Turnaround at Times Mirror.

Cost-cutting by Willes pays off for shareholders, but what's next?

A year and a half ago, Wall Street was skeptical about whether a man with no experience in the newspaper business could go from vice chairman of General Mills Inc. to the head of one of the nation's biggest newspaper publishing companies.

Mark H. Willes has since proven that there isn't such a big difference between shredded wheat and Sunday supplements after all.

One of the most dramatic corporate turnarounds in Los Angeles in recent years has taken place at Times Mirror Co., which has been reborn under Willes' watch from a bloated, under-achieving publishing outlet to a Wall Street darling.

Willes' program of cost-cutting and staff layoffs may not have won him many friends among the rank-and-file at Times Mirror Square - who still refer to him by the nicknames "Captain Crunch" and "The Cereal Killer" - but Tunes Mirror stockholders may well consider him a hero.

Now, however, the tough part begins. Cost cutting must give way to a broad-based strategy for actually growing the company.

"(Willes) has obviously got a long-term game plan, and he's completed stage one, which is reducing expenses, in terrific fashion," said Edward Atorino, an analyst with New York-based Oppenheimer & Co. "As for stage two, that's yet to be seen."

For 1996, Times Mirror reported an 80 percent increase in earnings per share from continuing operations, to $1.51 per share. Net income figures can't be legitimately compared on a year-to-year basis because of the $1.63 billion sale of the company's cable TV business in 1995. But Times Mirror's operating profit for 1996 was $312.5 million, compared with a $455.4 million loss in 1995.

Meanwhile, the stock, which was trading at a low of $17.25 a share in early 1995, was at around $49 last week (though down somewhat from its 52-week high).

Willes achieved the turnaround by slashing costs. He stunned the publishing world when, only two months after being named Times Mirror CEO in June 1995, he shuttered the widely respected New York Newsday, putting all 750 of its employees out of work.

Here in L.A., he cut 700 employees from the company's flagship newspaper, the Los Angeles Times. Three hundred more workers were trimmed from Times Mirror's six other newspapers, which include the Hartford Courant, the Baltimore Sun and the (Allentown, Pa.) Morning Call. Unprofitable editorial sections were cut from all the papers.

Then Willes turned his attention to some of the company's more problematic publishing assets.

After former Times Mirror executives. had spent years building up the company's Higher Education Group, which publishes mainly college textbooks, Willes decided to tear it down. The group was traded to McGraw-Hill Cos. for a legal citation service called Shepard's, half of which was subsequently sold to European publishing firm Reed Elsevier PLC.

The complicated deal will allow Times Mirror to better exploit its Matthew Bender & Co. legal publishing subsidiary through Reed Elsevier's Lexis-Nexis online service.

Willes has orchestrated a dramatic turnaround in Times Mirror's newspaper group, its largest operating segment. Before his arrival, the company's newspapers had an average operating profit margin of 9.5 percent, a sub-par performance considering that the newspaper industry average is 15 percent. In 1996, Times Mirror upped its average operating margin to 14.5 percent.

The company's two biggest papers, the L.A. Times and Newsday (which serves Long Island and Queens, N.Y., and is independent of the now-defunct Newsday) also both reported circulation gains for the first time in five years.

At the Times, average circulation rose by 16,884 to 1,029,073 subscribers in the six months ended Sept. 30, 1996, according to the Audit Bureau of Circulation. Most of that growth came in newsstand sales, which spiked after the Times lowered its cover price from 50 cents to a quarter last summer. A $6 million TV, radio and billboard advertising campaign is also credited with boosting readership.

There also were ad revenue gains, according to Jeffrey Klein, senior vice president of consumer marketing, though he conceded they were relatively low.

"Newspaper circulation only gets reported twice a year," Klein noted. As a result, from April though September "no advertiser knew our circulation was up."

For 1997, the Times is projecting that it will achieve profit margins of 16 percent to 18 percent. Publisher Richard T Schlosberg III told analysts at a conference in December that non-newsprint expenses at the paper, which include salaries, will be held to a 2 percent increase this year.

"Anticipating continued retail softness and modest, if any, circulation rate increases (in 1997), we will grow total revenue by 2 to 3 percent and grow advertising revenue by 3 to 4 percent," Schlosberg told analysts.

But the relatively flat revenue performance at Times Mirror's newspapers - and the company as a whole - may be the prime chink in Willes' armor.

The newspaper group's revenues rose to $2.08 billion in 1996 from $2.06 billion the previous year; ad revenues reached $1.57 billion from $1.56 billion. For Times Mirror as a whole, revenues declined in 1996 because of the sale of some operations.

"It's all been cost-cutting and restructuring. There's really been no revenue growth at the company, which is the thing that disturbs me about it," said Arthur Rockwell, research director at L.A.-based Yaeger Capital Markets.

Willes so far has taken an extremely conservative strategy, using cash reserves to buy back stock instead of acquiring other companies. Times Mirror paid $496.8 million to repurchase 11.4 million shares of its common stock last year.

Willes himself, who was not available for comment last week, told analysts two months ago that the company's restructuring phase is finished. He said the company's goal is a 40 percent increase in earnings in 1997 and a 30 percent increase in 1998.

"From that point, our aspiration is to be a double-digit growth company in terms of earnings per share," Willes said.

Willes didn't specify how his ambitious goal would be achieved, and analysts are somewhat at a loss to explain how he would accomplish it. Atorino speculated that Willes might be planning to buy back more stock, which would have an impact on earnings per share.

"(Willes) is obviously counting on legal publishing to make a big contribution this year," Atorino said. "Maybe he can squeeze the L.A. Times some more, I don't know."

Wall Street, however, remains boundlessly confident in Willes - as reflected by Times Mirror's stock price.

Pamela Bronson, associate analyst at Dean Witter Reynolds, said the company's stock as of last week was trading at a ratio of 22.5 times its projected per-share earnings for 1997. Most newspaper stocks trade at a ratio of 20 times projected earnings.