Exhibit 99.2
4Q 2004 EARNINGS CONFERENCE CALL
Remarks of Thomas O. Ryder, Chairman and CEO
July 29, 2004
Good morning.
The fourth quarter came in just slightly better than we
expected. Not a great quarter. Not a bad quarter. Not a
particularly significant one.
Here are the things I think are most meaningful in our
results:
Improvement continued at our core businesses in Reader's
Digest North America and in the International Businesses.
This is very good news, on the face of it, but, do these
improvements add up to a trend yet?
At RD North America, the trend looks solidly in place. Our
Reader's Digest magazine is much healthier than it was just 2
years ago. Lowering the rate base and eliminating sweepstakes
sales have significantly improved subscriber profitability, which
has been driving the magazine's profit improvements. And we are
much more optimistic about the advertising outlook.
US BHE is also in a healthier place. Remember, 2 years ago
this business lost over $40 million. Its goal for this year was
to break-even. We exceeded that goal, sharply reducing losses in
the quarter and generating a profit for the full year.
Now its goal is to drive margins from low single-digits to
high single-digits over the next few years.
For the first time in many years, RD North America has new
businesses to build upon. Businesses like Backyard Living, Our
Canada, and RD Specials all launched this year.
Overseas, the 40% improvement in profits continues to be
driven by lower costs and more efficient management of the
business and our mailing campaigns.
It is fair to say that the bad news has substantially abated
in virtually all markets around the world, and all of our local
companies were profitable in fiscal '04.
The keys to this success are many: a reduction of mailing
intensity, improved forecasting, a stronger publishing program,
better promotion and far better execution -- all accomplished
with 20% fewer employees.
In addition, profits increased inclusive of investment in a
variety of new business initiatives that we hope will bear fruit
over the next several years. These include the testing of new
countries, new magazines, Books Are Fun and Young Families, as
well as increased and optimized investments in new customers.
Offsetting our gains in the core business were declines at
QSP and Books Are Fun. Both had lower sales for the quarter, in
part because Easter came in earlier this year, and that affects
the timing of revenues. The fourth quarter is small for BAF and
QSP anyway, particularly QSP, and it's generally not a good
indicator of things to come. We do know that a lot of planning,
investment, and hard work have been done. But our only
meaningful indicator is that we are slightly ahead of last year
in booking events for both businesses. At this early stage, we
are certainly more prepared for competition.
All this said, we finished the quarter slightly above the
midpoint of our guidance range.
As with quarter, the good news for the full year was the
strong improvement of the core business at RD North America, and
the continued international recovery.
- - We had a $10 million improvement in profits at RD North
America, which grew by 16 percent, and an $8 million
improvement in profits at International Businesses, which also
grew by 16 percent.
- - For the year, CBS profits were down by $26 million, or 29
percent, on 5 percent lower revenues. QSP and Books Are Fun
were most of the damage, and most of it came in the second
quarter.
- - The bright spot at CBS was a smaller unit that markets adult
and children's trade books, which had a very strong year,
reflecting the sales of our Movie Theater interactive book
series. For fiscal 2005, we have expanded this and other
concepts with new licensing partners including Nickelodeon and
NASCAR, and other formats like DVD and music CDs.
Looking back at Fiscal 2004, I would like to point out some
areas that I think were significant in terms of progress, or the
lack of it:
We began Fiscal '04 by charting a two-year plan aimed at
achieving sustainable year-over-year growth by Fiscal '05. To
monitor our progress, we identified 15 metrics including cash
flow, overhead savings and indicators of performance as
preparation for growth in the operating segments.
I am pleased to report that we achieved or exceeded 11 of
the 15 performance metrics. We did, however, miss some big
ones. The initiatives that were measured by these metrics helped
us to improve stability in the customer base and improve margins
in the more mature businesses... invest in new products and new
product development... expand customer acquisition and distribution
channels... and increase selling across different lines of
business.
- We surpassed the benchmarks for two key financial metrics -
higher cash flow, and lower net debt, but we missed our
profit growth target.
- We hit our performance metrics for RD North America and
International to grow profits by double-digits and improve
operating margins. We also met our goals to launch new
magazines and Books Are Fun overseas.
These metrics turned out to be fairly good predictors of our
performance for the year as both RDNA and International achieved
100 percent of theirs and their profit targets.
- The four metrics where we missed all had to do with QSP and
Books Are Fun, and we did miss badly here - metrics and
profit targets.
- Please take special note of the metric for cash flow growth,
which one might argue is the most important factor of all.
Not only did our cash flow surpass the prior year's amount,
but it also was higher for the third consecutive year. Mike
Geltzeiler and his staff have managed our cash superbly.
The important initiative to expand our core business in the
U.S. and globally should also be noted. We had successful
new-magazine launches in Canada and the United States, and we
tested in other countries. We tested and launched new operations
in several Central European nations. Based on solid results in
testing programs earlier this year, we launched our book business
successfully in the fourth quarter in Romania, Slovenia and
Croatia. We have just begun testing in the Ukraine.
We entered Fiscal '04 saying this would be a transition year
in which we would invest for the future at least $20 million.
One goal that was not explicitly stated but has certainly been an
objective of mine has been to achieve greater balance in our
business. This was a business that just 5 years ago was 92
percent dependent on sweepstakes direct mail. Now sweepstakes
account for just over 30 percent of our segment operating
profits, almost all of it in international.
And I think we'll approach achieving our goal of sustainable
revenue and profit growth in `05. I use the word "approach" as a
hedge. Frankly, I think it's going to be close whether or not we
achieve revenue growth on schedule. We will certainly improve
our trends. But, we may sacrifice revenue growth one more year
to further reduce risk in a couple of troublesome smaller
businesses. So much also depends upon the performance of QSP and
Books Are Fun in the all-important second quarter.
As we speak today, I am not sure how the year is going to
turn out for these two businesses. Their teams have done superb
work dealing with their issues and preparing for long-term
futures. I have told you about the initiatives to train new
sales recruits and to strengthen territories, services and
product mix. But I do not yet know how to call the full effects
of a number of major changes in that marketing place in those
markets. And I do not think we'll have the first meaningful
indications until the end of the first quarter.
What I can tell you, though, is that we are better prepared
to address these issues in Fiscal 2005 than we were last year.
We are optimistic about the continued turnaround in our core
business and the outlook for those businesses. So, here's our
forecast for Fiscal '05 and some metrics you can track our
progress by:
- We expect revenue declines to end at RD North America,
except for a couple of small businesses we may purposely
downsize. And, we expect solid double-digit profit growth.
- We expect only slight revenue declines in International as
we finish our efforts to reduce risk in that business. And
we should achieve mid-single-digit profit growth, which
includes investment spending for new magazines, products,
and market launches. When we look at the international
markets, our forecasts do not assume that economies or
business trends will improve.
- At CBS, we have assumed that results will not get better,
but they will not get much worse. Slightly higher revenues,
slightly lower profits because of continued investment.
We will also have an aggressive program of business
development, and we expect to invest at least $15 million on new
programs. These programs and our expectations for them include:
- At least three new magazine tests, at least one of which
proceeds to launch;
- The test of two significant new products in several
International markets, at least one of which proceeds to
launch.
- Business launched in at last one new country outside the U.S.
- Further expansion of BAF and RD Young Families overseas.
- At least four new QSP and Books Are Fun product line tests,
at least one of which proceeds to launch.
Those efforts should produce the following corporate results:
- EPS of 77 to 87 cents.
- Free cash flow in excess of this year's $172 million,
excluding proceeds from real estate transactions.
- Net debt below $500 million, including the use of proceeds
from real estate transactions.
Quarterly year-over-year comparisons in the first half
should be favorable, but the timing of investments and campaign
activity will result in unfavorable comparisons in the third
quarter and improved results in the fourth quarter.
So, there you have it. A solid year with significant new
product development and some meaningful upside if QSP and Books
Are Fun exceed our modest expectations.
Before taking your questions, I am going to turn things over
to our CFO, Mike Geltzeiler, to brief you on our cash flow, the
accounting change and other financial details, including the
latest from the world of real estate.
Thank you.
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