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Edited Transcript of MNI earnings conference call or presentation 7-Mar-19 5:00pm GMT

Q4 2018 McClatchy Co Earnings Call

SACRAMENTO Mar 14, 2019 (Thomson StreetEvents) -- Edited Transcript of McClatchy Co earnings conference call or presentation Thursday, March 7, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig I. Forman

The McClatchy Company - President, CEO & Director

* Mark Zieman

The McClatchy Company - VP of Operations

* R. Elaine Lintecum

The McClatchy Company - VP of Finance, Treasurer & CFO

* Stephanie Zarate

The McClatchy Company - Compliance and IR Manager

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Conference Call Participants

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* Craig Anthony Huber

Huber Research Partners, LLC - CEO, MD, and Research Analyst

* Jamie McFarlane

* Michael A. Kupinski

NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to The McClatchy Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note today's event is being recorded.

I would now like to turn the conference over to Stephanie Zarate. Please go ahead.

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Stephanie Zarate, The McClatchy Company - Compliance and IR Manager [2]

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Thank you, Nancy, and thank you all for joining us today for our fourth quarter 2018 earnings call. I'm Stephanie Zarate, Investor Relations Manager, and I will be available to answer any follow-up questions you may have after our call this morning. My phone 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 and CFO, Elaine Lintecum; and our Vice President of Customer & Product, Scott Manuel.

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 and schedules posted on our website or in the body of our press release.

Before I turn the call over, I'd like to point out that our fourth quarter and full year 2018 results are a normal 13-week and 52-week basis. However, 2017 included an extra week of results a 14-week quarter and a 53-week quarter (sic) [year]. This happens about every 5 or 6 years. All operating results discussed during the call today have been adjusted to exclude the extra week in 2017 so that periods are on a comparable quarterly 13-week or annual 52-week basis. Reported amounts are included in our GAAP reconciliation schedules I referred to you previously.

Now I'll turn the call over to Craig.

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Craig I. Forman, The McClatchy Company - President, CEO & Director [3]

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Thank you, Stephanie. Good morning, and thank you for joining us today. We're looking forward to sharing with you the results of our fourth quarter and 2018 as a whole. Our headline is digital growth and progress in our digital transformation. But before we dive in, I'd like to state upfront that while there's been recent media coverage related to Tribune Publishing and a number of our other peers in the industry, we will not comment on rumors or speculation or comment on the public discussion of our peers.

So now on to the business of discussing McClatchy. Our Q4 performance provides continuing evidence of our transformation into a digital media company. We marked 11 consecutive quarters of digital subscriber growth, that is never easy and it gets harder as the numbers get larger.

Our increase in paid customer relationships reflects the technology and platform improvements that I identified as a key priority for McClatchy when I first spoke to you 24 months ago. It is gratifying to see our team's progress, and I thank them for it. It comes at a time the same time that we continue to deliver on our mission of producing strong, independent local journalism that is essential to the communities we serve.

Earlier this year, we took another important strategic step in accelerating the pace and cadence of our transformation. We moved to a functional organizational structure, which among other things brings together our audience, technology and product management teams.

As McClatchy becomes more digital, we're inevitably mirroring the organizational structure of digital platform companies of Silicon Valley to be more agile and to sharpen our focus on our customers. This structure accelerates decision-making, increases professional skills development and creates operational efficiencies. Bringing together the talents and energy of like-minded colleagues also unlocks new energy and innovation to apply to our challenges and opportunities.

Here are key proof points of the accelerated pace of our digital transformation at McClatchy. We increased digital-only subscribers to 155,500, up 51.1% from Q4 2017. We grew digital-only subscribers by 13.5% sequentially from Q3 2018. We increased digital-only advertising revenues by 10.1% on a comparable basis to Q4 2017. We improved our total revenue performance to be the best of any quarter in 2018. We reduced adjusted cash expenses, excluding real estate transactions by 7.5%. We met and nearly beat our 2018 guidance for Q4 adjusted EBITDA, and we fulfilled our commitment, which I also made 24 months ago, to continue to delever our balance sheet.

Journalism is the cornerstone of our business. It's what draws readers and thus advertisers to our news product and is the most appropriate place to start any discussion of the digital transformation that's occurring at McClatchy.

In the fourth quarter, McClatchy's 30 newsrooms continued to produce extraordinary journalism. From The Charlotte Observer and McClatchy Studios' multi-platform narrative, Carruth, that included the popular 8-part podcast series, which was named Sports Illustrated's best podcast of 2018 to The Sacramento Bee's coverage of the Camp Fire, culminating in a heart-wrenching documentary on the destruction of the community of Paradise, California.

McClatchy's tradition of investigative journalism continued with the Fort Worth Star-Telegram's series on sex abuse in the fundamentalist Baptist Church, Spirit of Fear, and the Miami Herald capped off the year with an explosive, blockbuster, Perversion of Justice, a year-long investigation into how a local, wealthy hedge fund manager and serial sex offender was given a sweetheart deal by then federal prosecutor who is now a member of the cabinet, while the rights of the victims of the crimes were ignored. We're proud to note that the Miami Herald investigative journalist, Julie K. Brown, our Julie K. Brown has just received a prestigious George Polk Award for her dogged and compassionate reporting in this series.

In streaming serial documentaries, McClatchy Studios' launched The War Within on Facebook Watch, which chronicled the lives of retired veterans of the war in Afghanistan who are struggling with the hidden effects of that war, including PTSD, as they navigate life after military service. And not to mention thousands of other stories published daily that are essential to our customers and the communities we serve.

And how is this strong journalism received? Let's look at our performance in Customer & Product, our audience segment. Over the past year, we've continued to make significant investment in our digital products and the results can be seen in the strong digital-only subscriber growth. We grew digital-only subscribers by 51% year-over-year in the fourth quarter, and they were up 13.5% sequentially from the third quarter of 2018. This marks the 11th consecutive quarter of digital subscription growth and indicates that the digital subscription platform we have built is starting to scale, delivering value, keener insight and benefit to our business. This success clearly points towards the importance of strong journalism and our intentional focus on strengthening the product quality, customer experience and analytical insights of our platform. We've now chosen to organize McClatchy along functional disciplines and have brought together our product management, engineering, analytics as well as our digital and print subscription business into the new Customer & Product organization led by Scott Manuel, who joins us on the call today.

Our subscribers and potential subscribers are the key audience for our local journalism, and improving their experiences and engagement is at the center of our customer-focused mission. Simple organizational change formalizes the work that has been underway for several months. At the core is our investment in data analytics to better measure customer experiences, segment our audiences by engagement and deliver a dynamic experience across a broader array of product services. Those services now include native iOS and Android mobile apps, digital traditional web pages, of course, and accelerated mobile pages as well as Google News and Apple News platforms. We still have much work to do and this ecosystem continues to evolve, but we continue to see increased platform engagement by our customers with healthy growth in monthly active subscribers and time spent on our sites.

Another area we continue to focus on is the journey to becoming a new paying customer. Last year, we took initial steps by adding alternative payment methods such as PayPal and Subscribe with Google. We're beginning purposeful experimentation on all aspects of the conversion funnel. We're continuing -- continuously testing the porousness of our paywall meter to encourage our audience to sample our product. And we're incorporating propensity to subscribe signals so we can show the right subscription offer at the right time to maximize our conversion rate.

Other efforts and initiatives to enhance our subscription journey, including improving page load times and inspecting both the steps required to create an account and the ease of use of doing so, as well as the specific language used in that interaction. With our enhanced analytic capabilities that I've talked about in previous calls, we can now test these and other variables to optimize the experience in real time, and we have seen improved subscriber conversion rates as a result.

This new functional organization is also focused on retention and optimizing pricing across all of our subscriber products. These are critical capabilities in a digital company. As I mentioned earlier, our strengthening engagement based segmentation models now enables a more precise view into cohorts usage patterns and helps eliminate strategies to reduce churn and identify the demand curve for optimal pricing. This has yielded growth in our average revenue per user for our digital subscribers, which increases the customer lifetime value.

In an intensive sprint of activity in just a short period, McClatchy has made a lot of progress leveraging our metrics to better understand our customers and improve the user experience to engage our journalism in a meaningful way. We are committed to strengthening the customer experience and optimizing our subscriber business to continue its strong digital growth.

Let me now turn for a moment to our loyal and important print audience. While it is not news nor unique to us that this is not an area of subscription growth opportunities, our print customers remain a very important part of our business and represent many of our most loyal customers. These are customers, who are increasingly using both our print and digital products and realize that the printed newspaper is increasingly becoming a premium product and is priced as such. If customers like the format of the printed page, not only do we offer them the newspaper in digital form, but on any given day our e-edition is twice the size of the printed version via our extra news, sports and business sections.

A word on this expanded e-edition. This edition looks like a broadsheet newspaper and is frequently a 76- to 100-page plus news daily that many of us would have longed to be able to produce even at the peak of American print newspaper business, which was more than a decade ago. It is simply a great newspaper, just conveyed to the customer digitally and not on newsprint. Of course, the rich new stories and other products told in our digital and print product, they attract readers, but as a result also advertisers to our sites.

In the fourth quarter, we've built on another milestone of digital transformation that occurred in early 2018. Revenues from total digital advertising as well as digital-only advertising exceeded print advertising in our daily newspapers. Our owned-and-operated sites coupled with the strength of our digital marketing agency, Excelerate, our growing video operations and our programmatic team combine to yield double-digit growth in Q4 2018.

We grew digital-only advertising by 10.1% from the comparable period in 2017. And while the fourth quarter is typically our best quarter due to the seasonality of advertising, our fourth quarter 2018 digital-only advertising revenue growth was about 530 basis points better than our comparable fourth quarter 2017 results, and digital-only advertising was up 4.8% over 2016. We saw both retail and classified digital revenue growth in Q4. Digital-only retail rebounded from Q3 to grow 4.3% in Q4. Local political advertising gave retail a boost in Q4 2018 as our digital platforms continue to achieve growth in areas that were formerly primarily the province of broadcast mediums.

The national category was up 13.1% for the full year 2018, although it slowed in Q4, and we continue to cycle over news events in the prior year quarter that reduced the 2018 fourth quarter digital audience, and as a consequence programmatic revenues compared to Q4 2017. And of course, this will happen for all of you, who are veterans of news companies given the news curve of a prior year that had hurricanes and other very large audience events.

For full year 2018, our national digital-only advertising still grew 13.1% and programmatic revenues grew 12.4%. Within digital, we continue to see strong growth in our digital agency, Excelerate. Excelerate is now a solid contributor for us in both revenue and cash flow. In fact, it contributed $26.9 million in digital revenues to the company this past year and total advertising of $33.4 million. And our Excelerate opportunity pipeline just in the next few months is more than $15 million, reassuring us a strong growth for Excelerate in 2019.

A big revenue driver for Excelerate is digital services, such as search marketing, which grew 31.8% in the quarter versus 2017. And reputation management or reputation -- revenue, excuse me, more than quadrupled in Q4 2018. We also continue to see strong results in video.

During the fourth quarter, our video views reached 106 million across all sites and social platforms. Video views on our O&O properties reached 39 million, a growth of 74% compared to the same time last year, our best performance ever. Video revenues grew 37.3% in Q4 and 47.5% for all of 2018 versus comparable periods in 2017.

When we put this all together, we had our best performance in total revenues for the year in the fourth quarter of 2018, an improvement of 210 basis points over the 9 months ending in Q3 2018. And importantly, we did it while continuing to drive the digital transformation that is required to continue to be the leading local media company in some of the best markets in our nation. At McClatchy, we believe we are building the platform that is needed to grow digital subscribers and advertising that supports our journalistic mission.

Now I'll turn the call over to Elaine to discuss our specific financial results for the quarter, give my raspy voice a rest and the overall improvement in our capital structure in 2018.

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R. Elaine Lintecum, The McClatchy Company - VP of Finance, Treasurer & CFO [4]

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Thanks, Craig. Good morning or good afternoon, as it may be for each of you. We reported a net loss of $27.5 million and an adjusted net loss of just less than $1 million in the fourth quarter of 2018. Our adjusted EBITDA during the quarter was $48 million. We like many companies sell excess property and have done so for many years, but those sales can add volatility to EBITDA depending upon the timing and the size of the property sale.

So to some extent in the fourth quarter of this year, we're a victim of our own success as we sold multiple larger properties in the fourth quarter of 2017. We reported to shareholders in December 2018 that we would improve on our run rate and adjusted EBITDA, if you backed out the $14.2 million in gains on real estate sales that we realized in the fourth quarter of '17. In our 8-K, we said that adjusted EBITDA, excluding real estate gains, was expected to decline from the fourth quarter of 2017 in the range of 8% to 12%, and we met that goal.

Our adjusted EBITDA, excluding real estate gains, was down 8.2% compared to 28.6% decline in the first 9 months of 2018, excluding real estate gains. Total revenues were down 7.7% in the fourth quarter versus a comparable 13-week quarter in '17. It was our best revenue performance of the year.

Advertising revenues in the fourth quarter were down 12.7% compared to the same quarter last year. As Craig mentioned, digital-only advertising grew 10.1% and total digital advertising revenues were up 4.7% on a comparable basis to 2017. We still face headwinds from print advertising, which was down 22.1%, including in newspaper advertising and our direct marketing products that are largely print and preprinted insert products.

Total audience revenues declined 4.5% in the fourth quarter compared to the fourth quarter of '17. Declines in print volumes were partially offset by growth in digital subscriptions and pricing initiatives in both our print and digital products. Digital-only audience revenues associated with digital-only subscriptions were up 47.6%. We saw our strongest growth in 2018 in digital-only subscribers as they reached nearly $156,000 in the fourth quarter. It reflects growth of 51.1% in digital-only subscribers compared to Q4 of 2017 and growth of 13.5% from Q3 2018.

As Craig noted, the sequential trend in audience has improved for 11 conservative quarters and digital subscribers are clearly the future of our audience growth. We continue to be efficient in our operations and focused on cost controls, even while continuing to make investments needed to have the platforms and the structure that will drive our business forward. It's important to recognize that being efficient requires that we continue to invest in the business and that those investments have paid off.

For instance, our digital advertising sales have been tripled in part by our investments 2.5 years ago in our digital marketing agency, Excelerate, and in tools such as state-of-the-art CRM software for our sales teams.

Our digital-only subscriber growth reflects the investments in our audience technology and analytics platforms. And our advertising and storytelling capabilities have been enhanced over the last 4 years by investments made in video and related technology. While we feel these investments are important, we're also striving to generate cash flows and manage expenses to our future revenue performance. This is tougher in some quarters compared to others, especially in the third and fourth quarters of 2018, when we were rolling over expense savings from 2017, that were down more than 9% compared to the previous year.

Still, excluding gains from sales of assets in the fourth quarter of 2018, we reduced adjusted operating expenses by 7.5% compared to the fourth quarter of '17. If you consider the increased investments running through our cash expenses in '18, adjusted expenses would have been down 8.4% in the fourth quarter and 7.7% for the full year. I'd point out these numbers to reinforce our ability and commitment to continue to optimize our business as we also invest for long-term growth.

Our cost savings came from reductions and efficiencies down in our legacy business, including outsourcing or centralizing some operations, downsizing facilities, and of course, newsprint savings. To understand the transformation of our business, it's notable that newsprint costs are about 4% of our cost structure, a cost that was nearly 20% just a few years ago. And even if you include outside printing costs, it's only about 8% of our total costs.

In 2018, our full-time equivalent employees went down 14.8% as we continuously focus on strategically restructuring our company, while respecting those areas that drive our business, news, sales and digital. But all areas of our company must become more efficient as we deploy technology and find the appropriate skill set of a digital media company, whose mission is to produce strong independent local journalism and be essential to our audiences, advertisers and the communities we serve.

Now turning to our balance sheet. In September, we sold the remaining interest in our CareerBuilder investment for $5.3 million and repurchased the same amount of our 2026 senior secured notes in November. As of the end of 2018, our principal debt outstanding was $745 million, and we had nearly $22 million in cash, resulting in net debt of $723 million.

Other than approximately $4.6 million that is due for an excess cash flow suite payable by April 24, we have no debt due until 2026, giving us ample runway for investing in our digital transformation. We also had approximately $61 million of total borrowing capacity under our ABL credit facility with no amounts drawn at the end of the year. Our capital expenditures were about $1.9 million in the fourth quarter and $11.1 million for all of 2018. Including a few small real estate transactions in the fourth quarter, the total pre-tax sales proceeds of real property for all of 2018 were approximately $22 million, just under our previously announced target of $25 million for the year.

Our predictions for our higher discount rate on our pension liabilities at the end of 2018 were correct almost to the decimal point. Unfortunately, the fourth quarter was horrendous in the capital markets, a reminder I'm sure many of you would rather not hear, but as a result, we had declines in pension asset values. Hence GAAP unfunded liabilities increased to $548 million at the end of 2018. While the markets and our returns have bounced back, this is a measurement in time and so is marked on our balance sheet until re-measure. Our unfunded pension -- position for IRS funding levels, which dictate pension contributions was approximately $316 million at the end of 2018, and we expect pension contributions in 2019 to be about $3 million.

Now I'll turn the call back to Craig to discuss our outlook and take any of your questions.

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Craig I. Forman, The McClatchy Company - President, CEO & Director [5]

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Thank you, Elaine. During 2018, digital advertising not only exceeded print newspaper advertising, but the company's growing base of digital-only advertising revenues surpassed print newspaper advertising in the second half of the year. We see this milestone as evidence of McClathcy's continuing transformation to a more digital media company.

Last year, digital advertising revenues represented 43.3% of McClatchy's total advertising revenues. In 2019, we expect to see growth in digital -- in total digital revenues, which includes growth in both digital advertising and digital audience revenues. As we discussed earlier, new audience products and offerings such as our SportsPass subscription are helping to spur digital-only subscriptions and revenues. Print newspaper advertising revenues are expected to decline. We expect digital-only advertising revenues to surpass newspaper print advertising in 2019 as print advertising becomes a smaller percent of total revenues.

In audience, digital subscribers are expected to grow and to largely offset continuing declines in print circulation resulting in low single-digit total audience revenue declines. We plan to reduce GAAP and adjusted operating expenses, and we'll continue to monitor cost throughout the year to align expense and revenue performance, while making additional investments in our news and sales organization. And we have already began to realize some of these cost efforts. We are moving beyond the effort to regionalize our sales structure and are now in the process of moving to a more centralized revenue structure under our new functional organization. And we announced near the end of 2018 that we would outsource the printing of our Tacoma News Tribune newspaper in early 2019.

McClatchy continues to transition to a more digital media company, as I'm sure these results show. And as we transition, we inevitably need to trim costs. Hence, we announced the voluntary retirement incentive plan in February that was offered to approximately 450 employees, nearly half of eligible employees opted into the program, which is expected to result in $12 million to $13 million of savings over the remainder of 2019. We will continue to sell property in 2019 that is no longer strategic to our operations. Gross proceeds from 2019 real estate sales are expected to be equal to or greater than the amounts we reported for 2018.

Net proceeds from real estate sales will be used to redeem our 9% notes due 2026, which is 7 years away. We expect capital expenditures of between $6 million and $9 million in 2019 depending how real estate sales proceed. And as Elaine mentioned, we expect to contribute approximately $3 million to our pension plan in 2019.

I would like to add that all of our progress comes amid a time of continuing dramatic challenges and opportunities in our industry and in an environment that is turbulent and at times can seem chaotic. These times especially call for steady leadership and execution. This is also our focus at McClatchy as we accelerate our transformation.

So in conclusion, our 11th consecutive quarter increase in paid customer relationships is just the latest milestone in our continuing digital transformation and a testimony to the hard effort of the thousands of employees at McClatchy. Our progress reflects the technology and platform improvements that I identified as the key priority for the company when I first spoke to you 24 months ago, and we've made a lot of progress. We're excited for what lies on the road ahead to create a sustainable business model for local journalism and continued progress in accelerating our digital transformation. We've extended the debt maturities to give us needed runway to reach our goals. And I believe, we've built and are continuing to build the platform and focus on customers and advertisers that will lead us to successful local digital media companies in the communities we serve.

And with that, we're happy to open up the call to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Michael Kupinski from NOBLE Capital Markets.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [2]

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Couple of questions. I'm trying to get a hand on the opportunities for further cost cutting. Elaine, I know that the company has consolidated some print facilities outsourced and so forth. I was just wondering at this point, does the company have further printing facilities that can consolidate? What level are we at, let's say, in terms of maybe even their offices being relocated to cheaper offices and so forth like that? I just want to get a handle of where -- what further are the opportunities on that front?

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Craig I. Forman, The McClatchy Company - President, CEO & Director [3]

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So Michael, I'll start and then I'll throw it over to Elaine. Obviously, you know, that we have done a great deal of this already. We announced Tacoma a little -- a while ago, and that is the most recent relocation of printing to a third party. We had moved late last year -- well, during the year last year Biloxi and Belleville to printing by others. We currently have 7 locations where we print, and those locations print 10 additional McClatchy titles. So there tends to be some opportunity to rationalize, but the company long ago was one of the first to realize that as print consolidates there may be both opportunities to continue to reduce cost and opportunities through third-party printing contracts to actually leverage our infrastructure. Some of our plants such as the one in Kansas City are absolutely nation beating in their efficiency and in their cost structure. So I'll turn it over to Elaine for a little further detail on your question.

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R. Elaine Lintecum, The McClatchy Company - VP of Finance, Treasurer & CFO [4]

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Thanks. Well, obviously, we just discussed the ERIP or the early incentive program, sorry, which a number of our employees took that will offer savings in 2019. I think there is a conception that at some point McClatchy stops taking out legacy costs. That would presume that we also stopped our digital transformation, and we haven't. And as we become a more and more digital company, that means that we have the ability to reduce those legacy costs going forward. It also means a number of things like the restructuring that we mentioned that we've just gone out through in this functional organization that allows us to look more closely at each of our organizations, me in the case of finance to see are we doing things as efficiently as we can and if not what are the right things that we can do and what's the technology that we can add to be able to do that. So we'll continue to do those kinds of things. I think we also mentioned that we're moving to a more consolidated focus on some of our revenue areas that will lend savings. I think digital companies tend to have more variable costs than fixed costs. And right now, as you know, we are roughly 60-40 fixed variable. I think as we become a more digital company that changes and that reflects additional savings. So I also think that newsprint, which has been a challenging or was a challenge in 2018 because of the tariffs will continue to be an area of cost savings, supply and demand would indicate and has already indicated that newsprint prices are falling whether or not the pricing itself goes below the average cost of 2018 we'll see, although I would argue that supply and demand leans into the favor of newspaper companies at this point. But certainly, as print revenues decline and digital revenues grow that will mean additional savings in newsprint volume. So there are number of areas, where we will continue to have cost savings as we move forward, and we will always be among the best. I can assure you that in finding efficiencies in our operations.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [5]

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Elaine, how [did you] deal with the tariffs on the newsprint? Did you get -- actually get rebates in the fourth quarter?

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R. Elaine Lintecum, The McClatchy Company - VP of Finance, Treasurer & CFO [6]

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No. None of the newsprint producers provide rebates to my knowledge. But what I would say, as we move into 2019, what we've seen is pricing softening, reflecting and actually began to see some of that in the fourth quarter, but certainly, in the first quarter. Softening in pricing as it relates to newsprint that was being artificially held up by the tariffs.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [7]

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Okay. I got 2 just quick questions. The decline in the average monthly unique visitors in the quarter, I would have thought with the elections. Was that due to the 1-week, a fewer week? Or is there something else going on in that number?

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R. Elaine Lintecum, The McClatchy Company - VP of Finance, Treasurer & CFO [8]

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It's a combination. It's the fewer week as I -- fewer weeks, but it's also that there were some major events in '17 compared to '18. So if you look at hurricanes and other kinds of news events that were coming out of -- just as the ecosphere in late '17 compared to '18, the news cycle will always drive audience to some extent. And those are the kinds of things that are out of our control. And so I think it was a combination of the news cycle as well as the extra week.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [9]

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Is that a tech national advertising? Or how does that -- is there a lag time on how the advertisers look at that?

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R. Elaine Lintecum, The McClatchy Company - VP of Finance, Treasurer & CFO [10]

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It affects programmatic advertising primarily. It doesn't affect as much advertising on our O&O necessarily because we have plenty of inventory, but remember that the programmatic advertising is lower rate advertising, and we do better with it than many people because we have a genius that's placing it for us, I hope Nick Ames was listening. But having said that, it's still a lower rate than our O&O. And so our focus is to grow advertising on our owned-and-operated sites, and certainly, we appreciate and want the programmatic advertising, but it's not the core focus.

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Michael A. Kupinski, NOBLE Capital Markets, Inc., Research Division - Director of Research and Senior Media & Entertainment Analyst [11]

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Other question. You gave more specific guidance last year in terms of the 8% to 12% decline in adjusted EBITDA, do you -- have you given more specific guidance in terms of EBITDA for 2019 at this point?

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R. Elaine Lintecum, The McClatchy Company - VP of Finance, Treasurer & CFO [12]

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We have not. That guidance was a departure, as I think Mark Zieman called it at the time that we spoke about it, from our process of not giving guidance. And the reason that we gave it was twofold. One is that we were in the process of adapting to the industry more. We're moving our conference calls closer to our SEC filings and we recognized that, that meant quite a delay in information to investors in the fourth quarter, and we felt like we owed it to people to kind of bridge that gap for them in the first year that we were making that move. Secondly, we had a lot of unfortunate timing differences that really suppressed results in the third quarter. And as much as we said it publicly and both Stephanie Zarate and I said it privately as well to investors, we didn't seem to be getting our message through. And so we thought, well, we can give some guidance on fourth quarter and maybe people will better understand that the third quarter was really not a run rate for the company. And so those are the reasons why we gave that preliminary guidance for the fourth quarter. We don't plan to do that going forward.

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Craig I. Forman, The McClatchy Company - President, CEO & Director [13]

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Michael, I'd like to add just basically getting back to your question about cost structure. I've said consistently since I took this role 24 months ago, that in the move to a digital company, it requires everyone who is paying attention to really understand how digital companies are operated versus traditional print newspaper company. So let's drill down into a couple of things that are part of that. In the early days, multicity newspaper companies had very little discipline about the cost structure of their digital platform. You would have cities, which would have different contact management systems, they'd be operating on different legacy infrastructures, some would operate their own servers, some would move to cloud. And as digital people take control of these companies, these are people who actually understand how to rationalize the digital aspect of productivity yield and leverage in the cost structure. We operate on a single platform across the 30 markets that make McClatchy. And while I'd certainly entertain any one of our senior executives suggesting to me that she needs a digital content management system that differs from the 29 other markets, I think we've gotten to the point now where no one really makes that case knowing that that's a very tough ROI case to make in the first quarter of 2019. It's been that way for a number of years. So if you look at productivity, I think, we look at something like dollars spent in our news -- now I'm just focused on cost structure in the newsrooms for this observation, and the productivity in our -- improvement is our year-over-year increase in page views per budget dollars spent in the newsroom, which was 17% in 2018. That's the kind of KPI, and I suggested on previous calls, that's really at the core of how to measure digital success in this environment. And so we're in an era where when newsprint is only 4% of cost structure that you can see a double-digit improvement in yield and productivity in newsroom that that's the kind of leading indicator of digital progress that I think everybody wants to focus on. And I will say that doesn't come at the expense of quality journalism or in fact the percentage of journalists and editorial people, and I started my career as one, who are part of McClatchy. It's surprising for some people to know that 28% of our headcount is in our editorial operations now. That compares with only 27% in 2012, which was pretty close to peak newspaper. So I think those are the kinds of stats that you want to ask the industry about as you sort of measure the opportunities still for progress in the digital transformation.

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Operator [14]

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The next question comes from James -- Jamie McFarlane from Bybrook Capital.

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Jamie McFarlane, [15]

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Can I just ask, with the good guidance and a strong guidance on real estate sales for next year, roughly how much real estate beyond the sale and leasebacks in the coming year do you think you'll have at the end of the year, 2019, so it'd be up for sale in the future?

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R. Elaine Lintecum, The McClatchy Company - VP of Finance, Treasurer & CFO [16]

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Thank you, Jamie, for the question. This is Elaine. I think that's a difficult question to answer. One of the challenges with selling real estate is that the timing is not always of our choosing. It takes a while for people to do their due diligence. There is also some markets that are under contract, some that are not. And so a lot depends on what closes in 2019 in order to answer your question about 2020. We have been active in selling excess real estate since 2011. So quite frankly, there are a couple of larger properties that we are looking at in '19, one being in Kansas City, one being in Tacoma, but others are a culmination of a lot of smaller properties. When put together can be meaningful, but they're all separate deals that we will be working on. And that's why we gave the guidance that we did that seems I know probably pretty general to you that we expect the proceeds from real estate sales to equal or perhaps exceed the amount in 2018. And it just really is dependent upon when properties close.

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Jamie McFarlane, [17]

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Right. And so maybe then I'll ask it a different way. Standing here today, obviously, I totally understand the timing is [tough to tell], but what would be the excess real estate that you could sell on a go-forward basis as you look at the portfolio today? Is it, say, you're giving guidance of sort of $25 million to $30 million in 2019? Is it 2x that, 3x that in total? What's the sort of total amount of excess real estate at the moment in the business?

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R. Elaine Lintecum, The McClatchy Company - VP of Finance, Treasurer & CFO [18]

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So I understand your question, Jamie. We haven't disclosed that. We've instead disclosed, as I have said, there's a couple of large properties that we're looking at. We hope they both close in '19, but I can't be assured of that. And then the rest are smaller properties. Again, we've been at this since 2011. So a lot of the major properties have already been sold. So we haven't encouraged people to think that there are significant amounts of real estate that's left. And obviously, we only sell those properties when they are not strategic to our current operations.

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Jamie McFarlane, [19]

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Right. Okay. So that makes sense. So -- and if you were to sell both of the property, the big properties, would you exceed your guidance for the year? Is that what you're saying?

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R. Elaine Lintecum, The McClatchy Company - VP of Finance, Treasurer & CFO [20]

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I believe that we would, if we were so lucky.

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Operator [21]

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The next question comes from Craig Huber from Huber Research Partners.

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [22]

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Wanted to ask just a long-term question here as you make this digital transformation here. Can you see a day in, say, the next 3, 4, 5 years where -- in some of your markets you shut down the hard copy paper and be digital-only? Is that where you're marching towards? Is that a reasonable time frame in your mind or it think elongates beyond that?

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Craig I. Forman, The McClatchy Company - President, CEO & Director [23]

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Craig, I'll take it first. It's Craig. And then I'll throw it over to Elaine. That's been the 64 flicker unit of measurement question on the industry really for the past decade or more, as you well know. I think our position is pretty much what we've laid out and been consistent. We think that a print publication has great value to a certain group of people, who, for whatever reason, really value that form of getting news and information. And I think what you want to be looking for are companies and management teams in markets, who understand total market penetration and their TAM, their total addressable market, understand efficiency and unit economics, so that they can carefully balance cost and revenue, and who understands how to get the growth side of the equation, the digital side of the equation, to balance what eventually is probably becoming much more of a premium product. And I think it's well understood in the industry that as pricing and we've all gone through our exercises in understanding our DMAs well, understanding trade-off between service, delivery time and premium pricing, how to think through the profitability of the print edition and all of our print editions are profitable. And so I think, that's the first level filter. I don't think in this call or at any time, we're going to be the kind of management team that puts some sort of date on print. I think it's really much more of a balanced approach. And I think we're confident in our markets, which are growing 50% faster in general than the United States as a whole. We're in that part of America that tends to be growing faster, whether it's the Southeast, the Carolinas, across the central part of the country, towards the South, Texas, of course, California and the Pacific Northwest, where there is a blend and a blend of revenue. And so we're focused on ARPU. We're focused on lifetime value. We're focused on wallet share and market penetration. I think if you focus on those inputs from a unit economics point of view, you can figure out a way to satisfy your company -- customers, including with a print product that remains profitable for some time to come. Elaine, do you want to add anything?

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R. Elaine Lintecum, The McClatchy Company - VP of Finance, Treasurer & CFO [24]

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No. I think that's right. I think that we are constantly looking at every market and thinking about how do we experiment and how do those experiments turn out when we're looking at both our print and digital products. But to put a time frame on when is the last time you print a newspaper, Craig, you know the industry well. You probably have a -- as good a guess as anyone else. I don't think it would be advantageous for us to try and look at a crystal ball to determine when that might be.

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Craig I. Forman, The McClatchy Company - President, CEO & Director [25]

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Craig, we'll add just one footnote, but I know you watch the industry, us and everybody else extremely carefully, so you'll be up to speed with this. We are carefully experimenting to understand exactly the cost-revenue dynamic. And the experiment that we've undertaken in this quarter, so it's too early to know the results, although the results are trending basically according to expectations. We've experimented in our Myrtle Beach market with a consolidated Friday, Saturday print paper or a weekend edition, still a very strong Sunday paper. But in consolidating those 2 days of the week, we've actually seen an expected nonimpact, if I can say, to our unit economics and our overall penetration in the market. So if you're looking to see how management teams are approaching this, I think, you look to McClatchy to continue to experiment with intent in those kinds of places.

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [26]

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And also wanted to ask a simpler question. You've talked about digital-only advertising, I guess, expecting that to grow in 2019. Are you expecting total digital advertising to grow? What's your thought on that, please?

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Craig I. Forman, The McClatchy Company - President, CEO & Director [27]

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Yes. Let me throw that over to Mark Zieman. Mark, do you want to jump in?

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Mark Zieman, The McClatchy Company - VP of Operations [28]

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Yes. Yes, total digital advertising will obviously grow less and has been in decline because it's tied to our bundling as well as our digital-only. So we have digital advertising that's digital-only, which is by far the bulk of our digital advertising and continues to grow as a larger share. And then we have bundled digital advertising, which is tied to print. And as you know, print continues to decline. But as we said, print continues to also get smaller. And so that bundled piece gets smaller as well. So I don't think we've made any predictions on total digital advertising. I think we're confident that digital-only will continue, but total digital somewhat dependent on the decline in print. And so if print continues to decline the way we've seen it decline, I think, it will be close, but we've seen total digital grow in this last quarter. So that's a good sign.

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R. Elaine Lintecum, The McClatchy Company - VP of Finance, Treasurer & CFO [29]

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Craig, this is Elaine. I think the level of guidance that we were prepared to give on advertising is included in the press release and our comments, and we're not prepared to give greater guidance.

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [30]

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Okay. Elaine, if I can just ask you a nitpick, please. On newsprint, adjusting for the extra week, can you just talk about, if you would, the percent change in newsprint consumption in the fourth quarter year-over-year and also average price?

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R. Elaine Lintecum, The McClatchy Company - VP of Finance, Treasurer & CFO [31]

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Sure. We were down in newsprint expense 4.8% looking at it separately from other printing costs. It reflected a decline of about 25% in volume and an increase of about 27% in price.

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Operator [32]

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This concludes our question-and-answer session. I would like to turn the conference back over to Stephanie Zarate for any closing remarks.

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Stephanie Zarate, The McClatchy Company - Compliance and IR Manager [33]

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Thank you, Nancy. I'd just like to thank everyone for joining our call today and your continued interest in McClatchy. Have a great day.

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Operator [34]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.