Exhibit 99.2
4Q 2003 EARNINGS CONFERENCE CALL
Remarks of Thomas O. Ryder, Chairman and CEO
July 30, 2003
Good morning.
Fourth quarter results were about as expected, with EPS in the
range of our previous guidance. Full year EPS was well below our
expectations at the beginning of the year, and revenues and
profits were relatively flat compared to the prior year.
"Flat" doesn't tell the whole story. If you look behind the
numbers, you will find many things going on. It was a tale of
two cities.
You will find full-year results that reflect significant declines
at most of our international companies, offset by incremental
progress - and some pretty fair numbers - in our U.S.-based
businesses.
For the year, international operating profits were off 54
percent. Hardest hit were our mature foreign markets - the
United Kingdom, France, Germany. Business was off in Latin
America as well as Australia.
Revenues and profits declined in most foreign markets, with the
exception of just a few, notably Russia. Response rates declined
dramatically against a backdrop of weak economies around the
world.
In the third quarter conference call, many of you heard Tom
Gardner describe his strategy to stabilize the International
revenues and return operating profits to double digits. That
plan is now in full execution mode.
While we do not want to claim victory yet - not for a moment - it
does appear that the International business has begun to
stabilize. Or, put another way, the declines have slowed greatly
or stopped. We are meeting or exceeding many of our mailing
forecasts, on reduced expectations. Customer payment performance
appears to be on track, at least for the last couple of months.
However, some of our larger overseas markets, like Germany and
Brazil, remain volatile. This concerns us and is an indication
there is more work to do.
Yet, at the same time, we had a bounce-back year in the United
States. For Fiscal `03, our U.S.-based revenues were up 16
percent collectively, and operating profits more than doubled.
This reflected the impact of new revenues and profits from the
Reiman Media Group. But even excluding Reiman, profits in the
U.S. grew by more than 50 percent, largely due to the greatly
improved performance at U.S. Books and Home Entertainment.
U.S. B-H-E made significant progress, reducing its losses by 80
percent. As you may recall, our goal was to reduce those losses
by 50 percent in Fiscal 2003. At this pace, we expect BHE to
break even or better during Fiscal 2004.
Revenues for both Books Are Fun and QSP grew by low to mid single
digits, as a difficult third quarter with bad weather and a tough
economy offset the favorable growth trends in the first half of
the year.
Reiman added $322 million in revenues, $68 million in EBITDA, and
$34 million in adjusted operating profits in Fiscal 2003. About
what we expected.
The company's cash flows continued very strong, growing to $162
million. As Mike Geltzeiler will explain, our vigorous cash flow
enabled us to continue to pay down debt well ahead of our
required payments.
By most measures, Fiscal '03 was a difficult year. Yet, later
on, I think we will look back and see that it was an important
year because we made a series of key moves to strengthen the
company.
Here are some of the highlights:
- In December, we changed our capital and governance structure
to provide equal voting rights to every shareholder.
- We completely reorganized our business operating structure,
including the creation of three new reporting segments,
expressed for the first time in today's earnings
announcement. And, we report unallocated corporate expenses
separately to give you greater visibility to our operating
units.
- We added key new hires to upgrade our talent pool in many
parts of the organization. Eric Schrier will tell you about
just a few of these folks.
- We made great progress at our U.S. Magazines. The flagship
Reader's Digest continued to unveil its editorial
improvements, while also strengthening the circulation side
by completing its move away from sweepstakes promotions.
- Our Special Interest Publications performed very well.
Selecciones continued to grow in both circulation and
advertising revenues, and the do-it-yourself titles had a
much-improved year.
- Certainly, the Reiman integration effort was another bright
spot. We made real progress in establishing ways to work
together. As we continue to engage at the creative level,
our exchange of ideas will have both companies producing new
and better products. I have always believed that Reiman's
contribution will not merely be financial. It will be the
acquisition of new skill sets and the sharing of
complementary ones. And, the ideas that result from that.
Finally, a piece of perspective. Five years ago, the U.S.
business had a little over a billion dollars in revenues and $80
million in operating profits. It was 95% dependent on a single
distribution channel - sweepstakes direct mail. It was a recipe
for disaster, and we got cooked.
But, we have painfully worked ourselves to a different place.
The U.S. business is now about $1.4 billion in revenue, an
increase of 30 percent, and profits have almost doubled. We have
several different businesses. We have multiple distribution
channels including more than 1,500 sales people. We are
developing exciting new products. We do very little
sweepstakes. We are generating substantial free cash over and
above our cost to buy strategic businesses. And, the business is
forecasting both top and bottom-line growth over the next few
years.
But, there is neither time or reason for celebration. As we look
ahead, I can tell you that we expect Fiscal 2004 will be another
difficult year, but also an important one for the long-term
health of our Company.
We have just completed a two-year planning effort. That plan
regards '04 as an inflection point, with Fiscal 2005 marking the
beginning of sustainable revenue and profit growth. The major
components include $20 million in incremental investments during
Fiscal 2004, as well as $70 million in permanent, annual fixed
cost reductions.
The more mature businesses, notably International and U.S. BHE,
will continue to reduce their marketing activity in the near term
to rest their customer bases, reduce risk and improve margins.
Meanwhile, each of the three segments will invest in new
products, expand new-customer acquisition channels, and execute
inter-division selling opportunities to drive revenue growth.
We see the benefits of both the cost savings as well as the
investments positively affecting our results in the second half
of Fiscal '04, with more benefit coming in '05. The first half
of '04 will be tough as we make our investments and phase in our
cost reductions.
We will provide more details about our plans in September but,
for now, a precis:
- RD North America will continue to trim costs while improving
profits through new product development and joint
marketing, capitalizing on cross-divisional
opportunities. We will enter the most fertile product
development period in RDA history, as we combine our
talents in US and Canadian magazines and BHE with Reiman.
Two new magazines will be tested in this group next year,
and this group will also assist in testing others in the
U.K. and Brazil.
- Consumer Business Services will focus completely on
increasing the growth rates of its highly profitable
businesses, QSP and Books Are Fun. Both those businesses
will significant increase their sales forces. Both will
add new products. Both will enter new markets. Books Are
Fun and RD Children's Publishing will work with Reiman to
develop products to be sold across all channels. QSP will
increase its efforts to sell Reiman magazines.
- International Businesses will focus on restoring its
existing business. International is being managed for
three objectives as you might recall: (1) to stabilize
revenues at a sustainable level by eliminating marginal
activities, (2) to restore operating margins, targeting a
return to double digits, by reducing overheads,
consolidating regions and re-engineering processes, and
(3) to position the business for modest long-term growth
by investing in high-potential opportunities, including
new-country launches, Reiman-inspired magazines, Books Are
Fun and new channels. That last point includes new
magazine tests in the U.K. and Brazil.
OK, what should you expect in Fiscal '04?
For the company overall, as we said in the earnings announcement...
- Revenues should be flat, as growth at Reiman, Books Are Fun
and QSP is offset by the planned lower revenues in
International.
- Total operating profits should also be flattish, despite
mid-teens growth in the segments, including the $20 million
in investments I mentioned. A big factor will be a $30
million increase in unallocated corporate expenses. Most of
these corporate expenses are non-cash items, but they will
reduce reported earnings.
- EPS should be in the range of $0.75 to $0.85 in Fiscal 2004,
and higher than that in Fiscal '05.
- Fiscal `04 will be stronger in the second half, as the
benefits of cost reductions take hold. Most of the 580 job
eliminations will be completed by December. Do not expect
strong earnings comparisons in the first half of this year.
- Cash flow should continue very strong and exceed Fiscal 2003
handily.
- And, finally, we will use the cash to continue to pay down
debt well ahead of requirements. We envision no other major
use of cash until our debt is substantially reduced.
Three years ago, our U.S. business was troubled on many fronts.
Today, it is the healthiest part of our company. We have paid a
hard price for some important lessons. We will continue to apply
these "lessons learned" as we revitalize our International
Businesses. We are talking about a segment that represents over
a billion dollars in annual revenues. It is still profitable.
But, restoring profit margins to historic levels is one of our
highest priorities.
In addition to the financial and other measures I've already
described, here are 15 key metrics by which we will evaluate our
business performance in Fiscal 2004. We invite you to join us in
monitoring our progress.
1. Low double-digit profit growth in each reporting segment.
2. Free cash flow in excess of $162 million.
3. Year-end net debt below $700 million.
4. Staffing levels reduced by 500 from December '02 through
December '03.
5. A 1 percent increase in RD North America operating profit
margin, from 7 percent to 8 percent.
6. Two North American magazine tests, at least one of which
proceeds to launch.
7. Breakeven operating profits at U.S. BHE.
8. A 1 percent increase in International Businesses profit
margin, from 5 percent to 6 percent.
9. Year-over-year International profit growth in the second
half of `04.
10. Two International magazine tests, at least one of which
proceeds to launch.
11. One new International market launch for Books Are Fun.
12. A 10 percent increase in sales personnel at QSP to drive
further expansion.
13. Mid-single-digit revenue growth at QSP.
14. Mid-single-digit revenue growth at Books Are Fun.
and finally...
15. A 10 percent increase in sales personnel at Books Are Fun.
At each subsequent quarterly call, we will update you on our
progress against these metrics. You should expect that we will
hit most but not all of the targets, although the people
responsible for them expect to make them all.
If we succeed, these achievements will drive significant
financial progress, and we will be well on our way with the
2-year plan we have developed. That should be a happy time for
our shareholders, who have been more than patient.
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