Meredith Corporation (NYSE:MDP)
UBS 39th Annual Global Media and Communications Conference
December 6, 2011; 10:30 am ET
Steve Lacy - Chairman & CEO
Joe Ceryanec - Chief Financial Officer
Welcome everyone to the Meredith Corporation presentation. Today we are happy to have with us Steve Lacy, Chairman and CEO; and Joe Ceryanec, Chief Financial Officer.
We are going to have a brief presentation and then have five minutes for questions thereafter. I’m going to hand it over to Steve to go through his presentation.
Well, good morning everyone and thank you for being with us this morning. It’s always great to have the opportunity to update you on our current business activities. Our presentation of course does include some forward-looking information and this is just a quick reminder of the various items that might impact our business going forward.
I thought I’d start for just a brief moment with this slide that summarizes our current business activities and we operate across a whole variety of media platforms. Our national media brands generated about $900 million in revenue during our fiscal 2011 and today reach $80 million unduplicated women offline and online. We are clearly the leading media company, serving women in the United States today.
The portfolio or brands that we have strategically assembled over time is unmatched with any of our competitive set. Our local media business on the other hand generated about $320 million in revenue in fiscal ‘11 and reaches about 10% of the US households.
Our marketing services activity is about $180 million in annual revenue in fiscal 2011 and we are a leading business to business marketer, offering clients from Kraft to Nestle to Chrysler and Lowe's expertise in digital, social mobile, along with database marketing.
Our ability to generate significant free cash flow is a hallmark of the Meredith Corporation. We are in a very strong financial position with little debt and certainly have the capability to fulfill our ongoing commitment to total shareholder return. As many of you may know, we recently raised our dividend by 50% and authorized an additional $100 million share buyback.
Over time, we have successfully extended our brands across a variety of media platform, giving our consumers the ability to access our content, as they prefer. We built scale across those platforms to attract advertisers and marketers alike, who want to reach our growing consumer audiences.
Consumer leadership and engagement related to our national media brands is quite strong, 112 million readers and over 25 million unique visitors to our website each and every month.
We are also seeing promising consumer metrics on our new tablet products and mobile apps. Viewership at our local media group is up as well. We are monetizing this growing audience by delivering eight straight quarters of growth in non-political advertising revenue in this part of our business. Additionally better, our daily syndicated television show now reaches 80% of US households and when we were hear a year ago, that was 50% of the country.
Finally we built a powerful presents for our brands at retail through our relationship with Wal-Mart, where today we have over 3,000 SKUs caring the Better Homes and Gardens brand at every Wal-Mart store in the US and in Canada. Our competitors are unable to offer this diverse channel, this mass reach or our deep consumer connection.
To drive revenue profit, and of course cash flow, we are aggressively pursuing these clearly defined strategic growth initiatives. We’ve had strong execution against each thus far in fiscal 2011. I’ll spend just a few moments on those accomplishments and then our Chief Financial Officer, Joe Ceryanec, will take you through the details of our recently announced new financial strategy.
We have a tremendous amount of confidence in the strength of our brands, our very robust business model and the sustainability of our future cash flows as we look to the future. The strength and consistency of that cash flow is really rooted in the brands that comprise our national and our local media groups.
Since advertising is of course a primary revenue driver, let me start with some key initiatives to improve advertising revenue as we look to the future. So far in fiscal 2012, we’ve successfully increased our reach and share of the food category across media platforms. We launched recently the multi-channel brand Recipe.com, we recently acquired Every Day with Rachael Ray, the magazine and its digital assets and the EatingWell media group.
Greater scale of course translates into more ad revenue and better margins as we look to the future. Over the last 10 years the food category has grown at about 4% on a compound annual growth rate, making it among the fastest growing ad categories in the industry.
We are also working to increase our scale in other high growth advertising categories, including beauty, retail and entertainment. We’ve used this strategy successfully over the past decade. We’ve more than doubled our share of total magazine industry advertising revenue, through not only organic execution, but acquisitions over that time period. And that’s stronger growth than any of our peers.
Our sales initiatives are really focused on two broad strategies, first magazine advertising to our large corporate accounts and second, integrated sales programs that feature our multi platform assets. These are sold by our Meredith 360 team and today account for about 20% of total sales. We also recently introduced an innovative and research based program called the Meredith Engagement Dividend.
It proves that magazines are a very effective and efficient platform for our marketers. This is clearly an industry first and we are guaranteeing to our customers that are advertising in Meredith magazines are life is sales of their products at retail and we are currently signing consumers up for that program as we speak.
On the local media side of the business we delivered industry leading revenue growth in non-political advertising over time. To continue this top performance, we are pursuing strategies to maximize both political and non-political revenue. Every indication at this point is that the coming election cycle will in fact be quite robust and we are looking forward to a strong political season as we move to the latter part of calendar 2012.
We are also taking advantage of a variety of digital tools and technology to deliver great local content to the individual consumer, including traffic, weather and other products. In turn, this gives us more opportunities to sell advertising.
We continue to build on the unique opportunity that we’ve created by managing the Peachtree TV station, which is the Turner Station in Atlanta. Peachtree gives us the access to a larger audience in the growing Atlanta market place and expanded lineup of sports programming and of course increased advertising inventory.
Turning now to our digital activates, we’ve delivered more than 20% growth in total company online traffic so far in our in fiscal 2012. Revenues related to digital activities today account for about 10% of our total revenue. While we are pursuing a wide variety of initiatives to drive growth, I’ll focus on just two this morning.
First, we are growing the number of digital orders we receive from subscribers to our print products. This is a significant profit improvement opportunity, because it’s about half the cost to either find or renew a subscriber digitally, compared to traditional direct mail sources. Additionally our total revenue and total profit for digital transactions is higher than from traditional sources.
Second, we are excited about the opportunity that tablets provide to strengthen our consumer relationship and lower production costs over time. As many of you know, Apple accounts for the majority of tablet sales today, but other devices are gaining a strong foothold. Our strategy is to maximize distribution across digital newsstands, including the NOOK Color, the NOOK Tablet and the recently released Kindle Fire, where we now have 14 brands available.
The number of single copy and subscription sales on tablets is small, but ramping up quickly. Early reads on the data are encouraging and consumers are highly engaged. It also represents an opportunity to expose our brands to new audiences and Gen Y, obviously a younger demographic.
Over the past few years we’ve successfully grown revenue from sources that are not dependent on traditional advertising and we are accelerating these initiatives as well. As I mentioned earlier, our brand-licensing program is quite large and revenue has doubled there over the last five years, led by our program at Wal-Mart, a very high margin business.
We recently extended that program with Wal-Mart three additional years through the end of 2016 and that extension includes an expansion of the product line, again, as we move into the fall of 2012. And again today we are selling over 3000 products at every Wal-Mart store in the US and Canada.
We also recently unvalued a new go-to-market positioning for our marketing services business, now branded as Meredith accelerated marketing. It reflects the many capabilities that we’ve developed and acquired over the last five years from digital to database, to social and more recently to mobile marketing.
We’ve grown the revenues of this business over the last five years by about 80% and transformed Meredith accelerated marketing into one of the top 10 custom marketing businesses in the United States today. In addition, we recently made an investment in a global marketing firm Iris. The Meredith-Iris Global Network will now serve the increasing global needs of our traditional domestic accounts and also opens the doors for new clients in the European and Asian Pacific markets.
Iris is known for its highly engaging creative and retail expertise and this is a quick example of the work that you might already be familiar with. Its the Holiday Light Show that’s currently playing several times each hour on the front of Saks Fifth Avenue, not too far from this conference.
So if you have the opportunity to go stand on Fifth Avenue, you get a good sense of how in our business-to-business activity, we inspire consumers to take action and move them to retail across multiple media platforms.
When it comes to acquisition and investments as we look to the future, we have a very aggressive development function in place, looking for opportunities to strengthen our portfolio. On the national media group side, we are actively seeking businesses that provide us access to new audiences and advertisers and also looking to enhance our national video platform for our brands.
In local media we look for strong stations in fast growing markets, as well as opportunities to diversify our network and our geographic footprint. We continue to evaluate opportunities to increase our online activities as well, including those that would add scale to the Meredith Women’s digital network, along with tuck-in acquisitions that help build our current portfolio.
So in closing my portion of the conversation this morning, we’re certainly taking steps in our fiscal 2012 that demonstrate our ability and willingness to execute strategic acquisitions and invest in the longer term.
Now Joe will discuss our capital allocation strategy and our strong commitment to total shareholder return.
Thanks Steve and good morning. So as many of you know, earlier this year we initiated a formal process to take a hard look at our capital structure and our operating results and our goal was to leverage our strong balance sheet and our consistent cash flow in order to maximize our total shareholder return that culminated in October when we announced the 50% increase in our dividend and the new 100 million share repurchase plan that was authorized. Over the next few minutes I’m going to walk though our thought process in arriving at those decisions and explain our view on total shareholder return.
On this slide you will see some of the key points that I want to walk through today and those are that (a) we generate strong and consistent cash flow, (b) we have a very strong track record of retuning that cash flow to shareholders in the form of dividends and repurchases, and (c) even give a significant dividend increase, we still have flexibility on it to do acquisitions and reinvest in the business and continue to grow that return to shareholders over time. And lastly, I’ll close with a illustrative view of our view of total shareholder return.
So as we look at the total shareholder return, we’ve really broken it into three components. First, we can deliver shareholder return through growth and revenues and leveraging that growth and revenues through cost containment to deliver improved operating profit and operating margins.
Secondly, delivering return to shareholders through accretive acquisitions, investments in the business and directly returning that cash to shareholders in the form of dividends or share repurchases. And really the third category of shareholder return, we would put in really the hardest component to manage, which is maximizing the companies valuation through either constant growth and performance, management of our portfolio of businesses and maximizing our financial policies.
Now depending on a company’s profile, whether you’re high growth or low growth, whether you generate significant cash or nominal cash, management has the ability to pull these levers to maximize shareholder return.
We’ve set the goal of retuning, shareholder return to deliver above median S&P towards top quartile S&P returns and what these two bar charts here are, is if you look at the last 50 years of the S&P 500, the median return has been 9% with companies in the top quartile returning 16% on an annual basis.
Now in the more recent years, a lot of that return has been generated through capital gains, but if you take a longer look at the S&P, there is much more balance between that return being generated between dividends and capital gains and so as we did our analysis, given what’s going on in the economy, the uncertainty in the world, we feel that guaranteeing a return of 5% in our case, through a dividend return, establishes a very attractive proposition to our shareholders.
Now a key component of our value proposition is the strength, the consistency of our underlying cash flow and this chart here shows our free cash flow over the last 10 years and you’ll notice, even in very difficult economic times, like 2008 and 2009 we still generated significant strong free cash flow. And even during the recent recession we were generating strong cash flow, but we felt that the most responsible use of that cash was to de-lever the business and pay down debt and so today we are in a much stronger position. Since 2008 we’ve paid down over $250 million of debt and along the way exercised or executed a lot of the strategic acquisitions as Steve talked about just minute ago.
The second point I wanted to make is that the company has a tremendous and long track record of returning cash to shareholders through dividends. Meredith has paid dividends consecutively for 64 straight years and we’ve raised the dividend consequently the last 18 years, even in the depths of the recession and frankly, there is not many media companies today that can tell that track record.
So again, as we took a hard look at our capital structure and our operating results, we looked at our forecast and pressure tested those. We concluded that we can significantly increase the dividend 50% in fact and still have the flexibility to invest in the business. Our current dividend yield, which I mentioned earlier, is over 5%, which would put us in the top 10 companies in the S&P 500.
Another conclusion of the process we just undertook is that we could significantly ramp our share repurchase program. This chart shows the cumulative share repurchases that the company has made over the last decade. Now, if you look between ‘09 and ’11, you will notice that we were not significantly repurchasing shares during those years, because those were the years we were paying down debt and delevering.
However as I said, we ended last fiscal year 2011 with under $200 million of debt. We were well under one times EBITDA and so we felt by maintaining or fixing that leverage percent if you would, we could take excess cash and start returning that to the shareholders, through a ramped up repurchase program.
Now the third conclusion, which I mentioned a minute ago, was that even by the significant ramp of our dividend up 50%, we would still have significant cash to reinvest in the business, do acquisitions, etcetera.
So what we are presenting here is, the recent three years, a miniature cash flow statement if you will where you can see our free cash flow, then free cash flow after dividends and what we’ve done is we’ve taken our fiscal 2011 which ended June 30 and we basically pro-formered that cash flow for the incremental dividend and the point of the slide is, even with the 50% increase in the dividend, we generated a $122 million of cash, which would be available to us for acquisitions, for the share repurchase program or for further debt service if we decided we wanted to delever further or increased our borrowings for M&A.
So this gives us a significant amount of flexibility and leverage to continue to achieve some of the things that Steve talked about, which was diversify the businesses into faster growing markets, add categories, continue to grow our MXM business and continue to expand our video and digital assets in both the mobile and the tablet platforms.
So I’m going to conclude my comments today by giving you an example of how we at Meredith look to create shareholder value and establish total shareholder return. And again to those three components I described earlier, first, we believe we can grow the company very conservatively, organically, 1% to 2% top line per year. By again managing the cost structure, we can turn that conservative revenue growth into about a 2% to 3% return through earnings.
Through free cash flow which I mentioned, through a 5%, greater than 5% dividend, by creating additional value through buyback, share buybacks, we believe we can add another 2% to 3%, so just through our free cash flow generation we believe we can contribute 7% to 9%. So if you just think organically, with very modest growth managing costs, returning cash to shareholders through the dividend and buybacks, we believe we can generate 9% to 12% returns just organically.
Then if you add in our ability to use cash for accretive acquisitions, to continue to mange the portfolio of our businesses, we believe that we can increment that total shareholder return and deliver more towards those higher top quartile returns that the S&P has seen over the last 50 years.
So we’ve used pretty much all our time; that’s the end of our prepared comments. Do you have any…
Thanks Joe. I mean we are out of time, but if anyone has any really great questions, put up your hand and we will – the really great one.
Do you target the 5% to 6% dividend as the payout? So if your stock price doubles from now, you will have to double your dividends.
Well we targeted that payout when we announced the dividend. Hopefully we’ll continue to see our share price increase, which will put pressure. But as you’ve seen over the past several years, we’ve continued to grow that dividend year-over-year. So we would expect that we would continue to increase that divided, more in line with what we’ve done historically, not another 50%, but then over time we would continue to grow that dividend, that would be our plan, yes.
Great, thank you.
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