EXHIBIT 99.2
FINAL
10/27/05
1Q 2006 EARNINGS CALL
TOR SCRIPT
October 27, 2005
Good morning.
I am delighted to report to you that we increased our revenues by 5 percent in
the first quarter to $516 million, up from $490 million one year ago.
Each of our three operating segments contributed to the topline growth. North
America was up by a percentage point, and International and Consumer Business
Services were both up 9 percent.
Our first-quarter growth continued the momentum we saw toward the end of Fiscal
2005, when we rolled up our two-year plan with strong performances from RD North
America and RD International.
Let me spend a few minutes talking about revenue.
At North America, first-quarter growth was driven by sales increases at Reiman,
U.S. Books and Home Entertainment, and RD Canada. Reiman growth came from its
newest magazines Backyard Living, Cooking for 2 and Birds & Blooms Extra, all of
which are performing ahead of plan. BHE had higher sales from Children's
Publishing and continued strong sales of the book, "Extraordinary Uses for
Ordinary Things." That book has already generated about 250,000 orders in the
United States alone, mostly without sweepstakes promotions. RD Canada
contributed to growth with higher sales of Our Canada, among other things. After
just two years, this new magazine already is a major hit.
I hope you notice a thread that runs through all the successes I just mentioned.
They all stem from investment. New products. New magazines and books. Home-grown
innovation. Eric Schrier's team at RD North America understands something very
powerful. New product development is what's going to move Reader's Digest
Association to the next level. And we're only just beginning.
At International, revenues improved all over the world. I mentioned that RDI was
up 9 percent. We had double-digit gains in France, Russia, Australia, Asia and
Brazil. Tom Gardner and his international team continue to just plain execute
well. Among the revenue gains were contributions from our newly launched
countries - Romania, Croatia, Slovenia and Ukraine. These markets continue to
exceed our expectations and add to the revenue growth. We expect them to
generate almost $25 million in sales this year with very healthy margins. Just
those four new countries. Again, the key factor - recent investment.
Our expansion model works well. We start by offering a book like "Discovering
the Wonders of the World," one that has proven itself in neighboring countries.
If that is successful, we publish additional products - another book, or perhaps
music. This makes for low-risk, low-cost launches, yet with the opportunity for
steady growth as each market is developed.
In Romania, we had such strong results with the first book-publishing offers
that we immediately branched into music. And I'm happy to tell you that today,
we are launching Reader's Digest magazine in Romania. This will become the 49th
edition of our flagship magazine around the world, in our 20th language.
At this hour in Romania, Tom Gardner is leading our staff and a number of
celebrities from Romania in celebration of our new magazine.
I mentioned that all three of our operating segments achieved revenue growth in
the first quarter. That's right, Consumer Business Services, too. Both QSP and
Books Are Fun had higher revenue for the quarter. QSP, our school fundraising
company, had higher gift and food sales, and it reaped some benefits from its
efforts to increase account retention and improve service. Books Are Fun was up
mainly because of favorable timing of sales events versus last year.
I don't want to get ahead of myself. The first quarter is typically the smallest
for QSP and Books Are Fun, which are gearing up for the big second quarter. But
QSP is definitely off to a better start than last year.
I want to dig a little deeper into this notion of investment. After several
years of focusing on fixing what we already had, this is a new direction. We no
longer are trying to become smaller and more profitable, our strategy early on.
We still want "more profitable," but we're at the point where we are stable
enough to focus on growth. And we are stimulating that growth through the right
kinds of investments. Expect to hear more about investment, and on a regular
basis.
- At North America, expect to hear about more new magazines. On Tuesday, we
launched one of our most promising new products in many years, Every Day
with Rachael Ray, featuring the popular TV food personality. This is a
different kind of magazine. Newsstand-driven. Younger readers. A hot
advertising product. It's a hot product, period. The initial response has
been incredible. We've had to increase the print run twice. We finally
printed 925,000 copies, and we forecast a 325,000 rate base.
- Do yourself a favor - pick up the magazine at newsstand if you can find
one left, or go to RachaelRaymag.com. This is a good one.
- As we progress through the year, you will be hearing about another major
new North America venture, called Taste of Home Entertaining. This is an
entirely new business that builds on the popularity of our Taste of Home
brand. It is a direct-selling business featuring items related to kitchens
and dining rooms and entertaining in them including our own magazines and
books. We think this will be a big business for us.
- Internationally, expect to see us launch in more new countries. Today we
announced the launch of new book publishing businesses in Bosnia and
Serbia. These are our fifth and sixth new countries over the past 18
months. We now are in nine Central European countries. And we are planning
additional international launches, three more in the next six months. Our
model calls for these new-country launches to be handled by our existing
administrative hubs. So far, most of them have been guided by our team in
Prague. As we add more countries, we'll manage from multiple hubs
including London, Finland and Moscow. This will enable us to do more of
this kind of expansion concurrently with less incremental investment.
- You will also see new magazines in the international markets. We are
moving ahead with plans for adaptations of Our Canada in Germany and
Finland. And we will continue to examine our developing markets to
evaluate their potential to support new editions of Reader's Digest
magazine.
These investments are strengthening the company by providing incremental revenue
and new customers. Some represent a short-term negative impact on operating
profit. Magazine launches in particular are cost-intensive on the front end, and
they can take several years to show profits. But their continued success will
drive our future.
Let's come back to the first quarter and look briefly at operating profit.
The company had an operating loss of $(9) million, or (9) cents a share. This
was about as we expected. A little better actually. As you know, the first
quarter is usually a loss for us. It's when we pay out to get ready for the fall
and winter selling seasons.
International and North America were both up despite significant investment in
both businesses.
CBS had a loss of $(18) million in its ramp-up quarter, slightly favorable to
last year. QSP and Books Are Fun both continued to spend to stabilize their
respective sales forces and to improve competitiveness. This is another kind of
investment.
Both of these businesses have more work to do, but we are seeing real progress.
QSP is a year or so further into its competitive battles, and I think QSP is
winning. I believe QSP will show share gains this fall, and it feels like they
will have a much better year. It's still too early to tell if their market will
fully bounce back.
Books Are Fun is in the middle of a tough competitive fight. They will likely
have a difficult year as our competitor continues attempts to raid our
independent sales reps. However, we have begun to see signs that are positive
for the long term. For example, our Schools Division, which was the focus of
competitive attacks last year, is doing much better this year - with higher
sales, higher averages and improvement in the number and quality of our sales
reps. The Corporate Division has recently had the same kind of competitive
assault that the School Division had last year and QSP had two years ago. We
have lost some reps and that will hurt our sales this year. But, we have learned
good tough competitive lessons in the last couple of years, and we will apply
them here. We will get those reps back or we will get better ones. We will make
this a stronger business.
For the company as a whole, we see a strong year ahead. We reconfirm our
estimate from the beginning of the year - Fiscal 2006 EPS should be in the range
of $0.90 to $1.00. We continue to expect revenues to be up by low-to-mid single
digits, and operating profits to be up double digits.
We liked the first quarter, and we like the full year. We see our progress
accelerating in the third quarter, followed by a very strong fourth quarter.
The one quarter that will seem soft is the second. But, that's mostly according
to plan. As per our prior guidance, profits should be down slightly. There are
three main drivers:
- First is investment expense for many of the new initiatives that we talked
about. A lot of that expense is front-loaded this year.
- Second is a series of timing issues. Both the International and the North
America businesses have moved more mailings to the front half of the year.
And, our U.S. businesses have moved mail to the second quarter to avoid
the January 1 postal rate increase.
- And third, what was a strong second quarter start has been slowed by the
recent string of hurricanes. Katrina and Rita interfered with North
America direct mail sales and product delivery and eliminated several QSP
and Books Are Fun territories around the Gulf Coast. We don't know if or
when these will come back. The hurricanes contributed to the spike in fuel
prices, which has resulted in fewer Books Are Fun events as well as fuel
price surcharges in several of our businesses.
Also in the second quarter, there will be an unfavorable comparison of 9 cents,
which was in last year's results mainly for the sale of some property.
Much of the expected softness in the second quarter was in our plan for the
year. And so we continue to be optimistic.
As we look at Fiscal '06 and the factors affecting it, here are some that I
especially like:
- The rebound of mature markets in RD International
- Continued strength in our new countries
- Very strong early signs at Every Day with Rachael Ray
- The growth of our newer Reiman-inspired magazines
- The U.S. advertising market
- it is getting stronger going forward
- and improved QSP performance.
Here are three problematic factors that you should keep an eye on:
- Hurricane Katrina and her evil siblings
- Higher fuel prices
- and Books Are Fun - although I'll happily move this to the positive column
if they can get enough traction this year.
Let's look ahead.
When we last met, I mentioned that we were finalizing a new program to build on
our successful two-year plan, completed last summer. The new plan calls for
profit AND topline growth, and improved results across all business segments.
The plan covers three fiscal years. During the three years, we hope to launch at
least six new magazines and enter at least twelve new countries, and to
introduce at least two entirely new businesses that dramatically broaden our
customer base. We expect to annually increase revenues by mid-single digits and
operating profits in the high single or low double digits during the course of
that three-year plan.
The new plan calls for a further change in emphasis from repair to investment.
Actually, it calls for a lot of changes - starting with strategy, but also
mindset and orientation. It addresses long-term goals. And at its heart, it is
our roadmap to achieving growth that is not only real - but also sustainable.
Here are the elements of that strategic plan:
First, Diversify the Core Businesses:
We plan to drive what we call "incremental innovation" in our existing
businesses - Magazines, Books and Home Entertainment, Reiman, QSP and Books Are
Fun - to keep them healthy, relevant and stable for years to come. We plan to
build upon the existing platforms via new products, services and distribution
channels related to them.
New products include magazines and books, and new configurations of existing
products, like "Bookazines," which combine features of books and magazines.
The second element is to Deepen our relationships in Customer Communities:
The classic RDA business model covers a wide breadth of content areas. We have
not historically gone very "deep" in each one to develop a full array of
products and services for those customers. Now we are building businesses around
their interests. We have started with the food category, where largely thanks to
our Reiman acquisition we already have a remarkable range of assets including:
- 7 million food magazine subscribers
- 6.7 million newsstand buyers
- 20 million food magazine readers
- 2.3 million cookbook buyers
- 270,000 cooking school participants
- and $20 million in food advertising or sponsorships.
We can leverage such relationships and generate new customers by extending and
deepening the products and services we offer to those communities. Every Day
with Rachael Ray and Taste of Home Entertaining are both examples of this part
of our strategy.
Food is only one area. Consider others where we have special
strengths. Home and Garden. Do-It-Yourself. Health. Country
Living. And, Children's Publishing.
The final element of our strategy is - Leveraging our Global Scale:
Our International strategy is simple to describe. More countries and more
businesses in them. We have about 25 new countries on the board for potential
launch in the next few years. Four last year. Six this year. More to come. And,
we are developing new businesses - beyond our traditional core. Businesses like
Books Are Fun and new magazines like Our Canada, Daheim in Deutschland and new
products like "English in 20 Minutes a Day" and Taste of Home Entertaining.
There is lots of room to expand this business.
So, that is our strategy going forward. It is a careful extension of the work
done over the past few years, as we have established what works best for this
company. We are in the process of tasking key managers throughout the company
around the world to develop plans to execute the strategy on a global scale.
We provided some details of the strategy in our new Annual Report. I concluded
my letter to shareholders by saying something that I believe is important enough
to repeat here:
After a few difficult years, 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. We are testing and
launching more new products and markets than we ever have in the history
of the company. Our next phase will be no less challenging than the last,
yet a lot more fun. Because we'll be creating sustainable revenue growth,
and the profits to match.
And, now I turn you over to Mike Geltzeiler, the hapless Jets
fan, for the financial report...
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