Lee Enterprises Inc (LEE) 2003 Q2 法說會逐字稿

Good morning, good afternoon, ladies and gentlemen. And welcome to your Pulitzer, Inc. Second Quarter Earnings Conference Call. My name is Rob. I will be your operator today.

Throughout this conference your lines will be on listen only. If you require assistance from an operator at any time, please key star, then zero on your touchtone phone, and we will be happy to help you.

At this time I would like to turn the conference over to Mr. Robert Woodworth. Sir, you may now begin.

Yes. Good morning, all. Thank you, Rob. Jim Maloney is going to read a statement regarding forward-looking statements. Jim.

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.pulitzerinc.com. A reply for today’s conference will be available until Tuesday, July 29, and the web cast will be available on Pulitzer’s website until Thursday, August 21

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

For discussion of these and other factors, please see the note of the company’s Press Release issued earlier this morning, which is also available on Pulitzer’s website and the company’s reports filed with the FCC.

In addition, please see the company’s Press Release for a reconciliation of the differences between non-GAAP financial measures, presented during this conference call, and the most directly comparable financial measures calculated and presented in accordance with GAAP. Thank you. Mr. Woodworth.

Thank you, Jim. And good morning, all. We appreciate you joining us. I’m Bob Woodworth, President and CEO of Pulitzer, Inc. With me today are Alan Silverglat, Senior Vice President Finance. Terry Egger, Senior Vice President and Publisher of the St. Louis Post-Dispatch, and Mark Contreras, SVP of Pulitzer Newspapers, Inc. or PNI.

Earlier this morning we released our financial results for the quarter. I’ll spend a few moments discussing those results and our perspective on the quarter, and Alan will provide more detail on the numbers. Then we’ll open it up for your questions.

As I hope you can see, we had a pretty good quarter. For some time now we've been telling you about our emphasis on revenue growth and cost control and those strategies were in evidence in this quarter.

As we discuss results, please keep in mind that the comparable numbers include our interest in the Tucson Joint Operating Agreement unless otherwise noted.

With a lot of hard work by people all across Pulitzer, we achieved solid revenue growth in what continues to be a challenging environment. Total ad revenue including our share of Tucson was up 3.6%. We saw strength in all categories of ad revenue with the exception of classified.

Retail ROP was up 5% for the quarter, and total retail including preprints was up 7%. National, including preprints was up 36.3%. We continue to see weakness in classified, which was down 6.6%, reflecting declines of 13.2% and 8.2% in help wanted and automotive, respectively.

Real estate revenue increased by 4.5% for the quarter. As we told you earlier in the year, we responded to the uncertain economy with a sharpened emphasis on cost control. Excluding newsprint, second quarter operating expenses were down 0.6%; primarily as a result of lower distribution cost and decreased bad debt expense.

Total cost of the quarter were up just 0.7%, driven by an 11.7% increase in news cost, reflecting a price increase in the mid-single digits, new and expanded editorial sections at the St. Louis Post-Dispatch, and increased content in select Suburban Journal papers.

In the first quarter, comparable expenses were down 1.1%, down 0 .4% if you exclude the impact of lower newsprint prices.

So you can see that we are being pretty effective on cost, thanks to the diligence of managers and staff throughout the company.

The combination of revenue growth and cost control meant solid growth in comparable operating income, which was up 13.4% over the prior year. It also meant stronger margin, with a 1.7 percentage point increase in our cash-flow margin for the quarter.

Going to the bottom line, GAAP net income was 53 cents per fully diluted share, compared with 32 cents a year ago. And base earnings, excluding the impact of non-operating investment charges and employment-termination inducements was 54 cents per fully diluted share, compared with 47 cents in the prior year, a 15% increase.

We're generally pleased with our performance in the second quarter because it demonstrates the impact of our long-term strategies. Those strategies are straightforward. Increase the audience reserve, maximize ad share, be very disciplined on cost and ultimately drive margins and profitability.

Let me give you some detail on how this played out in our market in the second quarter. In St. Louis, total ad revenue was up 5% for the quarter. Retail advertising was up 9.8% , reflecting a 7.3% gain in retail ROP and a 15.1% gain in preprints.

The increased sales pressure exerted by our coordinated sales force contributed to a 13.4% increase in the local retail territory revenue, driven by gains at both the Post-Dispatch and the Suburban Journals.

During the quarter we grew active accounts, 11.8% of the Post-Dispatch and 6.5% at the Journals.

We also continue to make good progress on cross selling. One example, in just the past two months cross-selling from the Post-Dispatch into the Suburban Journals has allowed us to double the size of five Journals in the fluent West St. Louis County, from an average of 24 pages to an average of 48 pages per edition.

National results are strong during the second quarter. Up more than 41% including preprints; with significant growth in pharmaceuticals, automotive, healthcare and telecommunications.

Strength in local retail and national offset weakness in major retail ROP, primarily reflecting decreased spending by department stores and in classified, which was down 8.6%. The classified weakness was the result of declines in help wanted and automotive, which were down 15.8% and 7.8%, respectively.

Real estate revenue increased 3.5% for the quarter.

We achieved good results on the cross side in St. Louis, with expenses at our St. Louis operations down 0.3% despite a 14.1% increase in newsprint expense.

Higher revenue and lower cost produced a 3.3 percentage point increase in our cash-flow margin in St. Louis. And further progress towards our goal of cash-flow margins in the upper 20's.

We're generally pleased with our results in St. Louis, but we are climbing a pretty steep hill in the third quarter. As you may recall, last year's results were up almost 10%, driven by two major grand openings and the refocusing of our sales forces.

Turning to PNI. Overall ad revenue was up 1% for the quarter, with retail including preprints up 3% and national up 18.3%. Classified was down 3.2%. PNI managed cost very effectively during the quarter. Total expenses including newsprint were down 2.2 percentage points. As a result, PNI's cash-flow margin improved by 1.1 percentage point, and EBITDA or FTE was up 5.2%. Those results continue PNI's progress towards its goal of cash-flow margins in the mid-30's.

During the second quarter and the early part of July, PNI continued its program of strategic acquisitions. We bought weekly papers in St. Helena and Calistoga, California near our daily in Napa. And in Crandon, Wisconsin, to supplement our daily in Rhinelander.

Our publishers report these acquisitions are already generating incremental cross-sell revenues. We now have paid or free weeklies in nine of our twelve markets, and we are cross selling between our dailies, weeklies and on-line businesses. And despite our sharp focus on cost at PNI, we continue to make sure we have enough feed on the street.

Turning to Tucson, our expanded and refocused sales force helped increase total ad revenue of 1.3%. A 3.5% gain in retail including preprints, was partially offset by declines in national and classified.

Let me close by once again reaffirming our guidance for the year. As we indicated last month, we expect to meet our guidance for full-year 2003 base earnings per fully diluted share of at least $1.95 assuming a stable economic environment. Even though the economy remains sluggish, we expect to benefit from our revenue initiatives and tight cost control.

Thank you and I’ll turn the call over to Alan.

Thank you, Bob, and good morning, everyone. I’ll concentrate my remarks on the expense side. Both what we did in the second quarter and the things we are doing to improve performance in spite of the sluggish economy.

As Bob noted, second quarter expenses were up 0.7%, primarily as a result of a 1.1 million increase in newsprint costs driven by both price and volume. That increase was largely offset by expense reductions in the following areas.

First, lower FTEs; down 0.3% from the prior year quarter, and 1.2% from the fourth quarter 2002, as well as the absence of inducements in the current year’s quarter.

Second, lower distribution costs reflecting the $3m annual benefit we achieved by reducing product duplication in St. Louis. By the way, I should note that next quarter will be the one-year anniversary of that change.

And third, reduced bad debt expense. Primarily reflecting the fact that we had K-Mart-driven reserve increases in 2002, but not 2003. And overall it improved collections this year. Four, lower promotion costs, and five, our concerted effort to control employee benefit cost increases.

You can expect us to keep a special tight control over expenses as the year goes on. In particular we are looking at two areas. First, staffing, including scrutinizing all positions as they come open. And more broadly all other discretionary expenses, such as travel and promotion.

Capital expenditures through the first six months totaled about 6.7m. We expect capital expenditures for 2003 to be in the range of 14 to 16 million, returning to a more normal level of 10 to 12 in the future. Thank you, and now I’ll turn it back to Bob.

Thank you, Alan. I’ll be happy to open it up for your questions.

Okay. Thank you, sir. Ladies and gentlemen on the phone, if you wish to ask a question at this time, please key star, then one on your touchtone phone. All questions will be taken in the order in which they are received. Once again, if you’d like to ask a question, simply key star, then one on your touchtone phone. Sir, give me a moment while I gather your first question.

Sir, your first question comes to you from [Peter Abbott] of Goldman Sachs.

Hi. Good morning. Couple of questions on the ad side. Number one, I’m hoping you might give us a little preview on what you’re seeing in July and whether you’re seeing any changes from the recent patterns.

Number two, could you drill a little further into what’s happening in the auto category? And specifically, it feels like maybe the newspapers are losing a little bit of market share on the near term basis, the electronic media. Do you think that’s part of the reason for the weakness you guys have seen recently? Thanks.

Peter, hi, it’s Bob. Good morning. I’ll let Terry and Mark really comment on the revenue environment, both in July, and particularly with auto. The one thing I’d mention is that, particularly with auto, as I mentioned in my comment, national was strong. And that, if you look at national and local auto, it gives you a bit of a different picture. But I don’t want to steal Terry’s thunder, so I’ll let him comment.

And I think that, Peter, on that point, you know auto revenue will come into the market in three ways; local classified, dealer association and the national spend. And different newspapers will categorize that in different ways.

For example, if you look at just the sixth period at the Post-Dispatch, while local classified auto was down, when you include auto that was spent in retail and national and co-op, we are actually up 8.8%.

And I’d just say, Peter, for us, it really was across-the-board auto was up. Primarily what we’re hearing from our folks is that car dealers are just having a tough time moving cars.

We’re seeing, you know, we’re hopeful that this is a short-term problem for us, though.

Right. And the PNI papers presumably are not getting significant national dollars.

Not to the extent you would in a metro, no.

Right. Got it. Thank you.

Regarding July, and looking forward the -- and again, the accounts that were based in St. Louis are a bit tougher, but overall the spend patterns for July look similar to what they’ve been in the last couple of months. Local territory is very strong. Real estate is strong. Still soft in recruitment. Department store is a bit soft. National is still good. Preprint is still solid.

Peter, Bob again. Just a quick comment on your reference to losing share in auto to electronic. I happen to think that’s one of the great opportunities for the newspaper business. The electronic media has really done a terrific job, particularly with dealer association revenue in building that revenue stream. And we talked before about our cross-media presentations and analysis. And one of the areas we focused is dealer-association revenue. So, from my experience, if you draw a pretty sharp bead on the dealer-association revenue going into broadcast, it really is an opportunity for newspapers.

Great. Thank you.

Okay, thank you, sir. Your next question is from [Stacy Fleck], of Merrill Lynch.

Hi. Good morning. I was hoping you could explain the slowdown in preprints in June at the Post-Dispatch. Was it really just tough comparisons or something else going on there. And also is that the type of kind of single-digit growth you’d expect going forward?

And secondly, could you discuss the circulation volume and revenue trends at the Post-Dispatch, specifically what was behind the 5% volume decline in June and the 8% revenue increase there?

Sure, Stacy. Good morning. I’ll let Terry comment on both those.

Great. Thanks.

Yeah, let me just start with the circulation. Last year during this period, Stacy, a year ago we were launching our new food section. And so with that we did quite a bit of bonus copies or sampling of the product to Sunday subscribers who did not subscribe during the week. And so that pushed the volumes with no revenue associated with it. That, coupled with the fact that -- so that’s the volume decline, because we didn’t do the same thing this year in terms of the sampling. Then the revenue increase is a direct reflection of some of the rate increases that we took in circulation late last year.

In terms of preprints, again, we are against tougher comps in June, July. But, you know, again looking at our business specifically I would say that the numbers in June were more of an anomaly. We think that the trend that we saw throughout the second quarter and, you know, staying in that double digit range, that’s an expectation. We still continue to see preprints as a huge opportunity force in St. Louis.

Great. Thank you.

Thank you.

Okay, thank you. Your next question is from Michael [McFee], of A.G. Edwards.

Thanks. Tucson came in a little softer than I was expecting on both the revenue and income line. Tucson revenue growth in June was up only .7%. We were looking for something a little bit closer to 3. And the trend didn’t look as good, I guess, coming off of May. Can you add a little bit more color on what’s going on in that market since you indicated some time ago that you beefed-up sales staffing there and was making a concerted effort to focus on that paper.

And then I have one quick follow-up after that.

Good morning, Mike, it’s Bob. I think your analysis is pretty sound. The Tucson economy continues to be impacted by a softness in tourism. So, I think you need to start there. But as I mentioned in my comment, the growth in local retail territory was reasonably good. I don’t think we shot out any lights.

But in addition to that, we have new advertising management there that we feel will really position us much better going forward. And we continue to be impacted by majors in Tucson, as we are in St. Louis. So, you put those all together, and I think it was a reasonably soft month. But our sense is, going forward, that we should perform a bit better on the revenue side in Tucson.

Okay. I know that you don’t - historically you haven’t talked about acquisition prospects and so forth. But I was just wondering, can you gauge the level of activity right now or are there any significant opportunities out there? I know that you’ve expressed interest as reported in some of the media regarding some of the Freedom assets. Are you still in the running there? Can you add any color on that?

Well, Mike, I’m not going to comment on speculation in the media about Freedom. I just -- I don’t think it’s appropriate. I mean, I think there’s been speculation about Pulitzer, but I’ll leave that to the speculators.

Can you gauge the level of activity or are you -- or are there things out there that you’re looking at at this point? Or can you just giving us a kind of a gauge on the market at this point?

Well, I ask Mark to comment here. I mean, as I said in my comments, we’ve been pretty active. We’re very pleased with the weekly acquisitions in the Napa area, as well as in Crandon. And Mark continues to ferret out those opportunities that ultimately represent a lot of value for us. And Mark, do you want to add to that?

Just, Mike, that the local acquisitions, I think that the code word for them is tuck-ins, we’ll continue to pursue, and I would anticipate us continuing along that path in the near term and the immediate term as well.

In terms of the, you know, the overall market for stand-alone acquisitions, there have been a few, but none that we’ve seen --none that we chose to take a swing at. It still remains, you know, this is not the go-go days of ’99 when we, you know, were deluged by lots and lots of those opportunities. We anticipate in the next couple of years though that that will pick up.

Okay. Great. Thank you very much.

Thanks, Mike.

Okay. Thank you, sir. Your next question is from Steven Barlow of Prudential Securities.

Good morning. A couple of things on the cost side. Labor, you were barely positive so that means they were basically flat numbers. Is that a trend we should be looking forward to over the next six months?

Two, other expense has been down the last two quarters. Is that your intent to be in that or were you --as we’re cycling through some of the productivity gains will that number go back into positive territory?

And then following up on Mike’s question, could you give us an outlook, I guess, for Tucson for the full year. Should we be looking for higher or lower contribution from Tucson versus 2002? Thanks.

Yes, Steve. Good morning, it’s Bob. Let me kind of handle that and maybe in -- let me talk about Tucson first. You know, as I suggested in my comments to Mike, I would hope our outlook in Tucson is more favorable for the second half of the year, versus the first half.

As you know, the Tucson JOA runs at high margins. They do an excellent job on expenses. We continue to be very focused on growing revenue there faster than we have in the past. So, you know, if we get some wind at our back on the revenue side, we’ll continue to control expenses and I have some hope that the second half will be better than the first half.

On the expense comments, labor is about flat. It’s, as we mentioned in our comments, it’s a reflection of being very diligent on FTEs, as well as some actions taken last year to mitigate our benefit cost. And we’ll continue to be very, very disciplined about that. But as you know, we selectively make decisions to make investments if we need to add sales people or the product enhancement in St. Louis, both at the Post-Dispatch and the Journals are represented investments that we think we ought to make for the long term. So, it’s really a balancing act there. But as our numbers suggest, we are very disciplined about FTE’s.

On other expenses, as we mentioned, we’re cycling against the distribution savings in St. Louis. So that’s going to make the hill a little more difficult to climb. But we have opportunities on the expense side throughout the company that we continue to focus pretty sharply on. So, I can’t give you a good read of exactly where other expenses will be. But just I hope you’d recognize that we’re going to be disciplined in saving money where it’s advisable.

I guess I have a follow-up question, since you’ve been down 6.7 and 4.5, is that number going to stay in negative territory or -- sorry about that, creep up into positive territory?

Hi Steve, it’s Alan.

Hello, Alan.

I think it’s going to come closer to increasing over the balance of the year. I mean, we, back in December we said our non-newsprint costs would increase less than 3%. I mean, given the difficult revenue environment, we’ve held those cost increases down. But I still think, you know, when the year is done there’ll be an increase all in.

And this is what, when Jim was reading the preamble there, the word labor negotiation came up. Do you have anything coming up between now and, let’s say, the next year?

Steve, I’ll let Terry comment on that. I mean, I think as you know we’re in active negotiations with the Guild here in St. Louis. And I probably won’t comment too extensively on that. But I’ll let Terry talk about it.

Yeah. We had the settled contract with our pressmen late last year. We’re active in the negotiations with the Guild currently and we have one other small unit that we’re negotiating with right now.

Thank you.

The next question is from Mark Hughes of SunTrust.

Thank you very much. In light of the good growth in the St. Louis market, do you have any updated market share statistics for local advertising?

Hi Mark, it’s Terry. We haven’t been out in the field again with the study this year on market share. So I don’t have anything updated. But what I would point to is, and we continue to be very encouraged by the growth in our local retail territory businesses.

Again, the macroeconomics that affect major accounts business so much more and employment business are things that you control to a lesser degree than you do just growing the core business with smaller and mid-size retailers. And the revenue growth, the active advertiser growth, the momentum that our sales forces have built in that area are the most encouraging signs to us, so. Just that activity alone tells us that we’re making progress on our market share.

What do your sighting senses tell you about department stores in the back half of the year, I guess, particularly in the 4th quarter?

Well again, I think that it’s been no secret that, you know, the department store category across the country has been under a bit of pressure, both from their sales standpoint and the advertising. But our folks are being very, very creative in trying to work with our local department stores. They’ve been long-standing, great customers of ours. We feel compelled to find ways to help them market their businesses and grow it and get through this tough time. So, we’re not projecting exactly what the spend will be for the balance of the year, but I would tell you that our folks are being very creative right now to try and find solutions that keep dollars in our pockets and help them grow their business. .

Right. And finally, it talks about lower promotion costs. Are you at the level now that’s sustainable, I guess, particularly in light of potential changes in telemarketing?

Yeah, Mark, Bob. I’ll let Terry and Mark comment on this too. But, I would say generally yes. I mean, in the short term, as you know, those costs can be somewhat discretionary. But we’re still investing in circulation and promotion costs across the company, and particularly in St. Louis. Frankly I think we’ve got an opportunity to spend that money a bit more efficiently and we’re pretty focused on that.

But yes, I mean in direct answer to your question, I think we’re at a level that’s sustainable and prudent.

Thank you.

I’d like, Mark, just make a mention, we’ve got roughly about 25% of our starts are telemarketing related, and what’s going to involve with us within PNI over the next few years, is we’re going to be focusing a lot on direct debit kinds of programs for subscribers, to increase retention and lower ultimate start and customer acquisition costs.

What are the telemarketing starts in St. Louis?

In terms of the actual number per year?

Or just the total or the percentage of the total?

Yeah, we’ve not disclosed the actual number, but the lion’s share of our starts historically have come from telemarketing and we’ve been pretty active in trying to wean off of that and go to more crew sales and key off sales and things that you can actually have face-to-face contact. Those have proven over the years to have a higher retention value, and so we’re shifting our focus increasingly there.

Mark, it’s Bob. I’d just chip in an editorial comment. The key in this front is not so much starts or telemarketing starts. I mean, I certainly understand the thought behind your question. But the key is retention and developing collection systems that are flexible and enable customers to pay in ways that are most appropriate for them. As Mark suggested, building credit card payment is a key objective here at Pulitzer, and it really aids retention. So, you know, that’s the piece of the puzzle that really is important long term.

Gotcha. Thank you.

Thank you, sir. Your next question is from William Drury, of Credit Suisse First Boston.

William Drury. Hi. Just one question and apology if you covered this. I was just wondering on the circulation revenue. It seems like the revenue is up nicely but the volume was down for the same period. If there was any explanation behind that or details, that would be great?

Bill, hi, it’s Bob. I’ll let Terry comment on that.

Hi, Bill. We did touch on this briefly. A year ago, in the sixth period we launched our new food section and so we took and sampled copies to Sunday subscribers who were not daily subscribers. So that impacted our daily number. It increased the volumes, with no revenue associated with it. We did not repeat that this year, on the anniversary of the launch of that section. So that brought the volume down, the revenue increase was a result of price increases that we put into place late last year.

So would the former a one-time occurrence for the month and then the price increase would continue to roll through?

That’s correct.

Okay. Great. Thank you very much.

Okay. Thank you, sir. Ladies and gentlemen, as a reminder, it’s star 1 for any questions.

I have Steven Barlow, of Prudential Securities.

Steven Barlow. Hi. Alan, could you give us what the cash position was at the end of the year, and if you have a forecast, what your cash position will be at the end of the quarter and your cash position for the end of the year? Thanks.

Sure, Steve. We don’t forecast the end of the year, but it increased from about $188m at the end of December to around a little over $200m at the end of June. And that’s the unrestricted cash balance.

Thank you.

Okay. Thank you, once again, star 1 for any questions. Sir, I have no further questions for you at this time.

Okay. Thank you, Rob. I’ll just close with a couple of comments emphasizing the key elements driving our performance for the remainder of 2003.

First, we remain sharply focused on executing our strategies to expand our audience and our share of local ad dollars. Second, we told you that our planning assumes the uncertain economic environment will persist and that we would adjust our costs accordingly. You can see the results in our first two quarters, and we will continue to align our expenses to match the environment.

We really do appreciate your joining us today. Thank you very much.

Thank you, sir. Thank you ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines at any time.

Okay. Thank you, Rob.