Publishers To Watch Rising Expenses In 2003

By: Lucia Moses

Ad spending is coming back bit by bit, even though the recovery has been slower and more muted than many forecasters expected. But in the face of rising costs, publishers aren’t breaking out the New Year’s Eve champagne just yet. Revenue is expected to improve only modestly next year, publishers confirmed last week at two annual investor conferences in New York, and the growing spectres of greater pension-benefit and newsprint costs have cast a shadow over the start of the new year.

“My No. 1 concern about the industry now is the expense side,” analyst Kevin Gruneich of Bear, Stearns & Co. commented as the conferences drew to a close. “Cost control seems to be the struggle now.”

The McClatchy Co. said expenses would increase by double digits next year. “No doubt rising prices … pose significant challenges,” Chairman and CEO Gary B. Pruitt said.

Media General Inc. told the financial community that operating profit in its publishing division would take a 3% dip next year because of an 8% increase in expenses, mostly due to higher newsprint costs. Publishers have enjoyed a long run of low paper prices, but, now that an announced price hike of $50 a metric ton has partly taken effect, they’re budgeting for higher newsprint expenses next year. And, like the rest of corporate America, newspaper companies also face sharply rising health-care costs as well as greater expenses to salvage pension funds that were left underfunded by declines in the stock market.

The industry’s overall costs should go up at least 3% next year after being flat to up 1% this year, Peter Appert, an analyst for Goldman, Sachs & Co., estimated in a recent research note. As a result, total earnings per share should grow only 12% to 15% next year, he wrote, down from an estimated 33% gain this year.

Publishers may have fewer levers to cut costs than in the past. Many have already switched to narrower web widths to save on paper and cut head count through layoffs, buyouts, and attrition.

Next year, they pledged to keep head count level for the most part, while rooting out efficiencies throughout their operations. Those adding personnel, such as McClatchy, Media General, and Pulitzer Inc., will do so mainly on the sales side. McClatchy, for one, will look to reduce head count in business, circulation, and production departments via attrition next year — through this September, the company already had cut its full-time equivalents by 3.4%, year over year.

Companies also emphasized plans to pursue growth through direct marketing and product extensions. But after the 1990s’ gold rush, “Growth rate assumptions are changing for companies,” said Robert W. Decherd, chairman, CEO, and president of Belo, which plans to look anew at its compensation program in that light.

Publishers took some comfort in the newsprint makers’ failure to fully implement their $50-a-ton increase. Some interpreted last week’s news that Abitibi-Consolidated Inc. would cut production as evidence that industry consolidation hasn’t shifted pricing power into producers’ hands as once feared. “I think the supply and demand is always going to be the rule, and that’s why production is being idled,” said Marshall N. Morton, vice chairman and chief financial officer at Media General.

Several publishers used the media conferences to stress the importance of readership as a measure of value to a Wall Street crowd that has for years focused on circulation declines. “People are recognizing we need to make progress among 18-to-34-year-olds, and we’re doing something about it,” incoming Tribune Co. CEO Dennis J. FitzSimons told E&P.

“We must continue to press the point with advertisers that we provide eyeballs, exposures,” said Gary L. Watson, president of Gannett Co. Inc.’s newspaper division, as he displayed a slide showing pass-along readership up 20% daily and 10% Sunday from last year to this year, even as paid circulation dipped 0.5% daily and 0.9% Sunday. “Readership numbers are critical.”

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