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Meredith Corp. (MDP) Citi Entertainment, Media and Telecommunications Conference Call January 4, 2012 5:00 PM ET

Unidentified Company Representative

[Abrupt Start] certain of the information that we talk about today will be forward-looking in nature and this slide is simply a reminder of the factors that could impact our business as we go forward. I thought I'd start with a very quick summary of the businesses that we operate in across media platforms. Our National Media branded businesses serve 80 million unduplicated women online and offline each and every month and we're clearly the leading media company that focuses primarily on women today.

Our Local Media Business reaches about 10% of the US households across the country and our business-to-business marketing service activity generates about a $180 million and we serve leading corporate clients including Kraft, Nestle, Chrysler and Lowe's. We provide them with a very deep expertise in digital, social, mobile and database marketing capabilities.

Our ability as a company over many, many years to generate very strong free cash flow is really a hallmark of the Meredith Corporation and we are in a strong financial position with the capacity to fulfill on our ongoing commitment to total shareholder return.

As some of you maybe aware, at the end of October we raised our dividend by 50% and also got a new $100 million share repurchase authorization from the Meredith Board of Directors. We have successfully extended our brands across multiple media platform giving our consumers the true flexibility to access our content as they prefer. We've built scale across those platforms to attract advertisers and marketers alike who want to reach our targeted and mass audiences.

Our consumer readership and engagement related to our national media brands is really quite strong with over a 110 million readers and 35 million unique visitors to our website each and every month. We see promising consumer metrics from our new tablet products and our mobile apps. Viewership at our local media group is quite strong as well and we monetize that growing audience by delivering what has now been eight straight quarters of growth in non-political advertising revenues.

In addition, we create a better television show that is syndicated and in fact reaches 80% of the US households and that’s up from about 50% a year ago at this time. And finally we built a very powerful presence for our Better Homes and Gardens brand at retail with a broad relationship with Wal-Mart where today we have over 3000 SKUs of product at every Wal-Mart store in the US and in Canada.

To drive growth as we look to the future and revenue profit and of course cash flow, we are aggressively focused on these strategic growth initiatives. We have had strong execution against these goals and I will spend just a few moments reviewing our accomplishments and then take you through the details of our recently announced financial strategy. We have a great deal of confidence in the strength of our brand, of our robust business model and our ability to sustain and grow cash flow as we look to the future.

The strength and consistency of that cash flow is really rooted in the brands that comprise both our national and our local media businesses. Since advertising is one of the primary revenue generators, let me start with some key initiatives that we're pursuing to improve our results in that area.

So far in our fiscal 2012, we have successfully increased our reach in share of the food category across a variety of media platforms. We launched recently the multi-channel brand, recipe.com, acquired the popular Everyday with Rachael Ray magazine and its related digital assets. The EatingWell Media Group and just a few hours earlier today, we announced an agreement with Walt Disney Company to acquire their family food brand.

The acquisition of that popular brand includes the magazine with a guaranteed rate base of 2.1 million and a readership of about 6 million and the related digital assets. That business really targets moms, with children ages 3 through 12 and is a really great compliment to our leading parenthood franchise.

We’ve also been working to increase our scale in other growth advertising categories including beauty, retail and entertainment. We’ve used this strategy successfully over the last decade as we more than doubled our share of magazine advertising revenue across the industry through organic growth and also acquisition and that’s stronger growth than any of our peers in the industry.

Our sales initiatives are really focused on two broad areas. First magazine advertising to our large, core advertising accounts. And second, integrated programs that feature our multi-platform assets and are sold by a senior team that we called Meredith 360. Our Local Media Group continues to deliver industry-leading growth in non-political advertising revenue and to continue that top performance we are pursuing strategies to maximize both political and non-political revenue.

Every indication is that this coming election cycle will be robust and we are looking forward to a strong political season in calendar 2012. As I like to say it doesn’t appear that any incumbent is safe at this point. We are taking advantage of digital tools and technology in this business as well to deliver our content to local consumers including traffic and weather information and this gives us a great opportunity to imbed those advertising messages as well.

We also continue to build on a very unique opportunity created in our Atlanta market place where we now manage the Peachtree TV station there that’s owned Turner Broadcasting. It gives us a larger share of the growing Atlanta market place from an ad perspective and also a great line up of sports programming to sell in the market.

Turning to our digital activities and we get a lot of questions about this part of our business, we’ve deliver more than 20% growth in total company online traffic, so far in basically the first half of our fiscal 12. Revenues related to digital activities today account for about 10% of total company revenue. While we are pursuing a wide variety of initiatives, I am going to focus on just two with you this afternoon.

First growing the number of digital orders that we generate for subscriptions to our print products. This is a significant profit improvement opportunity because it’s about half the cost to either find or retain a new subscriber digitally compared to traditional direct mail methods. Additionally our total revenue and total profit for digital transactions tends to be higher than the traditional direct marketing sources.

Second, we are very excited about the opportunities that the tablet offers to strengthen our consumer relationship and lower our product creation and production costs going forward. As many of you know, Apple accounts for the majority of tablet sales currently, but other devices are starting to gain a strong foothold. Our strategy is to maximize distribution across the digital newsstands and devices including the Nook Color, the Nook Tablet and the recently launched Kindle Fire where we now have 14 of our brands available.

The number of single copy and subscription sales that we are generating on the tablet platform is ramping up and the early reads from the data we have is encouraging as consumers are highly engaged and spend about the same amount of time or maybe a bit more on our digital versions as they do on our traditional print product.

It also offers us the opportunity to expose our brands to new audiences and of course a younger demographic. Beyond advertising, revenue diversification is a top priority for Meredith. Over the past few years, we've successfully grown revenue from sources that are not dependent on traditional and cyclical advertising. Our brand licensing revenues have more than doubled over the last five years and today we have about 3000 Better Homes and Gardens branded products at every Wal-Mart store in the country.

Recently at Wal-Mart’s request, we have renewed the program two years early and will be expanding it in the fall of 2012 and the contract is in place through 2016. We also recently unveiled a new go-to-market positioning for our business-to-business activity that we call Meredith Accelerated Marketing. It reflects the many capabilities that we have developed and acquired over the last five years in digital, database, social and mobile media and revenues from that business have grown nearly 80% over that timeframe and we’ve transformed the business into one of the top ten largest digital custom marketing businesses in the country.

In addition, we recently made an investment in the global marketing business Iris that is based in the UK and the Meredith-Iris global network will now serve the needs of our customers on a global basis and we hope to bring some of Iris’s customers to the US.

We continue to look for opportunities to strengthen our existing portfolio and add to our capabilities. In the National Media Group, we are actively looking for businesses that provide access to new audiences and new advertisers. We are also looking to enhance our national video creation capabilities and distribution platforms for our current brand.

In local media we look for fast growing markets and strong station with the opportunity to diversify our network affiliation and we continue to evaluate opportunities to increase our online activities including those that would add scale to the Meredith women’s digital network. The steps we have taken so far in fiscal 2012 demonstrate our ability and willingness to execute strategic acquisitions and invest in the longer-term growth of our business.

But now let’s turn to our capital stewardship and our strong commitment to total shareholder return. As many of you know, earlier this year, we initiated a formal process, which really took a hard look at our capital structure and operating results with the goal of leveraging our strong balance sheet and our very consistent cash flow generation in order to maximize total shareholder return.

This progress and activity really culminated at the end of October, when we announced the 50% increase in our annual dividend and a new $100 million share repurchase authorization, which represented at that time of about 10% of our market cap.

Over the next few minutes, I want to share how we came about that set of decisions and our view on total shareholder return. And I think there is two key points, there are two key takeaways here that our company generates very strong and consistent free cash flow, regardless of the advertising environment and we have a great and growing track record of returning cash to our shareholders.

Even with the significant increase in the dividends, our new financial strategy allows us to continue creating shareholder value, by investing in our business, both organically and through strategic acquisitions and continuing to increase the amount of cash returned to our shareholders over time.

Most of you know that total shareholder return breaks in to these three broad components. First, delivering growth and revenue and leveraging that growth through cost management and improved margins. Second, delivering returns to shareholders by growing the business through investments and by returning cash to those shareholders in the form of either dividends or of course share repurchases.

And finally, the third component is maximizing the company’s valuation through consistent performance, effective management of the business portfolio and maximizing financial policy. The goal that we have set for Meredith is to deliver above median to top quartile total share holder return. If you look at the last fifty years of data the median total shareholder return for the S&P 500 has been 9% with top quartile companies delivering 16% over that time frame.

In recent years the majority of that total share holder return has in fact been generated by capital gain with dividends accounting for a smaller component than they have historically. However, over the longer time frame total share holder returns have been much more evenly balanced between dividends and capital gains.

Given the economic uncertainty that we face in the environment, in the world today, we feel that the guaranteed return in the form of the higher dividend, which yields around 5% establishes a very attractive proposition for our shareholders. A key component to our value propositions is the strength and the consistency of our free cash flow generation.

Fortunately the businesses that we build and developed over many years generate strong cash flow even in very difficult economic times. As you can see our record is quite impressive. During the recent recession we felt the most responsible use of that cash flow was paying down our debt and also maintaining our historical track record of growing our dividend. This was driven by obviously a difficult and uncertain economy and the desire to add flexibility to our portfolio, should opportunities for acquisition become available.

Today we are in a very, very strong financial position. We've strengthened our balance sheet by paying down over half of our debt, since fiscal 2008. And at the same time executed a series of strategic acquisitions, a few of which I described just a few moments ago.

Meredith has a tremendous track record of returning value to our shareholders. We have in fact paid a dividend for 64 years straight and raised it for the last 18, even during the depth of the recent recession. So we took a hard look at our capital structure and our operating results and really pressure-tested our financial forecast and concluded that we could significantly increase our dividends, 50% in fact, and still have the flexibility to invest in our business, as we go forward. Our current dividend that I mentioned, yields around 5% is among the top ten of all companies in the S&P 500.

The next slide shows our cumulative share repurchase history over the last decade. As you can see, we slowed that activity in recent years as we made debt a priority. However, at the end of 2011 our debt stood at less than $250 million, a little less than one times EBITDA. So as we analyzed our capital structure we felt by maintaining that debt around the $200 million level, we could establish a measured and meaningful share buyback program.

Our third conclusion was that both the 50% increase in dividend and a significant repurchase program would not prevent us from being able to reinvest in our business or do acquisitions. This slide which simply shows a pro-forma of the cash that we would expect to have available, using our actual fiscal ’2011 results and pro-forming those results aftereffect of the higher dividend.

This powerful amount of flexibility can be used to support our growth initiative, which include diversification in the faster growing market and advertising categories; further additions and transformation of Meredith’s accelerated marketing; and continued expansion of our video and digital capability, including mobile and of course the tablet.

So if you take just a moment and look at fiscal 2009 that was the weakest year in free cash flow for Meredith for many, many years but we still generated $157 million in free cash flow and had about a $117 million available. So with the dividend pro-forma for fiscal 2011 you can see that after the 50% increase we have over $120 million available for acquisitions, share repurchase and debt service, if it is necessary.

So here is our illustrative view of how we expect to deliver total shareholder return in the near-term. First, we believe there is a revenue growth opportunity and even with modest improvement in margins over time, Meredith should be able to deliver a low-single-digit return through growth in earnings. With the dividend at around 5% yield, we think our buyback program can add another two or three percentage points on top of that and assuming no change in debt, the return from that free cash flow yield is 7% to 9%. The first two elements together then put our return in the 9% to 12% range and remember that the median return for the S&P 500 over the last 50 years is 9%.

Additionally, we believe there is incremental value to be achieved through acquisitions and careful portfolio management and it’s very possible that considering all these factors, we could move to the top quartile in total shareholder returns as we look to the future.

So with that, I’d certainly be happy to answer any questions that anybody might have about anything I’ve discussed today or anything that somebody might want to ask. So I will throw the floor open to Q&A.

Question-and-Answer Session

Unidentified Analyst

Can you give us a little bit of flavor on possible acquisition areas? I mean, the whole variety of different areas you’re playing in, what do you like the most? What’s the cheapest, can you give any sense of that?

Unidentified Company Representative

At this point in time, what we really like the most are businesses where we can take our brands to life in video form, in some way shape or form. So I think probably the best example I can give of that is what we’ve been able to do with the recent announcement and the launch of the Kindle Fire. We’ve always been limited by the amount of photography we could show in our print products, because of not only the space limitations but the cost of paper printing and postage.

But anybody who has ever been involved in a photo shoot, whether that be your wedding or anything else, you realize that there is a lot of content left on the cutting room floor. We’ve also, over time, really been challenged to move our consumer seamlessly, from our print to our dotcom business and back again. And the tablet allows us to do that in a very seamless way and also to embed a lot of video assets.

So going forward, really our highest priority would be either platforms or business opportunities that allow us to move much more seamlessly between the different media platforms. And the reason for that in emphasis is that we are primarily focused as we look to the future on the Gen Y female consumer who is the daughter of the baby boom customer that we served for so many years and she tends to aggressively use every media platforms and in a lot of cases do them all at same time and so you are going to see sort of lot of emphasis around back much less than siloed dotcom versus print versus television distribution. Thank you.

Unidentified Analyst

Can you just frame for us how you think about the political firm opportunity this year given the upcoming election?

Unidentified Company Representative

The political cycle for us obviously is an every other year occurrence, so in our fiscal 2011 we generated about $35 million in net political revenue which was an all time record ever. And we really feel with the persistent high unemployment rate and the tremendous amount of discomfort for the leadership in the country, both nationally and at the local level that this is going to be a very, very strong political cycle.

Exactly what markets that will play-out in, we are not sure at this point of time, but as I said a little bit earlier it doesn’t feel like any incumbent is particularly safe and we think it will be a really robust season. For us, the benefit of that will come in our early fiscal 2013 which are really the third and fourth quarters of calendar ’12 that’s where we’ll generate most of that revenue; next fall.

Unidentified Analyst

I was curious about one of the comments you made regarding digital, and I want to make sure I understood correctly. I believe you said that it is higher revenue generating and higher profitability in your traditional product?

Unidentified Company Representative

Yeah, what I was speaking about there was how we find and retain subscribers, so historically, we spend about hundreds of million dollars a year primarily in direct sales; but when we send you an offer and you will be following that offer; it’s a little bit early days to up-sell you a (inaudible). Now we are having about a third of those orders to follow, so when we say yes I will subscribe the business magazine, we have the opportunity to say, how about (inaudible) well. And we think, I think we refer that shopping part is higher, but in addition to that you probably would be buying paper and you are in fact sending the mail and we're using the credit card payment. The cost of the transaction is about half of what the cost was historically. It’s really about maintaining the circulation and doing it in a more efficient way. Does that answer your question?

Unidentified Analyst

Yeah that's helpful. And then how does that relate to, if I am a subscriber and I get a tablet version of one of your product, how does that compares on a P&L to the traditional product?

Unidentified Company Representative

(Answer Inaudible)

Unidentified Analyst

Probably, you were talking about that translate as you go from $20 billion of digital to the advertisers (inaudible)?

Unidentified Company Representative

Well, you know, the numbers again are so small from a rate base perspective a digital version is counted the same as the print. But the number of digital versions out there, you know, is really, really small. What we do know is that consumer engagement is about the same in terms of how much time she spends. She tends to be a little bit more upscale from an economic perspective, and a little bit better educated. That’s probably because until recently, you know, the iPad was pretty expensive item compared to the $500 to $700 compared with the Kindle Fire. And again, we think that it will be a modest amount of our whole audience that we do digital (inaudible)

Unidentified Analyst

Little bit of different subject, you keep referring the Kindle Fire and what I notice is that the ads that I see on my iPad, New York Times, Forbearance whatever are lousy. It would seem to me that, I mean is there a way for you guys to make the advertising more sophisticated than compelling on these tablets vis-à-vis what you’re seeing in the print media?

Unidentified Company Representative

Well, you know, we hope so overtime. You know, the challenge is that we don’t really create those ads. And you know, we don’t have very much experience yet, but one thing we do know is that we can for the first time seamlessly move her from a Home Depot ad to homedepot.com which has never been possible before other than she got up off the couch and went to the desktop over the (inaudible) and we can prove that transaction so you know that we can do. We are doing more interesting things you know it’s generally an activity that is done by the ad agency for our corporate client, but I agree and I think there probably will be some improvement there overtime.

Unidentified Analyst

I think you mentioned one of your strategic priorities was to move from print to video for this Gen Y customers and I think you said that in the context of potential M&A and maybe I misheard you, but if you like that more of just an organic opportunity for you to take these brands and sort of migrate into something in the video; but I misinterpreted what you said?

Unidentified Company Representative

Let me go at it in a couple of ways be there is sort of more than one part of the video platform. So if you go back in what’s very soon I guess in October will be the 110th year history of the company, the one platform that we really missed was the creation of brand specific compelling content that extended the businesses that we own and operate to the television space.

So to say it a different way, it would have been really great if HDTV had been BHDTV and the type of content that’s created there is very, very similar to the type of content that we create in print and in digital. So we have for many years and continue to look aggressively for a national distribution platform where we could move our brands in a more holistic way to television.

And to round out the consumer experience along with print and digital, and how to part of video with what would be a nationally distributed video opportunity. And we've worked on it for a really long-time, but if we had that along with the massive program that we have at Wal-Mart for like American Baby and Parents and Family Circle and Better Homes, we would pretty well surround the consumers with what we do.

Unidentified Analyst

So the script sort of moved into the magazine publishing business with…

Unidentified Company Representative

Yes.

Unidentified Analyst

You are going the other way.

Unidentified Company Representative

Yes. They've moved from television or from cable to print and we like to move the other direction as well. It is a more successful platform to drive traffic to web and we think also to drive traffic to tablet. We had never been as successful at moving the consumer from print to digital as are the visual media platforms.

Any other questions? Alright, thank you very much for being here and Happy New Year to everyone. Thanks for having us.

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