Slide 1
Steve Lacy:
Good morning. We thank Bill Drewery and Debra Swartz for inviting us to this conference. We appreciate the opportunity to update you about Meredith.
Let me introduce my Meredith colleagues with me today:
Suku Radia, Chief Financial Officer, and
Cindy Schaus, Director of Investor Relations.
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
Many people know Meredith best through our magazines. We produce some of the most widely read publications in the country, including one of the most recognized brands in our industry:Better Homes and Gardens.
Better Homes and Gardens continues to be a powerhouse in terms of brand and consumer reach. The stability and power of this brand provides a great foundation to expand our extensive media and marketing footprint.
Our footprint is comprised of 26 subscription magazines, which includeParents,Ser Padres,Child,Fitness andFamily Circle -titles we acquired from Gruner + Jahr last year. Our latest magazine acquisition isReadyMade - a multimedia brand targeting adults in their 20s and 30s. We also publish another 200 special interest publications annually that are sold at supermarkets and home centers.
We further leverage our talent and expertise by creating marketing programs for corporate clients including Principal Financial Group, John Deere, Nestlé and Jeep. To broaden our capabilities, we recently acquired a dynamic online marketing company, O'Grady Meyers.
In addition, we have a terrific book publishing business with 400 titles in print, and an 85 million name consumer database with an average of 300 data points per name. It represents the largest database among media companies in the country.
We also own 14 broadcast television stations located in some of the fastest-growing markets across the U.S.
I will share more insight into our Publishing and Broadcasting businesses throughout this presentation. But first, I would like to highlight another key aspect of our media footprint: our growing Internet presence.
Slide 4
We have built a strong Internet business in both Publishing and Broadcasting that leverages our recognized brands.
We operate 30 web sites across the company with 17 in Publishing and 13 in Broadcasting. On average, approximately 10 million unique visitors come to our sites and view about 125 million pages each month.
As consumer acceptance and interactive marketing budgets continue to grow, we are well-positioned to serve this expanding business opportunity.
We are also executing a targeted strategy to increase our online marketing capabilities. I'll discuss that in more detail in a few minutes.
Slide 5
We consistently expand our media and marketing leadership. We are delivering continual growth through three overarching objectives:
First, we are expanding our market reach by delivering rich content across multiple media platforms.
Second, we are driving revenue growth beyond traditional advertising through our Integrated Marketing programs, our Book business, and our Licensing activities.
Third, we are capturing the margin upside present within both of our operating groups, which I will discuss in more depth later.
Finally, we are off to a great start in fiscal 2007, building on the solid financial foundation that has produced strong EPS growth over the last several years. We are committed to increasing shareholder value over time.
Slide 6
We are the leading publisher serving women - from new home owners to new mothers to affluent empty nesters - we reach consumers across the spectrum of life stages.
We provide information and inspiration that fuels their key passions: home, family, and personal development.
InBetter Homes and Gardens,Ladies' Home Journal,Family Circle, andParents, we have four of the most recognized brands in the magazine industry. Many of our other titles have tremendous potential, especiallyMore,American Baby,Fitness, andSiempre Mujer- our new Spanish-language, lifestyle magazine for Hispanic women.
Better Homes and Gardens has developed a successful lineup of special interest publications, which are sold primarily at the newsstand. They focus on specific subject areas including cooking, gardening, decorating, building, crafts, and holidays. They are sold at retail outlets where our home and family publications perform the best - including home centers such as The Home Depot and Lowe's. We sell over 20 million Special Interest Publications annually.
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We hold the leading position serving the female audience, reaching 75 million women monthly - easily surpassing the female reach of Time, Hearst and Conde Nast.
Companies interested in reaching the largest audience of women in America can turn to Meredith.
Slide 8
We have made strategic acquisitions extending our reach to younger women and the rapidly-growing Hispanic market.
On July 1, 2005, we acquiredParents,Child,Fitness,Family Circle andSer Padres for $350 million from Gruner + Jahr - the most significant Publishing acquisition in our 104-year history. At the time of purchase, the acquired magazines had an EBITDA margin in the mid-single digits. One year later, the acquired magazines are outperforming our original expectations. They generated revenues of $316 million and EBITDA of nearly $40 million, or an EBITDA margin of 12.5 percent in fiscal 2006.
Looking to the intermediate term, we believe that we can improve their 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.
We have a track record of successfully integrating acquisitions. In December 2002, we purchased The American Baby Group. It is now one of our most profitable assets.
Slide 9
We completed our latest acquisition in October with the purchase ofReadyMade. A multimedia brand targeting adults in their 20s and 30s, this addition strengthens our reach to this growing demographic, which holds great appeal for advertisers. In addition to the magazine,ReadyMade's brand extensions include a popular web site, video, and products for sale to the consumer.
We will use our expertise in sales, circulation, production, and financial management to grow theReadyMade brand. We plan to double the magazine's rate base to 200,000 in early calendar 2007. We are actively marketingReadyMade as part of our group sales initiatives, and are very encouraged with advertiser response.
TheReadyMade acquisition demonstrates our commitment to remain relevant in a changing marketplace while expanding our tremendous consumer reach.
Slide 10
Our growth strategy is not limited to acquisitions. As I mentioned, we launchedSiempre Mujer, our Hispanic women's lifestyle magazine, just over a year ago. While it is still in the investment phase, it has performed very well. Advertising pages in the September 2006 issue were more than double the pages in the September 2005 inaugural issue.
Ser Padres is an established publication with a distribution of 500,000. Combined withAmerican 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.
We believe the Hispanic market is a significant growth opportunity for Meredith as we look to the future.
Slide 11
Another successful Meredith magazine launch is More, which targets upscale women over age 40. Meredith was the first media company to successfully serve this very attractive demographic. These women have more time to focus on their own self-development - and their own money to spend on it. Launched in 1998, More resonates 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 named More its 2006 "Magazine of the Year."
Slide 12
Our 17 Publishing web sites serve an average of nearly 9 million unique visitors and over 100 million page views on a monthly basis.
We are enhancing theBetter Homes and Gardens online site,BHG.com,at the same time we are reinvigorating our flagship magazine.BHG.com already averages 5 million unique visitors per month. Our intent is to increase the number of unique visitors and 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 brandparents.comto better serve the needs of women caring for their families. It will be the online home ofParents andChildmagazines and include content fromAmerican Baby andFamily Circle web sites. The portal will be launched mid-2007.
Slide 13
We also use the Internet for generating subscriptions to our magazines. This enhances circulation profitability as Internet subscriptions cost about 50 percent less than subscriptions generated from traditional direct mail.
We have been quite successful generating subscription orders online, tripling them over the last several years - from 500,000 in fiscal 2002 to 1.6 million in fiscal 2006.
Slide 14
Meredith's book business began during the Great Depression when we published theBetter Homes and Gardens New Cook Book as a subscription premium. To date we have sold almost 40 million copies of the red plaid cookbook, making it the third-best selling non-fiction book of all time, behind the Bible andWebster's Dictionary.
We also publish books on gardening, decorating, and other topics of mainstream interest based on our own brands. We've also expanded by publishing books based on client brands, such as the home improvement titles for The Home Depot, gardening books for Ortho, and children's books for Marvel and D.C. Comics. Fifty percent of the revenue of our book business is generated by books we create using our own brands, and the remaining fifty percent comes from the brands we license.
We are winning new business based on popular culture. For example, our recent release of "A Hand To Guide Me" by Denzel Washington is currently number six on The New York Times Best Seller List.
Slide 15
In addition to our expanding book business, we have a vibrant custom marketing business. We create relationship marketing programs for our clients that are designed to improve customer loyalty. Additionally, we produce direct mail pieces, and use our database management and marketing skills to our clients' advantage.
In keeping with our growth strategy, we recently acquired the online marketing company O'Grady Meyers. Based in L.A., it allows us to offer new and existing integrated marketing clients web design and online marketing services.
We are already seeing increased revenue as current Meredith Integrated Marketing clients are taking advantage of O'Grady Meyers' capabilities, and O'Grady Meyers' clients are tapping into Meredith Integrated Marketing's traditional services.
Slide 16
Before I move to our Broadcasting Group, let me summarize the growth strategies for our Publishing Group:
We are growing our magazine business by enhancing theBetter Homes and Gardens brand; exceeding our financial targets for the Gruner + Jahr acquisition; extending our Hispanic market leadership, and reaching out to serve younger women and the growing Hispanic market.
We are continuing to expand our diversified businesses, notably our book, integrated marketing, and brand licensing operations.
We are also strengthening our online capabilities by enhancingBHG.com, creating a parenthood portal, and extending our online custom marketing initiatives.
Now, let me turn to Broadcasting.
Slide 17
Our Broadcasting operation is also a growing footprint, which includes:
6 CBS affiliates, 4 FOX, 2 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 have created a strong local news culture at our stations, which is driving ratings and audience share gains. We are also expanding our local market presence through the use of our digital spectrum. For example:
Our CBS affiliate in Saginaw began multi-casting MyNetwork TV on the digital tier and it is also being carried by local cable systems. We secured local rights to broadcast Detroit Pistons basketball games on this channel, and
We recently launched the Telemundo network on our digital tier at our NBC affiliate in Nashville to serve the region's growing Hispanic population.
Slide 18
According to Nielsen, 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 will pass Washington DC to become the 8th largest market next year. Phoenix is now the 13th largest market, up from 14 last year.
Additionally, Las Vegas jumped 5 places to number 43.
Slide 19
As we continue to grow Broadcasting revenues, we are focused on capturing the margin upside in this business.
As you can see, we have produced strong EBITDA margin improvement in recent years, growing from 23 percent in fiscal 2002 to 35 percent in fiscal 2006. The EBITDA margin improvement complements our growth in revenues from $255 million in fiscal 2002 to $319 million in fiscal 2006. We have been able to grow revenues and margin in non-political years, which we believe is a clear indicator of the successful execution of our growth strategies.
We will continue to march toward our 40 percent margin objective and expect to achieve that objective with the close of the next political cycle - with the expectation that we will sustain it and build upon it.
Slide 20
Our strong performance for Broadcasting 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, withlocal non-political revenues up 7 percent.
This trend continued in our second fiscal quarter and we will report the highest political revenues in our history for this cycle.
Slide 21
The expansion of local news, improved ratings, and monetization of those ratings are critical components of our success.
Local news represents 35 to 45 percent of a station's revenues.
As you can see, we have doubled the number of weekly news hours, from 150 to 300 hours over the last eight years. Expanding our news coverage is important because it lessens our dependence on syndicated programming and provides more control over our inventory.
Slide 22
In addition to expanding our newscasts, we have done a great job increasing ratings at our stations. More importantly, we are effectively monetizing these gains as well.
As you can see, we have produced impressive gains. In particular, we have improved audience share significantly in our three largest markets - Atlanta, Phoenix and Portland.
To put this all in perspective, the gains in ratings and share in Phoenix of the last five years has netted us a 50 percent increase in advertising rates for our late newscast.
Slide 23
We are building a strong Internet presence in our Broadcasting Group - where we have 13 web sites.
We recently upgraded all of our TV stations' Internet capabilities to drive traffic 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 24
We have been very successful creating and growing non-traditional revenue sources in our Broadcasting Group. 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 25
Earlier this year, we formed Meredith Video Solutions. Our Video solutions business develops video content and secures outlets for its distribution across multiple platforms, including the Internet, as well as cable, satellite, network and syndicated television.
Currently, our video library includes content such asAmerican Baby andBetter 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.
Just as we have done in Publishing with our digital asset management system, we are committed to taking advantage of our video creation capabilities and building a video content library over time.
Slide 26
Let me summarize our Broadcasting growth strategies:
Our top objective is achieving a 40 percent EBITDA margin. We will do so by continuing to improve and expand our news, monetizing our ratings gains, and maximizing local 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.
And, we are investing in Meredith Video Solutions. There is a tremendous demand for quality video in the marketplace, and given our editorial expertise, broadcast capabilities, and brand reach - we are well-positioned to meet this demand.
Now, I will turn it over to Suku, who will highlight our commitment to delivering strong financial results. Suku.
Slide 27
SUKU RADIA
Thanks Steve.
As Steve mentioned, our commitment to delivering outstanding financial results is demonstrated by our track record of consistently achieving industry-leading earnings per share growth.
We have produced excellent earnings growth in recent years, including a 14 percent increase in earnings per share in fiscal 2006.
Our estimated five-year compound annual growth rate for our earnings per share is 20 percent.
Slide 28
We have a strong track record of generating cash. 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 theAmerican Baby or Gruner + Jahr deals every few years.
We have invested nearly $130 million in capital expenditures.
We have a consistent track record of returning capital to our shareholders through share repurchases and dividends. Let me provide more detail, starting with repurchases.
Slide 29
We believe our shares represent a good value at the current multiples.
We increased our repurchase activity substantially in fiscal 2005 and 2006, and are currently on track to deliver another strong year of buying activity.
To-date in fiscal 2007, we have repurchased approximately 600,000 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. In aggregate, there are approximately 4.1 million shares available under existing authorizations.
Slide 30
We have paid dividends 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 31
Our current debt is $525 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.
Even with healthy share repurchases and continued dividend payments, we have retired $40 million in debt so far in fiscal 2007.
Slide 32
Now let me update our earnings guidance:
Broadcast pacings, which are a snapshot in time and change frequently, are running up in the high-20s for the second quarter of fiscal 2007. The pacings, which reflect the strength of political advertising, are moderating as the quarter draws to a close.
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.
For the second quarter of fiscal 2007, we expect to grow earnings per share 25 to 30 percent from the $0.58 per share earned in the second quarter of fiscal 2006. The improved outlook for the second quarter is based on the strength of outstanding political revenues, as well as solid performance in local Broadcasting and Integrated Marketing.
Our outlook for the full year remains unchanged. We expect to grow earnings per share 12 to 15 percent in fiscal 2007, up from the $2.86 earned in fiscal 2006.
As Steve pointed out earlier, there are a number of factors that may affect our business and fiscal 2007 results - and you will find these detailed in our Safe Harbor reference.
We are going to release our second quarter fiscal 2007earnings on January 24. At that point, we will provide our outlook for the third quarter and the remainder of the fiscal 2007 year.
Now, I'll turn it back to Steve for concluding remarks.
Slide 33
STEVE LACY:
Thanks Suku. Much has been speculated on recently - in media and analyst reports alike - about the future of the traditional advertising. It's certainly a question I get often from reporters and investors.
I think this slide helps put the matter in perspective. It depicts advertising spending by various categories in calendar 2005, and estimated spending in 2008 and 2010. As you can see, industry advertising spending in our two primary businesses - local TV and consumer magazines - is expected to remain relatively constant going forward as a percentage of the overall advertising marketplace. Internet spending, as a percentage of the pie, is expected to grow, and that's why we have made significant investments to expand our online businesses.
As you consider this, also keep in mind that we derive nearly half of our Publishing group revenue from non-advertising sources. In addition, our online business, albeit small at approximately two percent of our revenues, grew by over 50 percent last year - and we expect robust growth this year as evidenced during the first quarter of fiscal 2007.
It is very early for us to predict calendar 2007, and meaningful advertising visibility is a challenge. We have only closed one set of magazine issues for the first calendar quarter of 2007, and it's a bit premature to provide any meaningful view on what calendar 2007 looks like.
Over the recent past, booking has moved later and later in the cycle, and a volume of deals now come together well into the calendar year. There is a lot of decision-making yet to be finalized by advertisers regarding their schedules, including the size of their schedules and their choice of marketing partners.
We tend to be a company that does not hype future expectations. We are not trying to signal weakness, it is just very early in the process.
Slide 34
I'll conclude by reviewing our strategy for consistent growth:
To broaden our media footprint,
We areexpanding our strong connection with consumers by leveraging our content creation expertise and delivering our content across multiple media platforms.
And, we arereaching new audiences, especially the daughters of the baby boom women and the rapidly growing Hispanic market. Both of these markets hold significant potential and our home and family content is relevant,
We have a proven record ofcreating and growing new revenues sources. We will continue to grow our Internet, online custom marketing and video businesses on a disciplined pace,
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, and
We have a strong track record for successfully executing our strategies, which has resulted in outstanding earnings and cash flow growth. We are committed to continuedelivering strong financial results and increasing shareholder returns over time.
Now, we would be happy to take questions.
Slide 35
