EXHIBIT 99.2
Remarks of Thomas O. Ryder, Chairman and
Chief Executive Officer, The Reader's Digest
Association, Inc., made to investors and analysts
This is an exciting time for me and my colleagues at
Reader's Digest.
We've been through a couple of years of triage as we dealt
with the catastrophes of 2001.
We created and executed a two-year plan aimed at stabilizing
our core business and investing in key new business initiatives
to build a platform for our longer-term growth.
And, now we are actively engaged in creating a new plan that
aspires to real and consistent growth, helped by a greatly
improved existing business and exciting new initiatives driven by
our core skills and assets.
We are drawing this new plan from a greatly improved
financial circumstance --confident that we have the resources we
require to grow our business and continue our program to increase
shareholder returns.
I will talk briefly about the major components of that
growth program, but first let's look at the final quarter and
final year of our just-completed two-year plan.
Our final quarter of Fiscal 2005 came in very strong.
Better than we expected in fact.
The fourth quarter helped drive full-year results that
exceeded our external guidance and created strong momentum as we
move into Fiscal 2006.
Fourth quarter earnings were 11 cents per share, an
improvement of 17 cents over last year's quarter, which had a
loss of (6) cents per share.
We benefited from the change in how we account for magazine
promotion expense versus last year, but we had very strong
performances in our two core businesses North America and
International.
Operating profits at RDNA were up 67 percent and RD
International grew by 30 percent.
More encouraging, however, was that these businesses
achieved revenue growth. Both were up by 5 percent, albeit aided
somewhat by foreign exchange. This is right on the schedule we
planned and we believe that this is the beginning of a trend.
Real growth is starting as our core business has stabilized and
the investments we have made in new products - principally
magazines and books, and new countries - have begun to kick in
strongly.
Offsetting gains in the core business were declines at our
third operating segment, Consumer Business Services. Although
CBS had a down quarter, the negative trends in QSP and Books Are
Fun are beginning to improve, particularly at QSP, where revenues
improved over last year. The fourth quarter is small for both
businesses, especially QSP, and I don't think we should read too
much into it. However, we expect to see better results in 2006.
The story for the full year was the same as for the fourth
quarter. Strong improvement in North America and International;
weakness at CBS. Here are some highlights:
Full-year reported earnings were a loss of $(0.95) cents per
share. Adjusting for special items related to our third-quarter
reduction of Books Are Fun goodwill, the write-off of financing
fees taken in the fourth quarter, and the acceleration of
deferred magazine promotion expense, earnings were $0.92 cents
per share.
- We had a $15 million improvement in profit at RD North
America, which grew by 19 percent...
- a $19 million improvement in profits at RD International,
which grew by 34 percent...
- CBS operating profits for the year were down 50 percent to
$29 million, and revenues declined to $485 million as we
dealt with some difficult competitive issues.
- Total company revenues were up for the first time in nearly
a decade, led by growth of North America and International
in the second half of the year especially.
For the full company, we gave EPS guidance for the 2005 fiscal
year both with and without special items.
Either way, results were better than the high end of our
guidance range.
This was the last quarter and last year of our two-year plan.
This plan was tremendously important to us, both in terms of
fixing our business and reestablishing credibility with you. We
think we've done pretty well, albeit with some ups and downs.
Let's recap:
When we announced the plan, US BHE was bleeding red ink
following the sweepstakes settlement. U.S. Reader's Digest
profits were under pressure, mail intensity in international
markets was negatively affecting profits, and the active customer
base in both the U.S. and International markets was in decline.
We had taken on almost $1 billion in debt, to acquire Reiman and
recapitalize the company. And consolidated revenues were in
decline, with few obvious opportunities for growth.
Our ambitious two-year goal was to stabilize the business and
build a platform for sustainable revenue and profit growth
beginning this year, in Fiscal 2005.
To accomplish this goal, our plan was to:
- stabilize the active customer base while improving margins
at North America and International;
- further improve margins by reducing fixed operating costs;
- and invest in new business initiatives to diversify our
revenue streams and drive long-term revenue and profit
growth.
- We also planned to aggressively grow QSP and Books Are Fun,
but that's a different story.
I am pleased to report that we have made significant progress
on most of these fronts, and this is a much better, stronger
business today.
Let's start with RD North America.
Over the course of the two-year plan, profits grew from $60
million in Fiscal 2003 to over $90 million this year. That's an
improvement of 50 percent.
Operating profit margins increased by almost 3 percentage
points, to 10 percent.
We stopped the decline in revenues. And stabilized the
customer base.
Those were the principal goals for North America.
But perhaps the most significant accomplishment is that we
stabilized circulation at Reader's Digest magazine.
We have seen several other magazines recently lowering their
circulation commitments. And with recent Audit Bureau of
Circulation changes, you will see more.
We started this process a few years ago. We lowered circulation
to improve profitability, while maintaining our position as the
largest paid-circulation magazine in the U.S.
We did this proactively and strategically.
And it has paid off.
As other magazines are now faced with the challenge of
maintaining circulation levels and profitability, our profits
have been growing for the past three years.
At US Books and Home Entertainment, profit margins in 2005 were
over 7 percent.
This business was completely devastated by the new sweepstakes
laws. It lost almost $40 million in 2002. We have had to
completely remake what was almost solely a direct mail
sweepstakes business. Today we do fewer products and use
multiple channels -- direct mail with sweepstakes and
non-sweepstakes; retail; television; catalogs; the Internet;
Books Are Fun. It's a smaller business, but a solid one with a
chance for steady growth.
Reader's Digest Canada, which was facing the challenge of a
declining customer base, has now become one of our strongest
international markets with growing revenue and high margins.
They have driven year-over-year customer growth with strong new
promotions, and the blockbuster success of Our Canada. RD Canada
is a very strong, very valuable business.
We said when we acquired Reiman that it was a great business
that was very profitable and added several million new customers
to Reader's Digest. But we also said its most important
contribution might well come in helping us transform our other
businesses.
In North America, over the past 2 1/2 years, Reiman has
contributed six new magazine concepts, which have all been
successful. These magazines have brought in more than 2 million
customers and $30 million in revenue in Fiscal 2005.
Backyard Living, Our Canada, the RD Specials, Cooking for 2,
Birds & Blooms Extra and Bookazines all have achieved strong
success, with little investment relative to what is normally
spent in our industry.
And, we have quietly assembled quite a food franchise.
More than 8 million magazine subscribers through Taste of Home,
Quick Cooking, Light and Tasty, Country Woman, and Cooking for 2.
Our RD Specials, which are largely food related, and our
Bookazines, which combine aspects of books and magazines, expand
our food presence at retail, primarily supermarkets.
Meanwhile, we sell more than 2 million cookbooks every year,
and we reach out to over 300,000 customers who attend our cooking
schools annually.
Combining all of these components makes us the largest food
publisher in the world. And, we will soon launch our new food
magazine, Every Day with Rachael Ray, which has both advertisers
and retailers buzzing.
This year, we also plan to launch Taste of Home Entertaining, a
direct selling business similar to Pampered Chef and building on
the remarkable success of our Taste of Home brand.
And we have begun to expand to other communities outside of
food.
We recently created a Home and Garden group to leverage our
scale in this category with The Family Handyman, American
Woodworker, Backyard Living, Birds & Blooms, as well as several
Do-it-Yourself and How-to Books.
This is also an advertising opportunity as well as an
opportunity to repurpose our existing content to several
platforms, including the Web.
RD International had an outstanding run over the course of the
two-year plan. Tom Gardner and his team did a superb job of
turning this business around.
Profits at RDI grew from $49 million in Fiscal 2003 to $76
million this year.
That's an improvement of 55 percent.
Margins grew from 5 percent to 8 percent.
Revenues increased, helped a bit by foreign exchange and we
reversed a decade-long trend.
RDI now has its sights set on solid, currency-neutral revenue
growth and we expect to achieve this in Fiscal 2006.
In a few minutes, Tom will tell you how he and his team turned
that business around and why they are very optimistic about the
future.
Of all our businesses, CBS was the one disappointment in the
2-year plan. We expected strong growth and didn't come close.
Revenues were down 14 percent over two years and profits were
down over 60 percent.
At the start of the plan, we recognized the tremendous growth
potential for both Books Are Fun and QSP, and we were hopeful.
But a number of competitors saw the same potential we did, and
they came after us, and our sales forces.
After two years of battles to hold existing reps and recruit
new ones, we are beginning to get traction, particularly at QSP.
And, we have built a stronger business as a result of the
competition.
There is still work to be done at QSP and Books Are Fun, but we
do expect improved revenues and profits for both in 2006. And,
we like the long-term outlook for these businesses a lot.
Back to the big picture, and our two-year plan. Our strong
performance relative to the plan at North America and
International offset most of the softness I just described at
CBS. We hit or came close to most of our metrics.
In the first year of the plan we hit 11 of 15 metrics:
- We grew profits by double-digits at North America and
International, which led to higher operating margins
- We returned US BHE to profitability
- We continued to generate strong free cash flow and
aggressively reduce debt levels
- We launched three new magazines in North America
- And we expanded BAF and Reiman to international markets
The metrics that we did not achieve related to revenue and
profit growth targets at BAF and QSP.
In the second year, we continued to build on our successes at
North America and International, recording the second year of
double-digit profit growth and further increasing margins at both
businesses. We stopped the declines in revenue and continued to
expand with new products and new markets. We launched three new
magazine concepts [Cooking for 2, Birds & Blooms Extra, and
Bookazines] and started businesses in four new countries.
We continued to produce strong free cash flows and lowered our
debt to 2.3 times EBITDA, slightly better than plan.
This enabled us to make shareholder-friendly moves like
doubling our dividend and beginning to buy back shares, both
during 2005.
Our strong finish in the fourth quarter gave us good momentum
going into the new fiscal year.
We are working on a new three-year plan. We are excited about
it because this one focuses on growth. This is a new direction
for us, because for the past few years we have had to concentrate
almost totally on fixing things that were broken. We are almost
done with that phase.
Our new strategy will focus on three elements:
1. Diversifying our existing businesses
2. Expanding products and services for key affinity groups
3. Extending and leveraging our global scale
Our excitement stems from the fact that we have a number of
great ideas in various stages of development to support this new
strategy. In our next fiscal year we will continue our work in
revitalizing our core business and we will concentrate on
launching three major new projects:
1. First: Our new magazine - Every Day with Rachael Ray
2. Second: Taste of Home Entertaining - our new direct sales
business that will leverage the power of our Taste of
Home magazine brand. (By the way, both of these
projects are examples of how we intend to expand
products and services for a specific affinity group.
In this case - food.) And,
3. We will continue our program of geographic expansion by
launching in five new countries next year and testing 3
to 5 others.
And, of course, we will continue development of new projects
launched in the last couple of years like:
- Backyard Living Magazine
- Our Canada
- Cooking for 2
- RD Specials
- Books Are Fun in Spain, Italy, Germany and Mexico
- Last year's launches in Croatia, Slovenia, Romania and
Ukraine
- And, "English in Twenty Minutes a Day", our foreign language
product
Fiscal 2006 should be another good year. We expect revenues
and profits to grow across all of our business segments, with
consolidated revenues improving by low-to-mid single digits.
And, we expect operating profits to grow in the mid-teens, even
though we will make significant investments - more than $20
million - in new businesses.
Additionally, the company is targeting:
- Mid to high single-digit profit growth at International.
- Mid-teens profit growth at North America (including a $21
million increase in profits because of lower amortization
expense) offset by substantial investment in Every Day with
Rachael Ray, and Taste of Home Entertaining.
- Increased revenues and profits at CBS, led by improvements
at both BAF and QSP.
- Free cash flow of $130 million to $140 million, which will
be used to continue to pay down debt, pay dividends and
repurchase shares.
- EPS in the range of $0.90 to $1.00, with growth mitigated by
a return to normalized tax rates and non-cash charges
reflecting the expensing of stock options and lower pension
income.
Inside RDA, we feel very good about this moment - and
about our success with the two-year plan. After the tumultuous
series of setbacks that began in 2001, we are now in a much
better place. We have created greater balance in our portfolio
of businesses and have diversified our sources of revenues and
profits.
But, stabilizing revenues and improving margins is just the
first step. We understand that better than anyone. Our next
phase will be every bit as difficult, but a lot more fun -- as we
create real, sustainable revenue growth and the profits to
match. I'll be telling you more about that in the near future.
Now I would like to introduce one of our principal leaders
in this effort, Mr. Tom Gardner, who will update you on RD
International. Tom...
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