John Wiley & Sons Inc (WLY) 2004 Q4 法說會逐字稿

Good day, and welcome to 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 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 to reflect subsequent events or circumstances.

Mr. Pesce, please go ahead.

Good morning, and welcome to Wiley's fourth-quarter and year-end conference call.

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

I'll begin with an overview of Wiley's performance.

Then Ellis and I will respond to your questions.

As anticipated, fiscal year 2004 started slowly, but we gained momentum in the third quarter and finished the year strongly.

As a result, Wiley reported yet another record year in revenue, earnings, and cash flow.

Fiscal year 2004 revenue of 923 million increased 8 percent over prior year.

Excluding the positive effect of foreign currency, revenue was 5 percent above last year.

EPS of $1.36 was 12 percent above prior year, excluding the 5 cents per share impact of certain tax benefits in fiscal year 2004 and charges related to the company's relocation in fiscal year 2003.

Gross margin of 66.5 percent was slightly better than prior year.

Operating expenses were 6 percent above prior year, excluding the negative effect of foreign currency.

The year-on-year increase related to employment costs and technology spending to support future growth.

Interest expense was significantly below prior year.

Full-year cash flow after investing activities of 120 million exceeded prior year significantly, reflecting the combined effect of improved working capital management and earnings growth.

At fiscal year end, cash and short-term investments were $82 million.

Receivables increased 19 percent, with most of that increase in the 1 to 90 days category, reflecting the effect of strong fourth-quarter sales.

Inventory was flat with prior year.

In fiscal year 2004, we repaid 35 million of debt and purchased 26 million of Wiley shares.

Our ability to achieve strategic milestones and generate healthy financial results is reflected in Wiley's 10-year compounded annual growth rates for revenue and EPS excluding unusual items of 12 percent and 22 percent, respectively.

This decade-long record of success reflects the resiliency of our business, the strength of our highly regarded global brands, and the professionalism and commitment of our colleagues, who embrace Wiley's performance-driven culture, which is built on a solid foundation of integrity and ethical behavior in all that we do.

I'd like to provide some additional information regarding Wiley's three core businesses.

Professional/Trade revenue increased 6 percent to $340 million in fiscal year 2004.

Revenue rebounded solidly in the second half of the year, particularly in the business, architecture, culinary, education, and consumer programs.

An improving retail book market contributed to a 16-percent revenue increase in the fourth quarter.

Professional/Trade's direct contribution to profit of $94 million was 8 percent ahead of prior year.

Gross margin improved significantly.

Operating expenses were 7 percent higher than prior year.

Among major accounts, Amazon and Borders performed particularly well.

Barnes & Noble, Baker & Taylor, and Ingram also contributed to the year-on-year growth.

Professional/Trade's business program generated strong momentum throughout the second half of the year, strengthening Wiley's position as the number two business publisher.

Wiley's consumer programs, including the Cliff's Notes and For Dummies brands, had a solid year.

Extension of the Cliff's Notes brands to Cliff's Notes StudySolver guides have helped generating additional sales for that particular brand.

In March, Wiley announced a partnership with the independent entertainment company Razor & Tie to produce a series of instructional DVDs based on For Dummies books.

The first offering is "Golf for Dummies."

Professional/Trade's market-leading travel program showed renewed strength in the second half of the year as vacation and business travel rebounded.

For the full year, our travel program was up significantly, including revenue generated through Frommers.com, which had a record number of visitors.

PC Magazine included Frommers.com on its 2004 Top 100 Classic Sites list.

The culinary program had a solid quarter and year.

Building on the successful Betty Crocker publishing partnership, Wiley signed another multi-year agreement with General Mills to publish new cookbooks under the well-known Pillsbury brand.

This is a major accomplishment, representing a significant expansion of our relationship with a company that has one of the most impressive collections of market-leading brands in the world.

The technology publishing program gained momentum during the second half of the year.

Despite challenging market conditions, we retained the significant marketshare gains in the prior year and remain the number-one technology publisher.

In fiscal year 2004, our professional and trade business strengthened and extended its impressive collection of global brands while leveraging multiple channels of distribution to reach more customers with more content.

Scientific, technical, and medical revenue increased 6 percent to 178 million in fiscal year 2004.

Fourth-quarter revenue increased over prior year by 17 percent.

Society journals, digitized journal backfiles, online reference works, current protocols and the book program contributed to the year-on-year growth.

Despite sluggish advertising sales, worldwide STM journal revenue increased 11 percent for the fiscal year.

STM's direct contribution to profit of $86 million increased 11 percent over prior year.

In fiscal year 2004 STM continued its transformation to digital access through Wiley InterScience.

Approximately 70 percent of STM's global journal revenue is now generated by Wiley InterScience licenses.

The number of journal articles viewed increased significantly in fiscal year 2004, continuing the rapid growth in customer usage since the service was launched commercially in fiscal year 1999.

Providing customers with a wide range of access options is an important part of the company's strategy.

Wiley InterScience extended its pay-per-view and ArticleSelect options to include access to its extensive range of online reference works.

In a challenging year, STM enjoyed healthy renewals of enhanced access licenses, which is a significant accomplishment providing tangible evidence of the quality and value of our content and service and the professionalism of the Wiley InterScience sales and marketing team.

Several new licenses were signed during the fourth quarter, and 18 additional universities joined the Chinese Academic Library's information service agreement, Wiley's first major license in China.

We continue to invest in Wiley InterScience by adding more content and functionality.

Additional digitized journal backfiles were added to the service through the launch of Angewandte Chemie Backfile Collection and the Biotechnology, Biochemistry and Biophysics Backfile Collection.

The latter spans more than 50 years of content across 15 seminal journal tiles.

In April, CrossRef launched a pilot program that enables users to search the full text of journal articles, conference proceedings, and other resources from nine leading publishers, including Wiley.

The results are delivered through Google.

Usage indicates discernable growth in Wiley InterScience Google-delivered traffic.

STM continued to develop its society (ph) journal publishing program.

Earlier in the year, the Company entered an agreement with the Society of Plastics Engineers to provide all publishing service for its technical journals.

Also new in fiscal year 2004 was an alliance with the American Institute of Chemical Engineers to publish its three flagship journals.

All of these developments in STM -- new access options, increased functionality, additional content, and new society relationships -- are enabling Wiley to provide more access to more information to more customers than ever before.

Higher education revenue increased 3 percent to 153 million in fiscal year 2004.

Industry sales increased only 1 percent for the 12 months ended April 30.

Programs in the sciences and social sciences did especially well for Wiley.

Sales of engineering and computer science titles continued to reflect sluggish market conditions.

Higher education's direct contribution to profit of $42 million was 5 percent over prior year.

The textbooks and related educational materials that Wiley develops continue to be widely regarded by professors and students as crucial to effective teaching and learning.

Wiley remains committed to delivering the highest-quality materials and services while addressing concerns about price and value.

For example, Wiley's core concepts program features pared-down, economical paperback books designed to be used in combination with online and customized components.

At the same time, the company is migrating to online delivery.

Doing so offers opportunities for even more customization and new pricing and business models.

During the year, the company launched eGrade Plus, which is the first product built on Wiley's Edugen technology platform.

This platform enables Wiley to deliver integrated content that is organized around teaching and learning activities. eGrade Plus is an innovative service which is being well-received by our customers.

Soon after the close of the fiscal year, the company announced the continuation of its agreement with the Financial Accounting Standards Board to be the exclusive distributor of its publications in the academic marketplace.

In addition, Wiley will offer online access to FASB's flagship searchable database.

In fiscal year 2004, our Higher Education team signed agreements for exciting new products and continued to invest in technology-enabled services to facilitate teaching and learning.

Wiley Europe's revenue in fiscal year 2004 advanced 13 percent over prior year to 238 million, including foreign currency gains, or 5 percent excluding such effects.

Fourth-quarter revenue was up 19 percent including foreign currency exchange, or 10 percent excluding them.

Several factors contributed to the growth of Wiley Europe's journal program, including a full year's results of new society journals, excellent reprint sales, healthy renewals and growth in ArticleSelect sales.

Wiley Europe's direct contribution to profit of $75 million exceeded prior year by 8 percent, including foreign currency effects.

Excluding such effects, the increase was 5 percent.

Revenue for our UK company increased 4 percent over prior year, excluding the positive effect of foreign currency.

In Germany, Wiley BCH revenue increased 8 percent over prior year, once again, excluding the positive effect of foreign currency.

During the fourth quarter, for the sixth (ph) time in nine years, the Association of Academic, Professional and Specialist Booksellers voted Wiley Academic Publisher of the Year in the UK and Ireland.

Wiley was also selected by Borders to serve as the category partner in the UK for business and management books.

Wiley Canada had a disappointing year.

The Higher Education business performed well, but the professional trade business suffered from a weak retail book sector.

Wiley Australia's fiscal year 2004 revenue exceeded prior year by 5 percent, excluding the positive effect of foreign currency.

School and Professional/Trade revenue in Australia was up 6 percent and 8 percent, respectively, while Higher Education reported a modest 2 percent increase.

All of these growth rates in Australia compare favorably with industry data.

Wiley Asia's fiscal year 2004 revenue advanced 5 percent from prior year.

Strong performances for all of Wiley Asia's book businesses in the second half of the year, combined with solid growth in subscription and translation revenue, drove these results.

Growth in India was particularly strong, and it is now Wiley's largest book market in Asia, surpassing Taiwan.

Subscription revenue in Asia excluding Japan was 23 percent higher than prior year.

Wiley Asia launched the For Dummies franchise in China, publishing 20 consumer and business titles.

At this time last year, I ended my report to Wiley's Board of Directors with the following statement -- "We have entered fiscal year 2004 hopeful, but not expecting improvement in market conditions.

We will be confronted with challenging trade-off decisions involving human and financial resources.

We remain committed to delivering financially responsible results in fiscal year 2004 while investing wisely in our future."

Well, one year after I communicated that message, I can state that we made those trade-off decisions; we delivered financially responsible results while investing in our future.

In fact, we delivered record revenue earnings and cash flow.

I am pleased with these accomplishments and very proud of the way in which we led the company through a volatile year.

Looking ahead, we anticipate revenue and earnings growth in the mid to high single digits in fiscal year 2005, with all of Wiley's businesses in the States and abroad contributing to the projected growth.

With that as background, we welcome your comments and questions.

(OPERATOR INSTRUCTIONS).

Brandon Dobell, CS First Boston.

This is actually Chris Pitt (ph) for Brandon.

I had a couple of questions.

You mentioned in your press release that you were seeing some improvement in the retail book market.

I wonder if you could give a little more color there.

Well, I would say, through most of the fourth -- actually, toward the end of the holiday season in our professional and trade business, we saw some momentum building across most of our categories of publishing in professional and trade.

And that continued to accelerate right through the fourth quarter.

And that was really a main driver of the company's very strong fourth-quarter performance.

And as I mentioned in my opening remarks, the categories, several of them did exceedingly well during the year, and helped drive the fourth-quarter performance.

I mentioned the travel category.

My recollection is when you look at year-to-year revenue growth for the Frommer's brand, it was over 20 percent growth year on year.

And a lot of that happened in the second half, and specifically in the fourth quarter.

That's just one example of a category.

So it was without a doubt we were certainly feeling some pickup in the major accounts.

And again, it affected very positively most of the categories in which we publish in professional and trade.

And my remarks there -- that reference was for our professional and trade business.

And by the way, not only in the United States; we also saw some evidence of strength in retail sectors outside the States.

Have you seen any pickup in the computer sciences and tech category of trade?

It's all relative.

What I mean by that is that the technology market over the last several years has been declining, the overall market.

We have been gaining share in that market.

And if you look at the two major pieces, more of the higher-end professional vis-a-vis some of the consumer topics, consumer books, there is certainly more strength on the consumer side than on the professional side. (multiple speakers) That includes the For Dummies titles.

And for the library market -- have you seen any change in pricing trends or demand out of the libraries?

A tough environment in terms of funding.

I think that's been very well documented in industry reports.

We have commented about that throughout the fiscal year, so I have not -- none of us have really witnessed any relief, if you will, in the size of those budgets.

We certainly remain in a tight library environment.

Having said that -- and I hope I conveyed this during my opening remarks, but I would like to emphasize it again here -- we are really very pleased with -- the library market mainly affects our STM business, both books and journals.

And when I talk about journals, I'm talking both about traditional, if you will, print subscriptions as well as renewals of licenses to Wiley InterScience.

We are really very pleased with our performance in a very challenging environment.

We showed growth on our book program for the first time in a while, and that's an encouraging trend.

And our renewals of licenses through Wiley InterScience was very positive.

The usage trends are very positive.

We believe we are delivering a lot of value and a lot more content for the price, and you're seeing the usage effects of that.

So yes, the environment is tight.

And we are fighting for each dollar.

But the outcome has been very positive.

And I just had one other one, if I could.

Your outlook for '05 -- can you give any direction on CapEx, D&A, free cash flow for '05?

And then maybe comment on -- the shared services and administrative costs were up, on average, about 25 percent in the fourth quarter.

Is that a pretty good run rate for looking at the next four quarters?

I'll have Ellis respond to that, but let me take care of -- that is not a run rate. (laughter) Let me state that emphatically, and Ellis will explain why.

Just to sort of circle back from your first part, CapEx, you will see in the 10-K, is forecast about 100 million.

D&A -- nothing unusual in terms of growth, just sort of paralleling, essentially, growth in CapEx over time.

In terms of sort of the increase in shared services, or rather the operating and administrative expense in the fourth quarter, there were three things that really kind of drove that and made that somewhat unusual.

So it's not a good indicator, and it's not a good running rate by any means.

Probably the biggest piece of that related just to volume growth.

Quite frankly, maybe that will relate to sort of future growth.

But volumes certainly pushed a piece of that.

Foreign exchange was another significant component of it, the quarterly growth year on year.

And the third pieces had to do with incentive compensation.

As you know, we had a relatively slow start to the year.

The first half of the year, we were accruing incentive compensation at a level that was commensurate with what our then projections were and what our experience was through the first two quarters.

Even into the third, quite frankly, we saw some improvement.

We, in fact, gave you guidance toward the upper end of the ranges we provided you.

And we did in fact sort of adjust our incentive comp programs a bit to sort of reflect that.

But certainly, the tremendous performance, quite frankly, in the fourth quarter was unanticipated -- very welcome, certainly, but unanticipated.

So that resulted in a pretty significant adjustment in incentive comp accruals based upon what our actual performance wound up on a full-year basis.

So a significant piece of that has to do with the swing in the fourth quarter year on year.

Chris Stein, A.G. Edwards.

Actually, my question was also on shared services expenses, which you guys provided color on.

Thank you very much.

Jeff Hershey, Awad Asset Management.

My question was on shared services as well, so it was covered.

(OPERATOR INSTRUCTIONS).

Ellen Gibbs, CRI Partners.

With cash building, is there (ph) more share repurchase?

How is the acquisition market looking?

I'll comment about acquisitions, and then Ellis can make some remarks about the share repurchase program.

We continue to be as committed as ever to acquisitions in our three core businesses of Professional/Trade, STM, and Higher Education.

We did some very, very modest acquisitions -- very modest -- during the year.

That wasn't for a lack of appetite, frankly; it had to do mainly with an appropriate supply.

And there really are not right now, to the best of our knowledge, major targets available.

But that does not mean that we are not proactively seeking them and involved in discussions with different people about their interests going forward.

We spend a fair amount of time looking at those kinds of opportunities.

And the compelling message that I said before that I'll repeat here is that we have a high level of confidence -- and this is not arrogance; this is based upon our record and the way we do things on the acquisition front -- we have a high level of confidence in our ability to identify the right targets, to pay a responsible price, and then to actually make the dream of the acquisition happen.

So we approach this in a very, I think, responsible way.

It needs to make strategic sense, and our appetite is as great as ever.

But it's just a matter of finding the right targets.

And frankly, in the last year, there haven't really been what we would consider to be, by our standards, the kind of opportunities available to us.

That leads very naturally into, then, appropriate uses of cash.

And certainly repurchase of shares is one of those ways.

Ellis?

Essentially, there are four other places to put cash, as you know.

One is organic growth, which we certainly do.

The other three areas or, I should say -- essentially, we're looking at dividends and share repurchase, certainly, as options as to where we might place cash.

As you know, we have a $200 million bank facility that's outstanding which comes due September of 2006.

We can prepay that at any time without penalty.

Certainly, at current interest rates we are not incentivized to do that, quite frankly.

You may have noticed we have stepped up the share repurchase program, and we expect to continue to do that.

We will, clearly, this quarter review with the Board what our dividend policy is and payout is.

And that will be under consideration as another means to return cash to shareholders.

We look at this, clearly, on a total-return-after-tax-to-shareholder basis, so we look at these -- sort of the trade-offs between share repurchase dividends and other ways to get cash back to shareholders on an after-tax basis.

So I guess the message there clearly is that the repurchase program is an important component of how it is we get cash back to shareholders, as is dividends and then planning for the repayment of our bank facility in 2006 or doing something else in terms of rolling that forward -- all of this in the absence of some major acquisition.

And at this time, there are no further questions.

Mr. Pesce, I will turn the call back to you.

Thank you very much for your continued interest and support, and we look forward to speaking with you again in September about our first-quarter results.

Thank you very much.

This does conclude today's conference.

Thank you for your patience and participation.

You may disconnect at this time.