first, let’s review the third quarter.

Total revenues in the third quarter of 2008 were down 16.4% from 2007. Advertising revenues were down 19% and circulation revenues were down 4.9%.

Retail advertising was down 11.2% during the quarter. Much of the decline continues to come in real estate related categories like furniture and home furnishing stores and in department store advertising. The declines in our newspaper advertising were partially offset by strong growth in online retail advertising. Online retail was up 83.5% driven primarily by banner and display advertising. Classified advertising revenues declined 30.1% and I’ll review the three major categories within classified.

First, employment. Employment advertising declined 40.8% in the third quarter as hiring continued to decline. Print employment revenues were down 46.8% while online revenues were down 29.9% reflecting the close tie between print and online ads in this category.

Next, automotive. Automotive advertising was down 21.1%. Our print advertising was down 30.2%. Online automotive is still strong in this category, up 28.7% in the quarter as dealers shift spending online to our successful Cars.com product.

Finally, real estate. Real estate advertising was down 37.7% with nearly half of this decline coming from California and Florida. Print advertising was down 42.5% but online real estate advertising grew 18.3% in the third quarter.

Turning next to national advertising. National advertising declined 19.7% in the quarter. Our performance continued to be hurt mainly by losses in telecommunications and the national automotive category. Together these two categories account for nearly 70% of our third quarter decline in national advertising. Print losses were partially offset by strong growth in online national advertising.

Looking more closely at our digital side, our focus on becoming a hybrid print and online media company has been underway for some time at McClatchy. While online advertising is included in the results discussed above, we want to highlight some important trends in our digital business.

We are pleased to report continued strength in both audience growth and advertising sales. In the third quarter average monthly unique visitors to our websites were up 43.8% and were up 37.1% year-to-date. Online revenues grew 9% in the third quarter and were up 10.7% in the first nine months of 2008. Online advertising now represents 12.2% of total advertising revenues compared to 8.6% of total advertising revenues for all of 2007. Excluding employment advertising, which has declined nationally both online and in print, our online advertising grew 49.3% in the third quarter this year and was up 53.3% through the first nine months.

We were also pleased to note that 52% of our online advertising in the third quarter came from ads placed directly online. They were not tied to a print upsell. We believe that this independent revenue stream bodes well for the future of our digital business and is evidence of its importance as a resource for advertisers.

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 revenue growth and in online advertising as a percentage of total advertising.

Turning now to audience and circulation. Our strategy is to expand our total audience in print and online. Despite declines in daily circulation of 5.9% and Sunday of 5.2%, we continue to extend our reach in our local markets. The unduplicated local penetration of our online and print products is now more than 70% in most of our markets. We will continue to focus on growing this total reach for our advertising customers.

Turning next to expenses. Total cash expenses were down $47.9 million or 11.8% excluding the impact of severance and other charges related to our recently announced restructuring plans. Compensation costs were down 18.5% excluding severance expenses related to restructuring. On average the number of employees was down 18.2% from the third quarter of 2007.

Newsprint and supplement costs were down 2.8%. While newsprint prices were higher, the impact on costs was offset with lower usage. Our shift to lighter-weight paper and web width reductions at our newspapers are paying dividends in our reduction efforts.

All other expenses decreased $4.6 million or 3.9% despite a $3.6 million increase in bad debt expense.

Net interest costs were $34.2 million down 29.1% from the third quarter of 2007 reflecting an average effective interest rate of 5.5% in the quarter.

Debt stands at $2.07 billion down $404 million from the end of 2007. Based on our recent bank amendment and leverage ratio of 4.7 times cash flow as of the end of the quarter, our incremental borrowing rate on bank debt is expected to be LIBOR + 275 basis points in the fourth quarter. Our fixed rate bonds have an average rate of 6.3%.

Other non-cash capitalized loans costs of about $4.7 million per quarter are also included in interest expense.

Looking forward, the advertising environment is weak, and we expect print revenues to continue to be down. Thus far in October, advertising revenues are tracking similarly to September. Given this economic climate we continue to reduce expenses and realign our cost structure while retaining our focus on advertising sales, news and online operations.

Our print products are an important mainstay of our business but we realize we must produce them as efficiently as possible. We are finding numerous opportunities to streamline operations. For example, beginning in the fourth quarter our Modesto Bee is being printed by a sister paper, The Sacramento Bee using faster presses with greater color capacity.

We are focused on operating through this tough environment and coming out of it as a stronger more efficient company. We continue to direct our efforts in five key areas. First, improving revenue performance with a particular emphasis on Internet advertising. Second, providing high quality public service journalism. Third, growing total audience based on the unduplicated reach of our print and online products. Fourth, restructuring and reducing our costs. Fifth, as a result of these efforts we expect to continue to pay down debt and improve our financial position.

Now we will be happy to take your questions about the third quarter.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Janedis - Wachovia Capital Markets LLC.

John Janedis - Wachovia Capital Markets

Gary, can you just talk a bit about the auto classified category? Specifically given some of the sales numbers over the past few months, are you hearing any anecdotal commentary related to another potential round of dealership closings in your markets?

Gary B. Pruitt

We’ve been suffering through months if not years now with dealership closings. They have accelerated in recent months in each of our regions and as a result we’ve seen a gradual weakening in automotive revenue. It hasn’t been a precipitous fall but it continues to weaken, down 16% in the first quarter, 18% in the second quarter and 21% in the third quarter.

We expect that we’ll see a continuation of that trend. We are showing good growth online and expect that online growth to continue as Cars.com delivers well for the dealerships that remain in business. I think we will see a continuation of decline in the number of dealerships but they need to reach their audience and we’ve got the best online products and the biggest audience in print. So we think we will have a successful future here but it’s going to settle at a lower level.

John Janedis - Wachovia Capital Markets

Can I just ask a modeling question for Pat? Can you give us some help with the equity line for 4Q?

Patrick J. Talamantes

It might be better if I talked about what happened in the third quarter a little bit and then you can extrapolate off of that. In the equity line in this quarter we had $400,000 of non-cash losses running through that line. If you exclude that, we had about $850,000 operating loss. If you break that down, we had an increase in income from our Internet investments up to $2.2 million from $1.8 million.

Our remaining investments as you know include the Seattle Times and Ponderay Newsprint Company, those investments lost $900,000 which was a substantial improvement from a $7.3 million loss a year ago when the newsprint investments we have were doing so poorly. The D&A and the equity line was $2.1 million and that’s the run rate we continue to expect.

In the fourth quarter again, we’ll see a substantial improvement from the losses we had a year ago from the newsprint companies in that equity line and then Internet should continue to do fairly well.

Gary B. Pruitt

I thought you asked what the outlook was on the ethical line.

John Janedis - Wachovia Capital Markets LLC

We know that outlook.

Gary B. Pruitt

Third quarter was ethical. Fourth quarter we expect to be ethical as well.

Operator

Our next question comes from Peter Appert - Goldman Sachs.

Peter Appert - Goldman Sachs

Gary, you guys have done incredible work on the cost side of the equation. I’m wondering just maybe a couple of details on how this could play out in ’09. This all falls in one big question. Number one a), newsprint price per ton increases, in terms of how you’re thinking about that? One b), how much further you can take the consumption down? One c), on the labor side and the comp side, I would imagine 18% reductions in FTEs is not something you’d want us to extrapolate. I’m trying to understand what the labor cost numbers might look like over the next bunch of quarters. Specifically to get to one d), can you sustain margins at current levels if we continue to see the kind of revenue declines we’re looking at?

Gary B. Pruitt

It’s an interesting modification of the one question rule.

Peter Appert - Goldman Sachs

And I’m going to have no follow ups.

Gary B. Pruitt

I know. We can control that.

As far as newsprint goes, the newsprint companies have announced their $20 increase per month through the end of the year. That increase is showing very little follow through on the West Coast and a little more strength on the East Coast. I would say that whether that goes forward at all and to what extent remains in doubt.

With energy costs falling and the Canadian dollar weakening the newsprint companies have some favorable trends for them, and with the weakness in demand we would expect that we are very near if not at the peak of newsprint pricing here in the fourth quarter. We have to see where it goes from there but we’re seeing lots of indications that we’re near a peak right about now. Time will tell exactly when it is and where the future holds.

We do see that our consumption will decline in newsprint further from here as we roll over our web width reductions which we have been completing throughout last year and this year, so we will have some rollover effect there. The papers have generally all switched to lighter paper at this point and we have a circulation decline, which also leads to less usage as we eliminate less valuable circulation and outer regions of our market that isn’t valuable to advertisers.

The newsprint picture, while it’s been grim this year and the rollover effect in the early part of next year will certainly be bad, I’m hopeful that we’ll see falling prices later in the year and the rollover effect will begin to help us later in ’09. It will hurt our margins early in the year. I’m hopeful that it will help our margins later in ’09.

As far as the FTEs go, it reflects two major waves of cost reductions. We’re still seeing more implemented in the fourth quarter so those numbers should improve in the fourth quarter in terms of FTE reductions. We’ll see that high rate maintained throughout ’09 but we’ll be rolling over those cuts made in late spring and late summer. So as we roll over that, those percentage declines would not be as great. But still we’re looking at only filling essential jobs and making strategic cuts in expenses and FTEs where we can. We expect that percentage decline to increase over the short run and then as we run through ’09 it will not be quite as high.

As far as margins go if we continue to run revenues at this rate, it will be difficult to maintain margins for sure but we would expect that we will get through this recession and that we’ll be rolling over weak numbers and with newsprint prices falling that could help us. So we would see erosion in margins again over the short term but we would expect to see some recovery in margins as the economy strengthens.

I would say that we’ve been led into this recession in many ways in categories that are important to newspapers; that is in real estate, employment and automotive. Those three areas have been in a recession earlier and as we have painfully shown in our numbers. While the full economy may not have reflected a deep recession, we have been suffering in those categories for a while. As a result next year, our comparisons in those categories will be easier. In a recovering economy I believe that will bode well for revenues.

Operator

Our next question comes from Alexia Quadrani - J.P. Morgan.

Alexia Quadrani - J.P. Morgan

Could you just comment on where you are in the Miami land sale, if it’s still expected to close in the fourth quarter and the proceeds expected to be the same?

Gary B. Pruitt

We’re selling 10 acres of land, a parking lot adjacent to The Miami Herald building for a price of $190 million. We have a good dialogue with the sellers and we’re hopeful that that deal closes. It’s a real estate contract which means we can’t guarantee that that deal will close. We’re hopeful that it will and 100% of the proceeds, which after tax would be about $115 million, will be used to pay down debt.

Operator

Our next question comes from Craig Huber - Barclays.

Craig Huber - Barclays

Gary, how much thought have you given recently to potentially some more asset sales? I mean obviously this is a terrible environment to try to sell any of your newspapers and so forth, but any of the criteria you’ve given in the past for underperforming markets; like what happened in Minneapolis, you eventually sold out because you had a big tax benefit there. On the flip side of that, almost all of your papers have a very low tax base with maybe the exception of Kansas City and Fort Worth. I believe that’s correct. How much have you given that particularly when we get back to a better economy?

Gary B. Pruitt

I think your analysis is well stated.

Craig Huber - Barclays

As you think out, are you happy with the portfolio for the long term or I guess you don’t want to mention any specific newspapers but would you be open at some point to trimming some of your holdings on the newspaper property front?

Gary B. Pruitt

I will tell you that we like our portfolio. We’re in high growth markets; we think we can operate them efficiently and do well as we look ahead and structure a hybrid print and online company; we think we’re operating in the right places in the right way, not burdened by high legacy costs. We feel good about that. We don’t comment or speak about potential asset sales of any kind because we feel it’s inappropriate, fuels speculation and so under no circumstances do we comment about that. We are generally pleased with our portfolio but we constantly evaluate our operations and assets in good times and bad times.

Craig Huber - Barclays

For newsprint, the average price in consumption percent changes in the quarter please?

Patrick J. Talamantes

In newsprint, expense is down 2.3% for the quarter, usage was down 21.3% and the price was up 18.5% year-over-year on a 30-pound basis, and together with supplements’ expense that’s how you get to the 2.8% down number for the quarter.

Operator

Our next question comes from David T. Clark - Deutsche Bank Securities.

David T. Clark - Deutsche Bank Securities

Gary, which of your newspapers are up and running on Yahoo’s ad sales platform and what do the early results look like? And just a second quick one, the AP/newspaper relationship has been in the news a lot recently. I was wondering how you feel about the AP. Do you share some of the same concerns that other newspaper publishers have expressed?

Gary B. Pruitt

I’ll answer AP first and then I’ll turn it over to Chris Hendricks, VP of Interactive Media, to answer the Yahoo question in more detail. As far as the AP goes, McClatchy has recently signed a new deal with AP so we are not part of the group that has put a notice in for cancellation. We were pleased that we had a rate reduction from AP. That doesn’t mean that all of our editors are happy with AP or there aren’t issues but McClatchy is not part of the group of newspapers that has canceled and we don’t plan to at this point.

I’ll turn it over to Chris then to talk about the Yahoo consortium and the early results there.

Christian A. Hendricks

We currently have seven newspapers participating in what is known as the Phase I portion of the Yahoo Apps platform launch. It is not a full launch of the platform but we are allowed to sell unto that right now. Currently McClatchy has the best overall performance in the consortium as far as total dollars sold is concerned. We are having great success not only selling advertisement in a run of site but also with behavioral targeting with great success in the automotive and real estate categories. We cannot speak to specific members because we at this point have agreed with the partners and with Yahoo not to, but know that we are seeing great success and we still remain bullish about our opportunities with Yahoo.

Operator

Our next question comes from [John Cornright].

John Cornright

On the land sale, I missed that. Was it $150 after tax or $115?

Gary B. Pruitt

$115.

John Cornright

Assuming that this gets done by the end of the year at $115 but given that you’re operating cash flows are going to be weaker than you had thought, what would you be targeting for year-end net debt net of cash? I may have missed that. I’m sorry.

Patrick J. Talamantes

Currently debt is $2.070 billion. We would expect that we would pay down more debt in the fourth quarter regardless of the land deal, so the land deal would be on top of that. The only guidance we have given to date for debt is that year-end debt would be in the range of $2 billion. We haven’t been more specific than that.

John Cornright

I don’t know if this is the right forum to discuss it, but if you look at the price of your fixed income bonds, that market is saying that McClatchy’s going to have a tough go merely to financially survive in the next five years. This is a vote that you’re not going to make it. That’s what the fixed income markets are saying much less the equity markets. If you look out beyond ’09 and just assume that your revenues were to decline at a mid-single-digit pace beyond ’09, what do you do? Is the long-term answer to bring in a partner with an equity infusion in this company even if it’s a foreign partner? What’s the survival formula?

Gary B. Pruitt

One of the things that’s going on, and John I know you’re a sophisticated and long-term observer, but many have looked at the secular change in our industry and the cyclical downturn and conflated the two and concluded that this is the run rate and that we’re going out of business.

I think they’re wrong. We’ve been in this secular transition for quite a while given the growth of the Internet taking share from existing media, and McClatchy showed revenue growth each of the years from the ’01 downturn through 2006 growth in advertising revenue. We’ve only had the declines in ’07 and ’08. Now they’ve been precipitous and they’ve been unprecedented, so it has been a difficult period.

We would expect to return to revenue growth when the economy begins growing but we know we’ll be facing secular headwinds. There have been various econometric studies to look at how much of this is permanent and secular and how much is temporary. We may be facing secular headwinds for quite a while until the revenue market settles in terms of the Internet being a more mature medium.

We are able to respond with reducing cost structures and growth in online revenues. The same technology that threatens on the revenue side also gives us opportunity to reduce costs on the expense side. I would expect that we will continue to reduce costs and realign costs, and as technology improves we have still a ways to go there. So that gives us opportunity that people often don’t factor in to any future analysis.

Importantly, in most media companies the best predictor of future success is your audience growing, and our audience is growing. Very few media companies can say that. So right now there are categories that are under stress as they switch to the Internet and there’s no doubt about that, but as those categories decline and those are liner classified ads in employment, in real estate, in housing, but as those decline there is less to lose in the future. Retail becomes a bigger portion of our business and we have a way to target online and to reach the largest audience. We have an optimistic future and we believe a bright future of reaching targeted and mass audiences.

John Cornright

Do you actually believe that once we get out of this precipitous decline you can actually sustain positive top line numbers even though you have a secular headwind? Forgetting about the recession, there’s still a secular headwind. I don’t know where you get a positive revenue growth? I can understand it’s not going to be 18% per annum down, but I don’t know how you get positive.

Gary B. Pruitt

I will say this. There were secular headwinds in ’03, ’04, ’05, ’06 when we had advertising growth. Not strong but we had advertising growth. So there’s a natural offset when the economy grows to a secular downturn. If we can take share from existing media in town, that will also help us.

Will we have growth? I can tell you that we’re not in the business of making economic predictions or projections, and I’m not prepared to give you our economic projection or revenue projection going forward for multiple years. What we can do is based upon the conditions and trends we see make sensible decisions about our operations. We are making those decisions by reducing our costs and focusing on revenue generation particularly Internet revenue generation. By doing that I think we will have a successful future.

John Cornright

Once the headcount reduction plan that you announced recently is out of the way, what will the total headcount for the company be?

Gary B. Pruitt

It would be between 10,000 and 11,000 employees company-wide.

John Cornright

That’s post the recent plan?

Gary B. Pruitt

Yes. In the low end of that range; a little over 10,000.

John Cornright

For sure there will be more at least attrition to that next year?

Gary B. Pruitt

You could expect there will be some more attrition, yes.

Operator

Our next question comes from Barry Lucas - Gabelli .

Barry Lucas - Gabelli

Looking at some of the monthly trends, and maybe you can talk a little bit on the shorter time. What’s happening in Florida and Carolina, both of which markets had fairly steep sequential declines Q2 to Q3? Charlotte probably understandable but when does Florida hit a floor?

Gary B. Pruitt

Are you talking about Florida and the Carolinas or California?

Barry Lucas - Gabelli

Just some granularity in terms of what’s happening there. Each was down about 600 basis points sequentially.

Gary B. Pruitt

With regard to Florida, we have seen not necessarily a steep fall off as you look at the full year. In the first quarter it was down 24% in ad revenue, down 20% in the second quarter and back down to 24% down in the third quarter. Maybe a bit of a head [fake]. It’s remained kind of stubbornly in that 20% to 25% down range throughout the year. We have seen more weakness in the retail category as the economy has weakened.

In the classified categories, they had weakness early on as you know leading into the real estate downturn. As a result the classified level has remained fairly constant at around down 40% for classified. It hasn’t gotten worse. It’s been down so long, it seems like up to me but it’s flat at 40% down. I’m hopeful that as we cycle through we will see the rollover of those easy comps and see some improvement. But we have not seen improvement in the classified category but by the same token, no erosion.

It has been retail that has weakened in Florida over the course of the year.

The Carolinas were later in getting into the real estate decline so as a result we’ve seen real erosion in real estate and employment there over the course of the year. They have suffered especially in the Charlotte market where we’ve seen banking issues and banking decline, and that’s led to a ripple effect through the economy. The Carolinas got there after Florida and California so they held up a little better but now they’re seeing weakening not to the same extent but certainly approaching the 20% level when they were around the 10% level at the beginning of the year. And they’re facing tougher comps than California and Florida.

Operator

Our next question comes from John Deysher - Pinnacle.

John Deysher - Pinnacle

Just a further clarification on the headcount. At the end of last year, end of ’07, your full-time equivalents was 14,300 approximately. What is the similar number for the end of this quarter and where do you expect it to be at year end for full-time equivalents?

Gary B. Pruitt

At the end of the third quarter it was around 11,500 and we would expect it to be about at least 1,000 lower than that at the end of the fourth quarter.

Patrick J. Talamantes

As we see the benefits of the workforce reductions go into ’09.

Gary B. Pruitt

That would be a year-end point. That wouldn’t be the average but the year-end point would be about 1,000 lower. So it would be from that 14,000+ figure to the 10,000+ figure from the end of last year to the end of this year.

Operator

Our next question comes from Edward Atorino - The Benchmark Company.

Edward Atorino - The Benchmark Company

Comp was down about $32 million quarter-to-quarter excluding the severance charge and you have another round of cost-cutting taking effect. There would be a greater year-to-year decline I presume in the fourth quarter. Is there another $20 million that comes out in the fourth quarter as a result of the two cost-reduction programs in effect?

Gary B. Pruitt

We’re not going to get to that level of specificity. I would say that the third quarter captured entirely the first round of cuts, virtually all. The second round of cuts as it rolls through will lead to some increase in the fourth quarter in that decline, but not to the magnitude that you described, not an additional $20 million.

Patrick J. Talamantes

The other thing maybe we should just also mention is that because this was the first quarter we benefited from some fringe accruals particularly in the pension and medical areas that we don’t see playing through to the fourth quarter.

Operator

Our next question comes from Catriona Fallon - Citigroup.

Catriona Fallon - Citigroup

My question is around declining classified ad revenue. If I just look at the year-to-date numbers, it looks like the total decline is about $154 million. I know there’s been some decline also in the online classifieds. Can you help me understand within that decline how much of that is cyclical versus secular so the seculars shift to the Internet being that there was a decline there as well? And then if it is a cycle, how long after we start to see the cycle improve? How long after an improvement in housing starts, how long after existing home sales improve, how long after an improvement in employment will we actually see the positive benefit in some of these classified ads?

Gary B. Pruitt

It is as you might understand difficult to answer with precision the question of a $154 million decline how much is cyclical and how much is secular. Certainly the secular issues are greatest in classified and within classified greatest in employment and least in real estate at this point with automotive in between.

I would think that and we would suggest that a majority of the current decline is cyclical and that we will unlikely see an increase even in the recovery we won’t see a significant increase perhaps in the number of small classified liner ads; we may see some but that’s really where the migration is underway.

We will still see classified display advertising from homebuilders and larger real estate companies and auto dealerships, etc. They will need to advertise. That advertising while falling into classified in some ways is more akin to retail sort of advertising. So classified’s not going away entirely. We believe a majority of the decline that we’re currently sustaining is cyclical and therefore temporary. It may yet get worse before it gets better.

As we pointed out the regions where we went into this recession first, California and Florida, haven’t seen the erosion that markets that came into it late are seeing. We’re seeing declines vary by region based upon the economic indicators which would indicate that it is a cyclical effect at least in part and we think a majority of it is.

We will not see based on what we’ve seen in the past an increase in a cyclical turnaround until we do see those economic indicators that you mentioned improve. So we’re starting to see the number of transactions increase in California; a good sign. The inventory is clearing at least or starting to clear. We need that to happen to bottom. Prices are going to continue to fall. The transaction numbers can rise and we will not see a turnaround in revenue or the end of a cyclical affect until the economy does begin to recover.

That means unemployment rate bottoms and begins to turnaround and housing prices near a bottom before they turnaround as well. It can still go a little lower on housing prices while ad counts begin to go up. But, we will not see that until the bottoming of the recession.

Operator

Our next question comes from Bill Green.

Bill Green

I just wanted to revisit the Miami land sale. It sounded like you were a little bit less hopeful of closing this deal in the fourth quarter versus the last conference call when you said you had contact with a buyer and you expected to close the deal in the fourth quarter. Has something changed in your dialog with the buyer? And, to the extent that you cannot close it do you have recourse versus the buyer or does the land just revert to you?

Gary B. Pruitt

I can tell you that nothing has changed in our dialogs with the buyers. We continue to have a good dialog with them so it is not as if that has changed. What has changed are the credit markets and so I don’t know if that will affect their ability to close the deal or not. I don’t know all of the details of their situation and what they’re dealing with.

So, we remain hopeful that it closes and the dialog remains positive. I just wanted to emphasize that it wasn’t like getting a tax return from the government, it’s a contract and therefore not a guaranty. If they are unable to close, and again, we hope they do but if they are unable to close we keep the $10 million that they have already paid us and they owe us an additional $2 million and we keep the land.

We’ll have to see how that all plays out in the fourth quarter but any change of tone isn’t the reflection of any change in our discussion or relationship with the buyers. Obviously, credit markets are worse which makes anything a little less sure.

Operator

We have no more questions at this time.

Gary B. Pruitt

I appreciate your attention and we look forward to better days ahead.

Operator

This concludes our conference call for today. You may now disconnect your lines.

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