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Meredith Corp. (NYSE:MDP)

F3Q12 Earnings Call

April 25, 2012, 11:00 a.m. 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

William Bird – Lazard Capital Markets

Jason Bazinet – Citi

Rich Ingrassia (Cody)– ROTH Capital

Matt Chesler – Deutsche Bank

Michael Corty – Morningstar

Barry Lucas – Gabelli & Co.

Edward Atorino – Benchmark Co.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Meredith Corporation reports fiscal 2012 third quarter results. (Operator Instructions).

I would now like to turn the call over to Director of Investor Relations, Mike Lovell. Please go ahead, sir.

Mike Lovell

Hi, good morning everyone, thanks for joining us. We’ll start the call today with comments from Chairman and Chief Executive Steve Lacy, and Chief Financial Officer Joe Ceryanec, then we’ll turn the call over to questions. Also with us this morning are Paul Karpowicz, President of our Local Media Group, and Tom Hardy, 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 earlier this morning, and in some of our SEC filings. With that, Steve will begin the presentation.

Steve Lacy

Thank you very much, Mike, and good morning everyone. We appreciate you joining our call. I’ll start this morning with a review of the business highlights for our third quarter and fiscal 2012 to-date and explain the special charge that we announced earlier this morning. Then I’ll detail National Media Group operating performance. Joe Ceryanec will discuss our Local Media Group performance and our guidance. Then we’ll open up the question-and-answer period.

Looking briefly at business performance highlights in the third quarter of our fiscal 2012, our Local Media Group continues to perform very well. The group delivered its 10th straight quarter of year-over-year growth in non-political advertising revenue, and achieved record operating profit for our fiscal third quarter.

National Media Group total advertising revenues grew 2% and circulation revenues increased 15%. This growth reflects the inclusion of the recent acquisition, strong digital performance and the successful implementation of the Meredith Engagement Dividend. As some of you may recall, that’s a program guaranteeing results from advertising in Meredith Magazines, and it has been very well received in the marketplace.

Our digital initiatives across the company are flourishing with both consumers and advertisers, highlighted by the addition of Allrecipes.com to our brand portfolio. Traffic to our national websites more than doubled, to a record 40 million monthly unique visitors in March, reflecting the addition of Allrecipes.com. Digital advertising revenues grew 70% in both our national and in our local media groups.

Back at the start of fiscal 2012, I outlined a series of strategic initiatives that we planned to execute against. These included strengthening our core businesses, expanding our digital and video activities and growing our brand licensing businesses. We also told you we would pursue acquisitions and investments to grow our scale and our capabilities. Finally, we pledged to reward our shareholders by increasing the amount of cash returned to them.

I believe we’ve done an excellent job executing against this plan. We’ve purchased Allrecipes.com, the world’s largest digital food brand, doubling our national digital presence. We acquired “Every Day with Rachael Ray,” an anchor food brand, and “Family Fun,” a popular parenthood category brand. We executed an ongoing major expansion of our digital, mobile, video and social media platform, including creating a tablet edition of our magazines across multiple delivery platforms, developing many mobile apps that have generated millions of downloads and expanding our video content creation capability.

We extended and expanded our very successful brand licensing arrangement for “Better Homes and Gardens” and the line of home and garden products with Wal-Mart stores throughout the country, which now extends through 2016. We expanded our daily syndicated better shows reach to more than 80% of households across the country, and finally, invested in Iris, a leading global marketing services company, to serve the global needs of our domestic clients and open the doors to international client opportunities as well.

In addition, last fall we implemented our total shareholder return financial strategy that has been very well received by the investment community. Key elements include a current annual dividend of $1.53 per share that’s currently yielding more than 5%, a $100 million share repurchase program, and ongoing strategic investments to drive incremental revenue and profit growth over time.

Turning now to today’s earnings release, you’ll see that we took a special charge in the third quarter of fiscal 2012, and it’s made up of two components. First there’s the transaction cost related to our acquisition of Allrecipes.com, and second, as I just outlined, in recent months we’ve executed a series of acquisitions and business expansions. We’ve increased our scale and capabilities with a strong emphasis on the digital space. Now we’re in the process of integrating these acquisitions and realigning our organizational structure so that the entire business can reach its full potential. This includes eliminating certain redundancies, improving efficiencies, and selected workforce reductions.

Now let’s turn to the National Media Group operating performance in the third quarter. Fiscal 2012 third quarter National Media Group advertising revenues grew 2%. The over-the-counter drug and media and entertainment categories were quite strong, helping offset weakness in the prescription drug category, which was down nearly 20% in the quarter. We also delivered growth in our largest advertising category, food and beverage. Digital advertising revenue grew 70%, reflecting very strong food-related advertising as well as one month of contribution from our Allrecipes.com acquisition.

We began implementing the Meredith Engagement Dividend Program during the quarter, with several inaugural accounts including Kimberly-Clark, Tyson Foods and Mars Pet Care. Again, this program, a first in our industry, guarantees clients that advertising in Meredith brands will increase their sales at retail.

The engagement dividends, our recent acquisition, and execution of our multi-platform advertising and marketing program, are helping us grow market share. Today our share of total magazine industry advertising revenues stands at 11.5%, up a half percentage point from a year ago at this time, according to the most recent data from Publishers Information Bureau.

Our recently acquired brands are tracking ahead of our expectations, from both a revenue and an operating profit standpoint, and our integration success is a big part of those favorable results. They include adding the acquisitions to our paper, printing and fulfillment contract, and linking them to our management information systems for sales, financial planning, information technology and human resources.

We’ve also been very focused on integrating these brands into our corporate-wide sales and marketing efforts, including adding them to our large-scale corporate advertising buys. We continue to enhance our position in advertising categories that grow fastest over time. This is one of the reasons for the purchase of Allrecipes.com, “Every Day with Rachael Ray” and of course “Family Fun,” which are increasing our already strong presence in the food and beverage category.

Other appealing growth categories as we look to the future include beauty retail business and automotive. To further increase our share, we’re bringing all of our assets to bear for our advertising and marketing partners, including video and other media platforms, research and consumer insights. Interesting examples executed during the third quarter include creating a year-long program for Target’s health and wellness platform that includes advertising in eight Meredith brands, outreach to the blogger community, digital media across the Meredith women’s digital network and a partnership with WebMD.

We launched a new tool on BHG.com with Benjamin Moore paint, that lets consumers upload their own photos and choose from about 800 colors for their own remodeling and redecorating projects. Consumers can then save those projects and share them with friends, and the Benjamin Moore brand is featured prominently across the site.

We launched a new video channel called Digs with YouTube. Our Digs channel speaks to the YouTube audience through original short-form video about interior design, gardening, crafting, home entertainment and do-it-yourself.

Our fitness brand, which celebrates its 20th anniversary in May, will execute a special nationwide program encouraging consumers to work out and get healthy. Major gyms nationwide will offer free access, including Gold’s, 24 Hour Fitness, Town Sports and Crunch.

Turning now to circulation, we grew revenues 15% and circulation contribution by 12%, driven largely by, but not entirely, our recent acquisitions. Including these acquisitions, we grew circulation 3%, including growth in both subscription and at the news stand. We increased the rate base of “Family Circle” to 4 million monthly copies, and announced plans to increase the rate base for “Eating Well” by 20% to 600,000 this coming fall. This is the second rate base increase for “Eating Well,” which had a guaranteed rate base of 350,000 at the time of our acquisition.

We generated 2 million digital orders for print magazine subscriptions during the first nine months of fiscal 2012, more than double the 800,000 we generated in the year-ago comparable period. We’re now on track to generate more than 2.6 million digital orders in fiscal 2012, again more than double the 1.1 million generated in the prior year. This is a significant cost savings initiative, because we realize approximately $5 more in incremental profit for each order we generate digitally. Our success is due to more aggressive website and email marketing, along with accelerated efforts to shift consumers to digital billing and renewal.

Other aspects of Meredith digital engagement also strengthened during the third quarter. With the addition of Allrecipes.com, the Meredith women’s digital network today is the largest premium owned and operated property in both the food and the women’s lifestyle categories. It’s a big step ahead of where we were a year ago at this time, and an important distinction in the advertising marketplace. Already it’s opening new doors for us, and it’s part of the reason why digital advertising revenues were in fact so strong during the third quarter. We also continue to drive strong extension of our brands across multiple tablet and mobile platforms. Currently, 21 of our subscription and special interest titles are available in tablet form across one or more platforms. These include iPads, Kindle Fire, Nook, Zinio and selected Android tablets.

Also, Next Issue Media, the industry joint venture, launched its digital storefront for tablet editions earlier just this month. The app offers consumers a variety of subscription models, including access to all of its participating magazines. As you may recall, Meredith is a founding member of Next Issue Media. To date, 20 mobile and tablet apps have generated nearly 20 million downloads. A big hit has been Better Homes and Gardens Must Have Recipe app, which has topped 1 million downloads in just the first four months after its launch. The app sponsors include Hidden Valley, Mission Foods and the Cool Whip brand.

National Media other revenues in the fiscal third quarter were $68 million, compared to $80 million in the year-ago period. Declines were due primarily to select clients within Meredith’s accelerated marketing scaling back programs in response to current organizational and economic conditions. In the third quarter, we won new business from Rustoleum and Wells Fargo, and renewed several of our very major client accounts. Now I’ll turn the discussion over to Joe Ceryanec for the Local Media Group and our outlook.

Joe Ceryanec

Thanks Steve, and good morning. Our Local Media Group delivered record high operating performance for the third quarter, led by continued strong non-political advertising. Expenses were down 4%, resulting in a very strong 37% EBITDA margin. Looking more closely at non-political advertising revenues, our two top ad categories, automotive and professional services, grew 4% and 11% respectively. Together these two categories account for approximately 40% of our non-political ad revenues.

Digital advertising revenues grew 70% as we rolled out new sales programs, and our strongest performances were turned in by our stations in Las Vegas, Phoenix and Nashville. Our non-political advertising revenue growth was fueled primarily by our ability to monetize our connection with local viewers, and we continued that trend by delivering a strong February ratings book. Additionally, unique visitors to our station websites increased 25% in the quarter, as we enhanced our sites, focused on search engine optimization to drive traffic and used social media platforms including Facebook and Twitter to lower our traffic acquisition costs.

Turning to political-related ad revenues, we began seeing some political dollars roll in from the early primary states, including Nevada, Michigan and Oregon. We hope this is a forerunner to a strong fiscal 2013 election cycle for political advertising revenue.

Finally, we grew other revenues by nearly 40% in the third quarter, and this was driven primarily by our management of Turner Broadcast’s Peachtree TV Station in Atlanta market, which we began running the station about this time last year. Meredith video studios also contributed to our growth. Our nationally-syndicated “Better Show” just renewed for a sixth season this early February, and today “The Better Show” is aired in more than 150 markets, including nine of the top 10 in the United States, and reaches over 80% of U.S. households.

Now, turning to our outlook. Looking at the fourth quarter of fiscal 2012, compared to the year-ago period, with two of three magazine issues closed, we expect fourth quarter National Media Group ad revenue performance to be up in the low teens, down in the mid-single digits, excluding the recent acquisitions. With nine weeks remaining in the quarter, our Local Media

Group non-political ad revenues are currently pacing up in the mid-single digits. In our most recent outlook, which was on our January 24th earnings call, we estimated fiscal 2012 full-year earnings per share to range between $2.45 and $2.65, which included approximately $0.10 per share of dilution related to Allrecipes.com. Now with just over two months remaining in our fiscal 2012, we expect fiscal 2012 earnings per share, before the special charge Steve discussed, to range from $2.47 to $2.50, which is in line with our previously stated expectations. This range now includes approximately $0.12 of dilution related to Allrecipes.com. Now looking just at the fourth quarter of fiscal 2012, we expect earnings per share to range from $.63 to $.66, and this range includes approximately $.10 of dilution from Allrecipes.com in the fourth quarter. And with that, I’ll turn it over to Steve for our closing thoughts.

Steve Lacy

Thank you very much, Joe. To summarize our remarks this morning, we continue to be highly confident in the strength and the resilience of Meredith’s diversified business model. We’ve demonstrated very consistently over time our ability to generate significant and sustainable free cash flow by leveraging our very strong brands.

We have a long demonstrated history of prudent capital stewardship that’s reflected in the action announced today, as well as our ongoing commitment to total shareholder return. As we look towards the remainder of calendar 2012, which of course goes into our fiscal 2013, we’re seeing an improving advertising trend for our National Media Group and, as Joe just pointed out, our Local Media Group non-political advertising revenues continue to grow. And given the current political climate, we’re eagerly anticipating a strong political advertising cycle as we move into the fall.

Question-and-Answer Session

Operator

(Operator instructions). We will go to the line of Mark Zgutowicz with Piper. Please go ahead.

Mark Zgutowicz - Piper Jaffray

Thank you. Hi, guys.

Steve Lacy

Morning, Mark.

Mark Zgutowicz - Piper Jaffray

Just a couple of questions related to the agency business. One, I’m just looking at the June outlook there, you know, you have – you had obviously a tough comp this past quarter, you’ve got a slightly easier comp in the June quarter, can you sort of characterize the type of growth you’re expecting in June, you know, relative to what you just reported,. And then maybe if you can talk about just the, you know, pipeline visibility through the balance of the calendar year there as well. Are you kind of seeing, you know, the same better-worst as you did in the first half?

Steve Lacy

Yes, thanks, Mark, I think that’s a great topic to get on the table. And you’re right, the third quarter I believe last year was the second strongest quarter in MSM in its history. So we are up against – we were up against pretty tough costs.

My best estimate at the moment is when we finalize fiscal 2012, revenue in that business is going to be down about 10%, which means that the fourth quarter, you know, will be down, but not as much as it was in the third.

And really, we are seeing a couple of issues at play there. First of all, I think you’re aware of who some of our really major clients are. The good news is that all of those accounts were renewed, but for different reasons. There were some pretty sizable reductions in the programs in a couple of cases. Also, we had expected, in the early goings of calendar ’12, that there would be a stronger new business pipeline then really developed, all though interestingly enough, just within the last, I would say, four to six weeks we’re really feeling a stronger pipeline of pitch opportunities, and obviously we’re working very aggressively to turn some of those into new business. And I’m hoping that when we’re on the next call that we will be able to report, you know, a couple of those closes. So you know, the difference in that business then in our local or National Media businesses, is when you pull the trigger on one of those major programs you don’t really have the opportunity to pull back because you had a difficult quarter. So I think we had a tendency of some of the major accounts to get their footings a bit into the early goings of calendar ’12, and as I said before, we’re seeing the RSB and the pitch opportunity increase as we move through the calendar year. Does that help?

Mark Zgutowicz - Piper Jaffray

That’s great, that’s great color, Steve, thanks. On the Allrecipes topic, it looks like you’re looking for a bit more delusion in FY ’12. I think we had originally talked about $0.10, or so, delusion in looking for a couple of pennies more. I’m just curious if there’s any carryover of that additional expense into the FY ’13, which you’ve previously indicated would be accretive and maybe along with that if you could maybe give a sort of progress report on, you know, a refresh of the RSB site as well as the mobile – on the mobile side there as well?

Steve Lacy

Okay, so let’s divide that up into a couple of pieces. I’m going to ask Joe to respond specifically to our expectations for ’12 and for ’13, and then Tom Harty is here, and I’ll ask him to give some color around the integration and sort of the early go-to-market between our existing Meredith Women’s Network and now with the addition of Allrecipes. So, Joe, why don’t you answer the first part, and then we’ll go to Tom.

Joe Ceryanec

Yes. So, Mark, on the Allrecipes, it’s really the investment we talked about making in that brand, but we’ve actually gone a little heavier than we anticipated originally. We’re creating more video assets for this site, and we’re being very aggressive in the international marketplace . In fact, they’ve had much success internationally. So a little more investment on our part which is the incremental two cents of dilution…

Mark Zgutowicz - Piper Jaffray

In fiscal ’12?

Joe Ceryanec

In fiscal ’12. We are still comfortable that for fiscal ’13, that that acquisition will be slightly accretive. There is some seasonality in that business though, so, that Q1, or the quarter ended September 30th, we still would expect it will be dilutive, but then they’ve got a huge second quarter due to the holiday season in cooking, and so, we would expect second quarter to be very strong, and then kind of carry them through the accretion for the rest of fiscal ’13.

Steve Lacy

So, the fourth calendar quarter, and that’s true, Mark, of our historical digital businesses, is, you know, often at time in those kind of categories for, you know, really strong results. So, Tom, why don’t you jump into, you know, some of the early goings since the first of March in terms of how the teams are working together.

Tom Harty

Sure, we’re a couple of months now into the integration, and I’m happy to report it’s going better than what we had expected. The team – the management team added Allrecipes, and Seattle is in place and locked on for employment agreements going forward so we maintain the team. And on the advertising side, which is obviously the most important area for us to focus on, we’re really pleased with how the sales and marketing folks are working together from both the Allrecipe side, and from the existing digital side of Meredith. On both areas, we’re performing significantly better than we expected in the third and fourth quarter. So, overall, we’re extremely pleased with what we’re seeing from Allrecipes, and we’re actually exceeding our initial plans from the acquisition plan.

Steve Lacy

Did that help you Mark?

Mark Zgutowicz - Piper Jaffray

Yes, that’s helpful, thanks for that. One last question on the digital subscription side of the equation. I'm just wanting if there’s any anecdotal commentary that you can give on digital sub growth, and any sort of forward thinking on when you envision a transition from free subscriptions?

Steve Lacy

Okay, so, we’re talking – I think you’re – we might be mixing a couple of things together here. You’re talking about the tablet?

Mark Zgutowicz - Piper Jaffray

Yes, tablets, sorry.

Steve Lacy

Okay, so, let me make a little point of clarification here. So when we talk about these 2.6 million subscriptions compared to roughly a million a year ago, this is converting from direct mail to a digital acquisition and renewal method for print subscriptions. Okay?

Mark Zgutowicz - Piper Jaffray

Right.

Steve Lacy

That’s where the $5 incremental profit comes from; moving from direct mail to a digital subscription activity. So that’s for traditional direct mail. Now if we transition to the tablet platform, I’m going to ask Tom to talk about a bit about the various methods that we’re trying really to get our consumer to test the tablet and see if she likes it well enough over some period of time we hope that she will be able to let her print version go, and that’s the next big cost savings opportunity. But we’re doing a lot of things to get her to sample the tablet. So you might speak about that a little bit Tom.

Tom Harty

Sure, so, we are – we have 21 of our brands, our subscription brands now on different tablet devices including the Apple iPad, the Kindle Fire, the Nook, and Zinio. We’re doing a lot of testing, obviously this is a new medium and initially so far, the numbers are modest as people adapt to this new platform. Roughly, if you think about our subscription base, our rate base basis, 30 million in print on a monthly basis – we’re seeing in someplace of the vicinity of less than 1% to give you an idea of this scale. But obviously we’re doing a lot of testing and learning. We’re seeing very encouraging signs from people under adaption of both from new subscribers that are coming into the median who weren’t existing subscribers, and also existing subscribers that have the ability to access the data on – the content on the tablet through activation of their print subscription. So between both these methods, we’re learning a lot and seeing a very good research adaption, but again the numbers are very small to start.

Steve Lacy

But from a broader perspective, and we talked about this when we were all together back in February for our investor day, that by the end of fiscal 2015, which is three years downstream, we hope through a variety of test and learn that we will create a compelling enough digital, or tablet product, that about 15% of our audience, and that goes back to that 30 million guaranteed rate base, would be happy to receive the tablet addition, and be willing to let their print addition go. And that opportunity then is against the physical production cost of creating a magazine; paper, printing, and postage, which is roughly 40% of the total cost, or about $300 million today.

Mark Zgutowicz - Piper Jaffray

Right. Is it more –sorry, Steve, is it still more of a push, I’m just curious on – in terms of getting that, you know, transition to happen, and dropping the, you know, print version, is – you know, there are some specific examples of, you know, what you’re doing to get, you know, that sort of pure digital subscription and maybe some progress points there? I’m just trying to get a sense of what you’re seeing in terms of just data points and what is moving people, you know, to potentially to just to sole digital subscription, or just sole tablet subscription?

Steve Lacy

I’m sorry, we’re using a variety of, you know, marketing methods to get people exposed to this. I think if you look at broadcast TV actually Barnes and Noble’s been featuring Better Homes and Gardens on their Nook advertising. So there is a lot of exposure points of how people are seeing the products that are being available. We’re also testing using our direct mail, we’re encouraged working with some of the industry folks that we see higher renewal rates on direct mail by offering people the opportunity to get both print subscription and to get availability on the tablets. So it’s a lot of consumer marketing that’s going on right now – we’re testing and learning, and seeing what best responds to the consumer.

Mark Zgutowicz - Piper Jaffray

Okay, that’s helpful. Thanks guys, I appreciate it.

Steve Lacy

Thank you, Mark.

Operator

You do have a question from the line of William Bird from Lazard.

Steve Lacy

Hi Bill, how are you?

William Bird – Lazard Capital Markets

Pretty good, thanks. So just an overall question on guidance. The guidance seems to imply pretty high expenses in National Media Group in the fourth quarter. Just wondering, you know, how big the investment standing is, and you know, how much of that won’t repeat in fiscal ’13? I’d like to start there as my first question.

Joe Ceryanec

Well Bill, as we look at the fourth quarter, I’ll kind of walk you through the high level of P&L, this maybe will help all the analyst on the call come to our guidance. So as we said on the National Media Business we expect ad revenues to be up low teens. As we look at circ, again with Rachel Ray and Family Fun, with a full quarter next quarter, we would expect their circulation revenue to be up in the high teens. And I think as Steve mentioned the other category, we would expect to be down. I’d call it kind of high single digits.

The expenses in the business will be up. Again we’ll have the first full quarter of Allrecipes in the business, and again the Rachel Ray and Family Fun. So we would expect in the National Media Group expenses to be up kind of low teens over last year, primarily due those new businesses coming in. I think on the local media side, as we’ve said, non-political kind of mid-single, we’re starting to see a little bit of political, but maybe a couple million in our Q4. And the expenses in that business, you know, we’d expect to be pretty flat, maybe just up a little bit.

Corporate has been running – we’ve been running under where we were a year ago, and we’d expect our fourth quarter again to be under where we were in the fourth quarter last year by a couple of million dollars. So really when you look at the consolidated results in our guidance is 63 to 66. Last year we were at 67, so we’re going to be pretty close overall on the consolidated P&L, at the operating profit and at the net income. Our interest will be up a little bit because of the 175 million borrowed from Allrecipes, call it maybe a million over last year.

So, hopefully that kind of helps get you to our fourth quarter guidance.

William Bird – Lazard Capital Markets

Yes, that’s very helpful. And is there a piece of that expense base in the June quarter that’s one-time of nature where you spend money to get set up, and that spending might not necessarily carry you into ’13?

Joe Ceryanec

No, I wouldn’t say that there’s any, what I’d call one-time. A lot of that expense is coming in with Allrecipes and that investment that we talked about will continue. That’s not a one-time CapEx or anything like that. It’s really ramping up the investment expense. So we do expect that to carry into next year.

Now, with the charge we announced, and you know, some realigning the business including some head-count reductions, that’s really us going after the cost side with three fairly sizable acquisitions, with adding pretty significant amount of head-count through those acquisitions. And now we’re seeing the revenue growth that we hoped for on the top line, we’re now really going hard at integrating those businesses and taking the cost out.

William Bird – Lazard Capital Markets

And just shifting over to kind of the print businesses, what are you seeing in terms of ad page pricing?

Steve Lacy

I’ll let Tom answer that one.

Tom Harty

As we’ve turned the corner into calendar year ’12, we’re seeing, you know, advertising pricing flat, basically to last year. That’s kind of what we’re seeing in the marketplace.

William Bird – Lazard Capital Markets

And then on the guidance laid out for the June quarter, what needs to happen in you July issues to kind of head that down mid-single digit ad revenue guidance?

Tom Harty

We still have our July issues that are open, but we’re seeing improving performance every single month into the quarter. So, we’re optimistic that we’re seeing trends improving as we move through the quarter. Yes, Better Homes and Gardens, our biggest brand has seen three consecutive months of advertising growth year-over-year.

Steve Lacy

Those three months again that would be the three months of our fourth quarter, May, June and July we’re really pleased that Better Homes in each one of those months. Obviously July isn’t done, but with that big brand, we’ve got a pretty good sense in each one of those months Better Homes is going to be up over the prior year, so that’s very positive. Okay?

William Bird – Lazard Capital Markets

Just one final question. The digital revenue slice that you have in the National Media Group, what did that do in the quarter? If we look at it on a core base ex-acquisition?

Steve Lacy

In the third quarter?

William Bird – Lazard Capital Markets

Yes.

Joe Ceryanec

It’s up 35%. So, overall digital, Bill, was up 70. About half of that was Allrecipes coming in, and the other half, call it about 35% was organic. It was the base business.

Steve Lacy

The base business was very strong in the third quarter.

William Bird – Lazard Capital Markets

Great, thank you very much.

Steve Lacy

Thank you.

Operator

Next we’ll go to the line of Jason Bazinet with Citi. Please go ahead.

Jason Bazinet - Citi

Yes, I just had two questions.

Steve Lacy

High Jason, Good morning.

Jason Bazinet - Citi

Good morning, how’s it going? Maybe dovetailing off of Bill’s questions. I guess at some level it’s sort of natural to have sort of the wide range of guidance sort of get tightened as the year progresses. But I was wondering, was there anything specifically that sort of cause the high-end of it to come down as much as it did, which I guess was about 11 million of operating income?

My second question was on the analyst data that you had in February, you talked about that sort of 10 to 15% for total shareholder returns, and I think about 2% of that was related to buybacks. It seems like your buyback pace is sort of trending below that and sort of decelerated in the quarter, I mean do you still think that’s a reasonable number sort of as we look out over the next couple of years? Thanks.

Steve Lacy

I’ll take the tightening the range and then I’ll ask Joe to speak to the total shareholder return question, which is obviously a really good one.

Jason, I think as we were putting our numbers together, you know, back in January, that we would of hoped that this recent improved performance in advertising in the National Media side would have happened sooner than it has, and that’s really the primary difference. Offset partially by the fact that the broadcasting non-political is a point or two stronger than we would have anticipated, especially now as we go into the fourth quarter. And of course from a Meredith accelerated marketing perspective, that business sort of like advertising operates on a calendar year basis. And we certainly knew that in these basically three or maybe four major accounts that we were going to have some budget tightening, but we didn’t know the extent of it. And so it’s really kind of those pieces, and necessitates, you know, sometimes when we look at half a year going forward, you know, a bit of a broader range then we’d really like to have. But those are sort of the puts & takes.

Joe, why don’t you take the next piece of it?

Joe Ceryanec

So, Jason on the share buyback, you are right. This quarter, the third quarter, we really didn’t buy many shares at all, due largely to the fact that we knew we had Allrecipes, the acquisition and that we were going to lever up 175 million, and wanted to use some of that cash, you know, to bring that leverage down. You will see us between now and the end of the year, reinvest in that Share Buyback Program. My guess is we’ll probably spend somewhere around 10 million in share buybacks between now and the end of June. And as we are now just putting our budget together for next year, presenting it to our board in about two weeks, we do have the Share Buyback Program built into our fiscal ’13 at this point. Yes, I do believe we’ll see some TSR coming from the share buyback. But, you know, this quarter with the 175 million in new debt, we just said, we’re going to delay that.

Steve Lacy

Does that help, Jason?

Jason Bazinet - Citi

That’s perfect, thank you very much.

Steve Lacy

Thank you.

Operator

Next, we’ll go to Rich Ingrassia with ROTH Capital. Please go ahead.

Rich Ingrassia (Cody)– ROTH Capital

Good morning, guys. This is Cody in for Rich.

Steve Lacy

Good morning.

Rich Ingrassia (Cody)– ROTH Capital

Going back to tablets, are you seeing any device trending particularly strong over the subscribes and app downloads other than the others?

Steve Lacy

I think probably the device we continue to be the most excited about is the Kindle Fire because the tablets, you know, the iPad was just a bit expensive for our broad middle-America consumer and that’s really the one that I think we have the most excitement about. Although, really across all of them, the numbers aren’t radically different. But because of that $200 price point, we’re putting a lot of emphasis around the Kindle Fire.

Rich Ingrassia (Cody)– ROTH Capital

Okay, great guys, thanks.

Steve Lacy

Thank you.

Operator

Next we’ll go to the line of Matt Chesler with Deutsche Bank. Please go ahead.

Matt Chesler – Deutsche Bank

Good morning, everyone. I guess it’s still technically still the morning.

Steve Lacy

Yes, hi, Matt. How are you doing?

Matt Chesler – Deutsche Bank

I'm doing real well. Steve, I always pay close attention to your outlook because I think you were right on in early 2008 in sort of looking at magazine trends as indicators. So I’m curious on how to reconcile your comments that things are – the conditions are improving a bit relative to your national ad revenue guidance for the coming quarter, which is pretty much on par with what you’re – what you did this quarter, is it that the first couple of issues took a step back and July is that much better, or is there something category specific or related to – I mean, are your comments related to underlying conditions or maybe your execution relative to the engagement dividends? Maybe you can elaborate.

Steve Lacy

Yes. So first of all, let me make a clarifying comment that – and that’s why we teased this out to try to make it easier for everybody. We said that in the third calendar quarter, excluding the acquisitions, National Media advertising revenue was down 7%. Without having the benefit of closing that last July issue, we’re not saying that it’s going to be down sort of in the mid-single digits. So I – in the way I look at it, it’s basically 50% better in the fourth quarter than it was in the third. Now, that will bounce a little bit depending on digital and depending on the July issues, but that’s really – and then the fourth quarter a year in calendar ’11, so our second quarter was actually about 50% worse than the third quarter. So it’s sort of like each quarter getting about 50% better; still not positive, but really moving in that sort of direction. So that was the distinction there I was trying to make about an improving trend.

Matt Chesler – Deutsche Bank

Okay. Steve, can you isolate what impact the engagement dividend is having on you achieving ad revenue performance different than you otherwise would do absent the dividends.

Steve Lacy

Yes, we – you know, we have – we mentioned – we have three brands in clients. We have a number of clients who aren’t willing to let us talk about them for competitive reasons. But let me ask Tom to put some color around that because it really has been pretty exciting for our sales and marketing team.

Tom Harty

Yes, most of our clients work on a calendar year basis when they’re negotiating their deal, so the engagement dividend from a dollar standpoint is really kicking in with the January timeframe. So it’s hard for us to isolate performance quarter to quarter, month to month, but we currently have eight clients in total that are committed to the program for calendar year ’12, and we have another four in the pipeline. As we stated, I think, on a previous call, we’re looking for the numbers to fall, and incremental revenue from those clients to be someplace between 12 to $20 million for the year. And those are commitments that they make, Matt, to get the guarantee.

Matt Chesler – Deutsche Bank

Incremental, so they will be up or …

Tom Harty

Correct.

Matt Chesler – Deutsche Bank

Or they will just be – okay.

Tom Harty

That’s correct.

Tom Harty

You can’t get the guarantee unless your revenue is up year over year.

Matt Chesler – Deutsche Bank

Okay. In terms of – it looks like we had another quarter benefit from you managing the Peachtree station in Atlanta. Will there be any of that left in the June quarter? And maybe a sneak peek at what your retrans, net retrans outlook looks like for Fiscal ’13?

Steve Lacy

Okay, so we’ll bifurcate that question again. I’m going to ask Joe to speak to Peachtree. It now does become comparable in the fourth fiscal. This was the last quarter – we had it even – a little bit of the third quarter last year was kind of a mid-March implementation. So it will be comparable going forward, but it continues to benefit us. And then I’m going to ask Paul to give you some color around how he thinks retransmission will come out as we move forward in – actually, it will be more of a sort of a calendar ’13 activity to get everything renegotiated. But Joe, why don’t you go to Peach first and then Paul can talk about retrans.

Joe Ceryanec

Steve pretty much answered the question. We started making that Peach station about this time last year. So we had the majority of – our fourth quarter last year had that it’s basically a revenue sharing relationship where we get a management fee and then we share in the operating profits.

So your question, Matt, is will our fourth quarter this year be up as it was, and the answer is no because we’re now comparing to a year ago where Peach was in it. So that other line in Paul’s business may be up slightly, but not like it’s been…

Steve Lacy

It won’t be as dramatic…

Joe Ceryanec

…as the first three quarters.

Matt Chesler – Deutsche Bank

Okay.

Steve Lacy

And relative to retransmission revenues, I guess I would say we are on track as each of these negotiations comes up and we have quite a few of them coming up in calendar 2013. We feel confident that our strategy is correct and we’re approaching each one somewhat aggressively. And to date, we have managed to close a number of deals and they have been very consistent with what we’ve budgeted for pretty much our retrans revenue across the board.

So we’ll give, obviously, a lot more helpful guidance on that when we speak to fiscal ’13 in July. But I think we feel, and it’s a little bit of what we discussed when we were together on the investor day, quite confident that as we begin to share retransmission fees with TBS and FOX, which will be during calendar ’13, and when we get everything renegotiated from an MSO perspective, that we will retain and going forward, increase the net political – the net retrans that has been in the income statement like in the current year. And we feel really quite confident about that going forward. So we’ll be a little more granular because we’ll have a little bit more information in terms of how that will play out in the quarters, but we really feel that by – when we’re sitting here a year from now, we’re going to be in quite good shape compared with where we are right now. Okay?

Matt Chesler – Deutsche Bank

Okay. I just – I heard you say calendar 2013 for the sharing of the reverse retrans, was that right, that you wouldn’t expect that to happen until …

Steve Lacy

Let me – I probably didn’t say that right, Matt. So we will begin to share in the early part of fiscal ’13, but all the MSO contracts are not all renegotiated until we get into calendar ’13, a little bit later.

Matt Chesler – Deutsche Bank

Okay, understand.

Steve Lacy

There’s a little bit of a timing issue, but it will net out and we’ll be in good shape.

Matt Chesler – Deutsche Bank

All right, well, thanks. That was helpful.

Steve Lacy

Thank you, Matt.

Operator

Next we’ll go to the line of Michael Corty with Morningstar. Please go ahead.

Michael Corty – Morningstar

Hey, thank you. Good morning, and thanks for the detail earlier on the call about the near-term P&L. Just looking longer term, maybe just by major business in terms of national or local, just maybe just give a rough sense of how investors should think about your expense management like over the next three years given a few things: One, maybe leverage you could pull if your sales expectations happen to fall a little bit short over that timeframe? And just secondary, you’ve done such a great job already in terms of cost cutting, are there additional de-levers in areas where you can take cost out of the business if you have to?

Steve Lacy

So one of the big factors at play, and I’m going to start with – really with the National Media side. One of the biggest factors at play is – the one commodity that we deal with as a company, that’s paper. And there’s usually about a six-month lag period as it relates to our paper activities. So when there is a really strong period of advertising performance like we had in calendar ’10, then the early going of calendar ’11, we saw escalating paper prices. Then in the latter part of calendar ’11 when there was really, across all platforms, a tightening of ad spend, we then began to get a bit of the benefit from paper as we move into calendar ’12. So that is always a bit of a cycle that, you know, sometimes extenuates the really good times and makes the more difficult times more difficult.

But more from a broader perspective, we’ve been on what I think of as more of an evolution rather than a revolution in terms of how we create our content and that’s really across all of our businesses. So if you go back to several years ago and if there was in the Phoenix marketplace, a need to go on location, it would have been at least three people who were there or maybe four. And now often times it is one person that we think of as a multimedia journalist. The technology, the light cameras, the abilities to move that content directly to the web and then aggregate it for the late news allows us very different multi-platform creation activity.

That same thing is happening and continues to happen on the National Media side where we used to have separate creative organizations for prints, for digital, for our special interest business, for our book activity; those are now all centralized and becoming more so within the individual brands that allow for a much more fluid content creation and distribution mechanism and the same way that we go to market. So if we have a major client that will allow us to go to market across all of our brands with one senior seller, that’s the way we go to market. But there are still instances where we have a separate call for digital, a separate call for print and a separate call for video.

So we align ourselves the way we can maximize the client revenue and we continue to evolve technologically to have our content be created and distributed in a multi-platform way. So I don’t know that they’re like huge levers we can pull, but I think it’s important to understand that we look at this as a very aggressive, on-going process of putting tools in our people’s hands to be more efficient. And I think that’s why you’ve seen us march in that direction over a series of years.

Michael Corty – Morningstar

Great. Thank you. That perspective is helpful.

Operator

Barry Lucas with Gabelli and Company, please go ahead.

Barry Lucas – Gabelli & Co.

Thanks, and good morning.

Steve Lacy

Hey, Barry.

Barry Lucas – Gabelli & Co.

A couple of items, mostly the same things as has been covered, but how much of the special charges taken in the quarter are cash and is that cash out the door yet?

Joe Ceryanec

Barry, the fast majority of the charge is cash. I think in the tables to the press release, there’s some footnotes that describe the makeup, but the bulk of it is severance related to the headcount reductions, which will be cash. Most of that will be prospective. There was a couple leased facilities that were shuttering. One actually was a tower in Portland and we had some vacant space in Washington D.C. , so we’re taking a charge for those to reserve for those leases.

So to answer your questions succinctly, most of its cash and most of it will be over – call it the next six months.

Steve Lacy

Does that answer your question, Barry?

Barry Lucas – Gabelli & Co.

Yes.

Steve Lacy

Okay, what else?

Barry Lucas – Gabelli & Co.

Real quickly, the – when you look at that $5 profit per order increment, when you think about a digital renewal or digital subscriber acquisition on the print products, that’s over the – you’re talking about over the life of the subscription, right?

Steve Lacy

Yes. And that, we would have achieved that over like a 24-month period, basically. Yes.

Barry Lucas – Gabelli & Co.

All right, thank you, that’s exactly what I was looking for, was the timeframe. And the last item would be, as we look at the success that New York Times has had with their digital addition closing in on half a million or so subscribers to that product, what can you learn, if anything, from the experiments in the test that the – your brother in the newspaper publishing industry is doing with digital?

Steve Lacy

Well, I’ll ask Tom to add to my comments here. I think one of the most important distinctions, Barry, is the type of content created. And you know, the great newspapers that have had some degree of success, I think it has everything to do with time-sensitive information being at the consumer’s fingertips much more quickly. In our world, as you know, we’re primarily involved in creating life stage and seasonal content, which frankly, the consumer is less concerned about having instantaneously at their fingertips. So as we see tablet adoption, it has more to do with the portability and the convenience of I'm now going on a trip and rather than taking a bag, carrying ten magazines that I’m behind on, I can have them all right on my Kindle Fire, in color, with video and direct access to a whole variety of web properties. So I think it’s more convenience and portability than it is the time-sensitive nature of what’s going on in the newspaper industry. But Tom, I don’t know what you want to add to that.

Tom Harty

We keep testing new ways to generate consumer revenue digitally. I think putting up a walled garden type of product from our web business is not what we’re looking at. We’re really looking at – we’re excited about the tablets because research is showing that consumers are willing to pay for content on the tablets where they haven’t paid traditionally on the web. And we’re looking at testing different apps. Our latest app where we have over 1 million downloads, the Better Homes and Gardens recipe app, there’s actually an option in there to upsell people for $1 to additional content.

So we’re looking at different ways. We’re exploring big initiatives; ecommerce where you can generate additional revenue with an affiliate program online. But right now, we don’t see, in the future, us putting up a paid content wall for our content that exists on the existing web business.

Barry Lucas – Gabelli & Co.

Great. That’s exactly what I was looking for, Tom.

Steve Lacy

Okay. Thank you.

Operator

(Operator Instructions). You do have a question from Edward Atorino with Benchmark. Please go ahead.

Edward Atorino – Benchmark Co.

Hi. In your projection on operating costs in the low teens, so the breakdown between production and SG&A are similar to the past relationships or is anything out of line? And secondary, I noticed you kept G&A about the same, doesn’t that jump up a little bit with – that must be some of that goodwill in there somewhere? No?

Joe Ceryanec

Well, you’ve only got, Ed, in the third quarter, a one month of Allrecipes. So I’ll tell you what, we’ll get that information in a little bit more granular fashion and we’ll get back to you on both of those points, okay?

Edward Atorino – Benchmark Co.

Sure.

Steve Lacy

Anything else?

Edward Atorino – Benchmark Co.

Nope. Thanks.

Steve Lacy

Thanks, Ed. Well, thank you all for participating this morning. We certainly appreciate your comments and questions. And as always, Joe and I are available for the balance of the day for any follow-on questions that anyone might have. Don’t hesitate to reach out to us. We’ll get back to work here, there’s some very exciting opportunities as we look to the future and we appreciate your continued support.

Operator

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

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