Lee Enterprises Inc (LEE) 2003 Q3 法說會逐字稿

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

Third Quarter Earnings Conference Call.

At this time, all participants are in a listen-only mode with a question-and-answer session to follow at the end.

Want to remind participants 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 call will be available until Monday, November 3, and the Webcast will be available on Pulitzer's Web site until Friday, November 28.

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 notes of the Company's press release issued earlier this morning, which is also available on Pulitzer's Web site and the Company's reports filed with the SEC.

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, you may begin your call.

David, thank you.

Good morning and thank you for joining us.

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

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

Louis Post-Dispatch."

Joining us by phone is Mark Contreras, who was recently promoted to Senior Vice President of Pulitzer.

Mark continues to be responsible for Pulitzer Newspapers Inc., or PNI, and has also assumed oversight responsibility for operations in Tucson.

Earlier this morning, we released our financial results for the third quarter.

I'll spend a few moments discussing those results and our perspective on them.

Alan will provide more detail on the numbers including our adoption of FASB 150, which caused us to delay our earnings release a bit and resulted in a $26.9 million cumulative effect adjustment to our third quarter results.

Then we'll open it up for your questions.

As we discuss results, please keep in mind that comparable numbers - that the comparable numbers we will discuss with you today include our interest in the Tucson joint operating agreement and exclude the impact of the acquisitions we made in 2003.

I should also note that when we discuss the retail and national revenue category, both include

.

The story of the quarter is straightforward.

We faced tough revenue comps because of the grand openings that added $1.2 million in incremental revenue in St. Louis.

We also had the challenge of continuing softness in major retail recruitment and auto advertising.

Despite those challenges, we continued to see positive effects from our key strategies of building audience, leveraging our combinations of print and online, and making operating efficiency a way of life.

In the third quarter, those priorities translated into improved local territory revenue and more cross-selling.

As a result, our revenues were down only very slightly from last year and our continued emphasis on expense control helps us offset revenue decreases.

It's worth noting that had we not benefited from the grand openings last year, both revenues and operating earnings would be up marginally this year.

Turning to the numbers, on a comparable basis, ad revenue was down seven-tenths of a percent.

Retail declined half a percent, while national increased eight-tenths of a percent.

Total classified was down 1.3% for the third quarter with a 5.9% increase in real estate partially offsetting continued slowness in help wanted and automotive.

We continued to see good progress with our e-media business.

Overall, e-media revenues were up 46% in the third quarter.

More significantly, all of our online operations are nicely profitable for both the three and the nine months of 2003.

It confirms our belief that e-media is best understood as another way to build audience and provide reach to advertisers and that newspapers are in the best position to take advantage of that fact.

On the cost side, our continued success in cost control was a key contributor to our third-quarter performance.

Despite an increase in newsprint cost of more than 10%, we held expenses flat.

Excluding newsprint, operating expense was down more than 1% and

were down about 2% from the prior year.

Operating income was down 4.1%.

Base earnings, which are defined in our release, were 46 cents per diluted share compared with 47cents last year.

GAAP earnings, including the $1.25 a share impact of the adoption of FASB, were a loss of 77 cents per diluted share compared with net earnings of 40 cents per diluted share in the third quarter last year.

Now let me give you some detail on how the third quarter played out in our operating groups.

In St. Louis, total ad revenue was down 1.4% for the quarter.

Retail declined seven-tenths of a percent, reflecting a 3.3% decline in

partially offset by a 5.4% gain in

.

As I mentioned earlier, we had a tough hill to climb in St. Louis because of the almost $1.2 million in incremental retail revenue injected into the market by the grand openings last year.

Removing those revenues from 2002 turns a seven-tenths of a percent decline in St. Louis retail into a 3.8% gain.

Despite the persistent weakness in

, we continue to see positive results in local territory revenue, which increased 12.4%.

Importantly, during the quarter, we began the rollout of the redesigned and dramatically enhanced "Suburban Journals."

We started with our West County papers.

Readers and advertisers have reacted positively and we expect similar results as we upgrade our other suburban papers.

National revenues increased 3.9% during the quarter.

Classified was down 3.8% with help wanted and automotive down 11.6% and 4.3% respectively.

Real estate increased 3.4% for the quarter.

We continued our tight control of cost in St. Louis.

Expenses were down three-tenths of a percent despite a nearly 12% increase in newsprint expense, and

were down 2.7% from prior year levels.

As we announced previously, during the quarter we reached agreements to purchase a number of single-copy distribution businesses.

When these transactions are completed, which is expected to be in the fourth quarter, we will own more than 75% of single-copy distribution.

Acquiring "Post-Dispatch" distribution is important because it enables us to better control customer service and establish direct relationships with our readers as well as to operate more efficiently.

To summarize the third quarter in St. Louis, the comps and continuing softness in a few specific categories posed tough challenges, but our overall results reflect the benefits of persistent execution of our strategy and good cost control.

In particular, our strategies are driving significant gains in cross-selling in local retail territory revenue.

Turning to PNI, overall comparable ad revenue was up 1.8 percent for the quarter with retail and national both also up 1.8%.

Classified was up 1.7%.

While we continued to see weakness in auto - down 11%, it was more than offset by strength in real estate, which was up 13.5% and importantly help wanted, which was up six-tenths of a percent.

We are cautiously optimistic about the trends we are seeing in help wanted at PNI.

Active advertisers at the PNI properties increased 6.3% including acquisitions in the third quarter.

These results exclude Bloomington and Provo, both of which have changed the way they track active advertisers, so their numbers are not comparable.

PNI continued to make acquisitions to add reach in its markets.

During the quarter, we closed on purchases of six properties.

In Utah, where Provo is our key market, we added three paid weeklies, a shopper, and a monthly real estate magazine.

We also added a weekly in Oregon that complements our Coos Bay operation.

These acquisitions give PNI additional cross-sell opportunities, and we continue to show good results in those efforts.

During the quarter, in those markets where we had paid weeklies, 45% of weekly ad revenues were sold by the daily sales force.

On the cost side, PNI's total expenses were down 1.8% including newsprint and 2.6% excluding it.

A contributing factor was the 1.9% decrease in

.

As a result, PNI's EBITDA margin improved by 1.8 percentage points and EBITDA per

was up 8.7%.

EBITDA margins were up more than one percentage point at the PNI dailies.

Significantly, the PNI weeklies showed an increase of 7.5 percentage points in EBITDA margins.

That reflects PNI's ability to grow revenue and cut costs by integrating operations, particularly at recently acquired properties.

Turning to Tucson, total revenue was down four-tenths of a percent.

Ad revenue was down 2.1% with retail down 5.4%, reflecting continued weakness with

.

National declined 42.7%.

On the plus side, classified was up 8.8% with gains in all categories.

Help wanted increased 9.8% and auto 2.7% and real estate 1.8%.

I'll close by reviewing our earnings guidance.

We expect full-year 2003 base earnings per fully diluted share of at least $2.

Please note that this projection reflects an update to our definition of base earnings resulting from our adoption of FASB 150.

It reflects no other change from our previous forecast for the full year base earnings per fully diluted share of at least $1.95.

However, continued weakness from recruitment, auto, and

, and cost associated with the upcoming purchase of the St. Louis distribution businesses make this more challenging than originally anticipated.

In addition, the grocery strike here in St. Louis is having a negative impact on Sunday single-copy sales.

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

Thank you, Bob, and good morning, everyone.

I'm certain most of you would like to hear about our considerations regarding FAS 150 and how its application has affected our third quarter financial statements.

I'll start there and end with my normal overview of our operating expenses.

First, let me assure all of you that our delay in issuing our press release had nothing to do with determining our financial results for the quarter exclusive of issues related to the application of FAS 150.

When the FASB issued their last interpretation on October 16, it resulted in a lot of reaction from reporting companies.

We thought it prudent to wait a bit and see if further clarifications were coming.

In fact, we understand the FASB may meet soon to reassess FAS 150.

The new standard causes Pulitzer to recognize as a liability the amount required to liquidate the capital accounts of The Herald Company in 2015.

As you know, The Herald Company holds a 5% economic interest in the operations of the "St.

Louis Post-Dispatch" and our St. Louis distribution company.

The initial liability recognition was made as of the beginning of the third quarter with, one, a cumulative effect after-tax reduction of earnings in the amount of 26.9 million, or $1.25 per fully diluted share; two, an increase in deferred tax assets of 16.5 million - this asset reflects the future tax benefit we will receive in the years following redemption of Herald's interest; and, three, an increase to the liability account such that when combined with our previously existing minority interest liability, the new liability balance totaled $45.6 million.

On an ongoing basis, we will no longer recognize as an earnings reduction the minority interest in the operations of "The Post-Dispatch" and the St. Louis distribution company.

Accordingly, we have restated our definition of base earnings to remove similar earnings reductions from prior quarters so as to present base earnings on a comparable basis.

We made one further change to base earnings for 2002 so they would become consistent with our presentation in 2003.

All investment activity relating to liquid assets will be included in the determination of base earnings.

In combination, these changes will raise our base earnings for full-year 2002 from the $1.85 per fully diluted share previously reported to $1.93.

Our earnings release contains a reconciliation table.

Standard 150 mandates that we recognize as interest expense the interim fluctuations in our estimate of the amount required to liquidate Herald's capital accounts.

The pre-tax interest expense credits associated with that evaluation during the third quarter amounted to $1.1 million.

We believe that over time this item will likely become an increase to expense.

I'll be glad to take your questions at the end.

Let me now, however, turn to a few comments on our expenses for the quarter.

Third quarter comparable expenses were flat in spite of a $1 million price and volume-driven increase in newsprint.

That increase was largely offset by expense reductions in the following areas - reduced bad debt expense primarily reflecting improved collections, decreased cost associated with fewer

, and reduced workers' compensation expense and savings and promotional expenses and other discretionary areas.

You can expect us to keep tight control over expenses the rest of this year and into next.

In particular, we are looking at two areas - staffing, including scrutinizing all positions as they come open, and other discretionary expenses such as travel and promotion.

Capital expenditures for the first nine months totaled approximately 9.4 million.

We expect capital expenditures for 2003 to be in the $14-$15 million range returning to a more normal level of 10-12 million in the future.

Now I'll turn the call back to Bob.

Thank you, Alan.

Now we'll be happy to take your questions.

Thank you very much, gentlemen.

Ladies and gentlemen, if you have a question or a comment at this time, please key star, one on your touch-tone phone.

If your question has been answered or you wish to withdraw your question, please key star, two.

Once again, that's star, one to begin.

And we'll pause just a moment for the first question, please.

And our first question comes from Peter Appert from Goldman Sachs.

Please go ahead, sir.

Hi.

Good morning.

Can you give us any perspective on what you're hearing from your major retail accounts in terms of their spending expectations for the fourth quarter?

Yes, good morning, Peter.

It's Bob.

We're - it looks like the early weeks of October are starting out a bit better.

I'll also ask Terry to comment specifically about St. Louis.

Yes, Peter, good morning.

This is Terry.

Yes, I think that the department stores are still a little bit cautious.

Some of the other categories, though, I think are going to try and give it a shot and, you know, spend some money this fourth quarter.

I think that we can continue to expect a shift to more preprint business from the

business, and that will be a big piece of our fourth quarter.

But we're not hearing of a major pull-back short of, you know, the industry's challenges in the department store category.

OK.

And then, could you just remind me what the trend has been for the last three months in terms of the aggregate year-to-year rate of change in help wanted advertising for the Pulitzer group?

For the - for the entire company, Peter?

Yes, if that's possible.

Or if it's not possible, just maybe St. Louis, then, so we could get a sense of the trend line over the last several months.

Over the quarter - this is Alan, Peter - over the quarter, help wanted decreased 6.9%, and that compared to a second quarter decrease of

.

OK.

And

in the first, so it's - from the first

, second

, third 6.9.

OK.

Peter, I'd like to comment just from the St. Louis perspective.

We definitely saw a gain on the losses, if you will, as we went through the third quarter, but I still want to note there's still losses.

Obviously the comps continually become easier, but we're still in no position to declare that we are going to be at the absolute bottom and then start to see numbers turn positive.

Right.

And we know that will come, we don't know when.

Peter, this is Mark Contreras, just for P&I and Tuscon, we are cautiously optimistic that the next period of time is going to show us gains.

And in the third quarter, about half of our markets showed growth and help wanted, about half showed decline.

But much lighter than they had been in the past.

Okay, so positive in the fourth quarter.

Okay, so positive in the fourth quarter.

We're crossing our fingers at this point, but there's good reason to believe that we've got cause for optimism.

Okay, great, last thing, Bob, how important is it to get to 100% ownership of the distribution and is getting to 100% changed the economic in a meaningful way?

No, I would describe it as a key objective, is this still Peter, I'm sorry.

Yes, sorry, I'm hogging the questions.

No, that's okay, I just wanted to make sure.

I would certainly describe it as a key objective for the company and obviously particularly St. Louis.

We're at a point where we control a significant majority of the distribution and frankly we've got a lot of the costs in place to absorb much of the rest of the distribution.

So the economics looking forward are favorable.

The mention, in my prepared comments about the purchase of single copy routes here in St. Louis, that's a big plus for us going forward, cause it's a significant piece of our operation and we're just going to be able to market much more effectively through that channel and just operate more efficiently.

Great, thank you.

Our next question comes from Mark Hughes from SunTrust Robinson Humphrey.

Please go ahead, sir.

Actually, Toby Sommer for Mark.

I was wondering if you could touch on newsprint, we've heard about the possibility of another price hike coming in early 2004.

If you've got a sense generally for where that may go, and then as well on the FTE side, sort of what we should expect going forward?

Toby, hi, it's Alan.

We think that newsprint is going to remain constant over the fourth quarter of this year.

As to first quarter of next it's a little too early for us to tell, although none of the mills have approached us with word of a price increase, I can say that much.

And I think we would hope the industry overall would push back until there's a real increase in advertising volume to support it.

Relative to FTE levels, we haven't finished our budgeting process yet, so it's a little early to speak about specifics, but I think our mindset going into 2004 will be much that is was going into 2003, that we're going to remain very tight and cautious on the cost side until we feel confident that a recovery is solidly at hand and then build up only as circumstances would permit.

Toby, I'd add a comment on the FTE question.

I think it's fairly clear that we're managing our staffing counts pretty rigorously.

From an employee standpoint, that translates to people working harder, and I think that just needs to be recognized and we're sensitive to that going forward.

But with the uncertainty of the revenue environment we just feel it's appropriate balance and management.

Regarding national advertising, it looks like Tuscon was down, was there any particular reason for that and maybe you can comment about strengthening particular national categories in St. Louis and in P&I?

This is Mark, Toby, I guess in the Tuscon number, roughly half of the decline in the third quarter was a result of pharmaceutical business not being there.

Primarily the

medicines that were there last year that did not return.

And Toby, this is Terry, in St. Louis I think the telecom category, which we classify as national, has been very strong for us.

It softened somewhat and the other surprise to us was in the third quarter anyway, the national auto was a bit softer than it has been.

Telecom could be soft going forward, auto we expect to be a bit stronger and for us, actually, pharmaceutical will be strong.

Do you expect generally, any sort of impact from wireless portability?

Have you heard anything from the cellular companies regarding their ad claims in the fourth quarter?

Again, related to telecom specifically, actually, a bit of a softer approach than we have seen, specifically to the portability issue.

I'm not conversing on that.

Toby, I'd echo Terry's comment.

We have not seen a gusher emerge from that as of yet.

Okay, thank you very much.

Thank you and our next question comes from

from Merrill Lynch.

Please go ahead, ma'am.

Thank you, good morning.

What percent of ad revenues do the major retailers represent?

That's the first question.

Question two, what types of positions were eliminated in the quarter and were those charges included within the labor expense line?

And just the last question for Alan, what tax rate can we expect in the fourth quarter?

It was a little bit higher than I was looking for this quarter, and also looking out into 2004.

Well,

, let me take the last one first while the others think about their response.

The fourth quarter tax rate will be no higher than 38% and probably no lower than 37.5% and we'll evaluate kind of what makes sense on that basis, and we would adjust the fourth quarter with the year 2004 in mind.

So I think, the same kind of range would hold for 2004.

Okay.

And Stacey, this is Terry, related to percent, again, our definition of majors here in St. Louis, including pre prints would be a little less than 30% of our revenue.

And of that, the pre prints would represent almost half of that.

A little less than half.

Stacey, the one thing that I'd mention there, the categorization of majors across different companies and be quite different, so I'd have a bit of a caveat there.

The other answer related to FTE's is, as a reduction in FTE's and specific departments, I don't think we would single out any particular department across the company.

It is just an overall, fairly disciplined approach to making sure we're hiring only when we have to and if positions can be left open for a period of time, we're trying to do that.

So I'd describe it more as an overarching kind of discipline than I would singling out any specific area.

Okay, and was that charge taken in the labor expense going out?

, I just didn't understand your question.

Oh, okay, just there was a $.2 million charge for termination costs in the quarter?

Oh yes, that would have been

Is that in the labor line?

It would be, yes.

Okay, great, thank you.

Thank you, once again, ladies and gentlemen, if you have a question or comment, please key star one on your touchtone phone.

And our next question comes from Steve Barlow from Prudential.

Please go ahead, sir.

Thank you.

Wondered if you could be a little more specific on the department store chains that you might see that there's any weakness, and whether or not it's just more St. Louis based or Tuscon cause obviously you may have different chains in different areas.

Any comments sort of on this grocery store strike, what is going on, from your point of view?

And Terry, can you tell me, these roots that you bought, are the prices higher or lower than the previous purchases?

You haven't done anything I think in about a year and a half and didn't know whether the various families were sort of giving up or you remain tight on the prices you want to give.

Why all of a sudden did this quarter we end up with some purchases and haven't seen them in a while, thanks.

Steve, this is Terry, I was just making notes to answer all three points.

Regarding the department stores, I think it's been well documented in the industry that there have been some challenges in some of the sales related to Dillard's and the different May Company divisions, as well as other department stores.

We're impacted here in St. Louis by Dillard's and May, are their Famous-Barr division.

So actually, in the third quarter, there was a compounding affect, a softness in that industry, coupled with cycling against a year ago when there was a major ramp up by Famous and Dillard's in answer to the Nordstrom's opening, as well as Saks all spending quite heavily in the quarter last year.

I think it's important to note though that these are our customers and they face some challenges.

So as we mentioned in our last call, our folks in advertising were very creative in going back to the department stores and coming up with programs that would allow us, relative to what we're hearing in some of the markets, save a lot of that expenditure, and try to increase the frequency and the exposure for those advertisers.

So it's an industry impact and I think that our folks have come up with a way for us to keep more of those dollars.

But importantly, help stimulate the sales for those businesses.

And some of the early comments we're hearing back from the department stores are very encouraging on that front.

Regarding the grocery, again, it's played out on the national stage now.

St. Louis actually was the first market to experience a strike lockout combination.

We know that immediately that impacts our single copy sales, as Bob mentioned in his comments, particularly on Sunday.

We sell a lot of papers out of the grocery stores on Sundays, and they have just had to shorten their hours in addition to some of the decline in shopping traffic.

Short term, there has been a bit of an advertising response from both the stores themselves as well as the unions trying to convey their message.

That has been a very short-term positive impact on revenue.

How long it goes and how it plays out long term, we're just not in a position to predict.

Finally, related to the routes.

We don't specify at all what we've paid.

Suffice to say we're pleased with the ability to make these acquisitions.

This was a large chunk.

And operationally, the more that we control in single copy, it becomes critical to be able to market the paper.

To be able to engage in things like, with 7-11's or convenience stores where you buy a cup of coffee and a donut and get a newspaper and do that market wide.

Previously, that is something that we have not been able to do because of the lack of coordination, cooperation with single copy dealers.

So whether it's a program like that or being able to work with a regional or national hotel chain to be able to have the Post-Dispatch at the doorstep in the morning, those were all things that we were inhibited from doing based on a lack of ownership.

So moving north of 75% puts us in a much stronger position to roll out some of those programs.

Steve, this is Mark.

I'd just comment on the department stores, we have Dillard's in about four or our markets, including Tuscon, and we're cautiously optimistic that they're going to ramp up in the fourth quarter.

Anecdotally on the west coast, particularly, we have not heard that there are massive cut back that are planned for the fourth quarter.

Thanks, and then, Terry, if you can be specific, if you could, just help wanted, remind us remind us what it was down July, August and September?

Total help wanted in St. Louis was down 11.5%, 11.6% in the quarter.

It improved through the quarter.

I think an important mark on the wall is, in total, St. Louis, over the course of the last three years, help wanted is down $33 million.

But you don't have it by month?

Oh, I'm sorry, sequentially?

I don't have that with me, we can get that for you, Steve.

Great.

Thank you, once again, ladies and gentlemen, if you have a question or comment, please key star one.

And we have a follow up question from Mark Hughes from SunTrust Robinson Humphrey, please go ahead, sir.

It's actually Toby Sommer again.

Wanted to get a sense for how big the different classified categories are, either as a percent of total classified revenue or percent of total ad revenue, if you have that available, or even a sense of that.

And then, perhaps, what some of the drivers are in terms of categories of the growth in emedia?

Toby, this is Alan.

Let me speak to the sizing and then maybe Mark and Terry can speak more to the drivers since their closer to that end of the business.

But, as a percentage of total ad revenue, classified's about 40%.

And that 40% breaks down about 14-15% to employment, about 12% to automotive, about 8% to housing, and the balance would be a number of individual categories.

And as you might guess, the employment percentage is a little higher in St. Louis and in a little lower in some of Mark's P&I markets.

And in between for Tucson.

And again, Toby, this is Terry, pointing to a recovery, and when and as that occurs, at one point, the peak recruitment represented 25% of all advertising, or 50% of classified advertising here in St. Louis.

So our ability as an industry, specifically here in St. Louis, in P&I, to be able to recover that money and other categories, and build that capability, then as the economy turns back, and we start to see some of that money returned, that's one of the reasons we're optimistic about the future.

Toby, I'd say in the P&I markets, help wanted is about 11% of total ad revenue, classified is about 34%.

And in terms of what we see driving emedia, obviously we have been up selling our classified ads for quite a number of years.

And that is delivering consistently more and more value to advertisers as our audience grows.

What we see happening in the next six months to a year is us up selling our display advertising, both from retail and from classified.

We see that as a very strong future driver of revenue growth in emedia.

And Toby, this is Terry, to follow up the media issue, first it starts with the acceptance and the market overall.

The traffic for STLtoday has been quite remarkable in growth.

We're up in the third quarter, our traffic was up almost 70% over the third quarter last year.

I think that's a direct tie to us bringing STLtoday back into the Post-Dispatch, and then promoting it heavily in news stories each day.

On the revenue side, similar to Mark's comments, it's classified up sells, but also we currently put each retail display ad that appears in either the post dispatch or the suburban journals up on STLtoday in a searchable database.

We also look to unbundle that and begin charging for that at some point in the future.

But we're proving that the online database being searchable works not only in classified but can work in retail as well.

Great, thanks very much.

And we have no further questions at this time, sir.

Good, thank you David.

Just to leave you with a couple of closing thoughts, and I hope this comes through clearly today, but we won the business in a pretty straightforward manner.

And the focus is really to increase audience, maximize ad share, be disciplined on cost, and if you do that, ultimately some good things happen, particularly our ability to drive margins and overall profitability, and I hope you saw some good evidence of that in our prepared remarks and the numbers we passed along today.

We appreciate your attention and thank you for your patience and joining us.

Thank you sir, thank you ladies and gentlemen today for your participation.

This concludes your conference call, you may now disconnect.