John Wiley & Sons Inc (WLY) 2002 Q3 法說會逐字稿

Good day, everyone and welcome to the John Wiley & Sons conference call. Today's conference is being recorded. Before introducing Will Pesce, President and Chief Executive Officer, I would like to remind you that this discussion will contain forward-looking statements.

You should not rely on such statements as actual results may differ materially and are subject to factors that are discussed in the detail of the company's 10-K and 10-Q filings with the SEC.

The company does not undertake any obligation to update or revise forward-looking statements to reflect subsequent events or circumstances.

Mr. Pesce, please go ahead.

Thank you. Good morning and welcome to Wiley's third quarter conference call. I'm with Ellis Cousens, Executive Vice President, Chief Financial and Operations Officer.

I'll begin today's conference call with an overview of Wiley's third quarter and year to date results. Then Ellis and I will respond to your questions.

As noted in the press release issued earlier today, Wiley continued to perform well during the third quarter in spite of sluggish market conditions around the world.

Third quarter review of 221 million increased six percent over last year reflecting the combined effects of acquisitions and organic growth.

EPS increased 15 percent to 39 cents per diluted share.

Year to date revenue of 651 million increased 19 percent over last year. EPS advanced 16 percent to $1.08 per diluted share including a one-time tax benefit recorded in the second quarter and an unusual charge related to the company's relocation recorded in the first quarter of this fiscal year.

Excluding "Hungry Minds," the company's largest acquisition, revenue for the third quarter and nine months increased eight percent and nine percent respectively.

The company's third quarter performance provides tangible evidence of the competitive strength of Wiley's highly regarded brands and the resiliency of our team.

During the quarter we encountered a lack luster holiday season at the retail level, the collapse of (RoeCom), a major journal subscription agent, and ever-tightening library budgets. Yet we reported solid revenue growth and a double digit increase in earnings.

In the third quarter revenue growth was driven primarily by organic growth in the States and Europe, the acquisition of (GIT Verlog) in Germany and (A&M Publishing) in the UK, continuing strength in Asia and favorable foreign currency translation effects.

Gross profit as a percentage of revenue was 67 percent in the third quarter, representing a margin improvement of more than a full percentage point.

In professional trade, the gross margin improvement reflects the positive effect of faster than expected gains with the "Hungry Minds" programs.

In (SDN) the pick-up was mainly due to product mix - that is journals representing a higher percentage of total revenue.

Third quarter operating and administrative expenses were lower than we expected. The year on year increase is primarily due to acquisition-related costs and depreciation on new facilities in the States and Europe.

For the nine months ended January 31st, the company generated 83 million of cash after normal investing activities. That number represents normalized cash flow excluding relocations in the States and Europe, some small acquisitions and the (NOL) tax refund related to "Hungry Minds."

Accounts receivable increased 15 percent over prior year, reflecting a top line growth. Days sales outstanding improved from a year ago. Inventories increased 17 percent to support growth in the business particularly "Hungry Minds."

The company made a scheduled $30 million debt payment in the third quarter. Now I would like to provide some additional information regarding the performance of Wiley's four businesses.

Professional trade revenue increased in the quarter and the nine month period by three percent and 37 percent respectively.

The quarter was affected by a lackluster holiday season particularly for bricks and mortar stores. After a sluggish November and December, January sales rebounded nicely.

Professional trade is gaining market share in its key publishing areas. The industry was flat in the business category throughout calendar year 2002 but Wiley's business publishing program grew as a result of the strong front list and healthy back list reorders.

Nine Wiley titles were on major best seller lists during the quarter representing a collection of titles that spans the entire spectrum of Wiley's program and business.

We are enjoying a strong year in the consumer publishing categories. Our cookbook program led by the Betty Crocker brand has performed well. For perspective, consumers purchased over 300,000 Wiley cookbooks during the month of December.

Frommer's is the number one brand in the travel category. Frommers.com had its best ever month in January, logging 12 million page views by a record number of visitors.

In the reference category, Webster's "New World" is having a solid year and in January CliffsNotes experienced its highest sales month of this fiscal year.

The computer book market has been in an industry-wide slump. Wiley has gained market share in this category on the strength of the "For Dummies" series on consumer topics such as digital photography, digital imaging, general PC technology, Windows XP, home networking and CD DVD recording.

Wiley's profile has been enhanced significantly since the acquisition of "Hungry Minds" and its well-known brands.

During the quarter five author tours were being conducted simultaneously while seven TV satellite and five radio satellite tours were completed.

Wiley authors and books were featured nine times on "Bloomberg" radio or TV, seven times on "National Public Radio," five times on "CNBC," 10 times on "Associated Press Syndicated" radio or print and three times on the "Today Show" as well as in "The New York Times," "New Yorker," "Good Morning America," "Reader's Digest" and "People Magazine."

U.S. scientific technical and medical revenue increased modestly during the quarter as journal growth was offset by continued sluggish book sales. Globally (SDM) revenue increased nine percent for the quarter, aided by acquisitions in Europe and worldwide journal revenue growth.

A major journal subscription agent. (Roe.com Inc.), filed for bankruptcy in January. It is estimated that this event will reduce Wiley's journal revenue in the calendar year by less than $3 million with some of that occurring in Wiley's fiscal year 2003 but most of it hitting fiscal year 2004.

Wiley has taken a leadership role in negotiations with various parties regarding this unfortunate situation. We have supported our customers while protecting the company's financial interests.

Wiley inter-sciences growth continued during the quarter as reflected in increased usage by academic and corporate customers in the States and abroad.

Over 60 percent of journal subscription revenue on a global basis is now under license compared with about 40 percent one year ago.

Several new licenses were signed around the world during the quarter.

In January the professional and scholarly publishing division of The Association of American Publishers announced that four of Wiley's (SDM) publications were named as best new books.

In addition, a journal published by Wiley was cited as the best single issue of a journal.

At the close of the quarter the company announced that the second annual Wiley Prize in the Biomedical Sciences was awarded to four scientists who were recognized for their contribution to the discovery of novel mechanisms for regulating G expression by small interfering RNAs.

High education revenue in States increased four percent in the quarter bringing fiscal year to date growth to five percent.

Globally, higher education revenue increased seven percent for both the quarter and the nine month period.

It is noteworthy that for calendar year 2002 higher education's revenue increased 12 percent, which is consistent with reported industry growth.

In higher education growth was principally due to the life science program particularly anatomy and physiology.

Biology is performing well as is chemistry. The modern languages program has grown at a double digit rate for the nine month period.

As expected, geography and accounting were down year to year due to the revision cycle of key titles.

Marketing, management, economics and finance are performing accordance with our expectations.

Engineering sales continue to be soft, reflecting difficult market conditions.

During the quarter we published new versions of existing titles with new product models including active learning editions, calculus study skill edition - which features a customized version of the ("CliffsNotes Quick Review for Calculus") - and the ("Core Concepts") series in business, which includes brief, low cost, alternative texts that are packaged with customized articles, readings and cases.

(Wiley Business Extra Select), which is being developed in collaboration with the division of (ProQuest), will enable professors to create customized business courses with material from Wiley's textbooks and other sources.

These initiatives, combined with Wiley's expanding higher education Web site and faculty resource network, are excellent examples of our ongoing efforts to facilitate teaching and learning and deliver more value to professors and students.

Third quarter revenue from European operations was up 20 percent over prior year, reflecting the effects of acquisitions and organic growth led by (STM) journals and professional trade titles.

Wiley's strong performance in the UK is resulting in market share gains. Southern Europe - especially France and Spain - is showing gradual improvement while the German economy continues to be weak with no signs of a recovery in site.

Wiley Asia had yet another strong quarter. Book sales exceeded expectations in most territories and product routes. Results Singapore and China have been particularly strong.

Taiwan, our largest book ((inaudible)) in Asia, has rebounded after a slow start to the year.

And in Japan, cutbacks in library funding and a weak retail environment are having an adverse effect on book sales but journals are holding up reasonably well.

Results in India continue to exceed our expectations.

Once again, Wiley Australia won the coveted publisher of the year award for the school and high education segments.

Wiley Canada had a strong quarter driven by solid results in professional trade and higher education.

In shared services the most important development has been the centralization of several Web development activities, which were previously in the various publishing operations. This organizational change, which was made earlier this fiscal year is already creating value for our company.

We are leveraging our Web development capabilities more efficiently and more effectively across organizational and geographic boundaries.

As noted in the press release, expenses for these activities are now included in shared services and administrative costs whereas previously they were included in business segment results.

Accordingly, these expenses have been reclassified for the prior year periods on the financial statements included with the press release to provide a more meaningful comparison.

In closing, Wiley's performance throughout fiscal year 2003 has been solid in a challenging environment.

The company continues to be served well by our strategic focus, highly regarded brands, long-term collaborative relationships, a culture that is built on trust, integrity and ethical behavior and a strong financial condition.

With that as background we welcome your questions.

Thank you. Our question and answer session will be conducted electronically. If you would like to ask a question, firmly press the star key followed by the digit one on your touch-tone telephone.

If you are joining us with a speakerphone, please release your mute function so your signal may reach our equipment.

Once again, that would be star-one to ask a question. And we will pause for just a moment to assemble our roster.

And our first question comes from Brandon Dobell with CS First Boston.

Good morning, guys.

Good morning.

Good morning, Brandon.

I want to focus on the (STM) division for a little bit. You mentioned books being a little bit weak, journals being strong. Maybe give us some idea both in the U.S. and globally what the revenue mix looks like there and has it changed materially in the past two or three years? And going forward what do you expect in terms of major changes?

And then, secondly, if you could address in a bit more of a broader context the issue with (Roe Com) and how that business works from your relationship with the different agents? Maybe what percentage of revenues come from those types of arrangements? What the - what the issue with (Roe Com) was? Was it - was it specific to them? Or should we anticipate other kinds of companies having those same kinds of issues?

Thanks. And I have a couple more follow-up questions.

OK - let me start with books and journals in (STM). On a global basis approximately 75 percent of Wiley's global (STM) revenues are generated by journals in print and electronic form. And about 25 percent from books and other publications.

And then within books you have a combination of what we would refer to as major reference works, which are multi-volume encyclopedias and, as I said, reference works and then also some one-off books that are part of that total.

Journals have actually out-stripped the book growth over the course of the last three years mainly as a result of conversions the company has successfully made from exclusively print subscriptions on journals to a combination of print and electronics.

In terms of this fiscal year, approximately - if you look at (STM) revenue growth year on year, it's flat. And that is we think very representative of what's going on in the market and what's going on in the market is tight library budgets and an allocation of those library budgets more on percentage terms to journal publications printed online away from books.

I should point out to you that our global (STM) book business is a profitable business. Our only concern about it right now is the top line growth and its dependence on library budgets.

Our strategic interests in that particular business relates to our ability to convert the content that is in books and book formats right now to an electronic environment.

You've heard me over the course of the last year or so talking about those conversions where we're taking major reference works and making them available online as well as some one-off books.

What we would like everyone to remember - that this is fundamentally content. It is content that has been historically valued by our customers. It happens to be in book form. And we believe there are opportunities to convert that content into electronic format - combine it with content currently available with journals to spur on future growth.

But that's basically in response to the books and journals mix.

And, as I think most of you know, we have three major publishing centers in (STM). One is in the United States based here in Hoboken. Another is in the UK. And the third is in Germany, which came out of the VCH acquisition that we did some years ago.

The publishing programs as well as the strategies for that business are coordinated globally so although we have three different locations we are increasingly integrated on a global basis across those three major publishing centers.

Regarding (Roe Com), which we and other members of the industry as well as some of our library customers have spent a lot of time over the last quarter. There are or were three major journal agents - (Epsco) being one, Swets - S-W-E-T-S - another one and (Roe Com) being the third.

Basically what these people do is they help facilitate the ordering process mainly on print journals between our academic and corporate library customers and the individual publishers - the commercial publishers as well as the not for profit publishers.

They perform a role of consolidating the order. So the library customers submit the funds and the orders are actually placed from the journal agents into the individual publishers and then fulfilled by the publishers to the ultimate customer.

The trend has been for - this is not the first time an intermediary like a journal subscription agent has filed for bankruptcy.

(Roe Com) has gone through my recollection a couple of reorganizations during the course of the last few years. I think they were actually acquired by - it was the old (Faxim), which some of you may know, was acquired a few years ago.

We are concerned about it because it obviously created some disruption in the marketplace. This happened just at the time when companies were preparing to fulfill orders for new calendar year subscriptions to major customers.

What I am pleased about under some difficult circumstances is that the Wiley team I believe established itself very effectively as leaders in the process and worked effectively to bring about what we consider to be a reasonable solution keeping in mind two major considerations.

One is continuing to serve our customers who very much need the content we provide while taking into account and protecting the company's financial interests.

OK - that was very helpful. And then could you follow up on the - on the agent business? About how much of the business comes from sources like that versus you guys going direct to the customer?

Well, about roughly 60 percent of our business is under (EAL) license. Some of that - or a good piece of that is what we bill directly and collect directly. But a fair amount of that also is through agents. Virtually all of the print business is through agents.

I won't have - we don't have exact percentages but that's roughly how it works.

OK. Shifting gears a bit to the college market - two questions there. I wonder if you could give us an idea generally how the makeup looks in the college revenues by general subject areas so we can get a feel for rally how much of an impact the engineering is having on your business?

And, second, looking at margin trends there and how much of that impacted by the mix of books? How much is that impacted by new releases during a quarter? ((Inaudible)) quarter for new releases does that push down margins? Give us some ideas what the major drivers are for margin trends? Thanks.

Regarding engineering - approximately 20 percent of Wiley's higher education revenue is generated from engineering - textbooks and related materials.

This is, as reported throughout the balance of this fiscal year and back to last fiscal year, enrollments in engineering are particularly soft right now in the United States.

I should point out to you that the revenue growth of our engineering programs outside the United States continues to be strong. And so that's one of the reasons why I quoted the segment information for higher ed as well as the global information for higher ed.

As most of you know, we are primarily a so-called hard side publisher at Wiley, meaning that we focus on the sciences, engineering and mathematics.

As I also mentioned in my remarks, the main issue right now is with engineering. We are doing fine in the life sciences as represented by the anatomy and physiology course area as one example - also in biology. We have some good, solid performance in the chemistry side of the program. Also, on the soft side - what we would refer to as the soft side disciplines - we believe we are gaining market share there.

We would actually - based upon industry information , which is not very detailed, frankly, from quarter to quarter by individual course area, but based upon what we have, we believe that we are actually gaining market share in engineering. The problem is the total market is down.

So about 20 percent of it in engineering. Most of Wiley's revenue - hard side.

The main issue right now is with, as I said, with engineering.

I should also - you didn't ask but - point out to you - we have been spending a lot of time looking at that.

We have conviction about the importance of engineering materials in the education market. We believe that this is a short-term issue. We are modifying our strategy in this area focusing even more on the higher enrollment courses as opposed to some of the small enrollment upper end areas.

We are also looking to cut back a bit on the total number of titles that we publish in that particular program thereby increasing the revenue per title.

We're putting even more - and I use the term "even" because all of this is relative - but even more emphasis on the top 50 engineering schools in the States in terms of sales and marketing efforts.

And we're also, as we are in many disciplines and course areas at Wiley, continuing to alter the mix of textbooks and technology-related materials to try to improve the price value equation with students.

Regarding margins - engineering, by the way - I know you asked the question as it relates to margins overall for higher ed. But engineering is a high margin of business for us and an attractive business.

Again, we do get global reach there so you get - you're making an investment in the United States but there are incremental units that we're able to get outside the States, which is important.

In terms of the overall profitability of higher ed, as I pointed out in other conference calls this year, the year on year expense growth - it's not a gross margin deteriorization. That's actually been pretty steady year to year.

Operating expenses as a percentage of revenue have gone up this year versus last year as we planned it to.

We are actually on course to achieve our top line and bottom line expectations for higher ed in fiscal year '03.

What we plan to do and what we are doing is making some investments on the product development side to support our front list as well as in an e-learning initiative that we started about a year ago. But we're investing more operating expense - mainly employments cost - this year than last year.

OK - very helpful. Thanks a lot.

You're welcome.

Once again, if you would like to ask a question, please press star-one now.

And we will now hear from Jeff Allen with Silvercrest Asset Management.

Hi - good morning.

Good morning.

I just wanted to ask if you could quantify the acquisition contribution to the sales growth?

The easiest one, as I mentioned earlier, is "Hungry Minds" and that was - if you take that out, that's eight percent revenue growth for the quarter and nine percent for the nine months.

Right.

I don't have a precise number if you take out every acquisition that we did because some of those get pretty quickly integrated into individual product lines. But I think it's safe to say that if you took out every acquisition that we made during the course of the fiscal year, you're talking about mid-single digit growth.

OK. And that's - does that apply to the third quarter as well?

Would you say it's pretty good?

Actually my belief would be that - I don't think I have it in front of me - but my belief would be that organic growth was probably a little bit better than that in the third quarter because that was certainly the experience with (TNT) versus ...

Yeah - because the affect of "Hungry Minds" I think ...

Yeah.

... brought down the quarter a little bit.

I'd say it still falls within the range of every acquisition that we made in the last year mid-single digits. And within the mid-single digit range in the quarter, the organic was a little bit higher ...

OK.

... than the nine months.

I guess isn't the quarter ended January '02 - isn't that - doesn't that full quarter have "Hungry Minds" in it?

Yeah - that is correct.

OK. So you don't need to adjust for "Hungry Minds" to do the year on year comparison?

Yeah.

Well, for the nine months it's relevant but you're right ...

Right.

... for the quarter it isn't.

OK - right. And, also, I wondered if the margins were - the operating margin was flat. If you exclude intangible amortization it looks like it was down about one percent.

I was just - does the - does the weakness in the higher ed margins explain most of that or was there anything else at work there?

I'll start with that and the perhaps Ellis can add a little detail.

Most of that - if not all of it actually - is caused below gross margin, which I think is an important distinction. Gross margins, as I pointed out earlier, have actually improved quarter to quarter and that's a healthy and positive sign.

Beneath that when you get to operating expenses, it really is, in terms of flowing through the year, the effect of acquisition-related costs on technology investments that are distorting the percentage of revenue. And, again, this was as expected.

Our operating expenses in the quarter were actually better than we had anticipated. So there's nothing going on there that is a surprise to us. And I think it's just really getting through the full year effect of acquisitions that we have made and getting that more in line.

In don't see operating expenses as a percentage of revenue continuing to grow beyond fiscal year '03 into '04. I think, again, it's a bit distorted by the effect - the full year effect - of getting these businesses within the Wiley system.

OK. So ...

And let me just add two things. One is, as we have discussed over the last several quarters, that depreciation on new facilities relocated, as you know, into Hoboken and into (Chichester) and (Vanheim).

And clearly there are some higher level - higher level depreciation related to those. And we said that there would be - that would counteract some of the benefit that you alluded to with respect to amortization of intangibles that's not there any longer.

The other one I would just say is that - and this is relatively minor - but clearly insurance costs have gone up significantly, external audit fees have gone up significantly. So there are a lot of bits and pieces of things that, quite frankly, add up to, on their own individually, a couple of million dollars.

But it's the cost of doing business in this environment that's changed.

OK. So - and you mentioned acquisition costs. Were there restructuring type expenses that you just chose to flow through operating income?

No.

No? OK.

No. Did you hear that? No.

OK - thank you.

You're welcome.

Moving on we'll hear from Robert Kirkpatrick with Cardinal Capital.

Good morning. Could you walk me through the calculation of the 83 million free cash flow excluding your various things that you were excluding?

Sure.

Yeah - Ellis will do that.

OK - you can start with - if you are looking at the statement of cash flows you see cash use for operations is 138 ...

Yeah.

... million? Out of that what you've got there on the schedule - investing activities used about $95 - $96 million. The net of that is about 42 1/2 .

Right.

What I'm adjusting for are PP&E, our new facilities, which we have talked about at length. That's about $34 million.

Acquisition of publishing assets which you see above 7.8 million.

And then we've got some duplicate rent payments this year for seven months from the period of July through January, which was about seven million. And then, something that Will alluded to earlier, which is - going the other way, which is the "Hungry Minds" NOL tax refund, which was about nine million.

So the net of all of that is about the $83 million that Will alluded to.

OK. And the duplicate rent payments have flown - have flowed through the income statement or was that part of ...

We took a charge last year for that but it's cash this year.

Right - OK.

And your - do you have any comments on - I believe your board reauthorized a repurchase program. And I saw there was some small activity during the quarter.

Yeah - just the comment that the board, in fact - the management recommended to the board in the meeting in December that they increase the authorization. We had a program that we were getting close to finishing up on - a four million share program.

They have authorized an additional four million shares and we access - utilize that program from time to time, as the sheet says.

OK - great. Thank you so much.

You're welcome.

Once again, if you would like to ask a question, please press star-one.

We will now hear from Nicole Channing with Alson Capital.

Hi. Just a quick question on the cutbacks in terms of state budgets. How much of an effect do you feel from that in library budgets and where do you see that?

Well, they - Nicole, this is Will. The main effect of state cutbacks is on the elementary and high school publishing business, which Wiley is not involved with.

So it's not a material effect. However, libraries are definitely being affected to some degree.

When I use the word "ever-tightening" it is because in this environment just about every institution that I'm aware of - whether it is corporate or academic - is in some form or another of managing through contingency plans of reallocating human and financial resources. And library budgets are just one of those areas.

So to the extent that, for example, a public institution of higher education in any of these states is going through some budget cuts, which they are. They look to employment costs and do hiring freezes.

They also look at where they have some discretionary spending. And in those cases they consider some of the library publication budgets to be, relative to other things, a little bit more discretionary than, for example, faculty. And so there's a balancing act.

I don't - I wouldn't consider this to be a major concern for our company given the makeup of this business. And I, as I said, mainly in the el high area an effect.

And where we would experience it would be mainly in (STM) books. That's the area that would be - out of all of Wiley's businesses that's the area that would be mainly effected. A little bit on the professional side but not much.

Great - thanks.

You're welcome.

And, Mr. Pesce, it does appear that there are no further questions. I'll turn the conference back over to you for final and closing remarks.

OK. Well, thank you very much for your continued interest and support. And we look forward to speaking with you again in June when we will report on Wiley's fourth quarter and full year results. Thank you.

Thank you. That does conclude today's teleconference and thank you for your participation. At this time you may disconnect from our conference.