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Meredith Corporation (NYSE:MDP)

Q2 2010 Earnings Call

July 29, 2010 11:00 am ET

Executives

Mike Lovell - Director of IR

Steve Lacy - CEO

Joe Ceryanec - CFO

Jack Griffin - President, Publishing Group

Paul Karpowicz - President, Broadcasting Group

Analysts

Michael Meltz - JPMorgan

Jason Bazinet - Citigroup

Peter Stabler - Credit Suisse

Barry Lucas - Gabelli & Co.

Edward Atorino - The Benchmark Company

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Meredith Corporation reports fiscal 2010 fourth quarter and full year results conference call. (Operator Instructions) As a reminder, this conference is being recorded today, the 29th of July, 2010.

I would now like to hand the conference over to our host Mr. Mike Lovell. Please go ahead sir.

Mike Lovell

Hi good morning everyone and thanks for joining us. We'll begin the call this morning with comments from our Chairman and Chief Executive Officer Steve Lacey, as well as our Chief Financial Officer Joe Ceryanec, then we'll turn the call over to questions. Also on the line this morning are Jack Griffin, President of our National Media Group and Paul Karpowicz, President of our Local Media Group.

An archive of today's discussion will be available later this afternoon on our industrial website and a transcript will follow that. Let me remind you that our remarks today include forward looking statements and that actual results may differ from our forecasts. Couple of the reasons why are described at the end of our press release issued earlier today and in some of our SEC filings.

With that, Steve will begin the presentation.

Steve Lacy

Good morning everyone. I'm pleased to report that fiscal 2010 marked the return to earnings growth for the Meredith Corporation. As detailed in today's earnings release, we increased earnings per share by 10% for the year before special items highlighted by a 27% growth in earnings per share in the fourth quarter.

Total company revenues were approximately flat with the prior year, even with about $15 million less in net political advertising revenue. Total company operating expenses declined 3% before special items and we reduced our debts by 20%.

At the same, we continue to invest in new media platforms including mobile and e-Tablet. Additionally, we increased our dividend to shareholders for the 17th consecutive year. Given the weak climate, I'm both proud and encouraged by our performance. Central to our strong results, more performance improvement initiatives put in place in fiscal 2008, when the early signs of the economic downturn appeared and expanded upon in both fiscal 2009 and 2010.

We've established a strategic plan called Vision 2013. It's a detailed road map designed to position Meredith for both near and longer term growth. I'd like to take a moment to provide a quick overview. I think it's crucial to understanding why we believe Meredith is uniquely positioned to prosper and grow in an evolving competitive media market place.

At its core, Vision 2013 contains fixed key strategies. I'll briefly highlight each noting progress achieved during our fiscal 2010. First of all to exploit the economic recovery, this strategy revolves around the beliefs that gaining market share should be a primary focus during the time of economic weakness.

Over the last two years, we've increased our share of magazine advertising revenue by nearly three full percentage points to 12.3%. That represents the highest share in our history. Our television stations outperformed the industry as well.

Secondly to optimize our core businesses. We've made significant progress against reengineering initiatives inside both our national and our local media groups, including content creation sales and consumer marketing. These initiatives resulted in efficiencies and improved products as well as cost savings overtime.

Third, to expand our digital businesses. We enhanced the online consumer experience and have taken steps to better monetize our growing online traffic leading to an 11% increase in online advertising revenue in our fiscal 2010. We launched mobile platforms for three key brands, better homes and gardens, parents and fitness and just completed the acquisition of the hyper factory, one of the world's leading mobile marketing company. At the same time, we joined publishing and broadcasting industry consortium to further develop the mobile and e-Tablets platforms for consumers and advertisers alike.

Fourth, to significantly grow Meredith's integrated marketing. In the last four years, we've doubled revenues and acquired six firms to provide sought after expertise in digital, Vierl, social, mobile, healthcare along with database marketing. In fiscal 2010, these new services helped to partially offset market driven weakness in core customer publishing activities.

Fifth, to enhance and extend our key brands. We built better homes and gardens into one of the most successful media brands in the industry. Among our many licensing relationships, I'll single out our ongoing program with Wal-Mart, where we doubled the number of SKU's over the prior year to approximately 2,000.

And finally, to build shareholder value overtime. While we obviously have no direct control over our share size, we're pleased to see it increase 25% during fiscal 2010 and in an environment where many media companies are slashing or eliminating dividend. We increased our dividend again in January of '10.

We clearly have improved our competitive position across the business. However, while fiscal 2010 was a better year for Meredith in most respects, I should note that our performance as it relates to advertising, is still below the historic ties we reached before the recession. The market place remains volatile both month-to-month and across our client base.

With persistent high unemployment, I think the economy will continue to be choppy over the relative near term. As we enter fiscal 2011, we expect strong growth in non political television advertising revenues, to continue for at least the first half of the fiscal year and we anticipate a good political advertising season. We expect that magazine advertising will be flat to down slightly on higher nets per page in the first quarter of fiscal 2011 as we cycle against our strongest quarter of industry out performance last year.

Now I'll review our operating group performance. National Media Group operating profit increased 11% in fiscal '10 over the prior year. We achieved this growth in part like run revenues and high margin activities such as brand licensing and through strong, discipline on expenses, which were down about 5% for the year. National Media Group advertising revenues were approximately flat with the prior year and stronger second half performance in categories such as household supplies, prescription drug and direct response off set decline in the first half.

Meredith Interactive Media advertising revenues grew sharply, up 17% for the year. Our advertising performance continued to exceed the industry in fiscal '10. For example, 11 of our 14 measured magazine titles gained share in the fiscal year according to PIB. All told, we've gained share in the magazine industry for five consecutive years and most recently, have outperformed the industry for seventeen months.

As a result, we closed fiscal 2010 with the market share of 12.3%, which is an all-time fiscal year-end high. Part of the reason our advertising has outperformed the industry is that we overindecked in categories that have performed relatively well during the recession.

As an example, our three largest categories in fiscal '10 - food and beverage, toiletries and cosmetics and prescription drugs were among the best performing categories in the industry. We generate twice as many dollars from the food and beverage and prescription drug categories as the industry overall.

Conversely, our under exposure to lower performing categories such as apparel and automotive worked in our favor. We have one quarter of the exposure to apparel and one third of the exposure to automotive compared to the industry taken as a whole.

Also helping our performance of course is our very strong brand and strong sales execution across multiple media platforms, including in book, online, mobile and video. As an example of our multi platform success, in the August issues of many of our largest titles, we debuted a large new program, aimed at moms called the Mother Board. We're launching it on an exclusive year long basis for Wal-Mart.

At the heart of the program is the private community of moms, who will generate consumer insight that will be used throughout the program. We've also identified a larger group of a million women, who will receive a weekly e-newsletter with Mother Board findings and Wal-Mart messages.

We advanced our strategic initiatives to raise our profile in the beauty category during fiscal 2010. Our prime example is an integrated program created for skin cream Tribeca. It leverages social media such as Facebook, YouTube and blogs. It also includes elements with more magazines reinvention conventions, product placement on the syndicated better show and the digital presence on both the Meredith women's network and broadband channels that are TV.

Looking at early fiscal 2011, our industry out performance is moderating when compared to our peers. This is mainly because we have much stronger year ago comparable and because there is an industry we're seeing some recovery in categories where Meredith under indexes the industry taken as a whole.

As the overall ad environment improved, we expect total industry performance will exceed Meredith to some degree through the balance of calendar 2010. However, we're working diligently to maintain the market share gains achieved over the last couple of years.

As I touched on in my opening remarks, we continue to grow and enhance our strong connection to the American consumer. Looking at the National Media Group in particular in fiscal 2010, magazine readership grew to a 113 million, up from a 110 million a year ago and up 13% from a decade ago.

Revenues and profits related to our circulation activities increased including a revenue gain of 4% at newsstands. The number of monthly online unique visitors and page use grows more than 25%.

Sales of our branded retail products continue to grow. Beyond the very strong reception our brands have received at Wal-Mart, we also experience growth from our real estate franchise partner [Realogy]. Today the Better Homes and Gardens real estate franchise is represented by 5,000 sales associates in the 16 states.

Meredith's integrated marketing were down about 7% in fiscal '10 compared to the prior year, primarily related to the soft custom publishing environment I mentioned a few moments ago. However, revenues rose 5% in the second half of the fiscal year due primarily due to strong new business development. This included interesting applications such as the new iPad, application for Kraft foods called Big Pork, Little Pork. It's targeted at parents with young children in the household. It launched a few weeks ago with more than 300 recipes, custom videos and games.

It follows the very successful iFood assistance that we build for Kraft and launched in the fall of 2008. Big Pork, Little Pork is designed to help Kraft connect with consumers in different and powerful ways and recipes can be shared via Facebook or email.

We continue to expand our relationship with the Chrysler group. As you remember, we regained this business last December. Our scope of work began with development and management of Chrysler's customer relationship management initiatives in both the United States and Canada. It's grown since then to include social media related works and is today approximately 50% larger than our prior program.

As a closing note on integrated marketing, our strategy of digital acquisitions is certainly proving beneficial. Our digital agencies are attracting more integrated opportunities involving multiple discipline and traditional discipline including direct mail, content creation and analytics, Examples of this work that we recently won from Wells Fargo and SunTrust. Our digital capabilities are helping our top line as well where revenues grew nearly 10% in fiscal 2010 now make up half of total Meredith's integrated marketing revenue.

Turning now to our local media group, fiscal 2010 operating profits grew nearly 25% excluding special items, thanks to 5% growth in non political advertising and a slight decline in expenses before special items. We grew total revenues in fiscal '10, quite an accomplishment for a non political year.

From an advertising standpoint, it's clearly a tale of two halves. After declining in the first half of the fiscal year, we rebounded to growing non political advertising revenues 15% in the second half over the prior year period. Our improving performance was driven largely by automated related advertising which grew 65% in the second half of the year.

Interestingly though, automotive advertising was not the only highlight. Seven of our ten largest categories grew in the fiscal year including professional services and restaurants which are our number two and our number three categories. We created several new sales strategies during the year that helped drive revenue growth.

We're aggressively recording newspaper advertising clients with a program called “Print to Motion” where we turn static newspaper ads into video. We're focusing on large national and institutional companies in our markets that don't traditionally advertise in local media. We sold significant new programs to Hartford financial and [Wellstar Gallop] in Atlanta.

And lastly, we launched one service, a program that features a series of non traditional television advertising opportunities. These programs demonstrate the creativity and the competitive drive we're bringing to the market place and they help to make Meredith one of the broadcast industries best performers for the year.

The other fact driving our success is a very strong connection that we build to the local consumers. This is exemplified by the most recent May ratings book, where in the important adult, aged 25 to 54 demo, our CBS affiliate and Hartford continue to lead the market, finishing first in every news cash for the seventh consecutive rating's book.

Nashville was number one in every evening news period for the sixth consecutive book and Portland with number one in late news. Atlanta continued to gain reaching the number two position in late news while Las Vegas, Phoenix and Kansas City were all strong number two late news catch as well.

We also grew non advertising revenues in fiscal 2010. Retransmission fees grew more than 40% and we delivered strong revenue growth at Meredith's video studio, led by custom video projects for corporate clients and continued expansion of the daily better show.

This fall, better will be in more than 80 markets, reaching more than 50% of the United States. We've consistently maintained at local broadcast television, is the most powerful and efficient way for advertisers to reach the local American consumer. I'm pleased to see that that belief is reflected in our performance.

Now I'll turn the discussion over to Joe Ceryanec, our Chief Financial Officer for financial updates and the fiscal 2011 outlook.

Joe Ceryanec

Thanks Steve and good morning everybody. Let me first touch on some financial highlights during fiscal 2010.

For the year we generate a 192 million in cash flow from operations, which was up from a 181 million a year ago. We generate 52 million in the fourth quarter, which was up 42 million or $10 million from the prior year. For the year, company operating expenses declined 3% excluding special items.

We reduced our total debt balance by 80 million to 300 million at the end of the year or a 20% reduction from the prior year. At the end of the year, our debt to EBITDA ratio was 1.3 times, which was down from 1.8 times at the beginning of the fiscal and over the two year period, our deleveraged story is even more powerful as we eliminated about 40% of our debt or a 185 million over the two year period.

Also during June, we renewed our $150 million revolving credit facility or a three year term and terms very consistent with the prior facility. We continue to return cash to our shareholders during fiscal '10, increasing our dividend by 2% and that was on top of a 5% increase in fiscal 2009.

We remain one of the few media and marketing companies with the financial strengths and confidence to continue to increase our dividend even as difficult economic environment. So even in these difficult times have continued to strengthen our balance sheet and as we look to the year ahead, we're going to continue to aggressively manage our cash and expenses and be in a very good position to capitalize on opportunities as they arise for us to invest in and grow our business.

Now we turn to our outlook. We expect fiscal 2011, full year, earnings per share to range from $2.40 to $2.75. As we look more closely at fiscal 2011, we expect to continue to fact a bottle of advertising environment, impacted by a continuing difficult economic climate.

We expect high single digit increases in both paper prices and post-it rates. We expect to spend and approximately $5 million to $6 million related to the development of our e-Tablet platform, including our investment in the next issue media industry consortium.

We also expect to benefit from an estimated 25 to 30 million of net political advertising revenues in our television stations. With the majority of that being booked in the second quarter of fiscal 2011, last year we generated about 9 million of net political advertising.

As we look at the first quarter of fiscal 2011, we expect earnings per share to range from $0.47 to $0.52. Again looking more closely at the first quarter of '011, we expect the total company advertising revenue to increase 6% to 7% over the prior year.

Local media grew non political advertising pacings which are a snap shot in time and changed frequently, are currently up in the mid to high teens. However, depending on the strength of political advertising and its related impact on total advertising inventory, these non-political patients may moderate as we move through the quarter. National media group adverting revenues are expected to be flat to down slightly and higher nets per page as Steve mentioned as we cycle against our strongest quarter over quarter, industry over performance. With that, I'll turn it back to Steven for closing comments.

Steve Lacy

Thanks Joe. To conclude this morning before the Q&A as Joe said, we continue to experience the market place that' quite volatile month-to-month and on a client-by-client basis at both the national and the local level. We have a significant amount of work ahead of us to regain and surpass the performance we achieve prior to the recession. However, we made strong progress towards that goal in fiscal '10 and are committed to continue to building shareholder value overtime. Now we be happy to answer any questions that you might have

Question-and-Answer Session

Operator

Thank you Mr. Lacy. (Operator Instructions) Our first question today comes from Mr. Michael Meltz Please go ahead sir.

Michael Meltz - JPMorgan

Thank you. Three question for you. Your fiscal 0'11 EPS guidance range, it's a wide range and the high end looks nice. I just want to know, what is the assumed gross range for magazine advertising and T.V. non-political? Ballpark? What you update in to get you to 240 versus 275? And I have a follow up?

Steve Lacy

Michael, this is Steve. And I don't have all those exact figures right here at my finger tips but what I can tell you is that the high strong performance on the non-political side that we're experiencing in the first quarter, once again, attending on political, we think will continue through the balance of the calendar year before we come up against the much stronger comp in early calendar '11. And we've also given a range of results for political that we think is reasonable but as you know that depends a lot as the time progresses. On the magazine side, we anticipate that the performance will improve a bit as we move through the balance of the year, from where we are now when we're up against less strong industry out performance but as you are aware, we have very, very, very limited visibility.

So we're looking for pretty modest growth on the magazine advertising side, much stronger growth on the television side.

Michael Meltz - JPMorgan

But for the range, it would imply growth for above Steve. The low end would still imply magazine advertising growth.

Steve Lacy

Yes, it would, year-over-year.

Michael Meltz - JPMorgan

And what about cost, how should we be thinking about that? If you are baking in, you're saying paper and postage could be up high single digits that alone I think is a couple percent at publishing costs. Then how should we be thinking about that going forward?

Joe Ceryanec

Michael, its Joe. First of all, our range is $0.35 which the lowest we've given in the last three years. So, just want to make sure you acknowledge that.

Michael Meltz - JPMorgan

No. I don't mind the rate. It was the, I like the high end of the range is high.

Joe Ceryanec

Overall, as we look through the year, we expect cost really on the nationally the broadcast incorporate to be relatively flat for the year. As you said, we do expect some paper increases, the postage increase which has been requested is 8% right now which would, there's a lot of back and forth on that cause that will take effect in the second half of our fiscal. But we also are carrying in some cost saving measures from last year. So overall, we expect cost to be pretty flat year-over-year.

Michael Meltz - JPMorgan

How could T.V. cost be flat if you are going to have incremental political so high and I don't think I understand that?

Joe Ceryanec

Well, there's not a whole lot of costs associated with that incremental revenue.

Steve Lacy

Remember Michael, all of the initiatives that Paul has been executive against to hub a lot of our activities and centralize those network went on through out fiscal 2000 and the latter part of '09 and through out '10 but it's pretty well completed. And so, we have the benefit of that as we go into the New Year and obviously, we're being very, very cautious because of the uncertainty in the environment and the really, really high unemployment rate. So we're not aggressively moving our spend forward but Joe said about anticipating, they'll be kind of flattish of the year is our best belief.

Michael Meltz - JPMorgan

Okay. And into that point, the corporate expense, the $9 million in June quarter, is that the run rate because that would you get you flat corporate year-over-year but is it choppy?

Joe Ceryanec

We expect for the year to be above flat Michael. As you remember, this year, we had an incremental pension expense that will moderate slightly. As you may also remember our first quarter tends to be higher because the option expense is a little heavier in the first quarter because of retirement eligible individuals, where we have to expense the full option grant all in Q1. So, I would say for the year we expect it to be flat, but probably a little bit of the pickup in Q1 with the expense on the options.

Michael

Okay and last one from me I promise. The current pacings, mid teens to high teens, what is that break down by months ex-political?

Joe Ceryanec

Michael, we'll have to get back to you on that one because we don't have that in all of our documents here. But we will.

Operator

Thank you. The next question comes from Mr. Jason Bazinet. Please go ahead sir.

Jason Bazinet - Citigroup

I just had two quick questions. I think you guys announced earlier that you were going to be testing some price increases, both at the news stand and on the subscription side. And I was just sort of curious as to why? It seems like sort of an odd environment where we read about deflation and unemployment's running high and the consumer seems sort of stretched to sort of use that. So I was just wondering if you could elaborate a little bit on that. And then I had a follow up on the rate base. I think you guys adjusted the rate base for a few titles, Ladies' Home Journal, and Traditional Home. Can you just walk through why the customer is so deep on those two titles and why there weren't cuts elsewhere and sort of just a risk of sort other rate base reductions as we go through the year. Thanks.

Steve Lacy

Jack would you help us with those two questions please on testing price increases at the sub and at news stand, and the metrics around rate base decisions, please.

Jack Griffin

Absolutely, this is Jack Griffin and I would say that both of those questions get to the heart of the matter about relationship as a branded company with the end user or the consumer. And I think if you've been following the trade press and the popular press in our industry you are seeing more and more discussion and more and more emphasis on improving the relationship with the consumer, both in terms of the product and the economic relationship. And it's central to what our mobile and tablet initiatives are about. And as we look at consumer pricing in our core magazine business we see both the opportunity and the imperative to get more revenue from the consumer as we deliver more value. So, a case in point in 2010 we raised the new stand price on better homes and gardens from 350 to 399, saw virtually no fall off in sale.

We have rolled out a price increase on family circle, and it seemed very favorable results relative to our expectations. And we think it goes back to what I just said earlier, the opportunity and the imperative to get more revenue from the consumer as we invest more in our products and deliver more value. So we are very committed to that, and its working.

On the second front, rate basis, I think that you've seen Meredith a history of judicious behavior in that respect, and what we do all the time is calibrate the level of consumer demand with the number of copies that we're putting out in the marketplace. And our ability to generate contribution and profit on the margin is a function of that. So, from time to time we will look at our magazines and their levels of rate base, and make decisions based on our judgment and what the economics tell us about what the level of circulation should be relative to the consumer demand and also the advertiser positioning in the marketplace. So we did it with Ladies' Home Journal, we did it with Traditional Home, we absolutely made the right decision and believe that it's going well on both the consumer side and the advertising side.

Operator

The next question comes from Mr. Peter Stabler. Please go ahead sir.

Peter Stabler - Credit Suisse

Quick question on the market share issue, you've noted the remarkable progress you made in taking the industry share. There is some suggestion that pricing remains difficult out there in terms of absolute paid rates paid by advertisers, wondering how the share gains of let's say fiscal '10 would translate into fiscal '11? Most advertisers are not buying on multi year deals, is that correct, or can we look across some of your largest relationships and have an expectation that page share gains can continue into the next calendar year?

Jack Griffin

So, advertising market share particularly in the magazine part of the business has been a major emphasis for us over the past two years for sure, and particularly in fiscal '10. And in calendar 2009, a very interesting thing happened where Meredith with a 12.3% share in PIB revenue moved into third place in the magazine business from fourth, and many years ago we were fifth or sixth. And our emphasis on share has been deliberate and has been successful. Steve talked about the market share gains. To marry it with pricing, I'll sort of give you this kind of framework to think about. As we took a full two points of share on pricing overall, we made modest concessions in the low-to-mid single-digit range on our realized CPMs on the income statement.

We knew that would happen. It was part of the plan. We actually did a little bit better than we had hoped on the respect, and in totality you see the results that ad revenue in fiscal '10, our business was flat versus the prior year. And you don't see that happening anywhere else in the industry.

So, we calibrate this just like we calibrate the consumer equation, and as we go into fiscal '11, understanding that the physical cost environment is changing with paper and postage, we are seeing now in fiscal '11 a nice uptick in our realized pricing in the mid single-digit range. And overall volume is a little bit down, but revenue is just about flat and we do that deliberately and we are generally successful in executing on the goal that we set for ourselves. So as we go into fiscal '11, we have an emphasis on share, but I don't think it's realistic to think that we are going to gain two points of share, where our focus on holding our share and improving our pricing and so far that's occurred.

Peter Stabler - Credit Suisse

So just to be clear, and I apologize as I'm kind of new to this story here. The share you referenced then is PIB revenue, rather than PIB ad pages, is that correct?

Paul Karpowicz

That's correct. We always look at PIB revenue. It's the only way to get a industry comparison that is worth anything, because if big magazines with big rates and small magazines with small rates and pages don't lead you anywhere instructive.

Peter Stabler - Credit Suisse

So, I guess the follow-on to that would be, do you believe that your rate concessions in this environment have been in line or less (inaudible) shall I say then your direct competitors?

Paul Karpowicz

We think that we have sacrificed far less rate in the current market place than our competitors. We have pretty good industry intelligence around that topic. With this is we are being a public entity, it gives us some advantage to talk about it in the open, and I would suspect that if you probed our competitors on this pricing question, you would have to go really far to find someone who builds two points of share and sacrifices three or four points of rate. I don't think it happened. That's what we've done.

Peter Stabler - Credit Suisse

And one follow-up question on the digital side. To what extent is digital packaged with the point, I mean I am sure it occurs. Can you give me some sense as to that half of your current clients combined digital product? Is it significantly more or less than that, and is there any indication that digital can start cannibalizing print.

Paul Karpowicz

Steve, do you want me to take that one again?

Steve Lacy

Yea, please do.

Paul Karpowicz

So now we are getting into competitive advantage and Steve talked about our ability and he gave you a couple of examples at how our team is very successful and our strategy is very predicated on across platform sales, and Steve gave you two really good examples. We have a Chief Revenue Officer Tom Hardy, who defines how we put all of our assets together into these programs and he is in the pivot position to make the critical decisions. And we do that deliberately and I think with good judgment and great skill and it has been central to the share gains that we talked about earlier. Specifically with respect to your question, Steve told you in the script that our interactive ad revenue was up in the mid teens in fiscal '10. That is not the case for display in the online environment overall, and a big piece of that is our ability and our decision to package our big online branded inventory with our print and other assets into integrated programs, and it's roughly now representing 25% to 30% of all of our interactive ad revenue in that activity.

Operator

Thank you. The next question comes from Barry Lucas. Please go ahead sir.

Barry Lucas - Gabelli & Co.

I have a host of little things. Maybe you could bring Paul on that $25 million to $30 million of estimated political revenues, its (inaudible) over the last cycle certainly was presidential. But, given the amount of contested races, it just maybe you can provide a little color Paul on what's going on in the individual and political markets?

Paul Karpowicz

Well, Barry, what we are finding is that there is no incumbent at safe. And virtually every race in every one of markets appears to be heavily contested. We just ran into a very nice situation in Atlanta where they were forced into a run-off right after the primary. So, we do seem to be enjoying some pretty brisk activity, and it is. It's across the board and it's going to come in late. We are getting a little bit issue advertising now, but not at the levels that we would have thought. So we still have some expectation that the issue advertising component will pick up as well.

Barry Lucas - Gabelli & Co.

The $5 million to $6 million in sort of the e-tablets and stuff like that. That's not going to capitalized or is capitalized running through the P&L, where would we see that?

Joe Ceryanec

Barry, right now, we are 20% (inaudible) in that consumer industry. We are picking up our share of the profit and loss and so far all of the investment has been on costs to startup in R&D activities, and so it has been expensed. This year there was probably about $1.5 million that ran through our P&L. Right now we do not have a good feel exactly how that organization is going to budget for our fiscal, but what we are signaling is in our guidance, we have $5 million to $6 million of potential expense related to both the consortium as well as our internal costs related to developing that platform of putting our magazines on that platform.

Your point is correct as that we continue to mature, some of these expenses are going to start being treated as development and get hung up on the balance sheet. Right now it's hard for us to understand that. So we've got $5 million to $6 million sitting in our P&L for next year.

Barry Lucas - Gabelli & Co.

Right, Joe, but you are not working on a new tablet. I mean given the success of the iPad, that's software primarily.

Joe Ceryanec

It's software and it's both an investment in the consortium, Barry, plus getting our content into the format to be able to put on an iPad or another e-reader is going to take some internal costs as well.

Steve Lacy

Hey Barry, I want to give you a little history on just the back political for a minute to clarify a bit and I'm going to give you the prior three cycles and then the current guidance again. If you go back to '05, we did $19 million in net political, '07 was the huge year you were think of when we did 33 and that $8 million on Lieberman rates, I am sure you recall. And then in '09, we did 23, and now the guidance we are providing is 25 to 30.

But pretty close to that high-end and what we love another $8 million Lieberman rate, but we'll wait and see how it plays out.

Barry Lucas - Gabelli & Co.

Where is Ned Lamont when you need him?

Steve Lacy

Well, he's actually starting to come back to life a little bit.

Barry Lucas - Gabelli & Co.

Just a couple of more quick items, and that is, you wound up after I guess partnering with Hyperfactory, buying the rest of that in. That business continues to grow, what do you see A. in the way of M&A activity and when do you break out the integrated marketing fees from a financial reporting purposes?

Steve Lacy

You know, Barry, when we talk about this for long periods of time, we've got a targeted hit list in all three parts of the business. The Hyperfactory deal was really critical from a capability point of view, although it's a very modestly sized entity at this point, but we think has good growth prospect. We hope that as we progress through the fiscal year and some of our competitors who have properties who have interest in begin to have the ability to model up an income statement rather than modeling down sort of into oblivion that will have those sorts of opportunities.

We do believe in integrated marketing though at the moment we have the capabilities we need and you would see us add to that business, it would be more of a scale play. And you know we always certain markets where we'd like to either expand our presence through a duopoly or enter, and you know, we have our hit list of magazine properties. The challenge always is to determine when they will become available but the primary reason we worked so hard to pay our debt down was to believe that there will be opportunities over the next 12 to 18 months.

Barry Lucas - Gabelli & Co.

Last question, promise and really to Joe, on the renewal of the credit facility, what's the pricing environment like and how does pricing differ if at all from the old deal?

Joe Ceryanec

Well, our old deal, you may be remember, our spread was extremely low. I remember we were like 50 bips or less over a LIBOR. So, we did come more in line with market. Our initial spread is 250 basis points over LIBOR. We do expect that to come down about 25 basis points when we file our first quarter queue. So September 30th we will provide our results, so we expect to be at a spread of about 225. Our covenants does not change at all from the prior facility. So, just a couple of covenants with quite a bit of room did have a collaboration.

Operator

Thank you very much. The next question is a follow-up question from Mr. Peter Stabler. Go ahead sir.

Peter Stabler - Credit Suisse

Yes, I'm just wondering if part of the guidance if you can break out what your expectations are for the circulation revenue for fiscal '11. Thank you.

Steve Lacy

Hold on just a minute while we are getting to the right place in our information.

Joe Ceryanec

I think Peter, I'll start and Steve can pile on. We do expect some decline in circ next year. As you may remember earlier this year we took action to reduce our special interest title, and still we do expect to have some revenue decline due to that, primarily as a new stand. So, you are looking to build your model and you're probably going to be mid, high single-digits down. But again, that's mostly BISM titles being reduced at a new stand. If you took that factor out, we would expect the subscription in the remaining news stand to be about flat, maybe down a little bit.

Peter Stabler - Credit Suisse

Thanks Joe and just to be clear, that's for the entirety of fiscal '11, not for Q1.

Joe Ceryanec

That's correct.

Operator

Thank you. The next question comes from Mr. Edward Atorino. Please go ahead sir.

Edward Atorino - The Benchmark Company

I got a couple. On the balance sheet. There were $50 million due June 10, did that get paid? Did the current portion of debt you paid that down?

Joe Ceryanec

Actually, Ed, $75 million was due this June 30th, which got paid.

Edward Atorino - The Benchmark Company

Okay. It's just 75 on the income statement.

Joe Ceryanec

I think as you are looking at the…

Edward Atorino - The Benchmark Company

That's the count for it. So you paid that 75, so your interest expense will be down for the year then I guess.

Joe Ceryanec

It should be. We ended the year at 300 million. We started the year at 380. And until we find an investment opportunity, we are probably going to continue to reduce that balance. Just to be clear, the $50 million is…

Edward Atorino - The Benchmark Company

That is going forward, I got it. So what would your interest expense be running a year and a quarter about a 13, 13.5 million a quarter?

Joe Ceryanec

I think it's (inaudible).

Edward Atorino - The Benchmark Company

That wasn't interest expense, it was…

Joe Ceryanec

Yes, we are running at about four a quarter.

Edward Atorino - The Benchmark Company

I mean for the year, I am sorry.

Joe Ceryanec

I mean quick math, take 300 million, and add call it 4.5%.

Edward Atorino - The Benchmark Company

Secondly. On the e-tab, is that going to be spread or would it be in a particular quarter?

Steve Lacy

Ed, that that is tough to determine at this point. We are just sort of thinking at it as it would be spread, but we'll clearly call it out and it maybe lumpier. My belief is that it might be a little heavier in our second quarter. That's really why we are calling it out so that we'll be able to make sure everybody understands how that's playing out going forward.

Jack Griffin

So the numbers Joe gave, the $5 million to $6 million is for the year. I think for modeling purposes you could spread it, but it probably will be a touch heavier in Q2.

Edward Atorino - The Benchmark Company

And now that the publishing other revenues perked up a little, did the comps get a little bit easier, or did something fall out of that? Will the growth in publishing other be better going forward?

Jack Griffin

You recall that a year ago Ed the decision was made to change our book agreement into a licensing program. We have now cycled through the majority of that, and that's the biggest part of the change that you would see. So you are going to see not much change and some nice growth I think in '11 in that other category. And of course there's a couple of drivers in there, but that's where both licensing and integrated marketing show up Ed.

Edward Atorino - The Benchmark Company

So the rate of growth in that number will get better from what it's been in the last year?

Steve Lacy

We finished the year, that number for the year was just a hair shy off $300 million. As we look into next year, as Steve said you've got the integrated marketing being the bulk of that. You also have licensing, which we expect to grow, so we're expecting an high single digit growth on that line.

Edward Atorino - The Benchmark Company

And lastly, I've might have missed this, did you give 1Q publishing ad revenue outlook?

Steve Lacy

Yes, Ed I did. I said that it would be flat, to down slightly on higher net per page. And that's really because this is the quarter where we have the largest out performance compared to the industry a year ago.

Edward Atorino - The Benchmark Company

And change in the tax rate going forward?

Steve Lacy

No, for the year 40.5, which is above where we have been, I think in the first quarter we tend to be a little higher. So, 41.5 Q1, 40.5 for the year.

Operator

Thank you. (Operator Instructions)

Steve Lacy

Okay well thank you all for participating today. We appreciate your continued interest and support of Meredith and we'll all get back to work. Thank you very much.

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Source: Meredith Corporation Q2 2010 Earnings Call Transcript
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