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First Sales Reports Indicate Solid 1999 Gains
Roxane Farmanfarmaian &Jim Milliot -- 1/31/00
Earnings exceed revenue growth at HM, MHC

Early reports from four prominent players in the book industry indicate that 1999 will turn out to be a solid year for book publishing. Sales gains ranged from a high of more than 20% at Publishers Group Inc. to 3% at the Tribune Education Group. Revenue increases at Houghton Mifflin and the McGraw-Hill Cos. hovered around 7%, but both publishers reported substantial improvement in earnings.

At HM, revenues increased 6.8% to $920.1 million, with net income up 20.1% to $48.9 million. The largest increase came in HM's K-12 publishing group, where sales rose 7.4% to $657.3 million. The gains were led by a 20% increase in the group's supplementary division Great Source, plus contributions from two acquisitions, DiscoveryWorks and Sunburst.

Sales in the college group increased 7.2% to $172.2 million, with new products selling well; sales to the high school advanced-placement market were also strong. The 1.9% gain in the "other" segment, t0 $90.6 million, was led by gains in the trade and reference divisions.

HM chairman, president and CEO Nader Darehshori said that last year's results give him confidence that the company will reach its 2000 goals. Those objectives include $1 billion in sales, a 17% operating margin (its 1999 margin was 12.2%) and repayment of $200 million of debt before major acquisitions.

The McGraw-Hill Cos. reported that revenues for its educational and professional publishing division increased 7.1%, to $1.73 billion in 1999, with operating profit ahead 25.5% to $273.7 million. Earnings in 1998 excluded a $16 million charge connected to the write-down of the assets of the Continuing Education Center.

The largest gain in the year came from MHC's professional publishing division, in which sales rose 11.6% to $132.5 million. Medical and computer books were the strongest categories in the year.

Sales in MHC's largest division, elhi, increased 9.8% to $913 million. The secondary school publisher, Glenc /McGraw-Hill, had a strong year, particularly in math and social studies. SRA/McGraw-Hill benefited from the emphasis on teaching basic skills in reading, while CTB/McGraw-Hill had a strong year due to the growing demand for assessment tests.

Sales in the higher education group rose 9.4%, to $393.1 million, aided by the June purchase of Appleton & Lange. International publishing operations had a 5.9% increase in the year, due to a rebound in the Asia-Pacific market, improvements in Canada and a good year for Spanish-language titles in Latin America.

Weak retail results in the fourth quarter dragged down year-end earnings at Tribune Co. During the last quarter, sales fell 12% to $62.8 million, and the education group had an operating loss of $10.9 million, compared to an operating profit of $1.8 million in the fourth quarter of 1998. For the full year, sales in the group rose 3% to $339.6 million, while operating profit dropped 20% to $34.6 million. Don Grenesko, Tribune's senior v-p for finance and administration, called the education group's results "disappointing," but added that the company still liked the growth prospects for the supplemental education market.

For the year-end, growth in the school channel was offset by declines in the retail market. Retail results were particularly disappointing in the fourth quarter, when sales fell about 32% to $23 million. Tribune education chief Frank Recchia attributed the decline to a soft book market for its niche areas--such as travel, sports and careers--compounded by decreased sales through mass market retailers. Recchia further noted that Tribune's "competitive positions were hampered by the loss of promotional space to 'hot' new products in children's publishing as well as higher-margin nonbook merchandise." Operating margins were hurt by higher sales, marketing and development costs in preparing for the 2000 school sales season plus a charge related to a write-down of inventory and accounts receivables.

The education group's school segment, which accounts for 65%-70% of total revenues, had a 10% sales increase in the quarter and a 14% sales gain for the full year.

Recchia was optimistic that the education group would bounce back in 2000 and predicted that operating profit would be approximately $50 million, with continuing business growing at a 20% rate and recent acquisitions adding $3 million-$5 million to earnings. Recchia said he expects the school group to have a strong 2000 with improvement in the consumer channel. According to Recchia, during 2000, Tribune will reorganize its sales operation and focus on publishing evergreen titles and family-friendly licensed products in the consumer group.

Publishers Group Inc., parent company of Publishers Group West and Avalon Publishing Group, reported that revenues in 1999 rose to $120 million, an increase of more than 20% over 1998.

Avalon, PGI's publishing arm, increased revenues by 150% in 1999, counting among its bestsellers Endurance (Carroll & Graf) and The Glucose Revolution (Marlowe & Co.), which each sold in excess of 150,000 copies. Avalon's four New York imprints--Blue Moon, Carroll & Graf, Marlowe & Co. and Thunder's Mouth--together enjoyed a 40% increase in sales. Last year also saw the launch of Avalon Travel Publishing (APT), which merged Moon Travel Handbooks and Foghorn Press and will soon include John Muir Publications. Projected sales for Avalon in 2000 are $25 million.

PGW, PGI's distribution arm, had a 20% increase in revenues over 1998. Sixteen of its client publishers had net sales growth of at least 25% in the year. The top-selling title in the year was Black Hawk Down (Atlantic Monthly Press), which sold 165,000 copies; titles that sold more than 100,000 copies included Get Healthy Now (Seven Stories), The Not So Big House (Taunton), Planning a Wedding to Remember (Wilshire) and Girlfriends (Wildcat Canyon). The most significant unit sales for the year were Pokemon titles and products from Viz Communications, with 2.2 million units shipped by the end of 1999.

In addition to adding eight new clients to its roster, PGW expanded its services last year by offering an e-book and an academic book distribution program. As of January 2000, it also offers distribution services to Europe, the U.K. and South Africa.

Charlie Winton, chairman, president and CEO of PGI, told PW, "We feel great about where we are from a strategic point of view. The evolution of the company over the last two years has been extraordinary." Although he acknowledged that "being an independent company in today's marketplace is challenging," he observed that the "entrepreneurial spirit in publishing has never been higher."
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