Exhibit 99.2
3Q 2004 EARNINGS CONFERENCE CALL
Remarks of Thomas O. Ryder, Chairman and CEO
April 29, 2004
Good Morning, and thank you for joining us.
For the third quarter of Fiscal 2004, operating profit was
$19 million, up sharply from last year's loss of $3 million.
Last year's results included a restructuring charge of $16
million. EPS was also up dramatically. By any calculation, this
was our best quarter for year-over-year operating profit growth
in quite some time.
Operating profits were up across the board. We had
double-digit growth in all three operating segments.
- International Businesses profits more than tripled.
- RD North America profits were up 26 percent.
- and Consumer Business Services profits increased by 46
percent, albeit on a low base.
Revenues were roughly flat for this year's quarter, at $561
million. Excluding foreign exchange, revenues declined by 6
percent. Revenues grew by 1 percent at both International
Businesses and Consumer Business Services, partly offsetting a 3
percent decline at Reader's Digest North America.
Overall, this was a quarter that came in close to the
two-year plan we introduced to you last summer.
At that time, we said that Fiscal 2004 would be
challenging. But we also said the goal of the plan was: To
reengineer certain businesses and invest in others during Fiscal
2004, and to position the company to drive year-over-year revenue
and profit growth beginning in Fiscal 2005.
We said that results in the first half would be down, but
that the second half would be up as the benefits of cost
reduction and results of our investments begin to achieve
traction.
Well, the first half was down, in revenues and profit, and
we have clearly begun to experience the improvement that we had
predicted for the second half.
And, our sharply improved profits were made despite a $7
million increase in unallocated corporate overhead, which is
largely non-cash, and $5 million in incremental investments.
I am pleased to say the principal driver of the Company's
profit improvement is our international business.
One year ago, Tom Gardner, then our newly appointed head of
International, developed with his team a plan to restructure,
restore and invest in the International business to bring about a
return to sustained healthy revenues and margins. It's a tough
plan and it's based on what Tom learned dealing with the problems
of our U.S. Books and Home Entertainment business.
We knew the plan would not improve profits immediately. The
plan required that we eliminate unprofitable business segments
and marginal marketing efforts, which quickly reduces revenues.
But, it also eliminated risk and increased stability and
predictability in the business. The key is to move swiftly and
aggressively to reduce costs, because costs always come out more
slowly than revenues decline.
So, our first half of the year was predictably bad with
international operating profits down 25% and revenues down 6%.
This continuing decline made many investors nervous, but we
believed our plan that the business would begin to turn in the
second half.
We're right so far. Profits for International were $14
million during the quarter; over three times the profits from
last year's quarter. And, third quarter results have also
reversed the decline in International profits on a year-to-date
basis, from negative 25% to positive 6%.
Tom and his team have done a great job taking cost out,
realizing overhead savings in excess of $30 million, with many of
the benefits hitting the P&L this quarter. And apart from cost
reduction, we are forecasting and executing much better,
resulting in more efficient mailing campaigns and stronger cash
flow. We expect profit growth to continue in the fourth quarter,
although not as dramatically. We do expect healthy double-digit
growth in the quarter and enough to give the business
double-digit profit growth for the year.
We are not claiming victory just yet.
Many of those International markets still struggle with
difficult economic environments, like Germany and Brazil. And,
response rates have merely stabilized, not improved. But we have
materially eliminated risk in these businesses and we've
dramatically reduced our cost base. These economies will get
better ultimately and I believe our response rates will too.
And, in the "investment" part of the plan, we have some promising
new businesses in the development stage, particularly in new
countries. We are launching in Romania - in fact, we just made
the announcement today -- and we expect more new country launches
in FY'05. Our International Books Are Fun businesses are making
progress, and we have more testing of Books Are Fun, Reiman and
Young Families underway. So, I am more optimistic about our
long-term international prospects than I have been in a long time.
Profits at Reader's Digest North America grew by 26 percent
in the quarter to $11 million, and year-to-date profits have
improved by 16 percent.
The story with RD North America continues to be margin
improvement and new product development. Profits have improved
at RD North America for 8 consecutive quarters.
And the major contributor continues to be our redesigned
flagship, Reader's Digest magazine.
We continue to see improving subscription profitability
driven by lower acquisition costs and higher renewal rates - both
a salubrious result of our reducing sweepstakes promotions and
our improved editorial package. We have also sold more than
250,000 Reader's Digest magazine subscriptions to Reiman
customers, which have helped our margins considerably.
Advertising pages are up, but revenues have not yet turned
around for us and will be weaker in the fourth quarter. But, we
like our new sales team very much and we are optimistic about our
prospects for next year.
Margins have improved dramatically at US Books & Home
Entertainment as well.
Keep this in mind as perspective: this was once our largest
business. It was devastated by the sweepstakes settlement three
years ago and is a small fraction of its former size. But, it is
making a comeback and we believe it will produce solid,
dependable profit producers, in fact, starting this year.
This is a business transitioning out of sweepstakes and it
was profitable again this quarter as three different
health-related titles sold well. We also had success with two
key series products, Select Editions and Today's Best Non-Fiction.
Revenues at Reiman fell slightly as the sales of book
annuals declined versus prior year. But, we have been able to
increase our customer counts, both new customers and total active
customers, and these are key-leading indicators in our business.
And, the new product pipeline continues to build and is very
promising.
We've talked before about our new magazines - Our Canada and
Backyard Living. Both look like solid successes. Our Canada has
circulation of more than 120,000 in that country, and Backyard
Living has more than 430,000 in the U.S. Both of these have
negative P&L impact now, but should be sharply improved over the
next two years.
We have a big success with RD Specials, our continuing
series of newsstand magazines. These have become nicely
profitable in their first 18 months and are significantly ahead
of schedule in a bad newsstand market.
And, we are focused on creating a host of new book products,
such as:
- New annuals that do not rely exclusively on existing
magazine titles;
- Products for Books Are Fun using repurposed editorial
material; and
- New books aimed primarily at the Reader's Digest audience
like The Diabetic Cookbook and The Family Handyman annual,
which are being promoted as we speak.
The key for us with Reiman is a vigorous new product
development program and cross marketing of the Reader's Digest
and Reiman customer bases. We are making good progress. And, by
the way, the biggest source of free cash flow in the Company
continues to be Reiman.
At CBS - that's Consumer Business Services, not to be
confused with the network or the broadcasting school - revenue
improved by 1 percent to $129 million and profits improved by 46
percent to $4 million.
The growth in revenues was principally the result of
improved year-over-year sales in our Trade Publishing business,
which grew by 15 percent, and to a lesser extent QSP, which grew
by 2 percent. Revenues at BAF declined by 2 percent.
A number of products performed exceptionally well for our
Trade business in this quarter. Most exciting is one we
introduced about 18 months ago called Movie Theater Books, which
combines reading material with images that can be projected on a
wall or a screen.
This was developed by our Children's Publishing Team.
Currently we license the popular Disney and Nickelodeon brands,
but the product has many other content applications. We sell it
via multiple channels including retail, third party catalogs and
Books Are Fun. And, we are already selling it in 21 countries.
This is a product I described on this call about a year ago when
it was just out of the development phase. We actually have a
patent-pending on the concept and it is already a major profit
producer in this quarter.
Trade has other products in the pipeline. Recently we
announced a partnership with NASCAR to bring to market car-racing
books for children. This is the first major books project for a
sport with 75 million fans in the U.S. Let's watch and see how
this one does.
QSP's performance in the third quarter was much improved
over the second, but still not where we want or expect it to be.
There has been a significant increase in school fundraising
programs of all kinds, which has had the effect of diluting our
own efforts. And, we have more direct competition in the
magazine segment, which is our most profitable. But, sales force
issues abated during the quarter, and we feel an improved tenor
in our own efforts.
Much of the QSP activity now is focused on the fall season,
which is in our next fiscal year, and I like the caliber of work
being done. We are adding and training new salespeople, we are
increasing our efforts to sign new and existing accounts, we are
targeting new types of fundraising accounts, we are designing new
products for them and we are working on projects to drive cost
out of our business processes. The increased competition will
make QSP a much smarter, better organization.
Revenues and profits were down at Books Are Fun, mainly
reflecting a decline in corporate event sales. This was driven
by fewer events and lower averages per event and we are likely to
have soft results again in the fourth quarter. Still, though we
have a lot of work to do, this business is improving. Since we
last spoke, our sales averages have gotten progressively better
indicating improvement in our product selection. And, the
improvement is through virtually all types of fairs. Our school
program events have picked up and are now running about equal to
last year, which is another good sign. But, we continue to run
fewer corporate events, which are hurting sales. This is still a
reflection of the sales force losses we took at the beginning of
the year. As with QSP, the big money comes in the
September-December months and we are gearing our corrective
actions for that period.
Overall, for the Company, the third quarter was the first
indication of tangible benefits from actions taken in the first
half of our 2-year plan. Let me recap the key initiatives from
our two-year plan:
1. We re-engineered certain businesses to improve
profitability, mainly overseas.
2. We removed fixed overhead from most of our businesses.
3. We identified new products, geographies and channels to
reach out to new customers, and
4. We invested in new businesses to build revenue growth over
the long term.
How do we know that the plan is working?
First, some of the evidence can be found in this quarter or the
year-to-date results:
- With one quarter to go, EPS is already at the low end of our
full-year guidance, albeit revised guidance.
- Cash flow is at $157 million, only $6 million shy of our
goal to improve on last year's 12-month number of $162
million.
- Net debt at the end of the quarter was $680 million, already
below our target of $700 million. And this is before
fourth quarter results and the proceeds from our pending
real estate transaction.
- Overhead costs have come down at an annualized rate of about
$55 million in part as a result of reducing staff by 600
positions since December of 2002. Remember, we have a
two-year cost reduction target of $70 million, one that I
expect we will exceed.
- We remain on track through nine months with 12 of the 15
metrics we identified as part of the 2-year plan. This
has not changed appreciably since last quarter. We'll go
through the whole list in detail next quarter, when you
have the chance to see how we made out for the year.
As for full-year Fiscal 2004, we reiterate the guidance
given in last quarter's call, when we said EPS would be in the
range of 65-75 cents, excluding restructuring and one-time
items. The second half is shaping up much as we had predicted,
although we believe more of the improvement hit in the third
quarter than will in the fourth. This should put us somewhere in
the middle of our range for the full year, and close to the track
we set for our two-year plan.
I am also delighted with the progress we have made in
improving our balance sheet. We have paid down debt in advance
of projections with strong cash flows, we are selling some
non-productive assets which will help that goal, we have locked
in some long-term debt at great rates and we have removed a
number of important restrictions on our flexibility with our bank
debt.
The architect of this effort has been my friend and our CFO,
Mike Geltzeiler, and I will now turn the program over to him to
tell you more about it.
Thank you.
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