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Meredith Corp. (NYSE:MDP)

FQ1 2012 Earnings Call

October 26, 2011 08:00 am ET

Executives

Steve Lacy – Chairman and Chief Executive Officer

Joe Ceryanec – Chief Financial Officer

Tom Harty – President, National Media Group

Paul Karpowicz – President, Local Media Group

Mike Lovell – Director, Investor Relations

Analysts

Mark Zgutowicz – Piper Jaffray

William Bird – Lazard

Michael Meltz – JP Morgan

Koji Ikeda – Roth Capital Partners

Shagun Singh – CRT Capital Group

Michael Corty – Morningstar

Matt Chesler – Deutsche Bank

Barry Lucas – Gabelli & Co.

[Christina Warmeson] – Citi

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Meredith Corporation Reports F1Q 2012 Conference Call. (Operator instructions.) As a reminder, today’s conference is being recorded. I would now like to turn the conference over to our host, Director of Investor Relations, Mike Lovell. Please go ahead.

Mike Lovell

Hi, good morning and thanks, everyone, for joining us extra early today. We’ll begin the call this morning with comments from Chairman and Chief Executive Officer Steve Lacy, and Chief Financial Officer Joe Ceryanec. Then we’ll turn the call over to questions. Also on the line this morning is Paul Karpowicz, President of our Local Media Group, and Tom Harty, President of our National Media Group. An archive of today’s discussion will be available later this afternoon on our investor website and a transcript will follow.

Let me remind you that our remarks today include forward-looking statements and that actual results may differ from our forecasts. Some of the reasons why are described at the end of our news release issued a couple hours ago and in some of our SEC filings. And with that Steve will begin.

Steve Lacy

Thank you very much, Mike, and good morning everyone. I hope by now you’ve had a chance to review our FQ1 2012 earnings release and the press release announcing our new financial strategy and significant dividend increase. We’ve also posted a brief presentation to the Investor Relations section of our website that gives more detail on our new financial strategy as well as our thinking and the philosophy behind it. This new policy is a clear reflection of our confidence in the enduring strength of our brands, our robust business model and the sustainability of our future cash flow. It also reaffirms our strong commitment to providing tangible shareholder value by returning significantly more cash to our shareholders while also maintaining the ability to make strategic investments in our business.

To recap the highlights of this policy, last night we announced a 50% increase in our dividend to $1.53 per share on an annualized basis. At its new rate, the dividend delivers a 6.1% yield and a payout ratio of approximately 55%. This places Meredith’s yield at the top of our SEC peer group and in the top 2% of all companies in the S&P 500. We also authorized a new $100 million share repurchase program representing approximately 10% of our market cap. Both of these actions reflect the confidence we have in Meredith’s financial strength and in our continuing ability to generate substantial cash flow. It also demonstrates our commitment to prudent capital stewardship and to total shareholder return.

The business model we’ve built at Meredith generates very strong cash flow. Even in difficult economic times our record is quite impressive. We generated $157 million in free cash flow during our F2009, $167 million in F2010, and $185 million in our most recently completed year, F2011. In fact, over the last ten years we’ve generated about $2 billion in cash. In recent years we felt that the most responsible use of our cash was maintaining our historical track record of growing our dividend annually while also paying down debt. This was driven by a very difficult and uncertain economy and the desire for flexibility to add to our portfolio strategically as opportunities became available.

Today we’re in a much stronger position. We’ve strengthened our balance sheet by paying down $250 million of our debt since F2008 and executed a series of strategic acquisitions along the way. Our new financial strategy is the result of a thoughtful and structured assessment. We have pressure tested these changes under multiple theoretical scenarios and have reached the following conclusions: first, that a meaningful increase in our dividend is possible and can be sustained and grown over time through our very strong free cash flow; second, a significant new buyback authorization representing approximately 10% of our current float would give us the opportunity to make opportunistic share repurchases; and third, that we could fund the dividend increase, the share buyback and maintain our ability to reinvest in our businesses and pursue strategic acquisitions.

Over the last six months we’ve demonstrated our ability and willingness to execute strategic acquisitions and invest in the longer-term growth of our business. As examples, we recently agreed to acquire the popular Everyday with Rachel Ray magazine and its related digital assets. We launched the multi-channel Food brand Recipe.com and acquired the Eating Well Media Group. These moves are all part of a strategic initiative to increase our reach and share of the food category across media platforms. In addition, we invested in the global marketing company Iris Worldwide that will allow our marketing services arm to better compete for contracts that have international components. We also rebranded this business Meredith Accelerated Marketing to reflect the many capabilities that we’ve developed over the last five years in digital, database, social and mobile media.

We also renewed and expanded our major Better Homes and Gardens brand licensing program with Wal-Mart stores across the country. The new agreement announced just last week extends the program through our F2016. We recently launched tablet editions of our popular brands across a variety of digital platforms and introduced a number of new mobile apps. We began operating Turner Broadcasting’s Peachtree TV station, significantly increasing our market share in the growing Atlanta market. We also built a new studio for our Better syndicated television show that began airing this fall in New York City, the nation’s largest market.

These steps in conjunction with our new financial strategy represent strategic and tangible actions we’re taking to strengthen the performance of our businesses and increase shareholder value. We remain confident and committed to strong cash flow generation over time and to a balanced total shareholder return agenda. Our new financial strategy is only one of several clearly defined strategic growth initiatives that we’ve focused on for some time. I think it’s worth restating these goals because they help frame our activities and accomplishments so far in F2012 and going forward.

So first and foremost we’ll continue to pursue actions that strengthen our core magazine and television businesses. Second, we’ll aggressively expand our digital activities. They’ve more than doubled from five years ago and today are approaching 10% of total company revenue. Third, we’ll expand businesses where revenues are not dependent on traditional advertising. Our brand licensing and marketing services activities contributed approximately one-third of total company operating profit in FQ1 2012. Fourth, we’ll pursue acquisitions and investments that grow our scale and capabilities. You’ve seen our actions against this goal so far in our current fiscal year. And finally, we’ll continue to reward our shareholders by growing the amount of cash we return to them.

We believe the steps we’ve taken so far in F2012 are a great example of success at executing our strategic initiatives. Now I’ll turn the discussion over to Chief Financial Officer Joe Ceryanec for an update on our operating group performance in FQ1 as well as our outlook for FQ2 and the balance of F2012.

Joe Ceryanec

Thanks, Steve, and good morning everybody. Overall we were pleased to finish the quarter at the higher end of our previously communicated range of $0.45 to $0.50 per share. We also reduced total company operating expenses 2% which is the fifth consecutive quarter that we’ve driven declines in year-over-year operating expense.

Turning to the National Media Group, quarterly operating profit was $36 million compared to $40 million generated in the year-ago period. Print and digital advertising revenues in the quarter were negatively impacted by two categories: food and beverage, and pharmaceuticals. Combined they accounted for the entire net advertising declines in the quarter reflecting pressures our clients are facing from higher commodity costs and fewer new drugs coming to market. Toiletries and cosmetics, our second largest category, was our best performing and grew about 20% in the quarter, which reflects our concentrated efforts to diversify our categories and grow beauty advertising across our women’s portfolio. Another of our larger categories – business and finance – also performed strongly in the quarter in both print and online. Additionally average net ad revenues per magazine page increased about 4% in the quarter.

To counter the weaknesses in National Media advertising we introduced a new research based product proving the effectiveness of advertising in Meredith magazines. The Meredith engagement dividend guarantees a return on investment for marketers. It overlays our 85 million-name database with the Nielsen Company’s HomeScan data and proves advertising in Meredith titles increases retail sales. To participate we’re asking for commitments from advertisers to significantly increase their calendar 2012 spend with us. We’ve had more than 100 meetings with clients so far about this program and response to date has been very strong.

Turning to circulation, we grew both subscription and newsstand revenues. Family Circle, More, and our Spanish-language titles helped drive subscription revenue for the quarter. At newsstands, the quarter’s results reflect in part the many improvements we’ve made in our Special Interest Media business. Growth in our circulation revenues is just one example of the very strong connection our brands have to the individual consumer.

During FQ1 2012 as compared to the year-ago period we delivered higher traffic to our nationally-branded website. Average monthly uniques grew 25% and page views were up 35%. Our recent re-launch of Recipe.com is an example of how we’re achieving that growth. Recipe.com is a robust consumer site that combines tested recipes with coupons, shopping tools, and cooking videos. It’s currently serving 2.4 million uniques every month which is up 4x from the year-ago period.

Demand is also growing at our mobile-related sites where traffic has tripled and mobile traffic is about 5% of our total online traffic today. We announced an agreement with Apple during FQ1 2012 to sell subscriptions to Better Homes, Parents and Fitness in the iTunes store. Tablet sales are modest so far but over time we believe this platform has great potential to strengthen our consumer relationship while increasing our operating margins.

Retail sales of our Better Homes and Gardens line of products continue to grow at Wal-Mart. Our program helped drive a more than 10% increase in total brand licensing revenue during this quarter. It’s an important component to Wal-Mart’s retail home business and we’re very pleased to have recently announced the extended and expanded program through 2016. Total readership in our measured magazines has grown as well according to the most recent data from MediaMark Research and intelligence. It currently stands at 111 million readers.

Meredith Accelerated Marketing posted another quarter of revenue and operating profit growth. This performance was driven in large part by our programs at Lowe’s and Chrysler. We’re very excited about the group’s new positioning and recently announced relationship with Iris. We believe the next phase of growth for MXM includes helping our current clients take their marketing programs overseas as well as helping foreign clients expand to the American market. Over the last five years MXM has delivered 17% compound annual growth in revenues through both organic growth and a series of strategic acquisitions.

Now turning to our Local Media Group, FQ1 2012 operating profit was $11 million compared to $17 million in the prior year quarter. Note that we generated $11 million less in political advertising in FQ1 2012 which we expect in an off-election year. Non-political ad revenues were up 3% - that’s the eight consecutive quarter of year-over-year growth and we outperformed the industry as a whole. From a market standpoint, growth was strongest at our stations in Portland, Hartford, Springfield and Las Vegas. Also we grew all five of our top five ad categories. Automotive, which is our top category, grew 4% which is on top of a 40% increase in the prior-year quarter. We expect automotive performance to continue to be strong especially now that the Japanese automakers have returned to a more normalized production schedule.

We also grew non-advertising revenues by more than 40% in FQ1, and this is due primarily to our management of the Turner Broadcast Peachtree TV station in the fast-growing Atlanta market. This strategic partnership is giving us access to a larger share of Atlanta. We delivered strong revenue growth at Meredith Video Studios as well led by custom video projects for corporate clients and continued expansion of our Daily Better show. In September we launched Better in New York City, the nation’s largest market, and the show currently reaches more than 80% of the households across 140 markets in the United States. We now have presence in nine of the top ten markets in the US. And finally, even with the revenue growth in the majority of our businesses we were able to reduce marketing expenses 2% in the quarter from last year.

Now looking forward, I’ll provide our FQ2 2012 as well as our full-year outlook. With nine weeks remaining in FQ2 we expect National Media advertising revenue performance to be similar to what we’ve experienced on a quarterly basis so far in calendar 2011, which has been down in the 8% to 12% range. I would also note that we’re cycling against our strongest quarter in F2011 ad performance when it was up 4%. On the Local Media side, non-political ad revenues are currently pacing up in the mid-single digit range so we currently expect for FQ2 2012 earnings per share to range from $0.65 to $0.70. And as a reminder we recorded $22 million, or $0.30 per share of net political ad revenues in our Q2 last fiscal year.

And, consistent with what we said in July, we expect F2012 full-year earnings per share to range from $2.40 to $2.80. So with that we’d like to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions.) We have a question from Mark Zgutowicz from Piper Jaffray. Please go ahead.

Mark Zgutowicz – Piper Jaffray

Hey, great results, guys. Just a question, Steve, for you: you talked about the strength of your positioning both financially and in the marketplace. I’m curious how you are marketing or how you will be marketing your rebranded Meredith Accelerated Marketing and sort of how you guys are positioning yourself obviously in a competitive digital marketplace – sort of what you want to be known for in the marketplace.

Steve Lacy

Well good morning, Mark, and thank you – that is an absolutely great question. We were just all together over this past weekend at the largest event where Chief Marketing Officers of all of our major clients, which is the ANA Conference that was held in Phoenix. That’s where we unveiled Meredith Accelerated Marketing, and our real significant point of difference from our major and what I would say traditional agency competitors is our ability not only to take messages out to the consumer cross-platform but to in fact generate the content that is necessary to create those messages, because obviously we have been messaging to the consumer for 100 and some years.

Our agency competitors do not have the content creation capability to populate the website, to put messages in the email marketing, to direct Facebook “likes” to the brand,. And that is really our very significant point of differentiation – our longstanding databasing capability to create content that delivers marketing messages and sells product, and that will be our continued platform, not only domestically but now internationally, because more and more in the last 12 to 18 months we saw opportunities to execute major programs but they had an international component. And so that’s the reason for at the same time the investment in Iris.

Mark Zgutowicz – Piper Jaffray

That’s helpful, thanks. One question as it relates to the upcoming Kindle Fire, I’m curious how you might quantify the opportunity there. I know, at least I recall you guys had some research out and were looking at some research that indicated some nice scale in the $200 to $300 tablet price point. And I think we’ve gotten there obviously now with the $200 Kindle Fire a little sooner than maybe you would have expected. I’m kind of curious how you’re looking at that opportunity and how you think about when you move titles over, sort of what goes into that decision making.

Steve Lacy

Well, your timing on that is great, Mark, because yesterday morning we just had a session with our Chief Digital Officer, so I’m going to ask Tom Harty to speak to that from the National Media Group perspective.

Tom Harty

Yes, we’re very excited. We have a deal with Amazon to put our products on their new Kindle Fire. Some of the early numbers that we’re hearing from a forecast perspective is that they’re looking to sell about five million units in the holiday timeframe. Again, this business model is emerging for us but what we’re really excited about is, to your point, the price point of the Fire - $199, which is half the price of the iPad.

To give you an example of the demographics, what we’re seeing even with the Barnes & Noble Nook product… The Barnes & Noble Nook product probably has about 5 million units that have been sold so far and the iPad has over 30 million units, but what we’re seeing demographically is that some of our brands are actually outperforming the iPad on the Barnes & Noble Nook because it’s skewing more towards women. So to have another player out there like the Amazon Fire at that price point, we’re very excited about the opportunity to kind of grow our sales numbers moving into next year.

Mark Zgutowicz – Piper Jaffray

Thanks, that’s helpful. And just from sort of a titles perspective, what is it that goes into it? I mean how do you think about titles on the Kindle versus the Nook versus the iPad? I’m curious how you think through that as you look at the new offering here.

Tom Harty

It’s basically we’re looking at everywhere the consumer, eventually where the consumer can consume our media. But to start, because of our production flow we started with our three largest titles on the iPad – Better Homes and Gardens, Fitness, and Parents – and these were enhanced versions. The enhanced versions are where we give extra content, video, interactivity because the iPad had that capability, where the Barnes & Noble nook was more of a PDF format where we’re basically replicating our print versions onto that product.

So as we look to the future we’re looking to have all of our brands on all of the products. We’re not going to have an exclusive deal with any of the platform players so we’re just kind of experimenting and seeing really what the consumer wants – a PD version versus an enhanced version – and obviously we have to wait for what’s going to happen on the technology side and what these players are bringing to the marketplace.

Mark Zgutowicz – Piper Jaffray

Okay, that’s helpful. And then just one last one on the Wal-Mart licensing extension, without getting into specifics I’m just curious how you’d characterize the terms versus your prior agreement in terms of being similar, better? How would you characterize that opportunity going forward?

Steve Lacy

Well, to be clear there were really two years remaining of the initial agreement and we were very excited when Wal-Mart came to us wanting to renew early and to expand because of some changes they are making within the Home category, in particular with their brand strategy. So we’ve had the opportunity now to have basically five years ahead of us with a three-year extension onto the original agreement. We are providing some incremental media and marketing to drive consumers into the stores from our existing brands and businesses, and on an overall basis when you net it all together we’re pretty excited about the growth potential we see going forward with the new and expanded program.

Mark Zgutowicz – Piper Jaffray

Super, thanks much Steve.

Operator

Thank you. Our next question comes from William Bird with Lazard. Please go ahead.

William Bird – Lazard

Thank you. I was wondering if you could just talk about the timeframe on the buyback program, and also if you could discuss what’s driving the 4% revenue per page and what are you seeing on pricing in the December quarter? Thank you.

Stacey Lacy

Why don’t we take those, Bill, and by the way, good morning. We’ll take those in opposite order. I’ll ask Tom to talk about pricing in the marketplace and then Joe can talk a bit about the timeframe of the share repurchase authorization.

Tom Harty

Well, our increase of 4% on our net yield, we call it a weighted average CPM. When you look across our whole portfolio it’s something that we started a few years ago – strategically looking at how we’re going to build value in our margins. And really what’s driving that, it’s not that we’re getting in this very difficult advertising marketplace advertisers to give us a 4% increase, but when you look at our mix of business we’re actually getting more rate per page from new advertisers and new categories of business, which is driving our overall mix.

So we’re still facing a very tough marketplace with a lot of inventory, with decreased demand, but it’s a great performance on our part where we’re able to actually increase our yield per page. Now I believe it’s our third year in a row that we’re actually doing this by looking at how we can drive higher rates per page from new advertisers and in new categories.

William Bird – Lazard

So do you think that 4% yield is sustainable in the December quarter?

Tom Harty

We believe that trend is going to continue for the next quarter, yes.

William Bird – Lazard

Okay, thanks.

Steve Lacy

Okay, Bill, we’ll turn to the share repurchase authorization.

Joe Ceryanec

Hi Bill, good morning – it’s Joe. So we have not given specific guidance on the buyback plan. We are not planning on buying x number of shares every week or every month but truly are looking to be opportunistic when we buy back shares. Obviously we’re going to look at things like where our debt levels are, what our acquisition and development opportunities are as well as our internal investment needs and what all those mean to our cash flow.

Again, as we’ve said, opportunistic so we’re going to look at how our stock is performing compared to the market and our peers; how we think we’re trading vís a vís our P/E and EBIDTA multiples and how those are trending against our peers, and really how we’re moving or how we’re trading against our averages. So again, we’re not being specific to say we’re buying X shares or X dollars’ worth at this time, but it does give us the ability to get back in the market because as you may know, our previous repurchase authorization program was pretty much exhausted.

William Bird – Lazard

That’s very helpful. Separately, what did digital grow within the National Media Group?

Steve Lacy

Let us look for that data, Bill, and somewhere along on the call I’ll repeat it. We’ve got to get to the right page in the book, okay?

William Bird – Lazard

Okay great, thanks a lot.

Operator

Thank you. Our next question comes from Michael Meltz with JP Morgan. Go ahead.

Steve Lacy

Does that help, Bill?

Michael Meltz – JP Morgan

Thank you. Three questions for you – one related to Bill’s last question: if you went through this shareholder return plan and you were weighing dividends versus repurchase versus acquisitions, can you talk a little bit about the repurchase element and why aren’t you pursuing an accelerated share program or a tender or something else? Given where the stock is, why aren’t you being more aggressive on the repurchase? And then a separate question on the TSR plan – did you do a portfolio review as well, for instance consider all the magazine assets or consider why you should still be in television? And then I have one follow-up, thank you.

Steve Lacy

Let me take those, Michael, in the order that you laid them out. First and foremost, thinking about the dividend compared to the share repurchase, we wanted to be very clear that we were making a strong and a definitive commitment to increase the amount of cash that we return to our loyal shareholders, and moving to a 6% yield on the dividend we think is a very, very strong message and in some ways I think of it as marriage as opposed to dating.

On the repurchase, as Joe said we’ve got to weigh that against a number of different alternatives and we believe that there are going to be a number of interesting opportunities in the marketplace to add to our portfolio over time as we go forward. And certainly there is much more action than there was a year ago or 18 months ago, really across not only print but digital and also on the broadcast side; and we wanted the ability to step in and be aggressive as Joe said in an opportunistic way when we looked at all the parameters and we had excess cash to do so, but we also want the flexibility over time to add to our portfolio in a way that we think makes longer-term sense for the business.

And as it relates to the portfolio of assets, I think you know that we have really an ongoing process at looking at the parts and pieces and whether we should keep something or sell it or close it is part of really an ongoing activity, and we certainly went through that process as part of this strategic review and part of a detailed market research piece that we did with our shareholders. And we feel really good about where we came out and think we’re delivering a very strong message to our shareholders about returning more cash to them in a definitive way going forward.

Michael Meltz – JP Morgan

Okay, and then a follow-up question, Steve – can you give us an update on reverse compensation? I think you or one of the trades had reported the deal with CBS, and can you just talk about where you are there please? Thanks.

Steve Lacy

Yeah, the only piece of new news really is the extension of our CBS affiliation agreement through August of 2012, and then obviously we will be in discussions and negotiations going forward, and also with FOX as well. And as we’ve said in the past, we believe when all of this shakes out there will be some sharing of the retransmission fees that we generate. The good news is that as we get closer into the latter part of ’12 and into ’13 we have the ability to go back to the marketplace and renegotiate the fees from the cable providers; and since we were in the market five years ago what people are receiving in the market is much higher than what we’re receiving today. So net-net our objective is when all of this shakes out to maintain or increase a bit sort of the net retransmission revenue that we receive today.

Joe Ceryanec

Yeah, so Michael, as Steve said we extended the agreement with CBS through next August so the economics of that revenue stream will not change in this fiscal year, and I would expect next Spring or as we move into early next Summer we’ll be able to provide much more definitive guidance on where we stand vís a vís the CBS and FOX agreements as well as what Steve said – our agreement with the cable providers.

Michael Meltz – JP Morgan

Okay, thank you for the time.

Steve Lacy

Thank you, Michael. Back again on the question, in the National Media Group total digital-related revenues were up about 6% and total company digital-related revenues were up about 9%. A lot of that is driven by the digital activities in Meredith Accelerated Marketing. Next question?

Operator

Our next question comes from Koji Ikeda with Roth Capital Partners. Go ahead.

Koji Ikeda – Roth Capital Partners

Hi, good morning guys. I have a question regarding your debt structure. Are you at your target capital structure right now and should we expect around the same level of pay down happening over the next year?

Steve Lacy

We’re pretty comfortable with the debt level around that $200 million range. We’re a little bit higher than that right now because of the recent acquisition of the Eating Well Media Group, but our intention would be not to go below where we were at the end of last fiscal year, which was around $200 million.

Koji Ikeda – Roth Capital Partners

Okay, great. That’s helpful, thanks.

Operator

Our next question comes from Shagun Singh with CRT Capital Group. Please go ahead,

Shagun Singh – CRT Capital Group

Okay, thanks for taking the question. Can you provide some detail on the Rachel Ray transaction, just the economics behind it; and any sense of long-term EBIDTA? And also doesn’t AllRecipes.com fit into your strategy and do you think it’s something worth taking a look at? Thank you.

Steve Lacy

Yeah, I’ll take those in reverse order. I think many of you are aware that The Reader’s Digest put out a press release that they plan to sell the AllRecipes business. I don’t believe the materials, the black book so to speak has yet been distributed but we will clearly take a look at that as we do basically every major transaction that comes in the deal flow. But I don’t believe that the materials in fact have been provided.

And as it relates to Rachel Ray, we will be acquiring the net assets of that business from The Reader’s Digest and entering into a ten-year license agreement with Rachel Ray for the use of her brand in publicizing that magazine and running its digital related assets. And we’ll pick up that activity in the early goings of calendar ’12, so the second half of our fiscal year. We don’t think it’ll have a material impact on the current year but we certainly think it will be a growth opportunity for us as we go forward. We have so many more assets to sell back into the marketplace plus we believe our database and our digital direct mail consumer marketing capabilities are a much, much better fit for the Rachel Ray business than where it was.

And I’ll ask Tom to speak a little bit about how we plan to take that to the marketplace from an advertising and marketing perspective within our portfolio.

Tom Harty

We’re very excited about the pending acquisition of Rachel Ray. It fits very well with our emphasis on food and also our women’s lifestyle category. We’re also very excited about the demographics of Rachel Ray. It fits nicely with our portfolio – it’s actually a little younger. The median age of the readers is 42 years old and actually the household income is significantly higher than our average household income. So really we see the opportunity that a lot of the advertisers that are doing business currently with Rachel Ray are clients of ours and we have our corporate sales and marketing machine to kind of bring in all of our assets to help Rachel Ray kind of fulfill their promise compared to where it was at Reader’s Digest.

Steve Lacy

Does that help?

Shagun Singh – CRT Capital Group

Yeah, that’s helpful. Thank you.

Operator

Our next question comes from Michael Corty with Morningstar. Go ahead.

Michael Corty – Morningstar

Good morning. Thanks for taking my question and congratulations on your (interference). I have a quick question. You called out the food and beverage and pharmaceutical as areas that were a bit weak. Are there any categories on the opposite side that were stronger than you expected or that have held up better than you’ve expected?

Tom Harty

Yeah, Michael, as I said if you take food and beverage and [DGC] pharma, if you take those two categories that basically was the net decrease in that entire ad business. We did have a couple categories up – I think I mentioned toiletries and cosmetics which is our number two category. It was up almost 20% over the FQ1 of last year. Our business and finance group, which is our number six category, was also up and then a couple of the other smaller categories were up as well.

Michael Corty – Morningstar

Okay great, thank you.

Operator

Our next question comes from Matt Chesler with Deutsche Bank. Please go ahead.

Matt Chesler – Deutsche Bank

Good morning, thanks for taking my call. Good to talk to you again. Just looking ahead I wanted to drill down a little bit more into your revenue guidance for National advertising. Your declines are larger – is it that the food and beverage declines are getting larger or are the declines broadening at all across other categories?

Tom Harty

As we look into the FQ2 we’re not seeing it broaden against categories. It’s basically the same as what we’ve been seeing for this calendar year as Joe stated before, in that down 8% to down 12% range. Many of our advertisers look at their advertising on a yearly basis and make commitments to different mediums, so we’re kind of cycling through this calendar year 2011 period. As Joe mentioned we’re also coming up against our strongest quarter that we had last year, which was our FQ2 where we were up 4%. So we’re guarded as we look to 2012; I like to say we’re cautiously optimistic about 2012. We’re right in the middle of when a lot of our advertisers are starting to make their decisions about next year.

Steve Lacy

Yeah, I think the messaging we’re trying to give, Matt, is that we don’t see the Q4 category-wise or volume-wise much different really than what we’ve experienced on a quarterly basis throughout calendar ’11.

Matt Chesler – Deutsche Bank

Okay. We’re all focused on where budgets are going to for 2012. Can you be a little bit more specific or are you at a point where you’re able to be more helpful in terms of what some of those early conversations are leading you to believe about calendar 2012?

Tom Harty

It’s still very early but we’ve had a call about this earlier. We’re very excited about the Meredith engagement dividend that we partnered with Nielsen on. We’ve had upwards of 125 meetings now with leading advertisers, talking about the performance that print provides them and the return that they get for advertising in print, and we’re guaranteeing those returns. It’s still a little early but right now we have one firm commitment from one large advertiser that is moving forward with a significant increase in advertising commitment to Meredith for next year and we have in the vicinity of 15 to 20 proposals out there, all looking for advertising increases for us to be able to give them the commitment where we guarantee an ROI return for them. But again, clients are looking at the broader economic issues that are going on and making decisions later and later on advertising commitments compared to what we used to see years ago.

Steve Lacy

And I think what I find interesting, having cycled through this a number of times, the calendar Q4 is always a time where we find that there’s extra money that we have the opportunity to deal with and that generally comes not only into our National Media Group digital business but it also comes in special project activities that will flush their way through Meredith Xcelerated Marketing.

And I think in the current environment, what we see and feel really across our major customers – as they’re basically the same in our media business as they are in our marketing services business – that those dollars are being held right now in the back half of calendar ’11 and in Q4 rather than being flushed out into the marketplace. And we can just see it and feel it really across our major customers, whether it be advertising or be marketing services. So I think it’s sort of the nature of the current environment in calendar Q4.

Matt Chesler – Deutsche Bank

And then real quickly on the cost side, can you give us an update on how your FTEs, your headcount is trending on a year-over-year basis and maybe some other major cost items such as paper so we can think about some of the underlying cost drivers in the division?

Steve Lacy

Headcount is down with the exception of the acquisitions that we’ve made – the Eating Well Group and obviously soon the Rachel Ray folks will come in, but otherwise headcount is down kind of in the low single-digit range. And there is not a broad salary increase built into our numbers for F2012 compared to F2011. Printing is also down as a result of a recent contract that we negotiated and then I’ll ask Joe to speak to the paper situation.

Joe Ceryanec

Yeah, Matt, as Steve mentioned on cost of goods sold or input side on the magazine, we did renegotiate the print contracts so we’re enjoying some cost decreases that will continue for a period of time. Paper obviously is volatile in the commodity but I think given the softness we have seen a little bit of a price decrease, and as you know, we renegotiated those contracts January 1 and so to use one of Tom’s terms – guardedly optimistic that we may see a little more softness on the paper prices as well.

And obviously we’re always looking at the back office on that business. We moved all our New York employees from two locations to one and we were actually able to reduce our facilities cost in New York so obviously an ongoing process on the local side. Our programming costs are down. We are no longer carrying Oprah and having that expense. We’re constantly looking to increase our own programming vís a vís news or the Better show which helps our costs. The [hubbing project], which we’ve been talking about some time is now done and we’ve been able to take some costs out.

On the (inaudible) side, now that those businesses are all out of the earn-outs we’re looking at ways to streamline kind of the back offices of those businesses as well, so kind of an ongoing process – no large, major things. We’re not anticipating any significant headcount reductions and things like that, but really just a constant focus.

Steve Lacy

But expenses will definitely be down in FQ2 compared to the year-ago period, just volume related. Okay?

Matt Chesler – Deutsche Bank

Great, thank you very much.

Operator

Our next question comes from Barry Lucas with Gabelli & Co. Go ahead.

Barry Lucas – Gabelli & Co.

Good morning and thank you, Steve, for taking the question. I’d like to drill down a little bit more if you would – I know you’ve gotten several questions in the ‘returning the value to shareholder’ area, but a couple of things come to mind. One is the tax inefficiency of increasing the dividend. You already had one of the highest dividends in the group so maybe you could talk a little bit about how you thought about taxes. And in the same vein when I look at opportunities, you’re dipping your toe in the water with Rachel Ray and Iris which we know will turn out to be terrific, but you had a chance to bulk up and build scale in television that you passed on with the McGraw-Hill station. So maybe you could talk about either the opportunities or how you look at returns, or what would change your attitude in terms of building scale materially in one or the other of the businesses.

Steve Lacy

That’s quite a few questions in a row there so if I miss something correct me. I’ll start with the McGraw-Hill station. We took a very, very aggressive look at those properties and we established a range where we felt excited about it at one end and sort of a high-end range that we felt would still have been a good value for our shareholders, and where those stations ended up selling and the multiple, regardless of how it’s been portrayed – we have the real numbers – that multiple would make our broadcast EBIDTA be in excess of the market cap of the entire Meredith Corporation. So we think that that was a pretty heady price. We think that there was a lot of work to be done to those businesses and I don’t believe we feel the need to do a bad deal just to do a deal.

And Paul, I don’t know if you’d like to add anything to that on McGraw-Hill?

Paul Karpowicz

Well, I would only say if nothing else we’re very disciplined about the way we look at stations and how we put together the pro forma, and we took a very close look. And we were very aggressive until the very end, but as Steve indicated, at a certain point we had developed our range; and once it appeared that the deal was going outside of that range we felt it was appropriate to step back. And to the extent that we still have a strong enough portfolio we’re not in a position where we have to do a deal. I think we can be very opportunistic and make sure that we do the right deal.

Steve Lacy

So that’s our feeling on that set of properties which I was personally involved with. Paul visited every station; we took, as he said, a very, very disciplined look. If you get to Eating Well and Rachel Ray, we think of more as tuck-ins around the strategy that we’ve been very, very definitive about. When you look over the longer haul regardless of the current commodity environment, the food category to Meredith is like automotive to our broadcasting side, and it held up better than any other category during the worst part of the recession. And we are going to continue to move aggressively to build out our capabilities really cross-platform in that space, and we think that those acquisitions, although not huge really add to what Tom is wanting to accomplish.

And then from a dividend perspective on increasing the dividend, although the tax law may change it’s still 15% tax on the receiving end and we think that’s a pretty favorable activity. But most importantly, I think the message is that we want to reward our longstanding and loyal shareholders with a definitive return on their investment, and I think at a 6% yield in the current marketplace that’s a pretty strong position.

Joe Ceryanec

And have the flexibility, Barry, on the share buyback as we talked about. We view that as a lever that we can pull when we need to; when we’ve got other opportunities we don’t need to. So a strong commitment on the dividend as Steve said – a guarantee if you will to the shareholders of a return – and then we can be opportunistic with the buyback lever.

Barry Lucas – Gabelli & Co.

Right, cash is king. We like it. One more if I can squeeze it in, Steve or Paul. You’ve spoken a bit about the Better show and now with distribution expanding… I think it was originally sort of a cost offset on the program but now it’s looking a bit more like an opportunity. So maybe you could size that for us a bit.

Steve Lacy

Paul, do you want to speak to the Better show?

Paul Karpowicz

Yeah, thanks Barry. We are just starting to see the benefits of being able to claim that 80% national distribution. So as we look ahead we are looking for a much more significant contribution from our Better show and our video group in general relative to advertising revenues. So this just occurred in September where we got the nationwide distribution basically so at this point we have a pretty aggressive budget laid out for the rest of the year.

Barry Lucas – Gabelli & Co.

Great, thanks Paul.

Operator

Our next question comes from [Christina Warmeson] with Citi. Please go ahead.

[Christina Warmeson] – Citi

Hi there, it’s [Christina Warmeson] for Jason, thanks for taking the call. Given the Supreme Court’s ruling that political donations are now a form of free speech some clients are expecting a big increase in political spend in 2012. Just wondering if you can give any color on what kind of impact this could be or what opportunity there would be in calendar ’12 for Meredith?

Steve Lacy

Paul, do you want to speak to that?

Paul Karpowicz

I’ll be the third one to use cautiously optimistic but we are very encouraged. As we look across our markets and we look at the gubernatorial races, the Senate races, the House races we are very optimistic that this could be a very strong political year for us. In addition to the candidates, there appears that there’s already a lot of issue advertising that is starting to percolate across our markets. So to answer your questions we do look ahead to the political season, which ironically is starting already. We’re already seeing some issue advertising and we’re starting to see just little trickles of some candidate advertising. The recent movement that we saw with some of the primaries moving around will probably benefit us in South Carolina and Nevada so we’re looking ahead to what we think could be a pretty positive political year.

[Christina Warmeson] – Citi

Terrific. Thanks very much.

Operator

And we have no further questions in queue at this time.

Steve Lacy

Well, thank you all for participating this morning. As always, Joe and Michael and I are available for the balance of the day and beyond for follow-up questions if you have any, and we appreciate your ongoing support of Meredith. Have a good day.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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