Lee Enterprises Inc (LEE) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Pulitzer, Inc. second quarter earnings conference call.

Today's call is being recorded, and will also be available via the Web by going to www.pulizterinc.com.

Again, that is www.pulitzerinc.com.

A replay for today's conference will be available until Wednesday, July 31, and the Web cast will be available on Pulitzer's Web site until Friday, August 23.

Before we begin, let me know that any statements made during the course of this conference call concerning the company's business outlook or future economic performance, anticipated profitability, revenues, expenses or other financial items, together with other statements that are not historical facts or forward-looking statements as that term is defined under the Federal Securities Laws.

Forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ material from those stated in such statements.

Such risks, uncertainties and other factors include but are not limited to: the seasonal nature of the business, changes in pricing by competitors or suppliers including newsprint, capital and general economic conditions, any of which may impact advertising and circulatory revenues and various types of expenses, as well as other risks detailed in the company's filings with the Securities and Exchange Commission.

Although the company believes the expectations in forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Thank you Mr. Woodworth.

You may begin your call.

Good morning, we appreciate you joining us.

I'm Bob Woodworth, President and CEO of Pulitzer, Inc.

Earlier this morning we released our financial results for our 2002 second quarter.

With me today are Alan Silverglat, Senior Vice President of Finance, Terry Egger, Senior Vice President and Publisher of the "St.

Louis Post-Dispatch", and Mark Contreras, Senior Vice President of Pulitzer Newspapers, Inc.

Before going further, I would like to recognize Terry's key role in St. Louis, and his recent promotion to Senior Vice President with oversight responsibility for all of our St. Louis operations.

I'll spend a few moments review the second quarter.

Alan will then provide more detail about the numbers and then we'll open it up for your questions.

Before getting into the details however, I would like to emphasize the three things that are the story of this quarter.

First, while revenue was down overall, we are seeing some significant pockets of revenue growth, chiefly at

and St. Louis retail.

The second point I want to note, is that this is our second consecutive quarterly gain in operating income, reflecting the continuing positive impact of our cost control efforts.

Third and I really think most important; we made great progress in realizing the opportunities in our St. Louis operations, particularly on the sales side.

I'll have more to say about each of these items shortly.

And now to our results.

Overall, this was a positive quarter in which we met expectations in spite of a difficult advertising environment and tough revenue comparisons, particularly in the national category.

Net income from continuing operations for the quarter was $7 million, or 32 cents per diluted share.

This result includes non-operating investment charges and employment termination inducements.

Earnings absent these items or base earnings would have been 47 cents per diluted share -- the same as one year ago on a comparable basis.

A key factor in that achievement is the steps we have taken and are taking to control costs.

These actions, principally

reductions, last year together with a decline in newsprint prices resulted in a 4.6 percent reduction in comparable expenses for the quarter.

On the revenue side, comparable operating revenue or revenue excluding properties acquired from both 2002 and 2001 was down 3.6 percent.

Looking at revenue by category: retail was up about 2.6 percent with a four percent decline in ROP offset by a 22 percent gain in pre-prints.

Despite the continuing decline with majors, we made progress in our strategy of focusing on local retail territories and in increasing the number of active advertisers.

Comparable classified was down almost six percent.

However, that drop is a significant improvement over the 13 percent decline in the first quarter and it appears that

, which has driven the decline, is stabilizing.

National was down 28 percent for the quarter as we faced tough comps with last year.

As I mentioned, we continue to hold the line on costs.

Excluding newsprint, costs were up one-and-a-half percent for the quarter, despite a 14 percent increase in employee benefit costs and increases in our reserve for uncollectible receivables relating to St. Louis route acquisitions and K-Mart.

These increases were offset by lower wage costs which were down almost three percent, driven by 2001 and 2002

reductions.

Overall, we benefitted significantly from lower newsprint prices down about 30 percent from the prior year and Alan will have more detail about expense control in his comments.

Now I'd like to briefly cover the results of each of our operating groups starting with St. Louis.

Ad revenue for the quarter on a comparable basis was down nearly six percent for our combined St. Louis operations.

However, we saw a marked improvement in June when the revenue decline was two percent compared with a drop of nine percent in May.

As for national, we continue to work through some very difficult comps in St. Louis.

In April and May of 2001 we saw increases in national revenue of 27 and 44 percent respectively.

So we knew we were unlikely to duplicate those results in the current environment.

Comps for the rest of the year are much easier.

However, the real story in St. Louis is the significant changes we have made in our distribution and sales efforts.

On the sales side we are excited about some of the changes we have made to refocus our sales force and bring greater clarity and accountability for results.

Historically, the sales staffs at the Suburban Journals end post dispatch have called on the same accounts and competed for the same dollars.

But beginning in June, we eliminated that duplication of effort and assigned each sales person exclusive active accounts and prospects.

As a result, local territory sales reps now can sell any combination of the Post, Suburban Journals or

to their assigned accounts.

When you think about it, this change effectively doubles our sales force and that is a major step towards taking better advantage of cross selling opportunities, expanding our advertising base and ultimately increasing our advertising market share in St. Louis.

Regarding distribution: earlier this month we held the grand opening of our expanded Pulitzer Publishing Center.

Thanks to the hard work of our great team of Post Dispatch Operations employees, we finished this project on budget and ahead of schedule.

The expansion will improve distribution efficiency, and provide a more comfortable environment for our employees.

Also, during the second quarter, we eliminated free delivery to non-subscribing households of the Post-Dispatch

sections, which largely duplicated the content of the Suburban Journals.

We estimate this move will result in cost savings of about $1.6 million for the balance of the year.

Even more encouraging, we've successfully migrated virtually all of the pre-print revenue from the Post Dispatch free-distribution sections to the Suburban Journals with the strong support and encouragement of our advertisers.

Taking a brief look at Pulitzer Newspapers, Inc.

PNI comparable ad revenue was up 1.3 percent for the quarter, the second consecutive quarter of revenue growth for PNI.

That is an impressive accomplishment in this environment.

Also impressive is the month-over-month improvement during the second quarter, culminating in a 3.1 percent increase in June.

I'd also like to note that PNI's overall market share has grown from 38 percent in 1998 to 44 percent in 2001, while it's peer-group share has dropped from 46 percent to 44 percent.

Those gains, while driven mostly by acquisitions, contained a 1 percent organic growth component, a really commendable performance.

PNI's e-Media operations continue to be profitable, with both page views and revenues showing growth over a year ago.

We are also finding success in converting web-based viewers to newspaper subscribers.

In Tucson, ad revenue for the quarter declined 5.6 percent, an improvement over the 9 percent drop in the first quarter.

Also encouraging was the month-by-month improvement during the quarter, with June showing a decline of just 2.6 percent from the prior year, and an improvement in Help Wanted.

In summary, we are pleased with our overall performance during the second quarter.

In our view, just as important as our financial results is the way we are vigorously executing our growth plans, with specific attention to sales and distribution.

We still have a long way to go, but we are laying a strong foundation for advertising, market-share growth and margin improvement, and we are confident the strategies we are executing in each of our markets will enable us to build value for readers, advertisers, employees and shareholders.

Let me close by restating our earlier guidance that we expect full-year base earnings per diluted share from continuing operations in the range of $1.63 to $1.67, which is the upper end of current analyst estimates, which range from $1.60 to $1.67.

Thank you, and I'd like to turn the call over to Alan.

Thank you Bob, and good morning everyone.

As Bob indicated, I will review our second quarter results in a little more detail.

Starting with earnings per share, we reported net income from continuing operations of 7 million, or 32 cents per diluted share.

As detailed in the release, these results included a pre-tax charge of $200,000 for termination inducement costs and pre-tax charges of $5.1 million, to adjust the carrying value of certain non-operating investments.

Earnings from continuing operations,

these items, our base earnings would have been 47 cents per diluted share in the quarter, the same as for the second quarter of 2001.

Revenue from continuing operations declined $3.6 million, or 3.3 percent.

Comparable advertising revenue declined by four percent in the second quarter of 2002.

This compares to a first quarter decline of 2.2 percent.

As

discussed second quarter comparisons are influenced by the strong national revenue performance generated in Saint Louis last year.

Even with this our first six month year over year revenue decline of 3.2 percent compares very favorably to last year's second half decline of 7.5 percent.

Operating income from continuing operations for the second quarter decreased to 20.8 million from 13.5 million a year ago - I'm sorry, increased to 20.8 million.

On a comparable basis excluding properties acquired for the same non-ownership periods removing employment termination costs and adjusting 2001 operating income to remove amortization of intangible assets no longer present under financial standard 142 operating income increased 2.7 percent in the second quarter of 2002.

The major cost side factors driving this increase in operating income were a 34 percent or 5.4 million decrease in news print costs principally on the strength of a 30 percent price decrease.

A payroll cost reduction of 2.6 percent driven by an FTE reduction of 2.2 percent, 89 FTEs on a year to year basis.

Decreased circulation costs in Saint Louis reflecting our various circulation initiatives.

We expect these costs to continue to decrease over the course of 2002.

Four, an increase in our bad debt provision of 1.3 million partially related to K-Mart and circulation route acquisitions.

And, finally, a tangible asset amortization decreased by 5.4 million with the adoption of financial standard 142.

I also want to point out that during the second quarter we addressed an imbalance in our capital structure which was rated - pardon me, which was weighted toward fixed rate debt.

In late May we completed an interest rate swap that in combination with our late 2001 swap converted nearly half of our long term debt costs from fixed to variable rate.

This restructuring will allow us to carry a greater portion of operating profits of the bottom line going forward.

Largely as a result of those swaps interest costs declined by $1.1 million during the second quarter.

This reduction also reflects $350,000 in capitalized interest on our northwest plant expansion.

I should also note a few other items.

We now expect 2002 capital expenditures to come in one or $2 million below our previous $30 million estimate.

The increase for our normal annual capital spending level of 10 to 12 million primarily reflects the Saint Louis northwest plant expansion.

We expect capital spending to return to normal levels in 2003 and beyond.

Finally, Pulitzer ended the quarter in strong financial position with cash reserves of around $176 million.

The $18 million decrease from year end reflects full year funding of certain employed benefits, capital expenditures and circulation route purchases in Saint Louis.

Now I'd like to turn it back to

.

Thank you, Allen.

Now, we'll be glad to answer your questions.

In order to ask a question, please press star then the number one on your telephone key pad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from

.

Hi.

Actually, this is Stacy for

.

I was wondering if you could review your newsprint price assumptions for the second half, and also, if you could break down the classified category a little bit with real estate and auto, just to give some detail in those categories as well.

Stacy, let me take the first one, and then I'll let

and Mark speak to the, you know, to the -- their experience on the advertising side.

With respect to newsprint: the budget employed in our outlook assumes that the $50 increase announced sticks effective September 1.

Having said that -- we did that just to be conservative on our outlook and so we wouldn't be negatively surprised -- it's our expectation that newsprint won't go up any sooner than advertising volumes increase industry-wide.

And, we really don't expect to see that increase at all this year, or - if it should be present -- very late this year.

Let me ask

to advertise on your advertising question.

: Yeah.

Thanks, Stacy.

In classified we continue to see very much an improving trend.

If you look at our numbers from last year, particularly the first six months of the year, our drop in the help wanted or employment advertising was substantially less than our peer group, so we're up against tougher comps.

That said, year-to-date in help wanted, we were down 28 percent.

However, in the sixth period, we were only down 17 percent, and the signs are, again, that we're stabilizing, you know, with getting closer and the comps will get easier.

It's stabilizing for the rest of the year.

Automotive has been strong for us.

In the local automotive category, we're up eight percent year-to-date there.

Real estate -- while it's flat for the year, despite the merger of the two largest real estate firms in the market -- actually we were up three percent in June.

So, again, all the trends right now in classified appear to be more favorable.

Really, for P&I, I would just echo the trend that's happening in many parts of the country.

Real estate for us in the second quarter was up nearly 12 percent.

Auto was up almost 18 percent.

In June, those trends slowed a little bit, but basically, those are the two drivers of our classified growth for the quarter, as well as for June.

It would be those continuing ...

What was help wanted down at P&I?

Help wanted was down 12 percent.

For period six, it was down about three percent -- a little less than three percent.

And then for quarter it was down about 12.

Right.

And Stacy, just to comment briefly on Tucson -- the good news in Tucson is that we really had a, I mean -- relatively speaking -- a good month in help wanted, where we were only down about 13 and a half percent, compared to a decline of about 27 percent year-to date, so hopefully that's a harbinger of things to come.

Auto has been rebounding a bit, but we've had some difficulties in Auto in Tucson, and we're obviously working on that.

Okay, great.

Thank you.

Your next question comes from

.

Thanks,

.

Congratulations on the quarter, by the way.

First of all, I wanted to ask about the National category, I know it can be very volatile, and if you could just add a little color on the weakness in that category that you saw in this last quarter, and if you are noticing any particular trends that you're seeing right now, if it looks like it's firming.

And then secondly, I believe, Alan, you gave us the number of the

count reductions of 89 employees, I think.

Is that year-to-date, or could you also tell me when you're going to be cycling against the

count reductions that you had last year, and if you can give us some color in terms of the second half expenses for payroll, going forward.

And then I have one quick follow-up question.

Hi Michael, it's Terry.

Hi Terry.

On the--on National, as we pointed out in New York, four and five were particularly difficult periods for us, both against tough

and a softening National category.

That has improved substantially in the sixth period, and I think we're down to about 7 percent.

That trend continues to improve, there are some bright spots and some schedules that appear to be showing themselves in the Automotive and the Pharmaceutical categories for the balance of the year, so, again, we think we hit the turbulence and are through it in National.

Michael, for P&I, Nationals tends to be a fairly small category; it's under 2 percent of our total base, but we are down for the quarter, after the--

Mike, it's Alan.

The

counts we made were probably made mostly in the second quarter of 2001; however, they did continue throughout the year, and even into the first quarter of this year, so there'll be some cycling, starting in the third quarter, but we'll see continued benefit from that throughout.

So do you expect that the payroll expenses will be just modestly up, even with your substantial increase in other employee costs?

We just haven't commented on specific cost increases, but I--

I think the trend line, in terms of the run rate was like--was up by only .3 percent, and if you exclude the severance payments in the second quarter, it would be up only like .6 percent in terms of cost.

I was just wondering if that type of increase is what we should look for, for the balance of the year.

I'm just not aware of anything going forward, that would change our historic trend lines, Mike.

Okay.

Mike, if I just could add a little color to that.

The big unknown there is the rate at which we're able to acquire routes in St. Louis.

Now, we've pretty much got the infrastructure in place at

distribution, and just depending on how quickly we find those routes available, and how quickly we can assimilate them, it will have some impact on our

s, so that's a bit of an unknown for us.

Okay.

And what, in terms of the amount of the circulation in terms of a percentage of the routes that you now have, vs. the first quarter, what--is there a material change from the first quarter?

It's really slowed dramatically, Michael, so we're still just around, slightly above 65 percent right now.

And in terms of the write-off the investments, was that the Internet investments that you guys have made--the 2 million, and then what was the other--the rest of the balance?

Mike, they were truly non-operating investments, directed towards the Internet and other media opportunities.

OK...

...but not strategic to our core operations.

And now, all the online efforts are completely written off now?

You don't have anything else out there?

There's still some left, but we feel what is left is fairly valued.

OK.

Thank you.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad.

Your next question comes from

.

Yes Bob, can you give us some color on what specifically is driving the pre-print growth you know, if it's market share gains?

And also, how does the growth split between volume and pricing?

And then can you quantify your expected total annualized cost take out savings in St. Louis, related to distribution?

Thanks.

Yes, good morning

.

The - regarding the pre-print question, and I'll let Terry comment on this, it is really driven by both rate and volume.

On the volume side, we were very encouraged about the execution of migrating pre-print revenue from the non-subscriber zoned sections that are delivered with the "Post-Dispatch" into the suburban journals.

We felt that this was the area of potentially greatest risk in redefining our sales staff.

So we were very pleased that we were able to migrate really virtually all that revenue.

So we preserved great in that respect.

The other thing that comes in to play here is that we've started a single sheet program.

These are you know, think of 8 by 11 flyers that tend to be marketed to smaller advertisers.

We - we actually had a pretty deficient single sheet program here in St. Louis and we've done very, very well at that, both in terms of building volume and generating excellent rate for it.

I think - I think Bob's pretty much covered it.

The two things that I would add are that this really in our conversations with our advertisers, even though they are paying us a higher rate on a per piece basis, they are saving so much money on printing fewer pieces overall and eliminating some duplication that they were pretty satisfied with - with what we did here as well.

And the move on the single sheet business is really important as we move to grow local territory sales.

It gives every rep a conversation to have with almost any business on any street.

And that has played a big part in our growing local territory revenue as well as our advertiser account - our active advertiser accounts.

, just another quick point not related to St. Louis here, but we had some really good news on developing a mailed

product in

where the folks out there really have been very aggressive to going after that business and to give you some idea, pre-print revenue was up 48 percent in

in the - in the second quarter.

So, job well done there.

Your second question relate - I didn't hear the whole thing, but I believe it was related to distribution expenses...

...do you - do you have kind of a quantifiable total annualized cost take out in St. Louis related to distribution?

No, we really have not commented on that, other than the number that we conveyed in the script, the $1.6 million savings associated with the elimination of the non-subscriber product.

And we're not trying to obfuscate anything here.

It is very much a moving target depending on our ability to acquire routes.

Not to get too arcane here.

It's not only our ability to acquire routes, but when we acquire them we're generally splitting them into smaller routes.

And that normally provides better service, better collections.

And that has an impact in our overall

account.

So, it is a bit of a moving target, but it's important to note that the vast majority of the infrastructure associated with

distribution is really pretty much in place.

just one last comment.

Do you have any update on just the trends of July?

In advertising?

We just don't comment before the stat report comes out at following month.

And as a matter of policy,

.

, I would add a little color to that, though.

The conversions strategy in St. Louis -- the one that we described in particular in my comments -- anything of that scale I think you can anticipate some bumps.

And while it has gone extremely well, we're working our way through a couple of challenges there, but we're very focused on it.

And we've got the right people looking at it and we anticipate hitting on all cylinders before Fall.

And that was our original objective.

Great.

OK, thank you very much.

Your next question is a followup question from

.

Hi, it's

again.

If you could just comment on the circulation revenue decline in St. Louis in June.

Yes, the largest part of that was a one time adjustment that we made to our circ revenues.

As we've talked about as we took on routes and specifically as we took on the billing of all of the routes, obviously, we were working with a new system.

And we discovered in that system that there were -- the system was inadvertently billing some copies that were bonus copies over a period of time that should not have been billed.

And so it was through a reconciliation process that we went through that we uncovered that and we've cleaned that all up in the sixth period.

Great.

Thank you.

Your next question comes from

.

Hi, I'm

.

A couple of quick ones: could you give us the blended rate, Alan, on your debt?

The cash percentage earning on your cash balance.

Are we done with K-Mart or any comments on that?

And then lastly, what is your feeling on stock option expensing and what would that have cost you if you had done that in the first six months of the year.

Thanks. silverglat: Sure,

.

The blended rate on the debt for the quarter is about seven-and-a-half percent.

That means the principle is $306 million.

That's a constant rate so you can compute the expense.

You get it in like, May, you said.

So, I guess, what ...

Well, we had a $50 million swap that we executed late last year.

And then we grew that by 100 to a total of $150 million in very late May.

So going forward into the third quarter we start the third quarter with $150 million or about 50 percent floating position.

And the interest earnings are a little less than two percent.

About one-and-three-quarters percent.

The stock option expense is around $4 million if expensed as of May -- if expensed as of December 31 last year.

And we really just haven't given a lot of consideration to, you know, to that issue.

Clearly, with the announcements at

and Washington Post is going to get a lot of attention in our industry and I'm certain we'll pay close attention to it going forward.

And the last thing was K-Mart.

Oh, pardon me, yes.

Thank you, sorry

.

On K-Mart our policy has been to build up reserves so that we have fully reserved that balance just so we don't have any bad news to look forward to and only good news.

And we got to that position in the quarter and we're starting to see some of that revenue that we are receiving flow through to the bottom line now on K-Mart.

About one third of the quarter's activity flew through and I would expect the third quarter to be a normal quarter in terms of revenue and profit production.

Thank you.

Your next question comes from

.

Yes, I was just wondering if you can just highlight for us again the status of any of the union contracts that you're in current negotiations or starting, I guess.

If you could just give us an update on that if there is anything to talk about that yet.

Hi,

, this is

.

We're currently in negotiations with our pressmen.

Their contracts expired in April, but we think that we're making substantial progress there.

Encouraged by the recent conversations.

So we'll continue to press on that.

We have a smaller unit photomechanical that will be in negotiations in the Fall and then finally, the Guild contract expires the first of January and we will look to begin some early conversations there if possible.

But we'll be in conversation there in the late Fall, early part of the -- or mid-part of the fourth quarter.

And you believe that at least for now that you have really good union relations and that you're not expecting any particular problems with your negotiations?

No, really I'm not.

I mean it's, you know, we've got really good people here and we've tried very hard to communicate what we're trying to do in St. Louis.

Obviously we have different entities now in St. Louis and now all of them are represented by unions.

But again, our focus is on being clear with all employees throughout Pulitzer what we're trying to do.

And I think they understand that.

I think they're interested in the best interests for the companies as well.

OK, thank you.

At this time there are no further questions.

Well, thank you.

I'll just close with just a couple comments here.

As I indicated at the beginning of the call there are really three primary reasons we feel pretty good about this quarter.

On the revenue side we saw some significant areas of growth, primarily

and St. Louis total retail.

Second, our continuing attention to expenses allowed us to report on a second consecutive quarterly gain in operating incomes despite some significant one time costs.

And third, and I really think most important is the progress we made during the quarter in realizing the opportunities in Saint Louis particularly in the areas of sales and distribution.

With a lot of careful management attention we were able to switch virtually all of the preprint revenue into the new Pulitzer platform and a lot of management focus but we still stayed on point.

And I think it's going to serve us well the rest of the year and beyond.

Thank you for joining us this morning.

We appreciate your time.

Thank you for participating in today's Pulitzer Incorporated second quarter earnings conference call.

This call will be available for replay beginning at 1:00 p.m. eastern time today through 11:59 p.m. eastern time on Wednesday, July 31, 2002.

The conference ID number for the replay is 4733913.

Again, the conference ID number for the replay is 4733913.

The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

This concludes today's call.

You may now disconnect.