John Wiley & Sons' (JW.A) CEO Stephen Smith on Q4 2014 Results - Earnings Call Transcript

Jun.17.14 | About: John Wiley (JW.A)

John Wiley & Sons, Inc. (NYSE:JW.A)

Q4 2014 Results Earnings Conference Call

June 17, 2014, 10:00 AM ET

Executives

Brian Campbell - Director, Investor Relations

Stephen M. Smith - President and CEO

John Kritzmacher - EVP and CFO

Analysts

Daniel Moore - CJS Securities

Operator

Good day, and welcome to the Wiley's Fourth Quarter Earnings Call. As a reminder today’s conference is being recorded. At this time I would like to introduce Wiley's Director of Investor Relations, Brian Campbell. Please go ahead, sir.

Brian Campbell

Thank you, Lisa. Good morning everyone and thank you for participating in our call today. Before introducing Steve Smith, President and Chief Executive Officer I would like to remind you that this call is being recorded and may include 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 obligations to update or revise forward-looking statements to reflect subsequent events or circumstances.

For those who prefer to listen to the call over the phone but would like to still view the slides we recommend clicking on the gears icon located on the lower portion of the left-hand side window and selecting Live Phone. This will eliminate any delays you may experience in viewing the slide transitions as well as remove any potential background noise should you ask a question on the call. A copy of the presentation will be available on our Investor Relations page at the conclusion of this call.

Thank you. I would now like to turn the call over to Steve.

Stephen M. Smith

Good morning. In addition to Brian I am joined by John Kritzmacher, Wiley's Chief Financial Officer.

A quick note before we begin. Ellis Cousens, our outgoing Chief Financial Operations Officer will officially retire from the company on June 30th. Ellis joined in March 2001. His contributions to Wiley are many and significant. He was a major contributor to the strategic decisions that shape our company today including the acquisitions of Blackwell, Deltak and others as well as our recent restructuring. He has helped drive our transition from print to digital. I would like to take this opportunity to thank Ellis for his contributions and to wish him well in his future endeavors.

Now on to our results. I will be excluding the impact of foreign exchange and the divested consumer business in previous year results when commenting on all revenue variances in order to give a clear measure of operational performance. Also note that adjusted EPS, adjusted contribution to profit and adjusted operating income metrics exclude foreign exchange, the divested consumer businesses and all unusual items.

In fiscal year 2014 we made substantial progress in pursuit of our long-term goals. We exceeded our revenue and earnings guidance, successfully executed on our restructuring plans to achieve a lower and more flexible cost structure and late in the year made two strategic acquisitions that’ll expand our solutions portfolio in professional development.

Adjusted revenue increased 4% on continued steady growth in research journals accompanied by double-digit growth in professional and educational solutions. The company continued to grow its share of revenue from digital and solutions now at over 55%. Our transformation to a provider of knowledge-enabled solutions that integrate content, technology and services will accelerate with the additions of CrossKnowledge and Profiles International and the continued strong growth in online program management, course management and test preparation solutions.

The full year share of revenue earned from print book sales is down to 29%. Adjusted EPS rose 4% to $3.05 due to revenue and margin growth, restructuring savings of $38 million and other savings of $9 million partially offset by higher incentive compensation accruals and the 13% increase in technology investment. Free cash flow was 10% higher than last year at $250 million. There were unusual items that impacted cash flow in both years including restructuring and impairment charges, restructuring payments and German tax appeal deposits.

In fiscal 2014 we made three acquisitions including CrossKnowledge which provides online learning solutions to corporations and academic institutions; Profiles International, which provides pre and post-hire assessments for corporations, and Elan Guides which provides CFA test preparation content for professionals. Finally we completed our plans for the restructuring program which began in January 2013. As a reminder we expect $80 million in run rate savings for fiscal 2015. Approximately half of that will be reinvested in the business to take advantage of growth opportunities in online program management, WileyPLUS course management, test preparation and talent management solutions.

Adjusted revenue grew 2% in the quarter to $457 million driven by steady performance of the research business and strong growth in education which offset a decline in professional development.

Fiscal year adjusted revenue grew 4% reflecting solid performance in research and education and growth from the full year impact of the Deltak acquisition. Adjusted operating income grew 3% in the quarter, contributions from revenue growth and restructuring and other cost savings were partially offset by higher incentive accruals and a 5% increase in shared services costs. For the year adjusted operating income was up 1% with revenue growth and restructuring savings offset by higher incentive compensation accruals, a 13% increase in technology investment and investments related to Deltak.

Adjusted earnings per share was up 4% in the quarter reflecting the improvement in adjusted operating income as just described and lower income taxes. As noted earlier adjusted EPS also rose 4% for the fiscal year. Research revenue was up 2% in the quarter to $297 million and 3% for the year. For the quarter and the fiscal year performance was driven by steady growth in journal subscriptions and strong growth in digital books and other and author-funded open access partially offset by a decline in print book sales.

2014 calendar year journal subscription billings are up 2% as of April 30th with 96% of targeted full year business closed. Subscription growth rates for the full calendar year are expected to remain at this level. Growth is due to a combination of new society business and modest price increases. For the quarter 16 society journals are renewed with combined annual revenues of $8 million, there were no new wins or losses. The fiscal year Wiley signed seven new journals worth $10.6 million annually renewed 85 journals with combined annual revenue of $40 million and lost 11 journals worth $6.9 million annually.

For the year digital research book revenue was up 27% largely offsetting the 11% decline in print books. Adjusted contribution to profit after shared service allocations improved 3% in the quarter or 4% for the year. Revenue growth in restructuring savings offset higher society journal costs and accrued incentives. Adjusted professional development revenues fell 3% in the quarter to $93 million and 2% for the year. Online training assessment showed solid growth in the quarter and in the year driven by test preparation solutions for finance professionals and Inscape post our assessment as well as one month of contributions from Profiles International which closed on April 1st.

Print book revenue was down 10% in the quarter due to softness in technology and consumer categories. For the year print book fell 8% as growth in business and finance did not offset weakness in technology and consumer. Our recent portfolio changes and new product developments are resulting in improvements in profitability. Adjusted contribution to profit for the quarter after shared service expense allocations grew 58% or 50% year-to-date. Performance is driven by restructuring savings and higher margin digital revenue.

As we discussed during our May 8th acquisition call we are very pleased to have made recent acquisitions -- additions to the full professional development portfolio. The combination of CrossKnowledge and Profiles International with our existing talent solutions business will create an end-to-end solution from candidate assessment through employee learning and development which will in turn provide significant value to corporate customers and individual professionals across the globe. Wiley will now be able to leverage a broad set of [sales] [ph] resources, content and solutions across a wider base of existing talent solutions customers.

For example CrossKnowledge has only recent entered the U.S. market and can immediately take advantage of Profiles or Inscape’s strong U.S. sales footprint, while Profiles will benefit from CrossKnowledge's strong presence in Europe. Wiley’s talent solutions portfolio is now a $100 million revenue business and positioned for strong double-digit growth. As noted in early May combined dilution from the two businesses is estimated to be $0.10 per share in fiscal '15 primarily driven by one-time write-down of deferred revenue under purchasing accounting.

Education revenue was up 10% in the quarter to $67 million or 12% for the year. Strong growth from online program management, WileyPLUS and digital books drove results. Fiscal year revenue growth also includes the comparability benefit of acquiring Deltak midyear in 2013.

Online program management showed significant momentum again this year with the number of university partners growing from 31 to 37 and the number of programs growing from 146 to 174. In the quarter Deltak added George Washington University as a partner and nine additional programs. The share of our global education revenue coming from print textbooks continued to fall from 55% a year ago to 44% today. Decline continues to be largely offset by growth in alternatives such as WileyPLUS, digital books and binder and custom products.

Education’s adjusted contribution to profit after shared services allocations declined slightly in the quarter but improved 2% for the year with revenue growth and restructuring savings offsetting investment in online program management and higher accrued incentive costs. Deltak was dilutive to earnings in fiscal year 2014 by $0.06 per share.

Shared services costs were up 5% for the quarter to $112 million or 7% for the year. For the year technology expense increased 13% over prior year as we continue to invest in new technology enabled services and systems. For fiscal year 2015 we expect technology expense growth to be approximately 10%. Distribution expense declined again in the quarter as a result of lower print volumes, finance and other administration costs were up in the year due to higher accrued incentives and the reduction of property tax incentive related to our New Jersey headquarters.

Turning to our balance sheet, net debt declined by $125 million compared to the prior year to $214 million. Our trailing 12 months net debt-to-EBITDA ratio at the end of April was 0.5. However our $175 million CrossKnowledge acquisition which was financed using a combination of overseas cash on hand and capacity from our revolving credit facility did not close until May 1st. Also note we exercised an accordion feature under our existing revolving credit agreement bringing the aggregate commitment from $825 million to $940 million.

In summary our strong balance sheet positions us well to continue to expand our service base and global reach. Free cash flow for the year was up 10% $250 million. Earnings performance and lower disputed income tax deposits paid to the German government offset cash payments related to restructuring. Also higher accrued incentive compensation in the current period offset the benefit from accelerated collections in the prior period.

Acquisitions made in fiscal year 2014 include Profiles International and Elan Guides totaling $55 million. Including the $175 million spent on CrossKnowledge acquisition which closed when for the fiscal year ended. Wiley has invested nearly $500 million on acquisitions until May of 2012. Companies and assets acquired include Deltak, ELS CPAexcel, Profiles International, Elan Guides and CrossKnowledge.

During the same period Wiley has returned over $250 million to shareholders in the form of dividends and repurchases. Last June we raised our quarterly dividend for the 20th consecutive year and in fiscal year 2014 we repurchased 1.25 million shares, over 3 million shares remain in the current share repurchase authorization. Plans have been completed in regards to our broad-based restructuring. We expect to achieve $80 million of run rate savings starting in fiscal year 2015 with approximately half of that re-invested back into the business.

Fiscal year 2014 savings were higher than expected with restructuring savings contributing $38 million and other savings $9 million. We’ve taken $67 million in charges since the program began in January 2013. The charges cover severance consulting fees and facility relocation. Our reinvestment we focus on growing our acquired solutions businesses including online program management, test preparation, pre-hire and post-hire assessment and learning and development.

We are developing new products in all three of our segments. As further development work in expanding our Wiley online library and WileyPLUS platforms we are developing customer relationship management tools and resources as we continue to expand our direct sales capabilities across our businesses. And we are in the beginning stages of deploying an enterprise resource planning or ERP solutions to replace multiple internally developed systems.

Finally I’d like to extend my utmost appreciation to all Wiley colleagues around the world. They have performed exceptionally through this challenging period of restructuring. Our strong performance in fiscal 2014 is a direct reflection on them.

Including the CrossKnowledge and Profiles acquisitions we are expecting to achieve mid-single digit revenue growth and adjusted EPS in a range of $3.25 to $3.35 for fiscal year 2015 including the combined $0.10 per share dilution impacts of the acquired companies. We are also reiterating our fiscal year 2017 goals that we set down last September. These goals include mid-single digit revenue growth, operating margin at or about 17%, EPS growth at or above 10% and 25% of our revenue coming from solutions.

Finally, our 2014 Investor Day will be held at our global headquarters in Hoboken, New Jersey on Friday, September 26. We hope to see you there. With that as background we welcome your comments and questions.

Question-and-Answer Session

Operator

(Operator Instructions). Okay. And we will take our first question from Daniel Moore from CJS Securities.

Daniel Moore - CJS Securities

Good morning. Thanks for taking the questions.

Stephen M. Smith

Good morning, Dan.

Daniel Moore - CJS Securities

And quickly Ellis, thank you very much for all your help over the last couple of years. Your guidance for fiscal ’15, are there any additional restructuring impairment charges assumed and I assume they will be adjusted, but do you anticipate further charges and what is the implied tax rate for the guidance range?

John Kritzmacher

Hey Dan, it's John Kritzmacher. First with regard to your question around restructuring charges, as we have and we’ve been saying we are aiming to have our restructuring program fully designed and in motion by the end of the year and we are there now. So we are not anticipating additional charges in our fiscal ’15 related to restructuring. Now of course there will be true-ups [normally] [ph] just as our estimates become more refined and the programs are completed but in terms of significant new activities it is not our current intent nor does our guidance anticipate that we’ll have additional restructuring charges.

And then with respect to the anticipated tax rate we would expect to be somewhere plus or minus 27%, 28% in terms of effective tax rates.

Daniel Moore - CJS Securities

Excellent, and what profitability or dilution for Deltak is embedded in the guidance?

John Kritzmacher

We are assuming that Deltak will be dilutive again in fiscal ’15 mid-single digit kind of somewhere plus or minus around $0.05 or $0.06.

Daniel Moore - CJS Securities

So still very much in investment mode as far as Deltak is concerned.

John Kritzmacher

We are still in investment mode with Deltak and yes and looking for a strong continued double-digit revenue growth in fiscal '15.

Daniel Moore - CJS Securities

Got it, and the amount of intangible amortization expense kind of continues to increase as you make the additional tuck-in acquisition. By my model I am looking at cash EPS at the 4 bucks or higher in fiscal '15. And the balance sheet despite multiple acquisitions is still highly under levered. Are there lots of additional acquisition opportunities out there that you are contemplating and if you not what would be the most likely alternative uses of cash. By my model you are trading at may be 10 times as they look at cash EPS as we look out a year or two would you consider a more aggressive share repurchases at these levels?

Stephen M. Smith

Dan, let me take that to begin with and John can maybe jump on capital allocation. And I think you can expect for us to continue to have a blend of use of cash over the coming year. We still believe actually that we have the opportunity to add further acquisitions that can complement the portfolio and help accelerate this migration toward solutions businesses.

So we continue to look at opportunities in that space across all three of our businesses. Share repurchase and dividends will still feature large in the way that we allocate cash and I don’t expect any major changes there. John you want to…

John Kritzmacher

I think that’s right, we continue to pursue a balance view that takes advantage of the flexibility we have in our balance sheet, given the strength of our balance sheet and our cash flow and we've been appropriating cash in a relatively balanced way across dividend and share repurchases in the past year, fairly consistent fashion and I just would remind this is the time of year when we typically take another look with our Board at dividend and we will have more information about our expected dividend in the coming days.

Daniel Moore - CJS Securities

Very helpful. Last one and then I'll get back in queue of the $80 million run rate savings from restructuring that you expect in ‘15 how much of that actually did benefit '14?

John Kritzmacher

Benefit through to '14 in terms of realized savings in the year [inaudible] $38 million.

Daniel Moore - CJS Securities

38 million, very good I'll jump back in queue. Thank you.

Stephen M. Smith

Thanks, Dan.

Operator

(Operator Instructions) And Mr. Smith, we do have one follow-up question from Daniel Moore and we'll take that now.

Daniel Moore - CJS Securities

All right, very good. Just in terms of shared service how much leverage is embedded in fiscal '15 guidance and when would you expect more material, given that the restructuring more material leverage on shared service to start to kick in the model?

John Kritzmacher

Well, the actions that we're taking around shared services Dan, go across all parts of the business. They do affect a significant cross section of the shared services function including distribution, including our technology group, including some of the integration and rationalization we are doing around content management. Those things are all part of the $80 million run rate building into our momentum going into fiscal '15. Some for them are still a little bit -- have still a bit of work to go but for example the reshaping of our distribution model is largely in place and we've moved through a lower and more variable cost structure there and we’re [going to grow] [ph] that, some other pieces are still a bit more work in process such as the execution of our strategy around content management but those will be kicking into the plan as we make our way into '15.

Daniel Moore - CJS Securities

And I am going to keep going if you don't mind because I've got a few more. Of the funded open access is that becoming an even greater tailwind, do you expect that to taper off? What are you seeing there?

Stephen M. Smith

So Dan, this is Steve. We're continuing to see good growth from both the funded open access and we have -- every year we reject significant numbers of papers that are submitted to our journal because they don't fit with the sort of the first peers you like of publishing decisions around our subscription journals and we are finding opportunities to provide a service to authors to publish those journals in open access journals that are rigorously peer reviewed and maintain very high quality standards.

There are funds available to pay for funded open access and we expect that to continue to be a growth, obviously it’s come from a very lower base so you are seeing in percentage terms a high rate of growth in fiscal ’14. We continue to expect to see good growth in ’15 and beyond, but as the base business gets bigger the pace of growth will probably moderate.

Daniel Moore - CJS Securities

Very helpful. And then in professional development, given the acquisitions you’ve made, many of the divestments obviously and then the fact that print book is still kind of a highest percentage among your segments of that. Are we at a stage where we should be seeing positive organic growth going forward as a segment as a whole? Or is that may be another year or two away?

Stephen M. Smith

Yes so as I said in my prepared remarks, the acquisitions of CrossKnowledge and Profiles combined with our other businesses, creative talent solutions business in PD of approximately a $100 million and that will be growing in double digits. And we expect overall that will fuel growth of the segment in its entirety. We have seen and probably we’ll continue to see a decline in Print Book sales with the digital version of those print books the straight e-book not yet replacing the lost sales of print. But we are beginning to see in some areas such as business and finance opportunities to develop new business models that go beyond the flat content of an e-book to add certification, test preparation services etc.

That can fuel growth overall from that category and we have repositioned that business so that we can get similar rates of growth in other categories. So overall we expect to see professional development being a growth engine in the years ahead.

Daniel Moore - CJS Securities

Very helpful. And the tax payments of the German government this year remind me, is there any tax or time frame when you would might hope to recoup that?

Stephen M. Smith

We are still expecting Dan, that that’s going to take a few years’ time so we are not expecting any resolution of that in the near future, probably something like three five years before we’ll get that result and we’ll be making incremental payments on that over the next probably three years in order to get to a point where [we come to an agreement].

Daniel Moore - CJS Securities

Right, and lastly you mentioned Steve, ERP solutions that you are starting to engage in, any sense of the quantity of what that investment might look like and the time frame?

Stephen M. Smith

I mean as with any major systems implementation an ERP implementation is likely to span out over at least two to three years. I am not sure whether John can give any guidance on…?

John Kritzmacher

Well, we can provide a little more about as we make our way through the year. Frankly we are still in the formula stages. We are in at the point of selecting the platform as well as an integration partner to work with. So we are on the track but we are not yet in implementation and I can give you more details as we finalized our plans and actually get underway.

Daniel Moore - CJS Securities

Presumably anything that would hit the P&L is embedded at least for ‘15 in that 10% guidance range?

John Kritzmacher

Yes.

Daniel Moore - CJS Securities

Okay.

John Kritzmacher

Yes, that’s correct. It's reflected in the P&L it is also reflected in our commentary around the technology spending that we anticipate for the year.

Daniel Moore - CJS Securities

Very good. Look forward to see you at the conference in July.

Stephen M. Smith

Right, Dan thanks.

Operator

And Mr. Smith we currently have no more questions at this time. Sir. I’d like to turn the conference back over to you for any additional comments or remarks.

Stephen M. Smith

Well we thank you for joining on our call today and thank you Dan for your questions and we look forward to speaking to you again soon.

Operator

And ladies and gentlemen that does conclude today’s conference and we thank you for your participation

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