Exhibit 99.2
Remarks delivered by Thomas O. Ryder, Chairman and Chief Executive Officer, to
analysts and investors on January 26, 2005.
Good morning and thank you for joining us.
I am going to be brief today and turn much of the program over to Tom
Gardner and Gary Rich who lead our International and QSP businesses.
Overall, results for the second quarter came in somewhat better than we
expected, with International having a strong quarter and QSP a weak one.
EPS was ahead of last year and consolidated revenues and profits were
somewhat better than expected.
We reported earnings of $0.58 cents per share, versus earnings of $0.67
cents a year ago.
If you back out accounting and restructuring items, earnings per share
improved strongly versus a year ago. Much of that improvement was because of
gains in other income and expense associated with the sale of non-strategic
assets like our magazines Crafting Traditions in the United States and Moneywise
in the United Kingdom, as well as lower taxes.
Revenues were 798 million dollars, up from 796 million dollars last year,
driven by an 11 percent improvement in revenues at RD International. That's up
two percent if you exclude foreign exchange. This is the first time we have seen
quarterly revenue growth in our International business in almost three years.
We reported operating profits of 88 million dollars, versus profits of 114
million dollars last year. These numbers were about flat if we exclude special
charges and deferred promotion impact.
International profits improved by 18 million dollars over last year, or 75
percent.
RD North America profits declined by 8 million dollars. But, profits
improved by $3 million on an apples-to-apples basis.
Consumer Business Services profits were down by 18 million dollars, the
majority of that because of declines at QSP.
The QSP business continues to face competitive issues in the marketplace
that not only hurt revenues but created significant margin pressure as we
invested to retain our existing business and increase our share of the
fundraising market.
After a slow start, trends at Books Are Fun improved significantly towards
the end of the quarter, partially reversing earlier negative trends. Revenues
and profits were slightly down for the quarter.
We had free cash flow of 181 million dollars in the quarter. We combined
that cash with the first payment from our Westchester real estate transaction
and paid down 203 million dollars in debt. We also increased our cash balance by
21 million dollars.
Let me give you more detail about what went on this quarter with North
America and our Books Are Fun businesses. Gary and Tom will give you more
details on their businesses.
Revenues at RD North America were down $8 million, although most of that
came as a result of eliminating telemarketing programs in our Young Families
business. Reiman, Canada and USBHE all had a solid quarter with improving
profits. The U.S. Magazine group had slightly lower profits as a result of
planned lower circulation levels and soft newsstand sales. Advertising sales
were slightly above the prior year quarter. This was a fair to good quarter for
North America, and I like the outlook for the second half.
Books Are Fun was down about 6% in revenue, driving profits down somewhat
as well. Virtually all of the decline came as a result of fewer events being
held. We held fewer events because several of our regional managers and some
reps were hired away by a competitor. As the quarter went on, our hiring of new
reps began to catch up with our losses and business began to improve. Over the
last few weeks of the quarter, sales began to run ahead of last year for the
first time this year, and we made up a lot of ground.
Just before the end of the quarter, our new competitor, a company called
Reader's Choice, announced they were folding, although we understand that
individuals behind Reader's Choice might try to reopen under a different name.
This feels like an attempt to dodge legal issues with us and their suppliers.
Suffice it to say, we're watching this closely. Having said all that, the second
half looks better for Books Are Fun.
As we begin the second half of Fiscal 2005, our Company as a whole is
slightly ahead of plan for the year. In fact, the second half looks favorable
for all of our businesses.
When I look back to a little over a year-and-a-half ago, we were in the
midst of a major turnaround effort in our core business.
International had launched a global turnaround initiative to stabilize the
business and improve margins.
RD North America had an unprofitable U.S. Books and Home Entertainment
business that had been largely destroyed by the sweepstakes settlement.
And, we were at the beginning phase of integrating the largest acquisition
in our history, Reiman, into the fold. We had urgent work to do and we created a
thoughtful two-year plan to guide us.
We had three primary goals:
- To fix the core business and improve its profitability
- To invest in new business initiatives to drive long-term
revenue and profit growth
- And, to pay back debt and increase our already strong free
cash flows
Our objective was to produce sustainable revenue and profit growth by the
end of our 2005 Fiscal Year.
We are now tracking to that plan.
By year-end, we will have achieved double-digit profit growth in '04 and
'05 for both North America and International, and we are optimistic about
continued strength in '06. Each of these businesses have begun to demonstrate
underlying revenue growth, which should continue as we slow down much of our
business redesign and underperforming asset sales. I have to say, I think these
businesses are stronger than at any time in the last three years. And, their
turnaround has come faster and stronger than we expected.
Books Are Fun and QSP are not. They both have underperformed as a result
of significant competition which entered their field and attacked their
business. This has hurt us in the short-term, but I really believe these
businesses are getting fundamentally stronger as a result of hard, smart work
now being done to deal with competition.
Revenue growth is starting to show in the core business now, and I think
it will continue as a result of new business investments we have made in the
last couple of years. Let me take you through some of those at North America and
Books Are Fun. Tom and Gary will do the same in their businesses.
Reiman has been the primary engine for new product launches for the North
American segment. There are a series of new magazines with different formats and
different economic models, but all are doing well.
- Our Canada: This magazine is stunningly successful. We
expect paid circulation of over 200,000 by the end of
the fiscal year and that is huge in a country 1/10 the
size of the U.S.
- Backyard Living: This U.S. magazine is also doing great.
We expect to have over 900,000 subs by the end of the
year. Not many magazines ever approach 1 million
circulation, let alone in 18 months.
- RD Specials: Although newsstand competition has increased, RD
Specials continue to succeed in a very crowded newsstand marketplace.
In fact, they are being regularly emulated now.
- Reiman Holiday Classics Bookazine: Last year we had tremendous
success with a holiday "bookazine", sold exclusively at Wal-Mart.
This year we have expanded to additional retailers and sales doubled
to 350,000 books sold at $10 each.
- Cooking for 2: Reiman has just launched a brand new magazine, Cooking
for 2. We expect it to expand the Taste of Home brand to a whole
segment of new customers. And, this new magazine has tested better
than any other Reiman product to the Reader's Digest customer base. A
tremendously important strategic victory for us.
- Family Handyman "New Homeowner": This is a partnership venture with a
major real estate company in which a few million new homeowners in
targeted demo areas receive special new homeowner's editions of The
Family Handyman or Selecciones magazine. This project is nicely
profitable.
The North American business also has three major book programs of note:
- Reiman's "Contest Winning Recipes": This is a new book
annual and it already has more than 300,000 customers buying the book
at $24 per year. Typically, these annuals grow their customer list
for several years before leveling off.
- USBHE's "Extraordinary Uses for Ordinary Things": This book
had the most successful test we have seen at Reader's
Digest in seven years. We have already sold 100,000
copies in its first month, and we expect it will be a
major book for us in about every market in the world
over the next three years. It sells in the U.S. for
$30.
- Young Children's Music Player: This is an audio version of our hugely
successful "movie theater" series. We have already received orders
for more than 400,000 copies since the fall. This concept should be a
major best seller for us over the next few years with many potential
content variations. It sells through mass marketers like Wal-Mart and
Books Are Fun with a $25 list price.
Books Are Fun is investing in three major areas. First, adding additional
reps. We are building the capability to add reps at a rapid rate. Second, in new
product lines. We are building our Bath & Beauty line, which we have had great
success with, and broadening our art product to a Home Decor line. Finally, we
are investing in hand-held scanners to improve inventory management and demand
forecasting.
The Company is now running at a very high success rate with new product
development and I believe it will certainly help our revenue growth objective.
In fact, I am pleased with the overall condition of our business. I certainly
wish we were farther along with QSP and Books Are Fun, but I do think we are
doing the right things with them and I know we have tremendous growth potential
with each of those businesses.
For the balance of the year, we believe the outlook is improving. I am
increasingly confident with our guidance of 77 cents to 87 cents because I think
the positive momentum in our core business will more than offset any residual
downside in Consumer Business Services, if any.
A final thought.....
One of the defining things about this Company is that it is a very strong
producer of cash. Even during transition years, even during the most difficult
times in our turnaround, with the exception of only one year, Reader's Digest
has produced strong cash flow. The outlook is even better now.
Since the Reiman acquisition and the share recap, we have used almost all
of our cash to repay debt.
We are now at the point where we have more choices for how to improve
shareholder value.
Last week we increased our dividend from 20 cents to 40 cents annually.
Based on our current ratios, we believe we have a further opportunity to
reduce our cost of financing and achieve greater flexibility in our covenants.
So, Mike Geltzeiler and I will be pursuing that opportunity in the next
couple of months.
We will keep you posted.
Now, let's hear more about two very important businesses from the guys who
run them. Gary, you first.
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