The McClatchy's (MNI) CEO Craig Forman on Q4 2016 Results - Earnings Call Transcript

| About: The McClatchy (MNI)
This article is now exclusive for PRO subscribers.

The McClatchy Company (NYSEMKT:MNI) Q4 2016 Earnings Conference Call February 9, 2017 12:00 PM ET

Executives

Stephanie Zarate – Investor Relations

Craig Forman – President and Chief Executive Officer

Elaine Lintecum – Vice President and Chief Financial Officer

Mark Zieman – Vice President-Operations

Chris Hendricks – Vice President-Products, Marketing and Innovation

Analysts

Avi Steiner – JPMorgan

Michael Kopinsky – Novoli Finance

Craig Huber – Huber Research Partners

David Stewart – Wells Fargo

Todd Morgan – Jefferies

Ken Silver – KLS Asset Management

Operator

Good afternoon. My name is Christina and I will be your conference operator today. At this time I would like to welcome everyone to The McClatchy Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] Thank you. Stephanie Zarate, Investor Relations Manager, you may begin with your conference.

Stephanie Zarate

Thank you, Christina, and thank you all for joining us today for our fourth quarter 2016 earnings call. I'm Stephanie Zarate, Investor Relations Manager, and I'll be available to answer any follow-up questions you may have after our call this morning. My number is 916-321-1931 and you can also find my contact information on our website. This call is being webcast at McClatchy.com and will be archived for future reference.

Our earnings release was issued this morning before the market opened and I hope you've had a chance to review it. Joining me today is Craig Forman, our President and CEO; our Vice President of Operations, Mark Zieman; our Vice President of Products, Marketing and Innovation, Chris Hendricks; and our Vice President and CFO, Elaine Lintecum.

This conference call will contain forward-looking statements that are subject to risks and uncertainties that are described in our SEC filings. Actual results may differ materially from those described during the call. Also, non-GAAP amounts discussed this morning are reconciled to the most directly comparable GAAP measures in schedules posted on our website or in the body of our press release.

Before I turn the call over for a review of our fourth results, I would like to point out that the 2016 operations disclosed in our press release and discussed during today's call do not include the operations of the Herald-Sun in Durham, North Carolina, acquired in December. The purchase of the assets and operations of the Herald-Sun took place as of the close of business on Sunday December 25, the last day of our fiscal year, and as a result had no impact on our 2016 fourth quarter operation.

Now I will turn the call over to Craig Forman.

Craig Forman

Thank you, Stephanie. Good morning and thank you for joining our call today. As most of you know this is my first communication with you as McClatchy Co’s President and CEO. Before we discuss the fourth quarter results, I’d like to take a few minutes to provide some perspective on the company and our path forward to the accelerated performance we're confident we can deliver.

The Board's decision late last month to make a change in the CEO reflected the Director's desire to find ways to accelerate our digital transition. As a Member of the Board for the past three years, I can confirm the Board’s continued confidence in the company strategy to deliver quality, meaningful journalism to serve our local markets, both our audience and our advertisers. I can also confirm the intent and commitment of the management team to generate shareholder value as we continue to align cost structure with business reality and our economic opportunity, which of course is largely in the growing digital ecosystem. Our leadership change is aimed at accelerating the cadence and pace of the digital transition.

We benefit from strong and unique assets; first and foremost, a talented, flexible and committed workforce, which I have seen firsthand in my first fortnight as CEO. Since taking this role I’ve addressed our entire 5,400 person team several times via video and electronically and I have traveled to meet in person with nearly 1,000 of our team members, approximately one-fifth of our total workforce in all-hands meetings in Sacramento, Washington, D.C., Miami and Raleigh, North Carolina.

These visits have confirmed what I’ve already believed as a Board member and now from the inside. Note, McClatchy benefits from a workforce that is strongly committed to the work we do and to its enduring integrity. Award winning work that is nationally significant and locally relevant. Second, we own and operate renowned brands that have strong and enduring relationships with our business customers in our local markets across the country and the audiences that turn for us for quality, accurate and meaningful journalism and products.

Third, we benefit from significant progress in restructuring, both cost alignment with trends in the business, as well as substantial debt reduction in our capital structure, achieved by the management team during the four-year tenure of my predecessor, who lead with integrity and commitment. You should expect a continuation. We will continue to align our cost structure with business trends.

In the years that I've been associated with companies in the midst of digital transition including McClatchy, I have observed that great brands, award-winning content in products, dynamic sales operations and a strong executive team do not always operate in the most rapid and agile methods. Our team understands that it must execute at a more rapid rate in order to make the most of opportunities in our core brands and adjacent markets. We have hard work ahead. We operate a business with substantial complexity, some of that is the result of our storied 160-year history. Other elements result from the acquisitions that have grown McClatchy to its 29 city national footprint over the past decades.

But this operational complexity also introduces cost in execution inefficiencies. To be sure, our team is overcoming many of these inefficiencies. Let me provide a few examples from just the past year. In 2016, we were able to reduce adjusted operating expenses, or cash costs excluding severance and other items, by more than $58 million. These costs were down by approximately $116 million over the last two years. That expense discipline has allowed us to make important investments including reinvention of our sales force aimed at better serving our advertisers and increasing our digital growth.

In the fourth quarter, we were able to repurchase $32.8 million of our bonds, bringing total 2016 debt reduction to $63.6 million and ensuring that we can easily retire our modest debt maturity this year. As a reminder, our next debt maturity isn't until 2022 and we also returned value to shareholders in 2016 by repurchasing nearly 656,000 shares of Class A common stock for $7.8 million. Still there's more work to do. Even as we remain vigilant on costs, we need to move with greater speed and agility to more rapidly conceive and deliver product in technology improvements to return to revenue growth.

What will be the hallmarks of those improvements? In only two weeks in this job it's not possible to have a complete answer, but let me offer some observations. In my two decades as an operator, executive, an investor in Silicon Valley, I have learned that great products in the digital area reflect one of several characteristics and the best embody all of them. Great products save our customers time, great products save our customers money, or help them make money by targeting the right customer at the right time. And finally, great products inform delight and gratify users in unanticipated ways.

For McClatchy this means that we will work faster to know our audience better, and to accelerate our abilities to deliver audience and client solutions that better meet their evolving needs. Products that offer breadth as well as depth, products that are accurate, timely, and that respect our customers intelligence. For me the timing of this new role is especially meaningful. Just last week McClatchy celebrated its 160th anniversary. Today we connect with a far greater audience in multiple more ways than our Founder, James McClatchy, ever imagined back in 1857 when he began editing his four page broadsheet during the gold rush in Sacramento.

There are few businesses that can claim such longevity, which is a testament to the enduring commitment of this company to quality journalism, community service and free expression. Today the McClatchy family still guides and supports our company, starting with our Chairman, Kevin McClatchy's. But even Kevin is fond of saying that our company has changed more in the past three years than in the prior 157 and that pace will only accelerate. In fact as we consider our longevity in the future and in the rearview mirror, the only constant that we can depend upon is change, and the continuing focus of our company to change with the needs of the communities we serve.

With that, let me hand the call over to Elaine.

Elaine Lintecum

Thanks, Craig and welcome everyone to a review of our fourth quarter results. Advertising revenue trends in the fourth quarter were relatively stable with those reported in the first three quarters of 2016, despite a very tough quarter in print advertising. We also were able to successfully reduce our adjusted operating expenses by 5.9% to maintain our historically strong EBITDA margin, which was 22.7%, that was in the fourth quarter. We're leaning into our digital stride and we're identifying ways that we can move more quickly to improve our top line plus steadily reducing legacy costs so that we can continue to invest in our digital future.

We reported GAAP net income of $3.1 million for the fourth quarter and adjusted net income of $12.9 million. Looking more closely at revenues, total revenues in the fourth quarter were down 8.3% when compared to the same period a year ago. Revenues exclusive of print advertising accounted for about 70% of total revenues in the fourth quarter that was an increase from 66% in the fourth quarter of 2015.

We continue to report strong digital advertising growth, in fact, our digital-only advertising revenues were up 11% and total digital advertising revenues were up 3.7%. Looking at total advertising revenues coming from all sources, they were down 10.9% in the fourth quarter, but it's a sequential improvement from the 11.1% decline we saw in Q3 and a 4 percentage points better than the advertising results in the fourth quarter of 2015. That was despite a steeper drop in print ad revenues which declined 20.6% in the fourth quarter, about 2 percentage points worse than the fourth quarter of 2015.

Direct marketing ad revenues were down 2.6% in the fourth quarter, compared to last year. That was an improvement of almost 12 percentage points from the third quarter. The improvement was due to the addition of new customers, stronger events revenues and cycling over the elimination of certain underperforming products in 2015. In audience, our total revenues declined 1.9% in the quarter, compared to the fourth quarter of 2015. But our digital audience revenues were up 1.3% in the same period.

Chris will speak to our audience trends a little later, but first let me turn the call over to Mark to provide an update on our digital revenue strategies.

Mark Zieman

Thanks, Elaine. In the fourth quarter, we again achieved double-digit growth in digital-only advertising revenue, despite cycling over impressive growth from the same period in 2015. In fact last quarter marks the fifth consecutive quarter of double-digit growth in digital-only ad revenue and a record growth rate of 14.8% for the full year in 2016. Our digital advertising represents 30% of our total advertising revenue last quarter, up more than 4 percentage points from 2015. For full year 2016, digital advertising made up nearly 31% of total ad revenue, up from 26.2% in 2015.

Last year we completed our sales force reinvention, which increased the size of our sales staff, doubled the number of digital cultures assisting our local teams, added new training and sales tools, and overall focused more emphasis on local advertisers and digital sales. We are confident that we now have the right sales structure and strategies to continue our digital success and generate the best results for advertisers. A big part of that is the launch of Excelerate, our digital agency. It embraces and supports our sale strategies and it's especially designed to help our markets generate leads, identify customer needs, provide a strong return on investment for advertisers and thus improve retention.

We have closed six figure deals every week, since our launch in August and that's only from a third of our markets. Excelerate has built campaigns for more than 40 advertisers, most of them new to McClatchy. And now this will only grow as we roll our Excelerate to the rest of the company in the first half. We plan to invest $10 million this year into Excelerate to grow its sales force, further improve results and to set us up for even more success in 2018.

Beyond Excelerate, our growth in digital-only advertising revenue in the fourth quarter once again came from across the Board, especially in areas that are increasingly popular with advertisers such as video revenue which was up more than 200% over the same period in 2015. We're also seeing strong growth in our digital services category, including reputation management, website design, SEO and search engine marketing. And as we've seen all year, the more traditional parts of digital business continue to post steady growth, such as display ads driven by our audience extension in programmatic strategies. Programmatic revenue was up nearly 64% in the fourth quarter and represented 65% of our national digital-only revenue.

So now I'll turn it over to Chris to speak to some of the partnerships that are helping drive those numbers along with audience highlights.

Chris Hendricks

Thank you, Mark, and good morning everyone. As Mark mentioned, during the fourth quarter our programmatic advertising was up 64% as compared to the fourth quarter last year. Since accelerating our programmatic efforts during the third quarter of 2015, which included joining the local media consortiums, high-quality brand-friendly exchange, we are now beginning to roll over more comparable programmatic results.

More than 50% growth rate during the fourth quarter; however, clearly demonstrate our team continues to maximize the opportunity. Video also proved to be a digital bright spot for us in 2016 as we further enhanced our branded content efforts, production expertise, monetization techniques, and video journalism. And during the fourth quarter of 2016 video views increase to 24 million, up 205% compared to 2015 and revenues grew 233%. For full year 2016, we saw video views on our player reached more than 74 million, growing four times compared to 2015. During the year we also completed transition the entire company to our own video player.

Video revenue overall grew by about 250% for the same period, not only showing that our video storytelling and journalism is valued by readers, but also demonstrating our ability to capitalize on views and create revenue opportunities. We continue to add resources to our video sales and operations efforts. We also added video partnerships and investments with companies like Pi, Stringer, and Radio Public during 2016. Another video investment Watchup was recently acquired by streaming service, Plex. And we plan to further grow our video effect adding more people, technology, investments and partnerships this year.

Turning now to our digital audience. During the fourth quarter of 2016, we once again saw audience in traffic increased and interest in our journalism and products grow. Total page views grew by 9.8% to 922 million. Total average unique visitors grew 22.3% to 61 million when compared to the same quarter last year. And our local unique visitors grew 13.2% over the same period. While the general election was certainly top of mind for most readers, journalists and media companies, and helped drive audience, local stories of interest originating from our newsrooms like the Charlotte Observer’s coverage of police protests in the Miami Herald and El Nuevo Herald's coverage of the death of baseball player Jose Fernandez, we’re also key contributors to our audience success.

Total paid digital-only subscribers were up 4.8% to 83,100 when compared to the fourth quarter of 2015. Strong marketing and professional efforts drove this growth, despite experiencing headwinds from significant subscription pricing increases initiated during the fourth quarter of 2015 and the relaxing of the paywall threshold during the fourth quarter of 2016. For the year, digital-only audience revenues were up 9% compared to 2015, and from fourth quarter of 2016 digital-only audience revenues were up 4.9%.

In 2017, we intend to grow digital subscriptions in audience engagement through the implementation of a new digital audience management system. We expect the system to also help us grow digital subscription revenues and to stabilize total audience revenues in 2017. The new platform watching during the first half of the year will allow us to better manage our subscriber relationships, capture and leverage user data, provide dynamic subscription options, and customize and target content to users and increase their time spent with our news and information.

And now I'll turn it back over to Elaine to complete the review of our fourth quarter results.

Elaine Lintecum

Thanks. We delivered on our commitment this year to reduce our legacy costs and gain efficiency in our operations. In the fourth quarter, we reduced adjusted operating expenses by 5.9% and by 6.7% for all of 2016, compared to the same period in 2015. We did this through identifying regionalization opportunities in our finance and human resources as well as other areas, co-sourcing technology, as well as outsourcing some current operations. Excluding the cost of some of these initiatives, we saved more than $58 million in adjusted expenses in 2016, on top of saving a like amount in 2015 compared to 2014.

As we continue our digital transformation, we balanced the impact on current earnings and debt repayments with the need to invest for the future. Consequently, we invested much of our 2016 savings in sales resources, in training, in our digital products and to pursue legacy cost restructuring that will bring us even greater returns in the future, but we're also focused on our capital structure in returns for shareholders. In the fourth quarter we closed on the sale of a covered garage in Sacramento, for pre-tax proceeds of $5.75 million.

And we recently announced that we entered into contracts to sell and lease back our Sacramento, California and Columbia, South Carolina buildings and land in which The Sacramento Bee and The State operate. The company combined proceeds for these asset sales are expected to be $67.8 million. We also entered into a new LOI to sell our downtown Raleigh building on improved terms compared to the previous contracts, and we are working hard to come to agreements to close these three transactions in 2017.

In December, we received a normal operating cash dividend of $6 million from CareerBuilder. We continue to be supportive of the decision made by our co-owners to review strategic alternatives for CareerBuilder, which is still in process and upon which we will not comment. We ended the quarter with cash of $5.3 million and debt of $873.7 million. Our leverage ratio was 5.27 times cash flow defined in our credit agreement.

We have an unused $65 million revolving credit facility and a restricted payments basket under our 2022 bond indenture, was approximately $745 million at the end of the year. After our fourth quarter debt repurchases, our near term debt is a very modest $16.9 million and as Craig said earlier, we have no other maturities until 2022. So we remain confident in our ability to manage our debt.

Our capital expenditures totaled $2.5 million in the fourth quarter and $13 million for the full year 2016. Aside from debt repurchases, we also used our cash to return value to shareholders by buying back 656,000 shares of Class A common stock or $7.8 million in 2016. And in total we've returned more than $15 million to shareholders via stock repurchases over the last two years.

Now I turn the call back to Craig to discuss our outlook.

Craig Forman

Thanks, Elaine. One thing that won't change in 2017 is McClatchy’s dedication to journalism that is fiercely independent and meaningful to our readers and communities. We all would agree that high-quality, accurate journalism is vital to our democracy. But at McClatchy, we also believe that good journalism is good business. That it is the underpinning of our success in the marketplace, because it attracts the audiences that are most valuable to our print and digital advertisers.

For 2017, we are focused on delivering more and better digital products and to deliver them faster to our readers and advertisers. As a result, we expect our digital-only advertising revenues to continue their double-digit growth pace, fueled in part by Excelerate and further investments in our digital portfolio and partnerships. We will be investing approximately $10 million in resources and tools for Excelerate in 2017. As a result, we believe our digital-only ad revenues can grow faster than we saw in 2016, as Excelerate finds its stride and other digital strategies take hold.

Print advertising revenues well important to the business remain volatile. As I mentioned earlier, we expect print ad revenues to decline in 2017, and become a smaller percent of total revenues. Audience revenues are expected to be stable in 2017 through a combination of the new consumer options and pricing programs described earlier.

We plan to reduce adjusted operating expenses and we will monitor cost throughout the year to achieve expense performance in line with revenue performance, despite the additional investments we're making in news and sales infrastructures. We will continue our efforts in monetizing our real estate assets in 2017 and we expect to use the proceeds and our cash from operations to delever the company through debt reductions and for further investments in the business. We have no required pension contributions in fiscal 2017 and we expect capital expenditures to be between $12 million and $15 million.

And now, I'd like to open up the call so that we can answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Avi Steiner from JPMorgan. Your line is open.

Avi Steiner

Thank you, and welcome Craig. I know it's been a short period, but I want to start off by asking, because accelerating the digital transition which is kind of how you lead off. Is that involves in your view launching new digital tools for marketers to reach your newspaper audiences broadly or is it to change how the news product is currently offered to the consumer and better monetizing that?

Craig Forman

Thanks, Avi. I think the best way to answer that is the Board and myself are very supportive of the team's efforts and the strategy that is in place to provide both sets of solutions. And you've seen us address both of those things and we referred to some of the media efforts underway in this call. You've seen us launch video products in ways that would have been unheard of several years ago, and both Mark and Chris referred to some of the efforts both with Excelerate and our new audience platform that will offer some more accurate targeting for subscription providers.

Beyond that I don't want to provide a lot of specifics, it's only two weeks. But I think I'd add that part of the energy is the new focus on the speed with which we conceive products, develop engineer and then deliver and roll out those products to the marketplace. And you can expect us to continue to redouble our efforts to accelerate that pace.

Avi Steiner

Perfect. And Management has historically done a great job on the expense side. Craig, how do you see going forward? I think you said at the very end of your prepared remarks, the plan is still to reduce OpEx. Whether you could put a little color around that and how – Elaine, I don’t know if you have to jump in here as well, but how does the $10 million into Excelerate factored into operating expenses only for this year?

Craig Forman

Yes, let me put a context to it Avi, and then Elaine will continue. We have been extremely adept at expense reduction and this management team as they've pointed out. Just in the past two years has delivered more than $100 million in OpEx savings over the course of that 24-month period. We're going to continue to look for ways to align our cost structure with the realities of our business and our focus on de-levering remains a very much important focus of our overall strategy. Elaine, may be you want to –

Elaine Lintecum

Sure. I would say that in the expense guidance that we've given we've included that $10 million. So even with that investment I think we'll continue to do the kind of focus on cost that you come to expect from McClatchy. And so we're not giving a specific expense guidance number because I think a lot of that depends upon where revenues go, we’re renascent to say costs going to be down by X. And then if revenues don't come in, we actually do more than that. So it doesn’t make a lot of sense to give you an estimate of something that is likely to change, but we will align our costs, we are still focused on legacy reductions. We quite frankly expect to see some savings from the reductions that we made in 2016 that occurred over the year and some of that will certainly roll into 2017.

So I think the answer is that, you can continue to expect to see reduced costs even with that $2 million investment in Excelerate and the level of those cost savings will be dependent to some extent on what we see in revenues and what happens specifically in print advertising which is the area that continues to give us and the rest of the industry challenges.

Avi Steiner

Fair enough and thank you for that. A couple of balance sheet ones, if can. First off, which bonds did you buy exactly in this quarter?

Elaine Lintecum

We bought back the 2017 bonds leaving us with only $17 million of those left. And then the remainder was about I think $15 million in the 2022 bonds.

Avi Steiner

Perfect. And can you remind everyone what the company is options/requirements are under both 9% notes those 2022’s and the unsecured notes with respect to sale-leaseback proceeds that you announce in January? And relatedly the North Carolina LOI would that fall under or be considered to sale-leaseback as well?

Elaine Lintecum

Sure. So when we sell assets whether the real estate properties that are sales leaseback or otherwise, our first obligation is to first offer them to the 2022 bond holders at par. And if they’re accepting that par, we will be delighted. If they don't, then we have the ability to do with that under that indenture with what we want. If it’s a sales leaseback under the 1997 indenture, we’re required to reduce some debt within 90 days. The amount of that debt is what we call attributable debt and the definition of that is the net present value of the lease payments under the leaseback agreement.

And so we will have 90 days to reduce those. If we're able to do so with the par offering, that's great. If not, then we will look at where all the bonds are trading and make decisions on whether or not we are buying back secured debt or unsecured debt based upon where the bonds are trading and what we think the right value as to the company.

As it relates to the Raleigh transaction, it may or may not be a sales leaseback. We're looking at numerous options and one of the advantages of working with the new buyer is that they are open to helping us to relocate in a building that is not the existing one which would make it not a sales leaseback, but we are still working through those alternatives. So I can't definitively say that it won't be a sales lease back, but I anticipate that it may not be.

Avi Steiner

Super-helpful. In the hypothetical that CareerBuilder, the let downs you won; hypothetical that CareerBuilder was sold, would that be considered an asset sale assuming it was still within restricted group? Or I not think about that correctly?

Elaine Lintecum

No, you are thinking about that correctly. If that is the outcome, and again we can't talk about the outcome because we're not there, but if that was the outcome, it would be an asset sale. And therefore it would qualify for the need to offer proceeds first to the 2022 bondholders at par. After that – because it's not a sale-leaseback we're free to do with the proceeds what we will. Although, as you know Avi, we’ve been focused on delivering the company and so you would probably expect at least some of those proceeds would go to delever the company.

Avi Steiner

Excellent. And I'm going to leave it at this, and thank you both for the time. Craig, the company made a newspaper acquisition recently. I know it’s small and I'm assuming that's one-off. But I'm curious if you could talk about that real quick and really my question is does McClatchy need to get bigger to achieve your digital vision or can you achieve it with the assets you have? Thank you both very much for the time.

Craig Forman

Avi, thanks for the questions and thanks for that thoughtful final question. That's obviously a big question and you know we never really comment on M&A in any given moment. We had an opportunity in Durham and we took it. The team executed very well finishing the transaction and in a very short amount of time and it's already been delevering to the company. So I think we're feeling very comfortable without that. You can expect us to be opportunistic. I hope you can expect us to be a smart in the future, as we have been in the past, and maybe I'll just leave it at that.

Avi Steiner

Thanks, guys.

Operator

Your next question comes from Michael Kopinsky from Novoli Finance. Your line is open.

Michael Kopinsky

Thank you, and welcome Craig. Having a management change right in the middle of a quiet period is never good and obviously created a lot of anxiety with the stock price. But I'm pleased to see that the results were at least in line and somewhat better in some cases than I expected, so I’m happy about that. A couple of quick questions. How long does the affiliate agreement with CareerBuilder last for the company and does the company plan to rebrand its employment section in the paper at some point?

Chris Hendricks

Hey, Mike, this is Chris Hendricks. Good morning to you. Our agreement with the – it’s renegotiated in 2016 – I'm sorry 2018 with CareerBuilder?

Elaine Lintecum

October 19

Michael Kopinsky

October?

Chris Hendricks

No, that’s accordance with account.

Elaine Lintecum

Oh, you're right.

Chris Hendricks

CareerBuilder, 2018, as far as ongoing business is concerned; the CareerBuilder sellers in that what potentially is going on hasn’t been completed. So we expect to continue in 2017 and 2018 as we are today. Should something happen? Of course, we will look for options.

Michael Kopinsky

Got it. In the print retail advertising moderated in the fourth quarter from the third quarter and I was just wondering if those trends are continuing as you go into the first quarter. If there were any signs of improvement in the retail category or is this just the loss diminishing numbers because of the fact that you're going up against smaller retail numbers.

Mark Zieman

Hi, Mike, this is Mark. Yes, I probably say it’s more allowed than the former. I don't think we expect to see rebounds in print retail or national revenue. In retail print revenue in the fourth quarter we continue to see large drops in department stores as well as home furnishing and other pre-print advertisers and we expect those trends to continue.

Michael Kopinsky

And in terms of you guys talked about your new initiative Excelerate, but what about Nucleus? Can you – that seems to me maybe a disappointment. Can you just talk about your talks about that initiative?

Mark Zieman

Sure. Yes, we certainly wouldn't think it's a disappointment. As you'll recall we are one-fourth partner in Nucleus along with Gannett, Hearst and tronc, we also have more than a dozen other media partners join us as affiliates and others are continuing to express interest and I believe you'll see in the future that others will be joining us.

Yes, soft launch in July 2016 where we announced it, but really it's now only beginning its first full year of operation this year. We're not providing projected contributions for Nucleus, but we are pleased with the reception that it's had in the market and with our agency partners, larger retailers and national advertisers are telling us that they appreciate the reach across the top 30 U.S. markets, integrated solutions, we're bringing to bear with that and the scalable distribution models. So all the reasons that we believed Nucleus would be successful are still there and we’re optimistic about that in the future.

Michael Kopinsky

Great. Okay. That’s all I have for now. Thank you.

Mark Zieman

Thank you.

Operator

Your next question comes from Craig Huber from Huber Research Partners. Your line is open.

Craig Huber

Yes, thank you. I’ve several questions, if I could. I first want to just a big picture, if you look at your operations what happen with fourth quarter on advertising maybe what happened early here in 2017, is everything you’ve seen in your various markets, we've seen the extra pressure from the economy. Did you see a recession coming like that? What status quo?

Mark Zieman

I'll start that answer, I guess. No, we certainly saw print take a dip in the fourth quarter of last year especially and in period 12. For the year it was down 18.3% which is basically flat to prior year, so not a big trend change there. And we've seen that softness has started in the holiday season continue on and that’s mainly attributable to the same things that we’ve been suppressing it for some time now which is our retail national and to some degree automotive classified categories historically were our best print customers and they've been hit hard, especially retail and national by competition from online retailers.

So when you look at our print results, it’s sort of a direct reflection of the stories you’re reading on our websites, in our newspapers about the effect of that competition digitally having on those retailers Macy's, Sears, Kmart announcing store closings, sports authority going out of business, that's having a director effect on our results, and as the pressure continues for them, the pressure will continue for us.

Elaine Lintecum

And then Craig, I would just add to that, keep in mind we've had a pretty good track record in running the company in efficiencies, but we're facing the same thing that everyone else in the industry is facing. And I think you've seen the press releases for our peer companies that have gone before us. Everyone is facing the kinds of declines in print advertising that we are facing.

Now we've made some changes given this transition. For instance, I think what you're seeing in the industry as it relates to print advertising are declines that are reminisce somewhat of the recession year of 2009. The big difference is that if print was down 20% in 2009 that meant total advertisings were down. It is now when print is down 20%, total advertising is down only about half of that because we've grown our digital base so strongly and that base is still growing very quickly.

So we are transitioning and I think as long as that math continues, that's helpful, it will only get better for us. In the meantime, we've been successful in reducing the legacy costs and selling non-strategic assets, so that over the last four years we reduced that by $682 million. And over the last two years we've been able to return over $15 million to shareholders. So while we are in transition and while we're seeing these stuff trends, I think it's more to do with a changing industry and less to do with overall economic terms regarding recession, in fact, the most recent employment report was a very positive one.

Craig Forman

And Craig, it’s Craig here. I’ll just round this out with one other observation looking forward. I think both Mark and Elaine pointed to trends that are much more particular to certain verticals whether it's retailing or the percentage decline being less of an overall impact to our overall business. I think looking forward one of the things we look to is the right strategy for a lot of these verticals is a combination of accurate targeting and reach. And how we deliver those solutions is something that our sales teams are actively working on. And I think you'll continue to see acceleration in that area.

Craig Huber

I appreciate that. And then couple of questions if I could on the digital side and the system. What was the digital-only pain subs at the end of the quarter? And then also for your video products on the advertising side, what percent roughly of your digital advertising comes from videos, like 5% to 8% in the ballpark?

Chris Hendricks

This is – Craig, on the first one – this is Chris, Craig. First one was 83,100 was the digital-only subscription count at the end of the quarter.

Mark Zieman

Yes. On the video advertising it’s still very small part of our total digital-only advertising, but as we mentioned earlier it’s growing rapidly.

Craig Huber

Okay And then, Elaine, if I could ask you regarding this too, what was the size of the underfunded pension at the end of the year and were the rest of the piece in that places? I know you are planning too this year, but thank you.

Elaine Lintecum

The pension plan at the end of the year on a GAAP basis was underfunded by $487 million due primarily to a lower discount rate. The rate this year is about 20 bps below the rate that we saw at the end of last year. But the increase was only about $22 million compared to last year, primarily because we had good returns on assets this year, while most pension plans had negative returns in 2015. They are rest underfunding was much lower than that; it was about $218 million.

As we look out, we have no required contribution in 2017, nor do we expect one in 2018 although that depends to some extent on how the assets do over this coming year. And those – we’re in that position largely because I think we were able to make the pension contribution property to the pension plan voluntarily earlier in the year. And that's turned out well for the pension plan and for the company over time. They've been able to sell some of those real estate assets again and we've been able to take tax deductions for those, but also to preserve our cash to use towards growing our digital business and towards paying down debt.

Craig Huber

And then also Elaine if I could, for news print in the quarter, what was the percent change year-over-year for the average price as well as consumption?

Elaine Lintecum

For the quarter price was up 7.4% and usage was down 20.3% if you look on a full year basis, our average usage of times was down almost 16% and prices was actually down 3.4%. So what I would say is that we rolling over some of the prices increases that we began to see in the third quarter. And we will do that I think probably in the first and second quarters of next year, although we expect that to be more than offset by declines and usage. Our sense is that news print pricing is somewhat stable. It really depends upon whether or not there is more capacity that comes out, because obviously news print event continuous to decline.

Craig Huber

I think it’s my last question Elaine. Could you give just – maybe just for modeling purposes, can you roughly size out the revenues for the new term paper has acquired. Thank you.

Elaine Lintecum

Very small and we've agreed to not talk about a lot of that stuff, but we will disclose it if it becomes material we certainly hope it grows much faster. But it's really a very small acquisition more like the size of our Rock Hill newspaper. So it's just not material, Craig.

Craig Huber

Okay. Thank you.

Operator

Your next question comes from David Stewart from Wells Fargo. Your line is open.

David Stewart

Hi, everyone, thanks for taking the question. I want to ask a question on CPMs. I wonder if you could give us kind of what the landscape looks like on the digital side, bigger video CPMs are out way your other digital impressions. And then a second question on CPMs, lot of your rivals in the local media space like to say print has a very expensive CPM and for advertisers. I wonder if you could just comment on that. Is that still an accurate statement? Do you think that the flawed data point? Just kind of curious on your thoughts there.

Chris Hendricks

Hey David, this is Chris Hendricks, good morning. On the CPM front, CPMs are down a bit year-over-year, but our inventory was up almost 50% so we made up for it more so then is demand for the increase inventory backward pressure on the downside. As per rate on that, the total average CPM for the company is just about $8 that all inclusive of everything that we throw in the bucket and the video CPM strength to be higher up in the $20 to $30 range.

David Stewart

Helpful. Thank you.

Mark Zieman

This is Mark. On the CPMs on print, I think you can look at that two different ways. I mean, in one hand, our print advertising tends to be very profitable because of the fixed cost we already have shrunk in the business – extra preprints, extra ROP ads that have high margin voice. On the other hand, if you want to look at those fixed costs and say that we have to have presses, we have to have folks delivering those papers, news print going down the streets. And if you add that in, then you can make an argument that that's expensive. So I think you look at two it different ways, but I guess I wouldn’t look at it as a print as high CPMs.

Elaine Lintecum

Certainly, not over the years.

Mark Zieman

Right.

David Stewart

Okay. And then just another question on the digital environment and your TV station arrivals even radio stations really are talking about digital as being a great opportunity for them as well. I just wonder if you could talk about the addressable market in local digital spend and what do you think gives McClatchy a competitive advantage over some of those other arrivals? Is it news quality or some other characteristic?

Chris Hendricks

This is Chris. Couple of things, obviously, the quality of our journalism does matter. We are the largest news media provider in the local marketplace, so we attract tremendous audience. Our breaking news capacity is pretty good as well as the number of journalists that we have in the marketplace. On the sale side, to look at that, we enjoy a very large sales force that's been in market for literally in some cases 100 years plus. We know the landscape well, so that is our advantage also. So it is a combination of high-quality journalism beat on the street and just being aggressive about it.

And then of course our people, our people are very bright, smart people in world. And we're always training them as you heard Mark speak to some of the training that goes on. On the sale side and we are embarking on training in of the advance journalism in our newsrooms continuously. So those are advantages, I think that are to our benefit in the digital age but it's not something that we rest on there. It's great to rest on your laurels sometimes, but we're not doing that here. And as Craig spoke to earlier, we're going to pick up the pace.

David Stewart

Great. And then one last question, if I could. I imagine being a more digital centric company, you're also more data driven. Is there anything that surprised you as you've rolled out your digital strategy whether it's a certain exposure to millennials, if that's changed your target demographic, time spin on our website, anything just kind of stood out to you over the past couple years? And thank you.

Chris Hendricks

I would say – this is Chris again. The most surprising thing to me and to everyone is that despite the rumors that millennials do not read news, the data has told us that in the cases indeed that they do and we do have a very strong segment of millennials and younger generation people reading our digital products, as well as the printed product. So I think it's about – in a printed product on a daily basis, if I get this right, roughly 25% of millennials do read a printed newspaper on a daily basis, let alone their consumption of the digital side. So that was a surprise but it really wasn't a surprise given our strength of the coverage that we provide.

Craig Forman

David, I'll just add this point. The reality of the marketplace is that the data provides underlying trends but the data is constantly changing, so you have to be flexible and agile in evaluating the data, and then operating your strategy to meet that opportunity. Increasingly, we look at the world in which we operate as a battle for audience time and attention. And in that respect, Chris highlighted many of the reasons why we think we have a strong competitive advantage in the strong place in the marketplace. And I think what you'll find us continuing to do is focusing on building and delivering quality journalism and products that meet the needs of those users rapidly and in all the different ways they may want to connect with us.

David Stewart

Great. Thanks so much for the color.

Operator

Your next question comes from Todd Morgan from Jefferies. Your line is open.

Todd Morgan

Thank you, and thanks for holding the call, and welcome, Craig. I just wanted to actually follow-up on one question, one topic, compensation expenses down exceptionally sharply I think in the fourth quarter of the year both sequentially and year-over-year. Where there any particular events or drivers for that? Can we think about – how should we think about that sort of a starting point for the next couple of quarters? Thanks.

Elaine Lintecum

Sure, I think we are rolling over some periods of time when we have outsourced four newspapers in 2016, and so there were savings there. We have also co-sourced our technology and we’ve regionalized a number of things. And so I think those are reflected also in the numbers. I think as we move forward, we will see the impacts of that, certainly rolling through as we get into the first half of 2017.

And so I wouldn’t necessarily – typically what we see is that the first quarter is not too dissimilar than what we see in the fourth quarter. And I think a best way to kind of look at those trends separate from the impact of what I’m talking about here in terms of outsourcing and co-sourcing. We try to give you those underlying numbers in our adjusted operating expenses. And so if you look at back of the press release, you will see that we’ve adjusted out for that severance. And I think if you adjust out for that severance, you can see what we’re going over now.

We will roll over some of that severance cost as we get into the second half of 2016. But we continue to work to make our operations more efficient and to work strongly. And again, the forward cost in line with revenue reductions. And so, I can’t give you specific details on compensation expense, just like I really can’t give you details on exactly where print revenues are going to go.

Todd Morgan

Fair enough, that’s very helpful. Thank you.

Operator

Your last question comes from Ken Silver from KLS Asset Management. Your line is open.

Ken Silver

Hi. Thanks for taking the questions. And Craig, welcome. I’ve had a couple of questions on some of the revenue buckets. And I may have – if I miss this, I apologize. On direct marketing, revenues were down 2.6% in the fourth quarter, but they were down lot more for the whole year. So can you talk about why they were sort of better in the fourth quarter? And going into 2017 is that more of the run rate or is this just sort of a one-off improvement? And I have a couple of other questions.

Mark Zieman

Sure. Hi. Yes, I think the biggest difference in Q4 versus the earlier quarters was due to a few markets. Miami had a couple of niche products that moved into the fourth quarter from earlier in the year at request of their customers and so that gave them a bit of a bump. So that was really a timing difference. We also saw Kansas City and a couple of other markets that added some major insert advertisers that hit in the quarter. And we also start cycling over some cuts that we had made in 2015 in the preprint and TMC business. And so those – that cycling will continue, but some of the other improvements in the quarter were really timing differences.

Ken Silver

Okay.

Elaine Lintecum

I guess what I would say and answer, Ken, this is Elaine and nice to hear your voice again.

Ken Silver

Thanks a lot.

Elaine Lintecum

I guess what I would say, as we look forward – to the some extend because of the timing difference that Mark mentioned, I wouldn’t expect that 2.6% decline to be a run rate for 2017.

Ken Silver

Okay. All right, great. And then on the circulation or audience, revenues were down 1.8% for the year – print revenues were down 1.8% for the year. The circ volume – print circ volume was down close to 10%, you obviously got some price increases. I guess going into 2017 – and print is still the lines share of the audience revenue line. So I guess, you said in your outlook 2017 that you thought audience overall would be stable. So are we going to see sort of similar dynamics? Is that estimate mean that we’re going to see similar audience volume drops offset by price increases or – I’m trying to get a sense of how the print that you can really replicate what happen to the price increases in 2017?

Chris Hendricks

Sure, this is Chris. Things to keep an eye on our, one, the pricing strategy that we’re putting in place as it applies to the audience management platform system or putting in place will allow us to better target, that’s one piece of the puzzles. Retention is another piece of the puzzle with loyalty programs and trying to make sure that the customers remain with us, we hope to slow that curve a slight bit also. And then increased marketing pressure, that’s another place what we’re focusing a lot of dollars on that this year again slow that curve and down the declines in home delivery side. So those three factors are very important and with that in the end of the day…

Elaine Lintecum

Digital growth.

Chris Hendricks

Yes, the digital growth also but that is incompetent in that is to keep those volumes, the decreases at a good pace while we increase pricing in at the same time in market more to get more people on board our digital subscriptions. In the end we believe that will allow us to keep audience revenues stable.

Ken Silver

Okay, great. And then lastly, what did you say the decline was in digital CPMs, to the earlier question?

Chris Hendricks

Let’s say they were down slightly year-over-year. The volume increase and ad inventory increase was about 50%

Ken Silver

Okay, all right. Thanks a lot. Appreciate it.

Operator

There are no further questions at this time. I will now turn the call back over to Craig Forman, CEO.

Craig Forman

Thank you very much for joining us today. We will continue to keep you informed. And thank you all very much for your questions.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!