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Meredith Corp. (NYSE:MDP)

F2Q2012 Earnings Call

January 24, 2012 11:00 am ET

Executives

Mike Lovell - Director, IR

Steve Lacy - Chairman & CEO

Joe Ceryanec - CFO

Paul Karpowicz - President, Local Media Group

Tom Harty - President, National Media Group

Analysts

Mark Zgutowicz - Piper Jaffray

Koji Ikeda - Roth Capital Partners

Michael Meltz - JPMorgan

Matt Chesler - Deutsche Bank

Shagun Singh – CRT Capital Group

Jason Bazinet - Citi

Michael Corty - Morningstar

Nadia Lovell - JPMorgan

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Meredith Corporation Reports Fiscal 2012 Second Quarter. At this time, all phone lines are in a listen-only mode. Later on, we will have a question-and-answer session with instructions given at that time. (Operator instructions.) As a reminder, today’s conference is being recorded. And I will now turn the conference over to Director of Investor Relations, Mike Lovell. Please go ahead.

Mike Lovell

Hi, good morning everyone, and thanks for joining us. We’ll start today with comments from Chairman and Chief Executive Officer, Steve Lacy; and Chief Financial Officer, Joe Ceryanec; and then we’ll turn the call over to questions. Also on the line this morning are 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 that.

Let me remind you that our remarks today include forward-looking statements and that actual results may differ from 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. With that Steve will begin.

Steve Lacy

Good morning everyone and thank you for joining. First of all, let me say how excited we are to add Allrecipes.com to our Meredith portfolio of national media brands. This acquisition of the world's number one digital food site doubles size of the Meredith Women’s network to 40 million monthly unique visitors. In addition, it positions us as the number one premium-owned and operated network in the women's lifestyle category according to the most recent comScore data. That’s obviously a key selling point to our advertisers.

Importantly, Allrecipes nearly doubled the digital advertising revenues generated by our Meredith Women’s Network. It matches perfectly with our stated acquisition goal adding meaningful digital scale and a brand that brings new audiences and great advertiser relationship.

And finally, the Allrecipes transaction is a great stick with our total shareholder return financial strategy. It’s expected to add to growth in revenue, profit, and free cash flow over time.

The Allrecipes demographic matches very nicely with our core audience of female adults, its editorial positioning is right in our wheelhouse. We are already the leading food magazine company and now we are adding the number one digital position as well. We can now offer advertisers access to 100 million unduplicated American women across the platform they use every day. It’s clearly a great combination.

We also believe that Allrecipes.com will help us in other ways, including providing Meredith access to a large and vibrant audience to market other products to, including our magazine subscriptions and other e-commerce opportunities. It also enables Meredith to apply the Allrecipes proprietary SEO expertise across our digital platforms, which is expected to improve performance and reduce Search Engine Marketing spending over time. It introduces Meredith brands to new audiences as Allrecipes.com has 17 sites in 22 countries across the globe.

Now, let’s turn to our quarterly results. Earlier this morning, we reported earnings per share of $0.70 for the second quarter of our fiscal 2012. That compares to $0.88 in the year ago period, which was a record high for the Meredith Corporation and included $0.29 in political related earnings from last year’s very strong political cycle.

Looking at the quarter just completed from an advertising standpoint, the national advertising market remained challenging for our magazine and digital brands, consistent with what we experienced throughout calendar 2011.

Meanwhile, our Local Media Group delivered 9% growth in non-political advertising revenue. That’s the ninth straight quarter we have delivered non-political ad growth.

As we now look to early calendar 2012 advertising, we’re seeing an improving trend in the National Media Group, with monthly results strengthening as the current quarter progresses. In our Local Media Group, non-political advertising revenues continue to show strength pacing up in the mid-single digits with nine weeks left in our third quarter.

So, stepping back for a moment, so for in fiscal 2012, we have aggressively pursued a series of initiatives that position Meredith for long-term growth in revenue, profit, and free cash flow. In addition, we continue to take meaningful steps to increase total shareholder return and return more cash to our shareholders.

Examples of our fiscal 2012 accomplishments include our new three part financial strategy that’s being well received by the investment community. It includes, first, 50% dividend increase to $1.53 a share, a new $100 million share repurchase program, and strategic investments in our businesses as opportunities arrive.

Our share price has increase 30% since the late October announcement, and our dividend yield was a healthy 5% to 6% during our second quarter.

We also enhanced our position in food, and the boarder parenthood media space through the acquisitions of Every Day with Rachael Ray and the FamilyFun brands. These acquisitions, along with Allrecipes.com, make Meredith the leading food media company, in addition to our leadership positions in both parenthood and the home categories. In our business, scale means greater reach to consumers and higher margins over time.

In addition, we grew total first half non-political advertising revenues 6% in our Local Media Group. We added new capabilities and scale to Meredith accelerated marketing through an investment in the global marketing company Iris. The Meredith Iris Global Network is already offering new client opportunities to MXM.

And finally, we extended and expanded our Better Homes and Gardens brand licensing agreement with Wal-Mart through 2016. Today, we have over 3,000 Better Homes and Gardens branded SKUs at Wal-Mart Stores across the United States and Canada, and that’s up from about 2500 products a year ago.

Meredith is the acknowledged leader in delivering inspirational and actionable content to American women. And while we continue to enhance our position through improvements to our existing properties and through our additions to our portfolio, we are also strategically expanding our digital and our video assets.

So far in fiscal 2012, we’ve grown viewership across our television stations, as witnessed by a very strong November 2011 ratings book. We extended the reach of The Better Show, our daily syndicated program to 150 markets reaching 80% of US households. We increased total company web traffic more than 50% to nearly 25 million unique visitors and half a billion monthly page views. Including alrecipes.com our total web traffic increases to 45 million monthly uniques.

We’ve made great strides in extending our brands across multiple tablet platforms. Currently, 15 of our subscription titles, as well as several of our special interest publications are available in tablet form across one or more platforms including the iPad, NOOK Color, NOOK Tablet, Kindle Fire, Zinio and select Android tablets. We saw strong gains in single copy and subscriptions of digital tablet editions during the recent holiday season.

We’ve also introduced 12 new mobile apps that have resulted in more than 3 million downloads so far this fiscal year. We’ve extended our local mobile presence by launching mobile sites for all of our stations and redesigning all of our news apps.

Additionally, we’re working with the broadcast industry to advocate for live local television, mobile streaming across devices. These initiatives have helped us grow online related revenues to 10% of our total revenues even before taking into account the acquisition of Allrecipes.com.

We are very focused on continuing to grow digital revenues and strengthening our ability to create and distribute video content that’s inspired by our national brands. We believe that this strategic focus on digital and video, enhances the relevance of our branded content for consumers, will attract new and younger consumers to Meredith brands and create new revenue opportunities as well.

These steps in conjunction with our new financial strategy represent very strategic and tangible actions we've taken 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.

Now, I will turn the conversation over the Chief Financial Officer, Joe Ceryanec for a review of our operating group performance in the second quarter and first half of fiscal 2012 and for our outlook for our third quarter and the balance of our fiscal 2012.

Joe Ceryanec

Thanks Steve, and good morning everybody. So, overall, we finished the quarter at the high end of our previously communicated range of $0.65 to $0.70 per share. For the first six months of fiscal '12, we are at $1.18 per share compared to the record $1.45 in the prior year period. Please remember that the prior year included $0.48 of the political related earnings per share.

As we look at our Local Media Group, fiscal 2012 second quarter operating profit was $27 million compared to $39 million in the prior quarter. Again, we generated $21 million less in political advertising revenue in the second quarter of fiscal '12. For an off political year our Local Media second quarter operating profit was the second best in our company's history. Expenses were down about 3% which helped us achieve an EBITDA margin of 40%.

Looking more closely at the non-political advertising performance in the second quarter of fiscal '12 compared to the year ago period, revenues rose 9% and at stronger growth than the industry delivered as a whole and is our 19th consecutive quarter that we've delivered year-over-year improvement. Performance was strongest at our stations in Atlanta, Hartford, Las Vegas and Portland.

Auto advertising revenues increased 15% on top of 17% growth in the prior year period. Professional services, our second largest category, grew 19% on top of 17% in the year ago period.

Digital advertising revenues increased more than 50% as investments we've made to better monetize our online and mobile assets began to the realized. Our ad revenue growth is primarily driven by our ability to monetize the strong gains we've delivered in news viewership, which grew at double-digit rates during many of the day parts across our station groups as we outlined in the earnings press release earlier this morning. We also grew other revenues by more than 30% in the quarter. This was due primarily to the management of the Turner Broadcast Peachtree TV in the Atlanta market, and this strategic partnership is giving access to a larger share of the Atlanta ad dollar.

Meredith Video Studios contributed a growth in other revenues as well led by a custom video projects for corporate clients and continued to expansion of The Better Show. When it launched four years ago it was only available on our own group of 12 stations. Today, The Better Show reaches more then 80% of the households across 150 markets, and now has presence in nine of the top-ten markets in the US, including the top five. The Better Show aired its 1,000th episode on December 22, 2011.

Now, turning to the National Media Group, second quarter operating profit was $36 million compared to $42 million in the year ago period. Expenses decreased 8%. Consistent with what we have experienced throughout calendar 2011, Print and Digital ad revenues continue to be impacted by the food and beverage and prescription drug ad categories. This reflects pressures our clients our facing and higher commodity cost and fewer new drugs coming to market. Remember we over-indexed the industry by more then two to one in these categories. We are seeing improvement in food relating advertising in early calendar 2012, though the prescription drug category remains challenging.

We delivered nearly 30% growth in the home category during the fiscal second quarter and this was the second consecutive quarter for growth for that category, as well as the over-the-counter drug in financial services related category. Weighted average net ad revenue per page increased 8% in the second fiscal quarter driven by both change in ad category mix and stronger pricing.

Turning the circulation with revenues due to higher subscription revenue. Of note, we doubled the number of online orders for print subscriptions to 0.5 million during the second quarter compared to the prior year period driven by a more aggressive website and email marketing program, as well as efforts to ship online billing and renewals. We are on pace to generate approximately 20% of our annual subscription renewals online this fiscal year. And as Steve mentioned, we are excited about the opportunities to use Allrecipes to help us with this initiative.

So, generating more online subscriptions is just one facet of our transition to paperless consumer transactions. This is an important initiative because, one, we can provide, in many cases, better and faster customer service. Two, it doesn’t cost as much as traditional methods, and three, we’re better able to up-sell other products and services at an online checkout resulting in a higher revenue per transaction.

Growth in subscription revenues is just one example of the strong connection our brands have to the individual consumer. In addition, total readership for measured magazines is growing as well. According to Fall 2011 data from Mediamark Research & Intelligence it now stands at a record of 113 million.

We delivered sharply higher traffic to our nationally branded websites this quarter as well. Totally unique visitor traffic to our sites grew more than 50% organically, as Steve mentioned earlier. This includes strong growth at our largest sites including BHG.com and our newer sites including Recipe.com which averaged approximately 2 million uniques. Recipe.com is a robust consumer site that combines tested recipes with coupons, shopping tools and cooking videos.

Demand is growing at our mobile related sites as well where traffic has more than doubled. Mobile traffic is about 5% of our total online traffic today.

Lastly, we significantly expanded the reach of our brands on digital tablets with the launch of the Amazon Kindle Fire. Today, we have the majority of our subscription brands available on all the major digital tablets including the Apple iPad, the Barnes & Noble, NOOK Color, and the NOOK Tablet devices.

Fiscal 2012 second quarter National Media Group other revenues declined primarily due to select clients with MXM that scaled back programs because of the higher than expected commodity prices similar to what our ad clients faced earlier in the calendar year. The programs that MXM develops and runs for client typically are longer term in duration and, as a result, this performance is often resilient against but not immune from short-term changes in economic conditions.

Over the last five years, MXM has been a strong performer delivering a 14% compound annual growth in revenue through both organic and a series of strategic acquisitions.

Finally, we extended our very successful brand licensing arrangement with Wal-Mart through 2016. The new contract includes an expansion of the Better Homes and Gardens branded HomeDecor and Garden program at Wal-Mart stores across the US and Canada.

Now, turning to our outlook. As we look at the third quarter of fiscal 2012 compared to the year ago period, two of our three magazine issues closed. We expect third quarter National Media Group ad revenue performance to be flat to up low-single digits. With nine weeks remaining in the quarter, Local Media Group non-political ad revenues are currently pacing up in the mid-single digits.

We currently expect fiscal 2012 third quarter earnings per share to range from $0.65 to $0.70. And we expect fiscal 2012 earnings per share to range from $2.55 to $2.75. Both our quarterly and full year estimates exclude the impact of the acquisition of Allrecipes, as noted in our press release issued earlier today.

So, with that, I will turn it back to Steve to wrap this up.

Steve Lacy

Thank you very much, Joe. As I mentioned earlier, we continue to focus on maximizing total shareholder returns. Our strategic acquisition of Allrecipes.com increases our relevance with a large and vibrant user community and strengthens our relationship with advertisers who want to reach those consumers. When combined with our National Media portfolio, Allrecipes.com will add to our ability to drive incremental growth in revenues, profits, and free cash flow over time. As I pointed out earlier, this is a key component of our total shareholder return strategy.

I will close this morning by restating our strategic growth initiatives, as I think they help to frame our activities and accomplishments thus far in fiscal 2012 and going forward. First and foremost, we will continue to pursue action that strengthen our core national and local media businesses. Second, we'll aggressively expand our digital and our video activities. Third, we will expand businesses where revenues are not dependent on traditional advertising sources. Fourth, we will pursue acquisitions and investments that grow our scale and our capabilities. And finally, we will continue to reward our shareholders by growing the amount of cash we return to them.

To conclude this morning, fiscal 2012 is off to an exiting start here at Meredith. We continue to be highly confident in the strength of Meredith's diversified business model and our ability to generate significant and sustainable free cash flow by leveraging the strength of our brands. Our new financial strategy built on our commitment to total shareholder return and prudent capital stewardship reaffirms this pledge to our shareholders.

Now, we would be happy to answer any questions that you might have.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) Our first question is from the line of Mark Zgutowicz with Piper Jaffray.

Mark Zgutowicz - Piper Jaffray

Hey guys, big congrats on the Allrecipes announcement. I’m curious, aside from the face value of the acquisition and some of the metrics you provided, I’m curious how you valued this asset, any tangible metrics would be appreciated. And also curious, you could certainly talk about the limits you had on your recipe site today, recipe.com in terms of scale for advertisers, and if this is immediately scalable and opens you up to a larger audience of CPG customers?

Joe Ceryanec

Hey Mark, it’s Joe. Why don’t I start and then Steve and Tom can pile on to the second part. So, as we look at any acquisition, we look at a lot of different valuation methods, including discounted cash flows, multiple revenue profits. In case of a digital business like Allrecipes, we also looked at the value of their eating visitors. And so, as we looked at the multiple methods, we are very comfortable with the $175 million and feel that it’s a very fair price for both our company as well as Reader’s.

Steve Lacy

And I would say, Mark, in addition to that, in this particular case; we really feel that media assets really aggressively need to be multi-platform. And Allrecipes really at this point in time is not developed beyond digital. So we think that there are print opportunities. We think there are video opportunities. We also think that it will add to our online subscription activities for our core brands because there hasn’t been any subscription marketing done on that site like we do aggressively on ours. Also e-commerce opportunities and, as I mentioned earlier, they have a very, very well developed search engine optimization program that we think that capability can be ported over to the Meredith Digital site and will allow us to save in search engine marketing spend as we go forward.

So those are some of the other factors that we really consider in addition to the metrics, the traditional metrics that Joe mentioned to do business valuation. And Tom, you might talk about from a marketing and advertising perspective, how you feel this scale plays into our ability to sell more aggressively with our portfolio as opposed to how this business was standalone.

Tom Harty

Sure. We were very excited about our launch of recipes.com last June and we’ve attracted 2 million uniques in the first six months of its launch. But if you take a look at the Meredith food assets as a whole, we rank number 22 looking at December comScore when it ranked food websites. With this acquisition of Allrecipes, we’ll obviously become number one because Allrecipes is number one in the world in that area and advertisers are looking more and more to scale. It's more like TV and these obviously just jumps our throughput that much higher with being number one now.

Mark Zgutowicz - Piper Jaffray

That’s helpful, Tom. And I’m just curios if you look at sort of how CPG has spend its transition to recipe sites specifically but I guess more generally digital. Can you talk about where those dollars are coming from? Is it, are you seeing just expanding digital budgets where this might have been directed, are you seeing that coming from FSI? Can you comment on sort of where this money is coming from?

Tom Harty

It’s very difficult to see exactly where it’s coming from because the research that’s out there doesn’t give us a real clear picture of all the money that’s being spent because there are so many opportunities in the digital area. We do get numbers on the national display advertising, but that doesn’t include search engine marketing, or Facebook or social. So it’s difficult to see. But some of it is being shifted from traditional media, some from -- significantly from newspapers and print, and also some from broadcast.

Mark Zgutowicz - Piper Jaffray

Okay that’s helpful. And just shifting gears to your accelerated marketing business. You mentioned a lag on the commodity related purchase that you’ve seen in your magazine business earlier in 2011. That makes a lot of sense. And I think we’ve seen that at other agency businesses in the calendar Q4. So I’m curious how you see that trending over the next couple of quarters. You see this as sort of extending into through midyear, calendar year, and maybe if you can talk about how may customers specifically are sort of cause that shortfall?

Tom Harty

It’s a great question and it’s a really interesting business cycle to have worked through over time. You might recall that while we were in the really difficult part of calendar 2009, where both our television and our print advertising were really in sharp decline, that business continued to move along very nicely, because you are accessing more of a marketing budget and less than -- less of a near-term advertising budget. But as we then move a little beyond that ad cycle where we had the really difficult food and CPG advertising in particular during calendar ’11, those programs have the opportunity to reinsert themselves basically and resize themselves on an annual basis.

So sort of a six months basis that business is down in kind of the high single digits on the top-line. Now last time when we had a downturn, it was only down a couple of quarters and it bounced back. There are quite a few RSPs in the pipeline at the moment. But that in addition with the acquisition of Iris, I think, gives us or the Iris investment gives us pretty good sense that it will work itself out in the relative near-term. But my guess would be we’re in for a couple more weak quarters.

Mark Zgutowicz - Piper Jaffray

Okay that’s helpful. And then one last quick one on the SG&A line, I am just curious how much of that declined sequentially in year-over-year was may have been tied or you could tie that to the agency business or what specifically was that sort of growth from?

Steve Lacy

Joe, go ahead.

Joe Ceryanec

On the SG&A line, Mark, that was really in large part due to the volumes, the magazines so paper, postage, and printing. You may remember we talked about some of our print contracts, we saw benefits there, as well as holding the line on other SG&A.

Operator

Our next question is Rich Ingrassia with Roth Capital Partners.

Koji Ikeda - Roth Capital Partners

Good morning guys. This is Koji for Rich. I had a couple of questions. Have you seen any change in level and timing of ad commitments? And are there more advertisers looking for lock-in rates or this is more an adjusted time basis?

Steve Lacy

So, Paul, why don’t you speak to timing and rates in your business and then we will come to Tom on the National side.

Paul Karpowicz

Yeah what we are finding at our television station is the market is developing very late. And where normally you would have a lot of commitments locked in prior to the quarter, say three, four, five weeks out from the quarter. Now we get into the quarter, we could be into the first week of a quarter, and some of the major advertisers still haven’t, still without their commitment. So in our case it’s been much later than anything we’ve seen before. And I think it’s simply a question of advertisers and agencies is kind of getting organized and taking a look at the markets. But we are adapting to the fact that the timing is a lot slower than we are used to.

Steve Lacy

Tom?

Tom Harty

Yes, on the National Media Group side, we see that trends continue where advertisers are being very, very cautious, and taking more and more time just to make decisions. It’s something that we are, we’ve been facing over the last few years and it just keeps accelerating absolutely.

Koji Ikeda - Roth Capital Partners

You guys mentioned on the press release that food, CPG and pharma ads that was down, but that food was improving so far in 2012? How are CPG and pharma’s outlook looking so far?

Steve Lacy

Tom, do you want to take that on a -- from a category perspective in early calendar ’12.

Tom Harty

Yes, the trend is positive in the third quarter. We’re seeing, we are not finished yet. But we are seeing food and CPG improving. Pharma is another story. We still see a weak pipeline and we’re still up against some pretty tough comps. So that trend is continuing a little bit.

Koji Ikeda - Roth Capital Partners

Great. All right. I know not anyone talks about it, getting on tablets. So this might sound like the last thing, but is that really the right strategy seems to me that especially in your demographic papers where you want to be for a long time?

Steve Lacy

Well, I will start in answering that and Tom can certainly add to it. First of all, we clearly realized the audience that brought us to the party and we are not doing anything to degredate the quality of the print products that our consumer has very, very safely paid for over many years. And you might recall that one of the things that has been the hallmark of this business regardless of the economic cycle has been our very strong leadership and our very, very strong circulation, profitability, and metrics.

But in addition to that, I think it’s very, very important that we make investments to position these brands for the next large generation of consumers and that’s the Gen Y population that’s coming along. And they tend to ingest and consume a tremendous amount of media in a visual format. So the opportunity to provide video, digital, and tablets formations of our product is a way to help to attract that younger demographic.

And in addition from a selfish prospective, I think you are aware that we spend roughly $300 million today on paper, postage, and printing, and even a modest migration to the tablet format over the next three to five year period of time 10% to 15%, you can do the math on how meaningful that could be to our financial profitability and margin.

Tom Harty

Yeah, and I will just add the consumer demand for our print products is still extremely strong. I don’t think it’s been any stronger. So, I think that our strategy is built upon that we are going to be on the platform where she wants to consume her content, and we are very interested in the tablet format, but at the end of the day, it’s going to be the consumer that’s going to decide how she wants to consume the content that we produce. And, early on it’s a very early period for the business model, but if we can maintain our revenues on the consumer side and our advertising side, as Steve mentioned, on the cost side it could be very, very interesting for us in the future to gain and hit the bottom-line.

Operator

Thank you. Our next question comes from Michael Meltz with JPMorgan.

Michael Meltz - JPMorgan

Thank you very much. I have three questions for you. On all recipes actually can you tell us what are the estimated revenues and EBITDA for the business please? And then, I have two follow-ups.

Joe Ceryanec

Hey Michael, I will start. You need to remember our recipes through the end of calendar ‘11, and until we close as part of Reader’s Digest, which is a public company. So, we are going to be a little guarded on what we disclose as far as their numbers. I can tell you, over the recent few years they have seen a very since growth trajectory. ‘11 was a little soft with food advertising, which we saw as well. But as we look at calendar ‘11, I can tell you that their top-line was little above $30 million and they were profitable both at the operating profit and the EBITDA line.

Michael Meltz - JPMorgan

Okay. And so, as your guidance for modest accretion or the related question Q4 the dilution, how much of that is cash versus non-cash?

Joe Ceryanec

Our fiscal Q4.

Michael Meltz - JPMorgan

Yeah, you are saying $0.10 dilutive for the current year?

Joe Ceryanec

Yeah. And probably…

Steve Lacy

About a third of that in the third quarter and two-thirds of it in the fourth quarter based on our best estimate at this point.

Joe Ceryanec

And I would say, Michael, most of that is cash. Two reasons. One is we are going to invest in this business. The management had come up with a plan to start investing some dollars in video and mobile and some of the other areas there that they really have not been spending. And so, we're going to invest some money which will cause it to be dilutive as we consolidate the operations as well as the incremental interest expense on probably private placement debt that were used to finance the acquisition.

Michael Meltz - JPMorgan

Okay, and so, if you are to be accretive next year, if you're going to do private placements say, I don’t know, I mean given your leverage profile let's say 5% or say 5% for rounding --

Joe Ceryanec

I'd say a lot less than that.

Michael Meltz - JPMorgan

Okay, good. What type of margin do you think that business should be?

Steve Lacy

Well, we looked at the recent history of that business. It doesn’t look very different overall than the way our National Media Business sort of on the whole from a margin perspective. And again, that doesn’t have any of the opportunities that we've talked about built in there. and as Joe said, they were on a very nice top and bottom-line growth trajectory that kind of leveled off in calendar '11, but they've been doing a nice business over the -- like a little back over the last three-year time period.

Michael Meltz - JPMorgan

Okay, and then I'm almost done here. So, if you -- this sizable deal plus FamilyFun were at -- plus where you ended the quarter, what is the pro forma leverage now?

Joe Ceryanec

We, Michael, would expect to end the year at 1.5 times. So, this does not cap our ability or other opportunities whether they are share buybacks or other deals.

Michael Meltz - JPMorgan

Okay, and then the last question. Of the Q3 guidance for National, that’s a big pickup versus where you've been trending. I just don’t know what -- where everything has closed -- what's closed and what hasn’t. what is the organic expectation?

Steve Lacy

So, Michael, right now we've done two of the three issues. So, that’s basically February and March. And as we said, the trend has been improving. The February issues were still weak; March much better; April PBD. And so, the -- what you might call organic which was down I think about 11% a year ago is probably going to be down sort of in that mid-single digit range sort of 5ish or something, and then with the new properties flat to up a little bit is our best guess but a third of it is still not quite done yet.

Operator

Our next question comes from the line of Matt Chesler with Deutsche Bank.

Matt Chesler - Deutsche Bank

So, as I look at the results, I think it was really pleasant to see the cost decline in the business. Have you -- in that 8% decline overall and in the national media as well, have you already started to see any of the balances from reduced paper pricing? Can that be incremental to -- I suppose if the paper, if that paper trends improve you have a little bit less of a benefit if you want to look at it that way for the cost, but what's your expectation for paper pricing to help cost in the second half of the year?

Steve Lacy

Yeah, well, thanks for your question, Matt. Good to hear from you. We don’t have that benefit. Actually prices are still higher year-over-year in the quarter just ended, but there's always this interesting kind of lagging indicator, if you will, around paper. When we did go to the marketplace for calendar '12 paper negotiation and will start to get the benefit of that actually in the third and the fourth quarter.

If we go forward, paper prices are going to be down sort of in that kind of low-single digit range year-over-year, but we always have about 60 days of paper on hand. so, we have to work through at the higher prices and then when we actually really get into the fourth quarter we will start to feel some benefit of that. And hopefully, I'd love to see total paper costs go up because that means we will have more ad pages and will be pretty more paper, but the bottom-line is the rates will be down when we get to Q4.

Matt Chesler - Deutsche Bank

Was that any different than what you were expecting?

Steve Lacy

I guess Tom, maybe you would say we did a little better than we thought we would in the negotiations. I will leave that to you for expectation on paper.

Tom Harty

Yeah, I think we went to market at the end of December and I think you could state that we did a little better than we expected.

Matt Chesler - Deutsche Bank

Okay, just on the share count. Can you tell us what the counter ending share count was?

Joe Ceryanec

I think, Matt, we will be filing the Q; it will be in there. I think we might have just been a hair under 45. Somebody just put it in front of me, 44.8.

Operator

Our next question is from Shagun Singh with CRT Capital Group.

Shagun Singh – CRT Capital Group

Regarding Allrecipes.com, were there any potential bidders for the assets?

Steve Lacy

Well, that whole process was handled by Morgan Stanley and Reader’s Digest and so we wouldn’t be in a position to comment on that.

Shagun Singh – CRT Capital Group

Can you discuss the immediate synergies that are to be realized between Recipe.com and Allrecipes.com?

Steve Lacy

Tom, you want to speak to that sort of the interplay between those two businesses? I know you got some at least early thoughts on that.

Tom Harty

Yes, we think they are going to co-exist. Again, Allrecipes.com has been around for almost 15 years already and Recipe.com has only been around for about six months from the relaunch for us. Allrecipes' business model was a user generated model and Recipe.com, we’ve been positioning it as companion or our content that we produce around savings, which obviously a lot of consumers are thinking about what we can link pricing and savings to the recipes and you can take that to your mobile phone. So, we see a real opportunity for them to co-exist and create synergy as we move forward.

Shagun Singh – CRT Capital Group

That’s really helpful. And then can you discuss the expense management efforts that are in place? It seems to be gaining a lot of traction, and I was just wondering how much of that is coming from switch to digital? And just a point of clarification, I was wondering if in fact you mentioned that the print subscriber base is 10 to 15% of the print subscriber base switches to digital the cost saving opportunity is about $300 million. Is that accurate? Thanks.

Steve Lacy

No. Let me go back through that again. This is Steve in kind of reverse order. So, total paper, printing and postage today is about $300 million. So, if 10% migration to the tablet roughly 10% of that number or $30 million, okay. Then in addition to that the current and ongoing cost measures include a very aggressive, strategic sourcing function which the paper negotiations on an annual basis would certainly be part of that.

Our printing contracts, as they come up for renewal from time to time, a lot of work is done to make sure we take all of our equipment and capital expenditure purchases to market as a whole, as a company. And then of course, as Tom and his team begin to migrate more and more subscription acquisition and renewal and billing transactions from direct mail and paper to online and continuous serve, we have an additional cost savings opportunity. And just in order of magnitude, we sold about 1.2 million subscriptions through digital forms in our fiscal 2011, and we have really strong belief that number will be around 2 million in fiscal 12. So its ramping up aggressively and each one those is probably worth about $5 in savings compared with traditional methods. So that comes into the cost play as well.

Joe Ceryanec

And let me just pile on especially for the guys and real-timers at home that are doing bottles. With the volume down in our second quarter, I mentioned earlier, I think I spoke to printing in production as well as SG&A, but we saw the cost down. As we look at Q3 and as we see some lift in the ad pages as we bring in a couple of the acquired titles which when we acquired them part of the synergy was to bring them up to kind of our standards. They had a little heavier cost structure. So, we do see a little bit of cost increase in Q3 which is baked into our EPS guidance. So I just want to make sure as everybody is modeling and trying to link to our numbers, we are going to see some cost pick up on the national media side in Q3 versus last year.

Steve Lacy

Did we answer your questions?

Shagun Singh – CRT Capital Group

Yeah, thank you very much. That was very helpful.

Operator

We go next to the line Jason Bazinet with Citi.

Jason Bazinet - Citi

Just a question for Mr. Lacy. Can you just give us an update on sort recent anecdotes or trends you’re seeing in terms of digital advertising, how that compares to print, and do you see that -- how do you see that evolving over time?

Steve Lacy

Well, let me ask, first of all, Paul to speak to what they've been delivering in the local marketplace, which I think in this time period is up about 50% in digital year-over-year, and as we said, the traditional spot business is kind of up in the mid-single digit range and then I’ll turn it to Tom. Why don’t -- Paul, why don’t you talk about some of the things you’re seeing in the local market from a digital perspective?

Paul Karpowicz

Yeah, it’s a huge initiative for us. In each of our local markets, we‘ve restructured our digital group to incorporate a Vice President of Content and a Vice President of Sales, and additionally have restructured within the station so that we put more emphasis on our digital platforms and sales and content. So, we do think that we are going to be looking at double-digit growth for quite sometime to come in that area. And while, as Steve indicated, our traditional business has matured a little bit and is certainly not at those levels, we don’t see any thing slowing down necessarily in our digital platform. And the other part of that is the rapid growth that we are seeing in mobile deployment and the fact that our mobile sites are growing at even higher rates then that. So, we are very optimistic about that area.

Steve Lacy

Jason, if we look back in calendar '11, actually our digital revenue declines were larger than in print, but I think Tom we see that trend really feeling like its turned around quite a bit in early calendar '12 as you look forward sort of the digital.

Tom Harty

Yes, I think you are right, Steve. We did see a bigger decline in digital revenue compared to print in calendar year '11 mostly related to you on the macroeconomic environment, related to our key advertisers in the consumer package goods and food arena.

As we look at the third quarter or the beginning of the calendar year '12, we are seeing that digital real strong growth from digital earl on, I mean we are not close yet, but right now the trending and the pacing reports are showing very, very good signs. Our performance was similar to what we saw, as we looked at Allrecipes. It was not a great year for the food category in '11, but I think that it isn’t about the platforms, it was more about the economic conditions of our advertisers.

Operator

Move on now to the line of Michael Corty with Morningstar.

Michael Corty - Morningstar

Good morning. Thanks for taking my question, I just have a few. The level of profitability on the Local Media side is very impressive. Can you may be just discuss, you have talked already about cost cutting on the national side, but may be little bit on the cost cuttings on the local side, and how you think about margins on that business, over the next two years? And then, in terms of the acquisition strategy, obviously Meredith is not the only company looking to make acquisitions in digital and video. So, how do you maintain discipline in the price you pay versus staying aggressive for the key assets that fit that strategy? May be for example, are there digital or video assets that you viewed as a good strategic fit, but you passed on it due to price.

Steve Lacy

Okay. Well, we will divide that up into two parts. First of all, I will take sort of a high level shot at how we view the local and then I would ask either Paul or Joe to add to that. I’m not sure that how carefully you’ve been following us over time, but in recent years under Paul’s leadership we’ve done some very, very aggressive moves to consolidate a lot of operations that neither our consumer customer nor our advertising customer can touch or feel. And I’ll ask Paul to give a little bit more background on the hubbing.

In addition, Paul and his team take a very aggressive posture on renewals of programming, and I think we have been very-very aggressive in terms of how we think about our capital expenditures. And I think it really comes together nicely in, you might have noticed in Joe’s remark, that in a non political quarter like we just completed that we had a 40% EBIDTA margin in this business and that was the second best performance since we’ve been in this business which goes back like 55 years.

So Paul, you might put a little color around the hubbing and on those major programming activities and anything else you’d like to say on the cost sides, and I’ll come back and speak a bit more to our acquisition strategy.

Paul Karpowicz

Okay, well, that’s exactly right. I mean it’s a core of it is we’re finally realizing the full benefits of having hubbed all our stations. So everything, all of our business operations are hubbed out of Atlanta, our master control and traffic operations are hubbed out of either Atlanta or Phoenix. Our research operation is hubbed out of Atlanta. So, we’ve taken a lot of the back room functions, in fact most of the back room functions of all or our TV stations and have moved them into either Atlanta or Phoenix. And to the viewer its totally transparent, but it does give us the ability to have a lot of synergy and a lot of savings in those areas.

Additionally on the programming front, what you’re seeing right now is the fact that Oprah went away. And the Oprah program cost was significant and that we’ll track through that for at least the next year the fact that that Oprah expense will not be there. And in terms of replacing Oprah we’re making sure and, as Steve indicated, we’re very careful in doing our programming analysis to make sure that our program profitability stays at significant level.

So those are pretty much the two areas, and then obviously you just have to continue to watch headcount and all other aspects of the business to make sure that things don’t creep back up on you.

Michael Corty - Morningstar

Great that’s helpful.

Steve Lacy

Does that help you on the cost perspective on broadcast side?

Michael Corty - Morningstar

Yes, very much, especially on the Oprah side, thank you.

Steve Lacy

So now, from an acquisition strategy, let me give our philosophy and then give you maybe some clear examples of how we execute against it. First and foremost, if you go back maybe about five years ago you’ve heard a lot this morning from Tom and Paul who run our national and local media businesses but we asked another executive, a direct report of mine, John Zieser to take a really active role in the marketplace from an acquisition perspective.

Our objective being to make sure that anything meaningful in the media space that comes to market or things that we want to help come to market that we get an opportunity to take a look, and in a number of cases over the years as you might know we gotten an opportunity to take a look before anybody else has.

On the back end of that, we have a very, very disciplined approach. Whereas Joe said depending upon the business platform, we look at a clearly defined set of metrics and then we establish a range. And on one end I would say that Tom or Paul would say they’d be thrilled to get the business at a certain number, and on the other end of the range is where we say, okay, we cry uncle at that number, and regardless of what happens if it’s an auction process or regardless of what happens based on the emotion of the seller we stay within the range where again, on one end we’d be doing the hi-five and on the other end we say we can look from a total shareholder return perspective and know that we can deliver on the promise. And in certain cases we succeed.

I would say an example of a place where Paul was very definitive was the sale by McGraw-Hill of their television station, which we would have been very excited to add to Paul’s portfolio, but we had a range and when it moved beyond that range we chose to no longer participate. Does that help you from a philosophy and an execution standpoint?

Michael Corty - Morningstar

Sure, it helps me in the investment community to know that you’ve got a discipline approach in place and that’s how you’re going to proceed. So thanks very much for taking the questions.

Operator

Our final question in queue at this time is from Nadia Lovell with JPMorgan.

Nadia Lovell - JPMorgan

Hi, Good morning. Thanks for taking my question. Just a few questions. What’s the annual revenues for Rachel Ray and Family Fund?

Steve Lacy

Tom, do you know that? I don’t know that off the top of my head. I think is it around $40 million in total for a full 12-month period?

Tom Harty

Yeah, I don’t want to quote the number that’s wrong so maybe we could come back and get that for you.

Steve Lacy

Nadia, we will get back to you, I am not sure I’ve got that number right off at the top of my fingertips.

Steve Lacy

All right. Well, thank you all for participating this morning. Joe and Mike Lovell, and I are available for the balance of the day if there are any follow-up questions.

As I said, early calendar 2012 is very exciting here at Meredith. We have an improving environment in our core print and digital businesses, a strong non-political environment heading into an exciting political season later in calendar ’12. The integration of Rachael Ray, FamilyFun, and Allrecipes, and an expanded licensing program at Wal-Mart as we get into the fall of ‘12. So there is a lot of work to do here, but it’s an exciting time. Thank you for your interest.

Operator

Thank you. Today’s conference call is available for playback beginning this afternoon and running through February 7th at midnight. You may anytime access AT&T playback service by dialing 800-475-6701 entering the access code of 231605. International callers may use 320-365-3844. The numbers again are 800-475-6701 or internationally 320-365-3844. Either number will require access code, it's 231605.

That does conclude our conference for today. We do thank you for your participation and for using AT&T’s Executive Teleconferencing. You may now disconnect.

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