John Wiley & Sons Inc (WLY) 2003 Q4 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 this discussion will contain forward-looking statements.

You should not rely on such statements as such results differ materially and are subject to factors that are discussed in detail in 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 or reflect subsequent events or circumstances.

Mr. Pesce, please go ahead, sir.

Thank you.

Welcome to our fourth quarter conference call.

I'm with Ellis Cousens, Executive Vice President and Chief Financial and Operations Officer.

I'll begin with overview of Wiley’s performance, then Ellis and I will respond to your questions.

Fiscal year 2003 was a year of many challenges.

The year started very positively.

You may recall that through the first quarter of 2003 revenues increased 27% or 9% excluding the Hungry Minds acquisition.

The sluggish economy and war in Iraq certainly had an effect on second half results.

Book store traffic decreased significantly once the war began as customers read newspapers and watched television to keep abreast of world events.

In addition we had to deal with the unanticipated bankruptcy of Roe Com, a journal subscription agent, a down market for engineering textbooks, tightening library budgets and soft advertising markets.

The amazingly smooth yet time-consuming relocation of our global headquarters added another challenge to the year.

I am very proud to report that Wiley and our leadership team confronted these challenges successfully to deliver yet another strong performance providing tangible evidence of the performance of our business and the commitment and perseverance of our colleagues around the world.

In fiscal year 2003 we accomplished important strategic objectives and achieved record revenues, earnings and cash flow.

As noted in the press release issued earlier today, Fiscal 2003 revenues of $854 million increased 16% over prior year or 14% excluding foreign currency translation effects.

Excluding Hungry Minds, Wiley's largest acquisition, revenues were up 8% for the year.

EPS of $1.22 increased 18% over prior year, excluding a one time tax benefit and an unusual charge related to the company's relocation to Hoboken, New Jersey.

Including these items, EPS was $1.38 in fiscal year 2003 and 91 cents last year, these results include the effect of the adoption of SFA number 142 and fiscal year 2003.

Operating income of $123 million in fiscal year 2003 was 23% over prior year or 12% before amortization.

The company's gross margin was strong despite changes in product mix.

Reflecting faster than expected improvements in the publishing programs acquired with Hungry Minds.

Cash flow after normal investing activities of $93 million was 20% higher than prior year, including product development expenditures and additions to property and equipment, but excluding acquisitions and relocation related expenditures.

During the year we repaid $30 million of long term debt.

For the fourth quarter, which due to the seasonality of the company's higher education business is the least significant in financial terms, revenues of $203 million were up 7% from prior year or 4% excluding foreign currency translation effects.

Fourth quarter EPS of 13 cents was up from 10 cents in the prior year, excluding last year's unusual relocation charge.

I'd like to provide additional information regarding the performance of Wiley’s core businesses.

Professional and trade revenues reached $322 million in 2003 which is 27% higher than prior year.

Fourth quarter growth of 5% was strong in a soft market.

Direct contribution of profit was 38% higher than prior year, reflecting the positive effect of the pop wine growth, Sangies from the Hungry Minds acquisition and prudent expense management. 2003 was a year of market share gains for our professional trade business.

Farmers became the leading travel brand during the year led by Betty Crocker, Wiley solidified the position as the number two cookbook publisher while winning International Association of Professional Culinary awards and the prestigious [James Beard] award for James Peterson’s Glorious French Foods.

Business publishing moved up to the number two position in the market as key titles appeared on major best seller lists.

Our architectural program continues to excel.

We signed an agreement with the American Planning Association to develop a major extension on our architectural franchise.

Our psychology program grew 14% year on year bolstered by the strong performance of the 12 volume handbook of psychology.

The computer book market remains in a slump but Wiley's technology publishing continues to outperform the market and gain market share.

Consumer titles in areas such as digital photography, digital imaging software, general PC technology, Windows XP and home networking among others performed very well.

Professional titles were adversely affected by cutbacks in corporate IT spending.

Revenues of the USSTM business were $168 million, up 2% for the year and potentially flat for the fourth quarter.

Journals performed well despite the Roe Com bankruptcy but books suffered from the effects of tight library budgets.

Direct contribution of profit was up 10% for the year mainly due to favorable product mix and a write-off of some investments in last year's fourth quarter.

Global STM revenues increased 12%, bolstered by the acquisitions in Europe and worldwide journal growth.

Wiley InterScience completed yet another successful year.

Globally, nearly $130 million of annual journal revenue is included in Wiley InterScience licenses, including print and electronic versions of our content.

Renewals of licenses met our expectations for the year.

Although library funding is tight, we negotiated several important new licenses with [consortion] around the world.

Beyond revenues, there are other ways to measure the ongoing evolution of InterScience.

For example, 95% of Wiley's journal issues are live on Wiley InterScience before the print publication mail date.

That's a positive statement about making the content accessible to customers faster than in the past.

In calendar year 2002 there were nearly 27 million full text accesses to the service, a 72% increase over the prior calendar year.

That's a positive statement about usage, demand and customer satisfaction with our online content and service.

We believe our new pay per view service will generate incremental revenue overtime.

Wiley InterScience, who also helped us build our journal publishing program.

Throughout the course of the past year Wiley successfully signed new publishing agreements and extended existing ones with prestigious societies.

U.S. higher education revenue of $148 million was up 5%, despite softness in engineering.

As planned, direct contribution profit declined from prior year as a result of investments in e-learning, increase commissions on high school sales and external production costs for an early front list.

The sciences and social sciences drove higher education top line performance.

Life sciences benefit from a strong front list.

The addition of interactive homework additions and other supplemental material combat used books in key course areas.

Our Physics program achieved strong growth in the high school market and social sciences and the modern languages program had a very strong year.

Technology is increasingly important in higher education, as reflecting in increase demand for web base products in court management tools.

Wiley has invested in and implemented numerous technology initiatives to help teachers teach and students learn.

In addition, we have a faculty resource network in place to help professors integrate our technology tools into the curriculum.

In Europe, Wiley reported strong year on year growth reflecting the combined effects of acquisitions and organic growth.

Journals and books contributed positively to these results.

Our UK company was named distributor of the year for the fifth time in six years by the Academic, Professional and Special best seller group.

Although economic conditions continue to weaken in Germany affecting the performance of our book programs and advertising sales, journals continue to thrive.

In fact, Wiley BCH’s journals are the most popular on Wiley InterScience.

Wiley Asia had a strong year reporting solid growth in all of its businesses and nearly all of its territories, despite the negative effect of SARS on book store traffic, growth was particularly strong in India and China.

India is now the second largest book market for Wiley in Asia just behind Taiwan.

Journal subscription revenue was better than expected in China and Japan.

Wiley's operations in Canada and Australia benefited from the addition of Hungry Minds titles as well as success with their indigenous publishing programs.

In fact, Wiley Canada had a record year with professional trade and higher education titles performing well.

With Wiley's strong balance sheet and steady cash flow, we're well positioned to capitalize on growth opportunities to meet the company’s strategic and financial objectives.

We anticipate mid to high single digits increases in revenues and earnings in Fiscal year 2004.

We are committed to delivering financially responsible results, while continuing to invest wisely in Wiley's future.

As I stated in the press release, our performance, not only during fiscal year 2003, but also over the course of the past decade, demonstrates our team's ability to execute the company's strategic plan effectively.

The competitive strength of Wiley’s highly regarded brands, the value our customers place on our deep reservoir of must have content and the strong foundation of trust and integrity that guides the long term relationships we have with our authors, partners, our colleagues and our investors.

With that as background, we welcome your comments.

Thank you, gentlemen.

The question and answer session will be conducted electronically.

If you would like to ask a question, please press the star key followed by the digit one on your touch tone telephone.

We'll come to you in the order you signal.

If you find your question has been asked and answered before you could ask it and would like to remove yourself, firmly press the pound key.

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Once again, if you would like to ask a question, press the star key followed by the digit one.

We will pause for a moment to assemble the question roster.

And for the first question we go to Brandon Dobell with Credit Suisse First Boston.

Good morning.

I have a couple of questions.

Just from a macro-perspective, I'm sure you saw the article this morning in the journal about the relationships between the retailers and publishers and mass merchandisers, wondering if you could comment a little bit on how you guys see some of the issues playing out or you think there's strength and weaknesses in that argument with the retailers becoming publishers and particularly if you could touch on the trade and professional stuff that you guys do and how that might be impacted.

This is Will speaking.

For those of you who have not seen the article that was in today’s journal about Barnes and Noble’s entry into the publishing business in addition to their major role in book selling.

Couple things about that.

One is this is not actually a new strategy.

It is a matter of degree growing as part of Barnes and Noble business.

Wiley has established a terrific relationship with Barnes and Noble over the years.

It’s a relationship that has been strengthened with the acquisition of Hungry Minds.

I want to emphasize to the investors that we're very, very pleased with the way we work with Barnes and Noble in terms of satisfying customers.

Clearly, this particular aspect of their business is in direct competition with publishers and that's part of their strategy and part of our strategy is to continue to provide the kind of content and service that we do to our authors and customers to compete effectively with all of our competitors in that area, including Barnes and Noble.

We're not in anyway surprised by this.

We’re not concerned about it in terms of compromising the relationship we have with Barnes and Noble.

There's a reference in the article and one of our colleagues is quoted in it.

There's one particular category of publishing that we acquired with Hungry Minds called CliffsNotes, which is in competition with Barnes and Noble’s line in that area and we just completed a very successful year with the CliffsNotes list.

And we did that through existing channels other than Barnes and Noble and the reason we were able to do that is certainly the value of the content through the eyes of the customers and frankly, the ability of the sales and marketing team to make sure other channels compensated for what Barnes and Noble was no longer able to provide us for the particular product line.

Thanks.

That's very helpful.

In different – in a different direction, in terms of guidance you're giving for fiscal '04, mid to high single digit top and bottom line, areas that you think might either contribute or hamper margin expansion this coming year as a certain project that you're rolling out that might have a bigger impact to GNA expense or certain geographic areas that you think might be either tough or a help the profit, just trying to get an idea of what level of leverage we can expect on the business.

I'll make a few comments about that as it relates to the United States and international and make a few comments as it relates to the three core businesses of professional trade, higher education and STM.

Great.

In terms of the top line, our current projections indicate a pretty narrow band in terms of the growth of those three businesses.

What I mean to communicate there is that there's not a substantial difference in the projected growth rates that we have for our businesses, our three core businesses.

The minor differences that exist would be maybe just a tinge higher and higher in professional trade than in STM and that reflects the concerns the industry has about library funding, particularly in North America, but certainly around the world, and the effect that could have on STM books primarily.

But a little bit also on STM journals.

I want to point out that they -- the projected growth rates that we have are really very close.

I'm just making a fine point here that if anything it is a little higher and higher in professional trade and a little lower in STM because of the funding.

In terms of U.S. in relation to international, we would expect growth to be a bit stronger outside North America than within the states.

We have been experiencing some very positive results, you know, relatively speaking.

For example, in Asia that has affected very

positively our STM business both books and journals.

We're beginning to get market penetration there with Wiley InterScience, but we have also experienced good growth there in the higher education and our professional and trade area.

Another reason why I would say that the international area in terms of overall growth would be a bit higher, based upon what we see right now than in the states would be the effect of Hungry Minds, the full year effect of that.

There was a little bit of a lag outside the states.

These are inside the states with the Hungry Minds acquisition in terms of getting all the distribution and marketing sales in place.

Again, I emphasize, I'm not talking about material differences here, just slight differences.

And regarding your question in terms of margins and operating expenses, I'll ask Ellis to add to this, but I do not believe there is anything material there that would suggest that there is one particular area that's going to go up significantly beyond, you know, revenues or anything like that.

We actually see it after a year of integration with Hungry Minds where we had a pop in terms of growth rate and expenses as we were integrating, we see return to normalcy, if you will, in terms of gross margin percentages and operating expense percentages.

Ellis, is there anything you’d like to add?

I think on services, probably kind of above average growth in distribution and finance, but those again related to the full year effect in distribution with respect to Hungry Minds.

We have kind of the banter agreement that we acquired with the Hungry Minds and also some other acquisitions.

So, you know, that's kind of an '03 kind of view.

Going into '04, there was some foreign exchange effect certainly, $2.5 million dollars.

So where that goes next year is -- these are -- kind of non-operating in its nature.

But, you know, beyond that, you know, we have done some things this year with respect to technology that we have talked to you about, what publishing technology formed in a group there this year, coming from the business where these people were formally integrated, so we see opportunity to leverage that further.

I’m not talking about big dollars here.

More in terms of contribution to our ability to develop products more rapidly and, you know, sort of meeting market demand and needs.

But it is a

cost control effort to a degree.

It is more in tune with sort of cost control kind of over the future as opposed to cost reduction opportunity in terms of margin expansion.

So I think, you know, overall we integrated some acquisitions over the past year or so.

We'll pick up cost opportunities and we'll, you know, kind of reap some of the benefits going into next year.

Okay.

That makes sense.

I think that will do it for me.

If you would like to a question, firmly press the star key followed by the digit one.

And for the next question we go to Robert Kirkpatrick with Cardinal Capital.

Good morning.

What was your pension expense in fiscal '03 and what do you estimate it will be in fiscal '04?

In ’03, we had a pension expense of $5.3 million and we expect it to go up 2 or $3 million next year.

And the $5.3 compares with what the previous year, lower number?

Or were you able to bring down your pension expense some how?

Kind of net pension expense.

In '02 – let me kind of take that back.

It was $8 million.

Last year it was $10 million.

It should be up another 2 to $3 million next year.

2 to $3 million next year.

And then I noticed on the statement of cash flows that you provide us that you had a rather large number -- $62 million in other non-cash items which was particularly large in relation to last year, number one, and also if I look back in previous releases it was particularly large in the fourth quarter.

Can you help me understand what goes into that number and why it might have been so large in the fourth quarter?

Well, in that number is everything from earned royalty advances, deferred compensation, deferred taxes, pension expense, and also -- well, so those are some of the larger items in there.

But the reason why it moves so much here on year was certainly change in royalty advances, earned royalty advances were relatively significant.

Probably the biggest item was deferred to tax provision rate -- European restructuring step-up that we had in the second quarter.

And then -- then a lot of smaller items, smaller meaning a couple of million dollars related to deferred compensation and so forth.

But the two biggest items were earned royalty advances and increase in deferred tax position.

And earned royalties was simply just a timing issue or was there something structural that's going on there?

It is a combination of things.

One relates to sort of royalty advance structure of Hungry Minds and how it was pre-acquisitioned versus post acquisitioned and the time that we had to work on that over the course of fiscal '03.

I'm not sure if it is timing or -- I guess it is more structural than anything.

Great.

Thank you so much.

Once again, if you would like to ask a question, please firmly press the star key followed by the digit one.

We go next to Paul Hogan with Fenmore.

Good morning.

Just want to get a little bit of guidance in terms of where you think CAPEX will be this year and also DNA.

Capital spending this year -- again, I'm kind of breaking out capital spending formally referred to capital spending as everything from additions to, you know, furniture -- furniture and fixtures and physical facilities, in additon to product development spending.

So kind of breaking out the difference between, you know, essentially, you know, in -- in terms of product development investment, we had about $50 million – 51 to $52 million this past year.

In terms of fixed assets, property equipment, software, so forth, $63 million.

Okay.

But where do you suppose those will go in terms of '04?

On the product development side, roughly a similar number to fiscal '03.

Next year in terms of physical facilities a lot of what you saw in terms of increase in spending was related to the relocation to Hoboken.

So -- in total we expect probably next year about $35 million or so, $33 million, in that neighborhood.

So it roughly having -- assets related to the relocation in U.S. and Germany.

And then in terms of depreciation of PP&E what kind of guidance there?

We talked at some length about how we would expect higher levels of depreciation related to the relocation.

That would be few million dollars.

So look to see few million dollar increase in depreciation beginning this year -- beginning last year in '03 and continuing forward.

Okay.

And do you have any targets for debt repayment this year?

We have a $35 million scheduled repayment in October, which will -- will shut -- close down or sort of complete our repayments with respect to the JP Morgan Chase facility.

That leaves us a remaining $200 million related to the Hungry Minds acquisition.

So that's what -- what is scheduled is $35 million in October.

Okay.

All right, good.

Thank you very much.

And ladies and gentlemen, we have no further questions on our roster at this time.

Therefore, Mr. Pesce I'll turn the conference back over to you for any closing remarks.

I want to thank you for your continued interest and support and we look forward to speaking with you in September after first quarter results.

Thank you very much.

It does conclude the Wiley & Sons conference call.

We appreciate your comments and you may disconnect at this time.