Slide 1
Steve Lacy:
Good morning. We thank Barton Crockett for inviting us to this conference. We appreciate the opportunity to share some insight on Meredith and the value that we offer investors.
Let me introduce my Meredith colleagues with me today:
Suku Radia, Chief Financial Officer, and
Cindy Schaus, Director of Investor Relations.
Before I begin, I thought I would share a little of my background with you.
I joined Meredith in 1998 as CFO, and moved to the Publishing Group to run our newly formed Interactive Media Group, and ultimately became President of the Publishing Group. In 2004 I was named President and Chief Operating Officer. Effective July 1 , 2006 - I was elected President and CEO.
Slide 2
This presentation contains forward-looking statements. I won't read the text of this slide, but it is important to remind you there are a number of factors that may affect our business and results.
This presentation includes references to non-GAAP financial measures such as EBITDA. Financial statements and tables that reconcile GAAP results and non-GAAP measures are posted on our web site.
Slide 3
Meredith is America's leading home and family media and marketing company. We operate two business groups - Publishing and Broadcasting. Both of these operations have a vibrant online component.
We are the leading magazine publisher serving women, reaching more than 75 million American women monthly. We have some of the country's most recognized brands such as Better Homes and Gardens, Ladies' Home Journal, More and American Baby. On July 1, 2005, we completed our most significant publishing acquisition, adding Parents, Family Circle, Fitness, Child and Ser Padres magazines. We acquired these titles from Gruner + Jahr.
In addition to our 26 subscription magazines, we publish approximately 200 special interest publications, which are sold primarily at the newsstand.
We are the country's leading Hispanic publisher, reaching approximately 4 million adult Hispanic women, or about one-third of the market in the U.S.
We operate 31 websites across the Company, with 18 of those web sites in Publishing and 13 in Broadcasting. Companywide over 10 million unique visitors come to our web sites each month and view about 125 million pages.
We also operate highly successful diversified publishing businesses that generate revenue from sources other than traditional advertising or circulation. These include our book and integrated marketing operations. Both have grown rapidly in recent years.
In Broadcasting, we own 14 television stations throughout the U.S., reaching approximately 10% of U.S. households. Nine of our stations are in the country's top 35 markets; most are in growing markets.
Slide 4
Meredith has a long-standing track record of delivering strong financials results, as you can see from this chart reflecting our historical earnings per share growth.
We have produced outstanding earnings growth in recent years, including fiscal 2006 results reflecting a 14 percent increase in earnings per share from the prior fiscal year.
Our estimated five year compound annual growth rate for our earnings per share is 20 percent.
Slide 5
As you can see, 80% of our revenues comes from Publishing and 20% from Broadcasting.
For our fiscal year ended June 30, 2006, operating profit margin in Publishing was 16.7%. It was 19% excluding the newly acquired titles.
And, EBITDA margin in Broadcasting was 35.3%
We have a strong track record of generating cash flow and Suku will provide more details later.
Slide 6
Meredith has many strengths upon which we continue to build. These include:
A tremendous portfolio of existing media properties with rapidly growing online and custom marketing operations,
A large consumer reach, including an industry leading 85 million name consumer database, and
Focused, experienced and dedicated business leaders and employees.
In today's world, consumers are choosing how and when they access content. Our ability to leverage these strengths and deliver our expert content across multiple media platforms has led to our superior performance over time.
Now, I will discuss each of our operating businesses, starting with Publishing.
Slide 7
This slide highlights Publishing's growth strategies.
We are growing our magazine business by enhancing the Better Homes and Gardens brand; exceeding our financial targets for the Gruner + Jahr acquisition; strengthening group sales; and extending our Hispanic market leadership.
We are continuing to expand our diversified businesses, notably our book, integrated marketing, and licensing operations.
We are strengthening our online capabilities by enhancing BHG.com, creating a parenthood portal, and extending our online custom marketing capabilities.
Slide 8
As a company, we possess a powerful portfolio of magazine properties.
We are the leading magazine publisher serving women - from new mothers to affluent empty nesters. In Better Homes and Gardens, Ladies' Home Journal, Family Circle and Parents, we have four of the most recognized brands in the industry. Many of our other titles have tremendous potential, especially More, American Baby, Fitness and Siempre Mujer.
More magazine - which targets upscale women over age 40 - continues to resonate well with readers and advertisers alike. Advertising revenues were up nearly 15 percent for the first quarter of fiscal 2007, on top of more than 20 percent growth for all of fiscal 2006. We are very proud that it earned one of the industry's most sought-after and distinguished awards when Advertising Age recently named More its 2006 "Magazine of the Year."
Better Homes and Gardens has the largest and most successful lineup of Special Interest Publications in the magazine industry. They focus on specific subject areas such as cooking, gardening, decorating, building, crafts or holidays. They are sold at retail outlets where our home and family publications do best - including home centers such as The Home Depot and Lowe's.
Slide 9
The scale and breadth of publishing operations has important advertising and marketing implications.
As you can see in this slide, Meredith holds the leading position in terms of serving the female audience by reaching 75 million women per month - surpassing Time, Hearst and Conde Nast.
Additionally, we are America's second largest magazine publisher in terms of circulation.
Slide 10
Our circulation strategy is a key driver of our magazine success, and is based on three fundamental principles.
First, we have a subscription orientation, which minimizes the risk due to issue-to-issue volatility at the newsstand. Approximately 70 percent of our circulation revenues are subscription driven, and the remaining 30 percent of circulation revenues are newsstand. Circulation continues to be very profitable for us, which sets us apart from many competitors who rely primarily on advertising for profitability.
Second, we attract long-term subscribers through high quality, direct-to-publisher sources - direct mail, the Internet and insert cards - as opposed to relying on third party agents. Our subscription model is also focused on long-term offers, generally two or three years. This results in a larger upfront financial commitment by consumers and more time for them to make the magazines part of their everyday lives.
Third, we are focused on long-term profitability. We generate better-than-industry response rates because of our 85 million name consumer database, our direct mail expertise, and our editorial sell. Also, direct-to-publisher sources renew subscriptions at higher rates than agent sources.
As a result of these factors, our direct-to-publisher model generates a high profit margin for Meredith as well as responsive readers for our advertising clients.
Slide 11
We are continually reinvigorating Better Homes and Gardens, our flagship magazine introduced 84 years ago in 1922.
Better Homes and Gardens is the largest women's enthusiast magazine in the country, with a rate base of 7.6 million and an audience of nearly 40 million readers every month. Its companion Internet site, BHG.com, averages nearly 5 million unique visitors and 60 million pages views monthly.
Slide 12
Better Homes and Gardens is one of the very few magazine-based brands in the industry.
Inherent in our continued success in the marketplace is our ability to take the rich content we produce and leverage it in a number of ways to serve consumer and advertiser needs.
We have been successful in extending the Better Homes and Gardens brand across the Internet, books, brand licensing, and product sales arrangements with Wal-Mart and Home Interiors, as well as approximately 200 special interest publications, and now video.
In fact, for every dollar of advertising revenue generated by BH&G magazine, we generate another dollar in non-advertising-related revenues across the brand.
Slide 13
Our acquisition of Parents, Child, Fitness, Family Circle and Ser Padres magazines for $350 million represents the most significant Publishing acquisition in our 104-year history.
We made this strategic purchase to broaden our magazine portfolio, and extend our reach to both younger women and the rapidly-growing Hispanic market. There is also a margin improvement opportunity in these titles.
At the time of purchase - July 1, 2005 - the acquired magazines, as a group, had an operating profit margin in the mid-single digits.
In fiscal 2006, the acquired magazines outperformed our original expectations. They generated revenues of $316 million and operating profit of over $30 million, and an operating profit margin in the low-double digits.
Looking to the intermediate term, we believe that we can improve their collective operating profit margin to the mid-to-high teens, which is comparable to the margin of most of our other titles. The precise timing will be dependent on how quickly we can improve the circulation dynamics. Overall, the needed improvements lie within our core competencies and we are confident in our ability to achieve this higher profit margin over time.
Slide 14
We believe the Hispanic market is a significant growth opportunity for Meredith, and we have established an early leadership position serving the Hispanic community.
We launchedSiempre Mujer, our Hispanic women's lifestyle magazine, just over one year ago. While it is in the investment phase, it has performed very well. I am pleased to report that advertising pages in the September/October 2006 issue were more than double the pages in the initial issue.
Ser Padres is an established publication with a distribution of 500,000. Combined with American Baby's Spanish-language titles andSiempre Mujer we reach about 4 million adult Hispanic women - or more than one-third of the market - on an annual basis.
Building on this early leadership position is an important priority for Meredith Publishing, one which we believe will be rewarded in future years.
Slide 15
Earlier this month, we acquired ReadyMade, a multimedia brand targeting adults in their 20s and 30s. This acquisition strengthens our reach to this growing demographic, which is a very attractive group of consumers to advertisers.
ReadyMade magazine, which launched in December 2001, is published bi-monthly. It was a National Magazine Award Finalist in the General Excellence category in 2005 and 2006. The magazine offers a myriad of do-it-yourself projects and promotes an environmentally friendly lifestyle. The Web site readymade.com complements the magazine's print content with how-to tips and project ideas. The site also boasts an interactive online community with blogs and an online store. In addition to the magazine and Web site, ReadyMade published its first book --How to Make (Almost) Anything -- in December 2005.
Slide 16
We will continue to grow our book business by publishing high-quality books based on our brands and those licensed from others.
Much of our proprietary content is evergreen, which helps reduce returns from retailers and distinguishes our book business from others. We've supplemented our content by licensing popular brands like The Home Depot, The Food Network and Ortho.
Additionally, we have expanded into children's books, as well as personality-driven and inspirational titles.
Looking to the first half of fiscal 2007, the book pipeline is strong. We anticipate top sellers to include the 14th edition of the Better Homes and Gardens New Cook Book; and Denzel Washington's A Hand to Guide Me, a book on the importance of everyday mentorship. It is currently #6 on the New York Times best-seller list.
Slide 17
Meredith Integrated Marketing--our business-to-business custom marketing operation--has grown rapidly in recent years as well. To continue this growth, we are focused on two areas:
First, we are leveraging Meredith's editorial heritage and skills. We have a competitive advantage in that we can use Meredith's very deep understanding of the editorial process to deliver smart content to our customers.
Second, we are developing new competencies delivering Customer Relationship Marketing programs. These include strategic market planning, multi-cultural programs, and direct/database marketing initiatives.
Our April 2006 acquisition of O'Grady Meyers enhanced our online custom marketing capabilities. It enables us to deliver interactive marketing services to our client base, and more traditional relationship marketing programs to OGM's clients.
We are actively pursuing additional acquisitions in the online marketing space.
Slide 18
We have built a strong Internet presence in Publishing with 8.6 million unique visitors and over 100 million page views on a monthly basis.
We are enhancing the Better Homes and Gardens online experience. Our intent is to further increase the number of unique monthly visitors and the number of page views by adding daily programming and personalization, creating a sense of community, leveraging interactive tools, and adding more video. The redesigned site will be launched in early calendar 2007.
We are also developing a destination portal under the brand parents.com. It will be the online home of Parents and Child magazines and include content from American Baby and Family Circle magazines and web sites. The portal will be launched mid-2007.
Slide 19
We have been quite successful generating subscription orders online. This slide highlights that our subscription orders grew from approximately 500,000 in fiscal 2003 to 1.4 million in fiscal 2006.
Generating subscriptions from the Internet is important to circulation profitability because the cost is about 50 percent less than from traditional direct mail. We will continue focusing resources on growing Internet subscriptions over time.
Slide 20
As I close this overview of our Publishing Group, I'd like to summarize Publishing's growth strategies:
We are growing our magazine business by enhancing the Better Homes and Gardens brand, exceeding our financial targets for the Gruner + Jahr acquisition, strengthening group sales, and extending our Hispanic market leadership.
We are continuing to expand our diversified businesses, notably our book and integrated marketing operations, and
We are strengthening our online capabilities by enhancing BHG.com, creating a parenthood portal, and extending our custom marketing capabilities to the Internet.
I am pleased that our Meredith Publishing creative team possesses the versatility to create expert content that can be delivered across multiple media platforms, allowing us to produce solid results in a rapidly changing media marketplace.
Slide 21
Now, let me turn to our Broadcasting Group:
We have a great collection of broadcasting assets. Here is a map of the Meredith Broadcasting Group. Today we own 6 CBS affiliates, 3 FOX, 3 My Network TV, 1 NBC, and 1 CW affiliate.
Nine of our stations are in the country's top 35 markets. In total, our group reaches nearly 10 percent of all U.S. households.
We are also expanding local market footprint through the use of our digital spectrum. For example:
Our CBS affiliate in Saginaw began multi-casting MyNetwork TV on the digital signal and it is also being carried by local cable systems. We secured local rights to broadcast Detroit Pistons basketball games on this channel.
We recently launched the Telemundo network on our digital signal at our NBC affiliate in Nashville to serve this the region's growing Hispanic population.
Slide 22
This slide highlights Broadcasting's growth strategies.
Achieving a 40 percent EBITDA margin is our top objective. We will do so by continuing to improve and expand our news, monetize our ratings gains, and maximizing our political revenue opportunities.
We will continue our strong record of creating non-traditional revenues with our Cornerstones and market specific programs, online initiatives and growing retransmission fees.
In addition, we are investing in Meredith Video Solutions. There is a tremendous demand for video in the marketplace, and given our editorial expertise and broadcast capabilities, we are well-positioned to meet this demand.
Slide 23
We have stations in fast growing markets. This graph highlights the household growth, according to Nielsen, for seven of our larger markets, the average for all our stations and the U.S. average.
Our 7 largest markets, on average, grew 2.6 percent, more than double the country's average growth of 1 percent.
In particular, our largest market, Atlanta, grew over 5 percent and our second largest market, Phoenix, grew almost 4 percent. At this pace, Atlanta, which the 9th largest market, will replace Washington DC as the 8th largest market next year. Phoenix is now the 13th largest market, up from number 14 last year.
Additionally, Las Vegas jumped 5 places to market number 43 from 48.
Slide 24
We have done a great job increasing ratings at our stations over time, and monetizing these gains.
For example, our CBS affiliate in Phoenix moved from a 4.1 to 6.4 rating in late news - resulting in a 50 percent increase in advertising rates.
Slide 25
Our strong performance continued in the first quarter of fiscal 2007:
Total Broadcasting revenues increased over 14 percent,
Net political revenues were $8.6 million - an increase of 35 percent over Q1 of fiscal 2005, and
Non-political revenues were up over 2 percent, with
local non-political revenues up 7 percent.
Slide 26
We have produced strong EBITDA margin improvement in recent years, growing from 23 percent in fiscal 2002 to 35 percent in fiscal 2006.
We will continue to move toward our 40 percent margin objective.
Slide 27
We have been very successful creating non-traditional revenues. Our Cornerstone programs are unique and differentiate Meredith from other local television broadcasters. We leverage our publishing brands by packaging content from our magazines with print and on-air advertising from local advertisers.
We are beginning to see increasing revenues from retransmission fees. While most retransmission fees are from satellite providers, we are encouraged that some cable companies have started to pay these fees. We look forward to the phone companies coming into the market as well.
Combined revenues from the Cornerstones, additional market-specific promotions, Internet sales and retransmission fees grew from about $5 million in fiscal 2002 to more than $45 million in fiscal 2006.
Slide 28
We are building a strong Internet presence, and operate 13 web sites in our Broadcasting Group.
We have recently enhanced our TV stations' Internet capabilities to increase traffic on the web sites and generate more revenues. Our efforts include:
Enhancing our technology platform and national sales capabilities, and
Investing in dedicated local editorial and sales professionals at each station.
Our overall objective is to become the local portal of choice in certain of our key markets and, at minimum, become one of the top destinations in all our markets.
Slide 29
Earlier this year, we formed Meredith Video Solutions to develop video content and secure outlets for its distribution across multiple platforms, including the Internet, as well as cable, satellite, network and syndicated television.
Currently, our video library includes a series of 30 minute shows based on magazine content, American Baby and Better Homes and Gardens branded video segments, custom DVDs and news vignettes. We currently have a video on demand relationship with Comcast, and are working on expanding its scope.
I'll now turn it over to Suku to discuss our financial metrics.
Suku.
Slide 30
SUKU RADIA:
Thank you Steve.
As Steve mentioned earlier, we have a long-standing track record for delivering results, as you can see from this chart reflecting our historical Earnings Per Share growth.
On our most recent earnings conference call, we reiterated our expectation to grow earnings per share 12 to 15 percent in fiscal 2007 from the $2.86 earned in fiscal fiscal 2006. Currently, the analysts' consensus is $3.28 earnings per share.
Slide 31
We have a strong track record of generating cash flow as well. In fiscal 2006, we generated $161 million in free cash flow (defined as net income plus depreciation and amortization less capex). In a typical year, our free cash flow will be about 115 percent of net income.
This chart highlights how we have utilized our cash in the last five fiscal years.
We have completed approximately $520 million in acquisitions. We want to continue targeting accretive acquisitions like the American Baby or G+J deals every few years.
We have invested nearly $130 million in capital expenditures.
We have a strong track record of returning capital to our shareholders through share repurchases and dividends. Let me provide more detail, starting with repurchases.
Slide 32
We believe our shares represent a good value at the current multiples and we have been aggressively repurchasing our shares.
This chart highlights the cumulative dollar amount of our shares that we have repurchased since the beginning of fiscal 2002. We substantially increased our repurchase activity in fiscal 2005 and 2006 and are currently on track to deliver strong year of repurchase activity.
To-date in fiscal 2007, we have repurchased approximately 585,000 shares.
In August 2006, our Board authorized an additional 3 million shares for our ongoing repurchase activity, which was on top of a 2.5 million authorization in May 2006. Including the recently authorized shares, there are approximately 4.3 million shares available under existing authorizations.
Slide 33
We have paid a calendar year dividends per share for 59 consecutive years. As you can see from this graph, we have increased the dividend for 13 consecutive years, growing the dividend at an 11 percent compound annual growth rate over this time period.
In January 2006, we raised our quarterly dividend 14 percent - on top of a 17 percent increase in the prior fiscal year - and a 26 percent increase in the year before that.
We expect to sustain a dividend payout ratio ranging from 20 to 25 percent of net earnings.
Slide 34
Our current debt is $540 million and the average cost is 5.25 percent. Our debt to trailing 12 month EBITDA ratio is 1.6, which provides plenty of dry powder for acquisitions, given our debt covenants allow a maximum debt to EBITDA ratio of 3.75 : 1.
We have retired $25 million in debt so far in fiscal 2007.
Slide 35
As this chart indicates, our EBITDA Multiple of 8.6 on September 30, 2006, compared to an EBITDA multiple of 10.5 as of September 30, 2002. We are currently trading at around $53, which is still at a relatively low historical multiple.
We believe our shares represent a good value at the current multiples and, as I mentioned previously, we have been aggressively repurchasing our shares.
Slide 36
Now let me turn to our expectations for all of fiscal 2007, including the second quarter. Let me reiterate what we said during our first quarter earnings call on October 25.
Broadcast pacings, which are a snapshot in time and change frequently, were running up in the mid-20s for the second quarter of fiscal 2007. The pacings, which reflect the strength of political advertising, will moderate later in the quarter.
Publishing advertising revenues are forecasted to be down in the low single digits for the quarter following the outstanding 16 percent increase achieved in the second quarter of fiscal 2006. The 16 percent makes for a very challenging comparable.
For the second quarter and full fiscal 2007, a number of uncertainties remain that can affect our results. These include overall advertising volatility, and in particular, the amount of political advertising at our television stations; the performance of our retail business; and paper prices and postal rates.
For the second quarter of fiscal 2007, the Company expects to grow earnings per share 20 to 25 percent from the $0.58 per share earned in the second quarter of fiscal 2006.
And for the full year, we expect to grow earnings per share 12 to 15 percent in fiscal 2007 from the $2.86 earned in fiscal 2006.
Now, I'll turn it back to Steve for concluding remarks.
Slide 37
Steve Lacy
I'll conclude by reviewing the five key points:
First, we areexpanding our strong connection with consumers by leveraging our content creation expertise and delivering our content across multiple media platforms.
Second, we arereaching new audiences, especially the rapidly growing Hispanic market and the daughters of the baby boom women. Both of these markets hold significant potential and our home and family content is relevant.
Third, we are working aggressively tocapture the margin upside in the former Gruner + Jahr magazines and in Broadcasting. Both of these businesses generate revenues in excess of $300 million and have approximately 500 basis points of margin upside.
Fourth we have a proven record ofcreating and growing new revenues sources. We will continue to grow our Internet, online custom marketing and video businesses.
Fifth, as Suku just discussed we have a strong record of executing our strategies, which has resulted in outstanding earnings growth and cash flow. I can assure you that we are committed to continuedelivering strong financial results.
Now, we would be happy to take questions.