Lee Enterprises Inc (LEE) 2002 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Pulitzer, Inc.

Fourth Quarter Earnings Conference Call.

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

A replay for today’s conference will be available until Wednesday, February 5th.

And the Web cast will be available on Pulitzer’s Web site until Friday, February 28th.

Before we begin, let me note that any comments made during the course of this conference call may include forward-looking statements.

These statements are subject to risks, uncertainties, and other factors, such as overall advertising expenditures, competition, newsprint pricing, outcome of labor negotiations, and economic conditions, that could cause future results to differ materially from management’s current expectations.

For a discussion of these and other factors, please see the note to the company’s press release, issued earlier this morning, and the company’s reports filed with the SEC.

Thank you.

Mr. Woodworth, you may begin your call.

Good.

Thank you [Terri].

And good morning everyone.

We appreciate you joining us.

I am Bob Woodworth, President and CEO of Pulitzer, Inc.

With me today are Alan Silverglat, SVP-Finance;

Terry Eggar, SVP and Publisher of the St. Louis Post Dispatch; and Mark Contreras, SVP of Pulitzer Newspapers, Inc. or PNI.

Just to make sure everyone on the call is familiar with Pulitzer, we are a newspaper publishing company, with daily and weekly newspapers, and Internet properties in 14 attractive markets, primarily in the West and Midwest, the largest of which is St. Louis.

Earlier this morning we released our financial results for our 2002 fourth quarter and full year.

The release summarizes our financial performance.

In our call today I will spend a few moments discussing our perspective on the quarter and year.

Alan will then provide more detail on the numbers, after which we will open it up for your questions.

In my mind, the story of the fourth quarter and the year is the work we completed and the progress we made in strengthening our ability to meet the information needs of our readers, and to effectively and efficiently bring together [inaudible].

Most simply, we believe that by executing strategies focused on readers and advertisers, we can grow both categories and, over the long-term, grow both revenue and profit faster than our markets.

We are a company focused from top to bottom on execution.

For those outside our business, much of what we did is not very exciting.

But it is the basic blocking and tackling of a well run newspaper business.

And it is exciting for us, because we are installing the gears and wheels that make things happen.

We have been putting those parts in place over the past several years.

And we put a lot more in place in 2002.

The results of our efforts are clearly reflected in our earnings release.

One major area of emphasis during 2002 was coordinating the operations of the daily and weekly papers in each of our markets, to take advantage of our market leadership and reach.

I would like to tell you briefly how this played out during the year in each of our businesses.

In St. Louis, we realigned the out-sized sales force at the Post Dispatch and Suburban Journals to facilitate cross-selling and place greater emphasis on expanding our advertiser base.

We also eliminated the free delivery to non-subscribers of the Post zoned editions, creating a more efficient distribution system.

The result has been a dramatic increase in free print revenue, while reducing our costs by nearly $3m annually.

A third change was moving our St. Louis portal site, STLtoday.com, back into the Post.

The move reduced expenses, while driving positive revenue trends, particularly in the classified up-sell.

As a result, STLtoday.com was profitable in the fourth quarter, ahead of plan, and will be profitable throughout 2003.

The impact of these and other changes is especially apparent in the gains we are seeing in local territory revenue, which was up 15.4% in the fourth quarter, and in pre-prints, which were up 15.7%.

We also showed increases in active retail advertisers, up more than 12% at the Post.

Overall retail revenue, including pre-prints, was up 8% in the fourth quarter.

And total ad revenue was up 4.3%.

Refocusing our sales force was also a major emphasis at PNI.

Specifically, we realigned the geographic sales territories in many of our markets, ending overlap, clarifying accountability, and focusing on new accounts.

And we continued to make sure we had enough feet on the street.

In many of our PNI markets, our refocused sales force is generating new revenue, with combo buys that put advertisers in both our daily and weekly papers, and by up selling classifieds from our daily into a weekly classified section.

We have also driven incremental revenue at our profitable e-media operation, by up selling classified advertising online.

These initiatives helped to drive an 11% gain in active advertisers at the PNI properties during 2002.

They also contributed to PNI’s continued strong performance, with comparable ad revenue up 6.2% in the fourth quarter.

It was PNI’s fourth consecutive quarter of revenue growth.

Strikingly, in this difficult year, PNI ad revenue was up year over year in each month of 2002.

Just as impressive as the revenue growth, PNI’s operating cash flow margins grew 3.6 percentage points for the fourth quarter over the prior year.

We are making consistent progress towards our goal of raising cash flow margins to at least the mid-30s.

In Tucson, we realigned our sales territories, and now have 21 salespeople dedicated to growing small to medium-sized accounts, an increase of nine positions from a year ago.

This more focused sales effort drove year-over-year gains in retail territory revenue, which increased 10% in October, 6% in November, and 13% in December.

Total ad revenue in Tucson was up 3.1% in the fourth quarter, compared with a gain of 1.1% in the third quarter, and declines of 5.6% and 9% in Q2 and Q1, respectively.

In these few comments, I hope I have communicated the scope of our accomplishments.

They are the product of a tremendous amount of work by all of our Pulitzer colleagues at all of our properties.

Indeed, they are the ones that create value every day for our readers, advertisers and shareholders.

As a result of their hard work, Pulitzer achieved strong performance in a tough year.

You can read the details in our press release.

But I would like to hit the highlights of our fourth quarter performance.

Comparable total ad revenue, including our share of revenue in Tucson, was up 4.6% for the fourth quarter, with retail, including preprints, up 6.8%.

I have talked a lot about our focus on revenue growth.

But I also want to emphasize that we are very disciplined in our cost controls.

While we were growing revenue, we also reduced comparable costs 3.7% for the quarter.

The result was our fourth consecutive quarter of growth in operating income, which was up 44% on a good will adjusted basis.

Going to the bottom line, base earnings, as defined in the press release, were 58 cents per diluted share, compared with 38 cents last year.

Let me just close by revising our guidance for the year.

As we said in December, we expect both advertising and total revenue to grow in the range of four to five and a half percent in 2003, assuming a stable economy.

Please remember though that these are the growth rates for the full year.

And we do start the year going against some tough Super Bowl comps.

We also expect a 5-10% increase in newsprint costs, and an increase of less than 3% in non-newsprint costs, including labor.

The combination of revenue growth and cost controls should increase our operating cash flow margin by one or two percentage points.

As a result, we continue to expect 2003 base earnings per fully diluted share of at least $1.95.

Thank you.

And I will now turn the call over to Alan.

Thank you Bob.

And good morning everyone.

As Bob indicated, I will review our fourth quarter and full year results in a little more detail, starting with fully diluted earnings per share.

We reported net income from continuing operations of $12.2m, or 57 cents per share, in the fourth quarter.

As detailed in the release, these results include pre-tax charges of $200,000 for employment termination inducements during the fourth quarter.

Earnings from continuing operations absent this charge, our base earnings would have been 58 cents per diluted share in the quarter.

By way of comparison, base earnings in the fourth quarter of 2001, excluding amortization, termination inducements, and non-operating investment charges, would have been 38 cents.

This means that base earnings were up more than 50% in the quarter.

Operating income from continuing operations for the fourth quarter increased to $25.2m from $12m one year ago.

On a comparable basis, excluding properties acquired from both 2002 and 2001, for common non-ownership periods, and excluding non-recurring good will amortization from 2001, operating income increased almost 44%.

Overall, operating expenses were down 3.7% in the quarter on a comparable basis.

The major cost side factors guiding this decrease were, first, our continued emphasis on overall operating cost control, the decline in newsprint costs, the savings Bob mentioned earlier from the elimination of the Post Dispatch non-subscriber product, and a net reduction of about 30 FTEs, or 1%.

This consisted of year-over-year reductions of about 50 FTEs, partially offset by increases in the level of volume-related temporary staffing for mail rooms in December.

These cuts were partially offset by increases in payroll costs related to benefits and performance incentives.

A portion of the increase was the result of gain-sharing programs we put into place during the year, which increased the number of employees who received incentives.

Our financial performance was also affected by lower interest costs, down about $800,000 in the fourth quarter, and $4m for the year.

That decline is primarily the result of the interest rate swaps, which converted nearly half of our long-term debt cost from a fixed to a variable rate.

2002 capital expenditures totaled about $25m.

The increase from our normal capital spending level of $10-12m primarily reflects $14m spent in 2002 for the St. Louis [Telequest] [ph] plant expansion.

While the carry-over of some projects will bring capital spend for 2003 to the $12-14m range, we expect capital spending thereafter to return to more normal levels.

Pulitzer ended the quarter in a strong financial position, with cash and marketable securities of around $194m, roughly flat with a year ago.

Finally, EBITDA increased 21.1%, to $101.6m, from $83.9m in 2001.

Significantly, EBITDA per FTE was up 23.2%.

Now I would like to turn it back to Bob.

Thank you Alan.

We will be happy to take your questions.

(Caller Instructions.) Our first question comes from [William Drewery] of CSFB.

Hi.

Good morning.

A couple of questions.

I jumped on a few minutes late.

So I apologize.

But could you break out ROP results and pre-print results in retail?

Also, if you have any comments on just general retail fundamentals, closures, consolidations, around the category [inaudible] on exposure.

Also, just forward-looking thoughts on help wanted, given where the trajectory is.

I think the number was down more than November and October.

But the first quarter, first half of the year [inaudible].

Bill, good morning.

It is Bob.

On the first question, for the quarter, retail on a consolidated basis, retail ROP was up about 3.6%.

And pre-prints were up about 15.8%.

So that is the way it breaks out.

I will let Terry and Mark comment on employment.

But the trend, I think, is generally encouraging, consistent with the comments you and your folks are making related to other groups.

But there is still an awful lot of uncertainty out there.

And we, just frankly, are not taking any strong rebound in help wanted to the bank in terms of our planning cycle for ’03.

I think it is -- obviously we are going against easier comps.

But I think it is a bit too early, from our standpoint, to call a major turnaround in help wanted.

Terry, do you have anything?

No.

I just would agree with that.

I think that we may be a little less optimistic about the immediacy of the turnaround there than some of our peers that we have heard.

But at the same time, on the retail front we are still very encouraged by our ability to directly impact some results there, particularly in the local territories.

We continue to see very strong gains in revenue and in active advertisers, importantly in the local retail territory categories.

I would just add on help wanted in PNI it is still choppy.

And we have not put in huge expectations in the help wanted category going into ’03 Bill.

If I could, just one follow-up on help wanted there.

Was there anything specific that drove that sequential progression month by month in the fourth quarter?

And then also, if you would help us out with the amount of help wanted revenue that you had, or a rough estimate, at the peak two years ago, and where the dollar amount is, just to give an idea of the magnitude of potential delta in the recovery.

Yeah Bill, in terms of the specific period by period results in the fourth quarter, I don’t think there was any one specific thing.

Obviously October was our best performance.

And disappointingly, December was our least.

But I don’t think -- there was no one specific thing by category that stood out there.

Importantly on your question, from our peak in St. Louis anyway, the reduction in help wanted advertising has been to the tune of approximately $29m from the peak in 2000 to where we are today.

Excellent.

Very helpful.

Thank you.

Bill, for PNI, help wanted represents about 10% of the total ad revenues.

So generally we are less dependent on that.

But it is on a base of roughly $90m in ad revenue.

Thanks again.

Our next question comes from [Mike Kopinsky] of A.G.

Edwards & Sons.

Thank you.

And congratulations on a great quarter.

Do you feel that the shortened Christmas holiday season had any effect on the strong retail for the quarter, specifically in pre-prints?

And also, can you give the numbers for active advertisers in St. Louis, much like you did for Tucson, I believe, or maybe PNI?

And then finally, can you talk about the employee expenses in the quarter?

It seemed like they were a little lower than I expected.

And are there any updates on the progress with the union contracts?

Yeah [Mike], I will go first, and then turn it over to the rest of the crew.

But the difference in the selling season between the November/December cycle obviously had impact.

But in your specific question about pre-print revenue, I think if you go back and look at our overall performance, really through pretty much of the year, we really had fared pretty well on pre-print.

And it is a result of our ability to increase rates on a CPM basis, particularly in St. Louis, as well as just an excellent job of selling additional volumes, particularly single sheet volume.

So those numbers are both rate and volume driven.

I will ask Terry about active advertisers.

Yeah.

And just a comment too on the shortened Christmas.

It is a lot like Easter this year I think Mike.

I think you almost need to take 11 and 12 and combine them to really look at what the results are in a normal cycle.

And I would point out that we had very, very tough comps relative to the industry in 11 and 12 related to some opening business of Ultimate Electronics last year, and then a big Kmart schedule.

But in terms of active advertisers, at Post Dispatch active advertisers were up 12% in retail for the quarter.

So again, that continues to be a real important metric for us to monitor.

With the realigned sales force, our expectation is that we simply do business with more businesses.

And that is just a mantra in the organization right now.

Are there any exposure to Kmart then going into this year that you are concerned about?

And then also, can you talk a little bit about the pace of retail so far this quarter?

Well again, with Kmart I think we are all in the same boat.

We are hopeful that there can be a recovery there.

We are fully reserved for our Kmart activity, and will be on a going-forward basis.

I think we are all waiting to see how that plays out.

In St. Louis we think though that their stores here are particularly strong relative to their stores’ performance around the country.

So that bodes a bit better for us.

Mike, I might just mention, Kmart, in our other markets, the only PNI market that lost a Kmart was Lompoc, California.

And so it is a relatively small exposure.

In Tucson there are going to be some store closings.

And we have taken that into account.

They predict closures in the Spring of ’03.

But there will still be a presence of Kmart in the Tucson market.

In terms of retail trends, I think, Mike, with the clear exception that Bob mentioned of the comps we face in the first six weeks of the year related to the Rams Super Bowl run last year, we think that we will be strong in retail.

Mike, as we, I think said – it is Alan – as we said about a year ago, Kmart is in the neighborhood of 1% of total revenue.

Mike, one of your first points was a question about overall labor costs.

And I think the point there for us is, as you know, we reduced staffing considerably in 2001, with some carry over into 2002.

And as the FTE numbers that we talked about in the presentation indicate, we are being very, very careful there about adding back staff, particularly in this uncertain climate.

And so we are basically in a position of keeping our powder dry there, and watching our FTE counts very, very carefully.

Any update on the union contracts that you can talk about?

Well again, currently we are in the midst of negotiation with our guild, as that is a normal course of business.

It is early in the process.

We are supportive of the process.

And we feel confident about getting that resolved.

It is just a matter of how long it takes.

And again, we will just stay supportive of the process.

Okay great.

Thanks.

Thanks Mike.

Your next question comes from [Stacey Fleck] of Merrill Lynch.

Hi.

I have two questions.

First, within the classified category, if you could break out how auto and real estate did in each of the properties.

My second question is with regard to whole year 2003 guidance.

It seems to be a little bit more conservative, now at about only 5% growth, versus 10% growth previously that you guys stated at the mid-year media review.

And I don’t think any of your other points of guidance changed in ad revenue and newsprint costs.

So I was wondering if there was any other non-operating items I am missing.

Yeah, [Stacey], on a consolidated basis, in answer to your first question about auto and real estate, for the year, auto was up 5.2%.

And real estate was up 2.1%.

That is for the year.

And for the fourth quarter, auto was up 1%, and real estate was just about flat, up about a tenth of a percent.

What occurred out of the auto number though, [Stacey], is that when we last met in December in New York, we were a bit concerned about the climate in auto, because periods 10 and 11 had been a bit softer.

But period 12 was very strong, both on a local and a national front.

Okay.

Great.

Thanks.

[Caller instructions.] We have a follow-up question from [Stacey Fleck] of Merrill Lynch.

Hi.

If you guys could just comment on that EPS guidance question I had.

Thanks.

Yes, [Stacey].

We tried to give you some color in terms of the way we are looking at revenue and costs next year.

But it is still very early in the year.

And, as you can tell, we have a certain amount of caution in our voice related to the revenue environment.

And it is just too difficult to see out any distance in 2003.

So we feel comfortable with that estimate at this point.

And that is about as far as we want to take it.

Okay great.

Thanks.

We have a follow-up question from [Mike Kopinsky] of A.G.

Edwards & Sons.

Yes.

You had stated in the past that you wanted to get St. Louis operating on all cylinders.

And certainly you have made tremendous progress to do that.

You have expanded your production facility in the Northwest.

You integrated your sales force, and now are seeking union contracts to kind of facilitate that even further, and buying in your carrier routes and so forth.

You have stated that you probably would like to get St. Louis running before you start looking at acquisitions.

And I was just wondering, where do you think you are on the timeframe of that progress on St. Louis?

Do you think you are in like the seventh inning, and maybe then you can start looking at acquisitions?

Or do you pretty much still believe that there is a lot yet to do in St. Louis before you start looking?

Yeah Mike, it is Bob.

I would just say I don’t want to leave the impression that we wouldn’t look at a very attractive acquisition, because we certainly would.

And there have been a couple of ideas that have come our way.

I mean we would be very interested in the right kind of opportunity.

So we don’t regard that as exclusive.

My comments have been more of one of priorities.

As you well know, we have made some big bets in St. Louis.

And we just want to make sure we have got razor-sharp focus in executing on the opportunity that is here in St. Louis.

But we really don’t believe that they are mutually exclusive.

I don’t know how to characterize the inning we are in, in the St. Louis ball game.

As you can see by the numbers this year, we are very encouraged at the progress we are making.

And I was very serious about giving the credit to the people who are involved day in and day out in the trenches on this, because they are the ones that are generating these results.

We think we have substantial opportunity to increase our share of ad revenue in St. Louis, and a particular opportunity with growing revenue at the Suburban Journals.

That is a very high priority for us this year.

So we are not looking for a relief pitcher to come in.

I mean we are pretty excited about where we are in the game.

And we just want to execute on the opportunity as fully as possible.

At this time there are no further questions.

Mr. Woodworth, do you have any closing remarks?

Yes.

I would just like to, in reference to [Stacey]’s question on the guidance for ’03, I think it is important to know we have not lowered guidance.

I mean this is pretty much what we said in December.

So [Stacey], I probably should have circled back to that.

But I do have just a couple of closing comments.

I would like to reemphasize what we believe are the key elements of our performance in 2002.

First, we continue to sharpen our focus on the parts of our business over which we have most control – building strong relationships with readers and advertisers.

And we made substantial progress, particularly in leveraging our daily and weekly papers in all of our markets.

Second, this focus is enabling us to expand our advertiser base, and drive revenue growth, particularly in local retail and pre-prints.

The result is a company that is increasingly well positioned to realize its growth opportunities.

And we are confident that you will see this positioning become increasingly apparent in our results.

We appreciate your time today.

And thank you for joining us.

This concludes today’s Pulitzer, Inc.

Fourth Quarter Earnings Conference Call.

You may now disconnect.