EXHIBIT 99.2
3Q 2005 Earnings Call
Remarks of Thomas O. Ryder, Chairman and CEO
April 28, 2005
Good morning, and thank you for joining us.
Today's earnings numbers read like hieroglyphics, for which
I apologize. Let me see if I can help. Our results include a
loss of $(1.41) per share, or $(142) million in non-cash
charges. Nine cents, or $(13) million, is from the amortization
of previously deferred magazine promotion expense. You've been
seeing that kind of charge each quarter this fiscal year; we'll
be done with it after next quarter. Hallelujah. The larger
piece, $(1.32) per share or $(129) million, is for a write-down
to reduce the amount of goodwill we carry for our Books Are Fun
business.
We conduct our annual recovery assessment for all of our
businesses in the third quarter. After two years of
softer-than-expected results at Books Are Fun, our analysis
resulted in this adjustment - which, as you know, now comes in
the form of a single non-cash charge.
I want to say something about Books Are Fun. Accounting
regulations require that we write down the goodwill of this
business. But I have not written down my belief in its
potential. This has been a good business for us since we
acquired it five years ago. It still is. It has been an
important contributor to revenue, operating profit and free cash
flow. It still is. This business grew nicely in its first few
years. Today, it's in a different phase. We are dealing with
the periodic pains of a successful business - things like
staffing issues and increased competition. All the while
building for the future. Is the business model broken?
Absolutely not. It happens to be a lucrative, innovative
business concept with very strong margins. That's why it is
attracting competitors. Books Are Fun remains an important part
of our portfolio. We liked Books Are Fun when we bought it... we
like it now... and we like it for the future. We do have issues
that we need to fix. And we will.
Let's take a closer look at our results for the quarter.
When you peel back those accounting charges, you get something
closer to an apples-to-apples comparison. Without the charges,
adjusted EPS for this quarter was 8 cents a share. Last year,
same quarter, we reported earnings of 2 cents a share, though
much of that improvement was below the operating profit line in
Other Income and Expense.
Revenues were 545 million dollars, down from 561 million
dollars last year, principally driven by a 9 percent decline in
revenues at CBS.
We reported an operating loss of $(97) million dollars. If
you exclude all the non-cash items, profits were 16 million
dollars versus 19 million dollars last year. That's the
operating comparison. And, you will remember at the beginning of
the year, and again last quarter, we told you to expect lower
third quarter comparisons. These results are actually better
than we expected, except for the Books Are Fun non-cash charge.
RD North America profits were 22 million dollars in the
quarter, an improvement of 8 million dollars over the Fiscal 2004
quarter. On an apples-to-apples basis - adjusting for the
favorable impact of the change in how we expense magazine
promotions - profits improved by about one million dollars. The
principal driver was higher circulation profits at Reader's
Digest magazine, reflecting lower customer acquisition costs,
resulting from our stabilizing circulation at 10 million in
January of 2004. Profits also benefited from our initial mailing
of our book, Extraordinary Uses for Ordinary Things. This book
generated over 100,000 orders in its initial U.S. mailing and
will be offered in most of our markets around the world. Partly
offsetting these gains were lower advertising profits and
continued investment in new magazine concept testing and launches.
RD International profits were down in the quarter, as
expected in our full-year plan. Operating profit of 7 million
dollars was down from 14 million last year. Adjusting for
magazine promotion expense timing, profits were down 4 million.
Nothing in the underlying trends of this business caused the
decline. It was purely a shift in the timing of direct-mail
campaigns and increased investment activity. In fact, profits
for the quarter came in at about double our internal
expectations, driven by a rebound in markets like Germany, Brazil
and Australia, which have been soft in recent years.
Year-to-date, profits in International are up 36 percent. There
is no mistaking it; RD International is having a great year.
Consumer Business Services had an operating loss of (4)
million dollars, down (5) million dollars from last year. Most
of the decline was at Books Are Fun and was caused by lower
same-event sales in the schools division and fewer small business
events. During the quarter, Books Are Fun focused on identifying
initiatives to grow events and improve event averages. We
increased recruiting and retention efforts. We provided new
product offerings to our sales reps and customers. We began
expanding into under-penetrated metropolitan markets like New
York and Los Angeles. We started a program to increase sales in
large venues like hospitals. And we expanded our national
accounts program. These are the right initiatives - now we need
to execute.
At QSP, revenues were down and profits roughly flat as we
are seeing a continuation of lower same-school sales. In the
third quarter, the sales force is typically focused on the
upcoming fall selling season. Commitments are made in the spring
for programs to run in the fall. To do that, this spring we are
further differentiating our products and services from the
competition. We are focused on signing more new accounts,
winning back lost accounts, improving prize charts to drive
student participation, upgrading our gift catalogs, and expanding
our on-line business. We are also intensely focused on margin
improvement through our effort to re-engineer virtually every
element of this business. I believe that the thinking and work
at QSP is very good - and should eventually result in much better
sales.
Improving profitability at QSP and Books Are Fun is our
highest priority right now.
Overall, in terms of operating results, the quarter was a
bit higher than our internal forecast. As we look ahead, we see
significant improvement in the fourth quarter. We are expecting
solid revenue growth and strong double-digit profit growth to
more than offset the declines in the third quarter. We expect
earnings will be at the high end of our previously announced
range. And, yes, I did say solid revenue growth.
Most of the growth in the fourth quarter will be from our
core businesses in North America and International, as we see
real revenue growth and continued margin improvement. But, we
also expect some improvement in the softness at CBS.
By the end of Fiscal `05, our core businesses will have each
improved operating margins by close to 3 percentage points in two
years.
This is particularly encouraging given that we have made
$30-plus million dollars of cumulative investment in the business
over the past two years.
So why have these businesses come back?
After several years of aggressive downsizing and cost
cutting, we have clear evidence that the core is stabilizing.
Our promotional packages are better. Our product flow is
stronger. Our operations are more efficient. We have improved
our forecasting and our customers' payment performance. We are
working better across divisional lines. And, our new businesses
like Reiman and Books Are Fun are helping to sell our core
business products.
All of this is evident in our results.
All of these factors have helped stem the dramatic decline
in our customer base and have created a platform upon which to
grow our business over the long-term.
This has allowed us to invest in several new initiatives
over the past two years and our hit rate on them has been very
encouraging. We believe they will drive revenues and profits
well into the future.
Let me give you some examples:
- At RD North America, we have largely stopped the declines at
Reader's Digest magazine and Books and Home Entertainment.
With the help of Reiman, we have created new products and
new businesses to grow our top line. New magazines, new
books, new channels and new product configurations have all
contributed to new revenues of 30 to 40 million dollars to
this year's results.
- In magazines, we have had six launches in the past 18
months, four of them in North America. Most of these new
magazines are off to strong starts. The most dramatic
success is Backyard Living, which is closing in now on 1
million circulation. Our Canada continues to grow rapidly.
By our reckoning, it is already among the ten largest
magazines in Canada. Cooking for 2, launched just a few
months ago, will be smaller in scale but it's important
because it is bringing in new people from outside our
existing franchise. RD Specials are doing spectacularly
well at newsstand and have led to a new category of
products, Bookazines, a combination of books and magazines.
We started selling them at Wal-Mart this year. Our program
was so successful that they wanted four more titles. Now
we've expanded beyond Wal-Mart, and the latest titles have
sold well over 300,000 copies a piece.
And we're not done yet. We have a pipeline with a number of
other new titles in development.
- Coming soon is Every Day With Rachael Ray, announced earlier
this week. We are excited about the prospect of building a
new magazine around one of television's most popular food
personalities. This initiative is an expansion of one of
our growing core competencies. Quietly, we have become the
world's leading food publisher. Our food magazines have
combined circulations in the area of 10 million, and we also
sell 2-3 million cookbooks a year. Watch for us to continue
to grow in this important area.
- Our books business is experiencing a resurgence. This is
particularly important given that, annually, we sell over 1
billion dollars worth of them globally. We no longer
operate in just a single channel. Our trade business
continues to build on the success of our partnerships like
the Disney music player. Our new Do-It-Yourself manual,
developed in-house, is expected to sell close to 200,000
copies at retail, before it goes through our other channels
like direct mail and Books Are Fun. Books Are Fun has
become a major sales channel for our books business.
- Internationally, our growth going forward will be fueled by
expansion into new countries. Results in the four new
markets we launched last year in Central Europe have been
phenomenal. By the end of the year, we expect to have
generated over 1 million orders in these four countries.
That equates to over $20 million dollars in revenue. And,
overall, these new markets are profitable in their first
year. We expect to grow significantly over the next few
years as our businesses in those new countries develop more
fully. And we have no fewer than six other countries that
are being evaluated now for launch next year.
Internationally, we have had outstanding success selling a
diverse group of blockbuster titles, including the new
Reader's Digest World Atlas, Caring Everyday Ailments the
Natural Way, Vanished Civilizations and 1,001 Home remedies,
each of which we have sold in excess of 100,000 copies in
multiple markets. In the case of the Atlas, will sell well
over half a million.
Over the past two years, our core business has improved,
providing strong free cash flows to aggressively pay down debt to
a more comfortable level, and to fund organic growth within the
company. At current debt levels, we believe that we can now
focus less on debt - and more on equity.
In January, we doubled our stock dividend. We then
re-financed our variable debt to lower interest rates and
increase flexibility. And, today, I was delighted to share the
news that our Board of Directors has authorized a share
repurchase program. One hundred million dollars over the next
two years. Combined with our dividend, that means we expect to
return about $90 million of cash to our shareholders each year.
We have made these moves because we have confidence that our
core business is on the right track.
It has certainly been a tough road. We have seen ups and
downs in all of our businesses. Our core business went through
an extraordinarily difficult period. But RD North America and RD
International are much stronger now than they were two years
ago. For the first time in years, they have a path to achieve
real top-line growth, in addition to improving margins. We also
have confidence that we can fix Books Are Fun and QSP and we
continue to believe that they have strong growth potential ahead.
In Fiscal 2005, we have stayed very close to the targets
that we described to you at the beginning of the year. Keep in
mind what our goal has been all along - to move the company ahead
on the path to sustainable growth. I am confident that we are
achieving that. On the next call, I will report to you on the
year that was - and the outlook for the year ahead.
###