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Meredith Corporation (NYSE:MDP)

Q3 FY08 Earnings Call

April 22, 2008, 11:00 AM ET

Executives

Mike Lovell - Director of IR

Stephen M. Lacy - President and CEO

Paul A. Karpowicz - President, Broadcasting Group

John H. (Jack) Griffin, Jr. - President, Publishing Group

Analysts

Karl Choi - Merrill Lynch

Barton Crockett - J.P. Morgan Securities, Inc.

Paul Ginocchio - Deutsche Bank

Catriona Fallon - Citigroup

Michael Meltz - Bear Stearns

Robert Rodriguez - First Pacific Advisors, LLC

Edward Atorino - The Benchmark Company

William Bird - Smith Barney Citigroup

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Meredith Corporation Third Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. As a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Director of Investor Relations, Mike Lovell. Please go ahead.

Mike Lovell - Director of Investor Relations

Good morning, everyone. Before Chief Executive Officer, Steve Lacy, begins our presentation, I will take care of a few housekeeping items.

In our remarks, we will include statements that are considered forward-looking within the meaning of federal securities laws. The forward-looking statements are based on management's current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. A description of certain of those risks and uncertainties can be found in our earnings release issued today and in certain of our SEC filings.

The company undertakes no obligation to update any forward-looking statement. We will refer to non-GAAP measures, which in combination with GAAP results provide additional analytic tools to understand our operations. Tables that reconcile non-GAAP measures to GAAP results are posted on Meredith's website, and a transcript of this call will be posted to our website as well later this morning.

With that, Steve will begin the presentation.

Stephen M. Lacy - President and Chief Executive Officer

Thank you very much, Mike, and good morning, everyone. Participating with me on the call today are Publishing Group President, Jack Griffin; and Broadcasting Group President, Paul Karpowicz. I'll begin with an overview of total company results, discuss performance of our Publishing and Broadcasting groups and conclude by updating our current earnings outlook. Then, we'll be happy to answer any questions that you might have.

We are very pleased to report increased earnings per share for the third quarter and the first nine months of fiscal 2008. Before reviewing our performance, let me share some thoughts regarding the current economic climate and its impact on our business.

The environment is certainly different than on our earnings call in January. At that time we reported Publishing Group advertising revenues increasing 10%, and Broadcasting non-political revenues up 4% for the first half of our fiscal 2008. The current economic slowdown has impacted calendar 2008 advertising across our businesses. It's reflected in our third quarter results, and I'll provide some detail on our fourth quarter outlook later in the call.

I think it's important to note that we strongly believe these trends are cyclical in nature and not structural as they relate to our industry or to Meredith in particular. We possess outstanding consumer brands and a rock solid connection with our core audience; American women primarily ages 25 to 54 who make the vast majority of consumer purchases. We provide help and inspiration in the areas that matter most in her life, caring for her children, her home, and her family's health and well being. We possess broad content expertise in these subject matter areas along with a growing network of core and digital media platforms.

These assets enable us to provide content how and when she chooses to access it and to deliver the messages of our marketing and advertising clients in a targeted and effective manner.

In addition, it's important to remember that while advertising is extremely important in our revenue mix, approximately 40% of Meredith's revenues come from non-advertising activity. Chief sources include magazine circulation revenue along with our rapidly growing business-to-business operation. These include our expanded Meredith Integrated Marketing business and our brand licensing initiative.

Our strategy is to capitalize on these strengths, carefully manage expenses, and work aggressively to increase market share overtime. We have successfully employed this strategy during past times of economic weakness, enabling Meredith to emerge in a stronger and more competitive position.

Now turning to the third quarter of fiscal 2008. Net earnings per share increased 5% and core earnings per share rose 10%. Circulation contribution and margin both increased reflecting the strength of our consumer appeal and subscription operation. Meredith Integrated Marketing continued its strong performance with revenues up nearly 50% and operating profit climbing more than 150%. As a result we maintained our Publishing operating profit margin of 20% in the quarter.

Our balance sheet remained very strong. We generated more than $50 million in free cash flow, and significantly increased our share buyback activity. We increased our quarterly dividend 16% to $0.215 per share during the fiscal third quarter.

Looking at the highlights for the first nine months of fiscal 2008. Net earnings per share rose 6% and core earnings per share increased 7%. Publishing Group advertising revenues grew 6% and operating profit margin grew by 1.2 points reaching 17.1%. Broadcasting Group non-political advertising revenues rose 2% and we continue to exercise very disciplined expense management offsetting higher paper and postal costs and continued investments in new custom marketing, online, and video initiative.

Now let's turn to our Publishing Group performance for the third quarter. Fiscal third quarter Publishing operating profit was $65 million and revenues were $323 million, both approximately even with the prior year quarter.

After an exceptionally strong first half of fiscal 2008, when Publishing advertising revenues grew more than 10%, in the third quarter Publishing experienced weakness in home, pharmaceuticals, and direct response to advertising categories, partially offset by significant growth in food, Meredith's largest advertising category.

Publishing advertising revenues were $155 million, compared to $161 million in the prior year quarter. A strong increase in net advertising revenue per page partially offset lower page volume.

Circulation contribution and related margin increased in the quarter. Circulation revenues declined, as expected, due primarily to the ongoing transition of Parents, Family Circle and Fitness magazines to the Meredith direct-to-publisher model.

Our brands continue to demonstrate a powerful connection to the consumer, as evidenced by growth in readership. According to recent data from Mediamark Research and Intelligence, readership across all of Meredith's titles is currently 140 million, up from 83 million 10 years ago. This increase can be attributed to organic growth, acquisitions and launches of new brands.

In addition, the vibrancy of our consumer brands has led to several new licensing relationships with market leaders including Wal-Mart Stores, Realogy, and Universal Furniture. These relationships further extend Meredith brands to categories including home products, real estate and furniture. I'll speak more about these programs in a few moments.

A key factor in our ongoing success is increased emphasis on developing and executing multi-platform advertising and marketing programs for our clients. We secured a series of new business wins in the quarter with programs that span several Meredith media platforms. For Procter & Gamble, we created a program for the Pure Essentials line of products that featured advertorial content in our magazine, interactive programming on Parents.com, a word-of-mouth campaign conducted by New Media Strategies, custom content on Better.tv, our broadband channel; proprietary research and a public relations campaign.

The 15-stop Better Homes and Gardens' Living Green Tour launched in February, and it's stopping at several Meredith's television markets providing opportunities to tie our national brands with local sponsorship. Sponsors include Pella, Kohler, LEE Industries along with Green Works. Content from the tour is featured on the broadband channel Better.tv and at BHG.com.

For Kellogg's we created a program for it's Frosted Mini-Wheats brand that included a series of custom videos distributed via broadband channels Better.tv and Parents.com, as well as on Comcast video-on-demand. Additionally, the campaign is being supported by custom advertorials in Better Homes and Gardens, Family Circle, Ladies' Home Journal, Parents and their related websites.

Wells Fargo signed on as the title sponsor of the Better Homes and Gardens Home Improvement Challenge. The program includes a publication for 250,000 Wells Fargo customers, and financial tools sponsored by Wells Fargo that have been integrated into various Meredith's website.

Ladies' Home Journal teamed up with Chrysler, it's media agency, and a film producer to create a feature-linked movie called "Ladies' Home Journal Presents Soccer Mom." The movie features product integration involving the Dodge Caravan and will be distributed via the Star's pay-cable television channel and through DVDs sold at retail beginning this fall. The program was recently featured in Stuart Elliott's advertising column in The New York Times.

One of our long-term strategies is to grow revenue sources that are not dependent on advertising. In addition to magazine circulation, these sources include our brand licensing, retail, and integrated marketing operation. Through the first nine months of fiscal 2008 non-advertising sources represent approximately 40% of revenues.

We have several emerging brand licensing programs that we expect will add meaningful revenues and profits going forward. The expansion of our licensing relationship with Wal-Mart for our line of Better Homes and Gardens branded home products is moving along well and is on schedule. We expect 400 to 600 SKUs to be available in stores across the country this fall.

Additionally, we recently hired Elise Contarsy to oversee the Wal-Mart licensing relationship. Elise was the former Senior Vice President of Merchandising at Martha Stewart where she managed the brand's line of products at K-Mart. The new Better Homes and Gardens real estate franchise will launch on July 1.

The Realogy management team is being led by Sherry Chris who previously served as the Chief Operating Officer of Coldwell Banker. Along with royalties based on sales volume the relationship will include advertising and subscription opportunities for Better Homes and Gardens, custom marketing assignments and database programs.

Our Better Homes and Gardens branded line of home furniture with Universal has proven to be one of the most successful furniture launches in the last 20 years. The relationship just celebrated its one year anniversary, and sales to-date are double original projections. Earlier this month we introduced a fourth collection in the line at the High Point Furniture Market in North Carolina.

To give you a sense of the scale of our brand licensing business, these activities today generate approximately $15 million in annual revenues. We expect these three newer relationships to add an incremental 12... $10 million to $12 million in revenues in fiscal 2009 at very high profit margin.

On the retail front, the Meredith's book operation has been impacted by weak sales and higher than anticipated returns due primarily to inventory reduction activities at key retailers. We are focusing on content, distribution, and cost control initiatives to improve the financial performance of our retail operation.

Meredith's Integrated Marketing is a key source of non-advertising revenue. It delivers another outstanding quarter as revenues rose nearly 50% and operating profit increased more than 150%. These results include increased contribution from three marketing services acquisitions over the last year; Genex, New Media Strategies, and Directive.

On a comparable basis, revenue rose over 30% and operating profit more than doubled due to continued growth in our custom publishing activities.

Let me share just a few integrated marketing highlights. During the quarter we were awarded additional new business by Kraft. As you may recall, we were selected to create custom magazines and provide contents for e-mail campaign, when we announced this important new relationship with Kraft in the fall of 2007.

In the short time since then we've successfully secured additional new Kraft business including circulation, database, and campaign management programs along with custom video production. Genex has been engaged by Cessna, the world's largest private aircraft manufacturing company to redesign and develop Cessna.com. The new site to launch later this year will feature robust aircraft comparison tool and interactive showrooms [ph].

Genex has also been hired by Realogy to design and developed a website in conjunction with the Better Homes and Gardens' Real Estate service that will launch on July 1. This new site will serve brokers, agents, and consumers alike.

Over the past two years we work aggressively to transform Meredith Integrated Marketing from principally a custom publisher to a comprehensive marketing services provider. The added capabilities further strengthen our competitive position and our relationships with key clients.

Now let me turn to Broadcasting Group performance for the third quarter. Fiscal third quarter Broadcasting operating profit was $19 million compared to $21 million in the prior year quarter. Revenues were $78 million, down slightly from the prior year.

During the quarter, growth in online, video, retransmission, and political revenues offset weakness in spot television advertising, particularly in the automotive, retail, and telecommunications category. Meredith's television stations continued to enhance their competitive position among adults 25 to 54 in the February ratings books. Nashville, Flint/Saginaw, Las Vegas and Greenville all posted strong share growth in Morning News. In addition, five of our stations led by Greenville and Las Vegas increased overall sign-on to sign-off ratings.

Growing non-traditional sources of revenue is another component to our Broadcasting growth strategy. Three examples include our cornerstone marketing program, our new Job Connections initiative, and Meredith Video Solutions.

Revenues from our unique Cornerstone and Meredith's magazine branded promotions increased nearly 10% in the quarter. Advertising revenues from market specific local promotions increased more than 40%. Earlier this fiscal year, we piloted a new program called Job Connections in our Kansas City Market. It takes advantage of the power and reach of our local television stations and their related websites to meet the employment recruitment needs of local businesses.

The Kansas City pilot was quite successful, and we're rolling this new program out across our group beginning with Atlanta and Las Vegas. Better, the hour line... the hour long daily lifestyle television program that's produced by Meredith Video Solutions, and runs across our station group is off to a strong start. It's currently syndicated in three non-Meredith stations and 18 additional non-Meredith markets are scheduled to begin airing the show later in calendar 2008.

Turning now to our company-wide online activities. Third quarter revenues across Meredith's consumer website including those branded by Publishing and Broadcasting rose 12% aided by strong growth at Meredith Video Solutions and our television station site.

Monthly unique visitors to Meredith's consumer websites rose 15% to 19 million, and page views increased more than 25% to 170 million. Visitors to our website viewed 2.4 million videos monthly during the quarter. Additionally, Meredith secured more than 3.3 million online subscriptions during the first nine months of fiscal 2008, compared to 2.9 million during the prior year period.

Last week, BHG.com was honored as Redesign of the Year and as Digital Team of the Year in the Media Industry Newsletter's Best of the Web competition. Combined with our digital marketing activities that I mentioned earlier, we're making strong progress towards our previously stated goal of generating 10% of Meredith's revenues via online and videos sources by our fiscal 2010. For the first nine months of fiscal 2008, approximately 6% of Meredith's revenue was generated via online sources, and that's up from 1.7% for all of our fiscal 2006.

Turning now to some full company financial metrics. We generated more than $50 million in free cash flow in the quarter. We repurchased approximately 1 million shares, more than triple the 280,000 shares repurchased in the third quarter of fiscal 2007. For the first nine months of fiscal 2008, we've repurchased approximately 2.4 million shares compared to 1.1 million shares in all of fiscal 2007. We have 1.2 million shares remaining under our current share repurchase authorization.

Unallocated corporate expenses were lower in the quarter, due primarily to lower management incentive accruals and employee benefit costs. Our current debt level is $445 million, down from $475 million at the start of fiscal 2008, and our average cost of those funds is 4.8%.

We increased our quarterly dividend 16% to $0.215 per share during the fiscal third quarter. We've paid a dividend for 61 consecutive years increasing it for 15 consecutive years.

Looking at the balance of fiscal 2008, Meredith is facing a weaker economy and related advertising demand. Fourth quarter Publishing advertising revenues and broadcast pacings are currently down in the low double-digits compared to the prior year quarter.

Meredith anticipates a 6% increase in paper prices and a 3% increase in postage rates, both effective in May of 2008. We expect unallocated corporate expenses to approximate $27 million for the full year of fiscal 2008 compared to $35 million in fiscal 2007, due primarily to careful expense management, lower management incentive accruals and employee benefits costs.

Our overall effective tax rate is expected to be 39.1% for the full-year fiscal 2008, and 40.4% for the fourth fiscal quarter. For the full fiscal year ending June 30, 2008, Meredith now expects to report earnings per share of $3.15 to $3.20 compared to the $3.31 reported for fiscal 2007.

To conclude, as I stated earlier, Meredith possesses a solid foundation and is well positioned to build shareholder value over time. We have a powerful portfolio of highly profitable media brands and assets across multiple distribution platforms and we are making continued investments to grow them inline with consumer demand and preference. Our non-advertising sources of revenue, including our integrated marketing and brand licensing businesses are positioned for continued rapid growth.

We have an extremely talented and deep bench of management; Broadcasting Group President, Paul Karpowicz; and Publishing Group President, Jack Griffin; were each recently named Broadcaster and Publisher of the Year respectively by prominent industry trade organizations.

We generate significant free cash flow; have a conservative balance sheet and modest levels of debt at a low cost of funds.

Finally, we have a proven track record of outperforming our respective industries and growing market share particularly in economic downturn. This has enabled us to emerge in a stronger competitive position.

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

Question And Answer

Operator

[Operator Instructions]. And our first question is from line of Karl Choi from Merrill Lynch. Please go ahead.

Karl Choi - Merrill Lynch

Hi. I have a few questions. First one is on the TV side. Could you talk a bit about the pacings for the fourth quarter? Is there any sort of particular weakness by either geographic location or affiliation or it's pretty weak across the board? And second is, as far as your guidance is concerned for the fourth quarter, it looks like, if my... I do my math right, the non-postage and non-newspaper... non-paper costs are actually going to be relatively up slightly or not really coming down a whole lot even though the revenues are under some pressure. Just trying to see if there is any unusual timing as far as cost is concerned?

Stephen M. Lacy - President and Chief Executive Officer

Okay, Karl. Let me take those in opposite order, while we dig out the pacing information that you requested. I'm not quite sure how you are doing the calculation, but certainly compared to either what we would have anticipated earlier or to the fourth quarter in the prior year as reported, we will have expense reductions across the organization as I mentioned earlier. Part of that being places that we think of as discretionary spending, part of it related to lower incentive accruals and some favorable results that we've had in benefits primarily in our healthcare activity for the year-to-date.

And as it relates to pacings and of course, this is just basically pacings as of last Friday, May is a weaker month than April at this point. And of course, it's very, very early for June, but June sort of looks like the quarter taken as a whole. And I don't have the affiliate information at my finger tips and Paul Karpowicz, I don't know if you could add anything to that and if not, Karl, we can get back to you a little later with that data.

Paul A. Karpowicz - President, Broadcasting Group

Yes, this is Paul. It's... your question, was it across the board, and certainly there is a softness across the board. However, certain markets like Phoenix and Las Vegas that have traditionally been very, very hot markets for us, have slowed down and as a result, we're seeing unusual softness in those places.

So, while our pacing is still very much up in the air as it relates to June, we do know that Phoenix and Vegas specifically, have not been particularly helpful. But there is really no trend across affiliation or even geography. It's just in two markets where they've had some significant housing foreclosure, mortgage issues, we're seeing a significant slowdown there.

Karl Choi - Merrill Lynch

Can I follow-up on my questions then, Steve? Is it possible to sort of give us some sense about what you expect EBITDA margins to be for the segments either for the quarter or for the year? Just to give us a better sense then.

Stephen M. Lacy - President and Chief Executive Officer

Yes. For the full year, Karl, my best estimate now is that total company EBITDA margin would be about a point lower than it was a year ago. And of course, there's lot of things between now and the end of the year that could move that a bit but that's my best sense in terms of where we are right now.

Karl Choi - Merrill Lynch

Okay. Last question. What about page, advertising yield realization in the second quarter? You saw a pretty good realization in the third fiscal quarter. Just wonder on what you see in the fourth quarter.

Stephen M. Lacy - President and Chief Executive Officer

Obviously, we are a little more than halfway through booking the advertising and while we are still seeing improvement in the net per page, it doesn't appear to be as strong as it was in our third fiscal quarter when it was really very, very strong. But we are still seeing improvements, but obviously we don't know where the July issues are going to finalize and we don't have that data for the June issues either at this point, perfectly finished.

Karl Choi - Merrill Lynch

Great. Thanks.

Stephen M. Lacy - President and Chief Executive Officer

Okay? Thanks, Karl.

Operator

Next we go to line of Barton Crockett from J.P. Morgan. Please go ahead.

Barton Crockett - J.P. Morgan Securities, Inc.

Okay, great. Thanks a lot. I just wanted to clarify one thing in terms of putting this double-digit decline that you are seeing here in your fourth quarter in context. As I look back historically, you haven't seen declines of this magnitude really since like September '01, December '01, March '01 in the respective segments, and there... it was a pretty dramatic situation there economically and just broader. I mean, the situation that you are encountering here, I mean, this seems relatively unprecedented. I'm just wondering on a qualitative basis, if you'd echo that and within that, if you can provide some context in terms of why you are so confident that it's more cyclical than secular?

Stephen M. Lacy - President and Chief Executive Officer

Let me take that, I guess, and thanks for those questions, Barton. Let me take that in reverse order. And I think the primary reason that we feel so strongly that this is secular is that we have absolutely seen no change in our interaction with the consumer and of course, the important measures of that are big, big mail volumes that we do right at the end of the calendar year, and then the mail activities, again in March. In terms of our response rates, our renewal rates, absolutely rock-solid and really no deviations that would cause us to believe that the very, very large consumer audiences that we aggregate are going somewhere else for that information, and that is obviously the most important part of the long-term impact on advertising revenue.

In addition, and some of you may recall that there was an industry conference a few weeks ago... several weeks ago, I guess now, the Bear Stearns conference, Jack Griffin and I were there, and we were talking to the best of our knowledge at that point about advertising in the fourth quarter, and that for us is the May, June and July issues of the magazine. And we did have a pretty good sense of the May issues at that time, and they looked a lot like the third-quarter results, and the June issues were quite weak and July appears to look like June. And so, at this point in time, it's kind of two sets of issues, not 10 or 12, and so what we're giving you is our best sense based on really the data points that we have available. And if you... regarding pacings, sort of the same thing. The April month is better than what we're seeing for May and June. And so, it's a series of data points and obviously we are trying to get a sense of what this means and what the duration will be and that's kind of where we are at this point, Barton.

Barton Crockett - J.P. Morgan Securities, Inc.

Okay, all right. Shifting gears a little bit in terms of expenses, you guys in the last significant ad downturn were able to cut expenses quite a lot like the March and June quarters of '02. You were down 6% year-to-year and double-digits year-to-year in those quarters. Is there anything, I know you have got some rise... problems with postage and paper, but overall, I mean is there any reason why you'd have less flexibility now to cut costs than you did back then?

Stephen M. Lacy - President and Chief Executive Officer

Well, you've already focused on the biggest issue, and then I'll give you some sense of the things that we are able to do. But we purchase, on an annual basis, a little bit less than $200 million in paper. And so with the three increases, the November-February and the anticipated May, fourth-quarter prices will be up about 15% year-over-year and, of course, the volume will ultimately depend on where advertising plays out as we finalize those books.

But certainly we are very, very carefully managing expenses across the enterprise and really focused aggressively in places such as contract renegotiation where they are open at this point, expanded use of our digital technology that includes what we can do with our photography and our in-house pre-press operation, clearly limiting any discretionary travel and deferring capital expenditures and holding positions open to later time periods where possible. And those are the kind of things that we can do, I guess, what I would say sort of short-term and tactical while we're getting a sense of where the advertising market plays out.

Barton Crockett - J.P. Morgan Securities, Inc.

Okay.

Stephen M. Lacy - President and Chief Executive Officer

Okay?

Barton Crockett - J.P. Morgan Securities, Inc.

And then, just one final question. Can you update us on where you are with the CFO search?

Stephen M. Lacy - President and Chief Executive Officer

Sure, happy to do that. We have engaged Spencer Stuart and I have been very, very pleased with the interest that we have seen. We have done one round of interviews, having some follow-ups with that first group of candidates, and next week we'll be introduced to two additional, very interesting candidates and I think in the relative near-term we'll have the search wrapped up. I'm feeling very, very good about the response from people who have important industry knowledge and some beyond our traditional industry.

Barton Crockett - J.P. Morgan Securities, Inc.

Okay, thank you.

Stephen M. Lacy - President and Chief Executive Officer

Okay. Thank you.

Operator

Next we go to the line of Paul Ginocchio from Deutsche Bank. Please go ahead.

Paul Ginocchio - Deutsche Bank

Thanks. Hey, good morning, Steve. First, can you just talk some of the... what categories were incrementally weak going from the fiscal third quarter sort of, June-July, sounds like there obviously was a downturn? Which categories caused that sort of incremental deterioration? And then second, again, looking at your '01 and '02 performance, you're down, I think your ad revenues on a clean basis were down mid-single digits. But sort of what you are seeing now in the fourth quarter, it seems like the driver of this downturn is a little bit different from the driver of the last one, with house and gas prices. So, was it... do you think it's unreasonable to assume that this downturn looks a little bit worse than the '01, '02 one in your eyes? Thanks.

Stephen M. Lacy - President and Chief Executive Officer

Well, I'll start with that second part of your question and then I'll be... I'll ask Jack and Paul to speak to categories for their respective businesses. If you go back again and look at the '01 and '02, the real sharp decline really happened in the quarter, the first calendar quarter right after 9/11, and it was very, very dramatic.

And as I said, what feels different to us at this point in time is that we are really dealing with kind of two months out of a quarter and obviously, I think, the more important thing will be how it paces as we go on into what will be the first quarter of our new fiscal year. And we'll be providing information on that as it comes available and we'll have some sense at the mid-year media review and certainly better sense when we release earnings. But there are different circumstances than there were before. It's not event-based. I would say it's more macroeconomic-based at this point in time. And like everyone in the market, we're cautious and we're trying to get a sense of really where it's going to play out a little bit longer term. But, Jack, why don't you speak to the category information in the third fiscal?

John H. (Jack) Griffin, Jr. - President, Publishing Group

Paul, this is Jack Griffin. And let me try to see if I can give some narrative to the Publishing advertising performance in addition to what Steve already mentioned. As you remember, 2007 from a calendar year standpoint was quite good. And the first half of our calendar 2007, we started to see some real momentum in the business, so we're up against those comparables. We are very clearly in a difficult environment presently. But it's quite interesting, if you look at the first five months of the calendar year for Meredith, that's the January through May issues. In the aggregate we strung together five sets of issues that were down from the prior year in revenue in the low to mid-single digits. Even though the paging information that you see publicly looks more like it's in the high single-digits, we've been doing a very good job on pricing.

Now, baked into that performance, that sort of string of five issues, we saw a pretty uniform weakness in the advertising categories in which we over-index as a company relative to the competitive set. So that would be DTC Pharmaceuticals, Home, and... excuse me, Household Supplies, and Direct Response. So double-digit weakness in those categories that, when you add them all up were 30% to 40% of our business. So the downturn that we experienced was not surprising to us.

Also in this environment we have been... we had been and have been achieving strong pricing performance and that's absolutely critical to our business in an environment when paper, as Steve said, is going up by a healthy clip and postage is going up. So through the May issues, the performance that we were achieving was quite understandable to us and in advertising categories that were behaving as we expected them to.

Now what we've seen in one month, in the month of June as Steve said, the performance, and you haven't seen the public numbers yet, but the performance was disappointing. And driving it where the categories I mentioned previously that had been weak all along and a sudden downturn in the food category.

In the third fiscal quarter, food and beverage was up in the mid-single... in the mid-double digits, so about 15%. And then all of a sudden we turn into the period of June and it has been now... it is now down in the double-digits. So we're closing July issues and as Steve said July is behaving like June, so we essentially have two issues, two sets of issues at the end of our fiscal year that are down in a tough environment, they are disappointing to us. Our teams are all over the business doing everything you can imagine to remediate the performance, and we essentially have two tough issues in a tough environment and we are sorting out the exact construct of the decline and when we talk to you the next time we will be able to speak with great... in great detail about where it's coming from. But, I would sort of summarize by saying that the new news in the fourth quarter that's made it so different than the prior period is the downturn in food and that's our largest category.

Paul Ginocchio - Deutsche Bank

Thanks a lot Jack. Thanks very much.

Stephen M. Lacy - President and Chief Executive Officer

Okay. Paul, do you want to speak to categories?

Paul A. Karpowicz - President, Broadcasting Group

Well, I think for the Broadcast side, the most significant category is automotive, and automotive represents about 25% of our total business. And when you have your largest category down double digits, obviously that's where we are seeing major softness. And ironically, in the quarter that we are currently in much of the automotive was booked, but now we are seeing cancellations on a pretty regular basis and that's been very frustrating. So really, as far as categories go, I would have to say it's primarily automotive.

Paul Ginocchio - Deutsche Bank

Thank you.

Stephen M. Lacy - President and Chief Executive Officer

Okay. Thank you for the question.

Operator

Next we go to the line of Catriona Fallon from Citi. Please go ahead.

Catriona Fallon - Citigroup

Yes, hi. Thanks for taking the question. I'm trying to work through kind of what's changed over the past month. I mean we have been watching the magazine, ad pages, and they have been quite bad through the entire quarter, and yet you still hit the revenue number and you hit the bottom line, and now you are guiding essentially down $0.35 for the next quarter. So even if I take what you are saying about double-digit declines in Publishing and Broadcasting, it's still tough for me to see how costs are increasing as much as you are indicating. I mean, when you spoke at Bear Stearns you are already seeing paper prices up 6% to 7%, and postage you are already expecting that to be up. So I am just... I am just trying to understand what's changed about the business to make you so much more negative on the bottom line today versus a month ago?

Stephen M. Lacy - President and Chief Executive Officer

Well, to be very clear once again we have provided no guidance until today about the fourth quarter in any way, shape or form. But the fundamental difference is that; let's just take Publishing as an example. We were down 4%, 5% in advertising, and with the combination of very strong revenue per page that we delivered, cost management and really strong growth from the non-advertising based businesses, Publishing was able basically to deliver results that looked a lot like the third quarter.

Now we turn to the fourth quarter and the story, companywide or Publishing in particular, is really very much related to the advertising information that we have provided this morning. It has to do with volume, and it is, if you do the calculation of the impact of advertising for both Publishing and Broadcasting, it is about $0.20 a share more than the change in guidance. So we are able to offset that partially by the volume reductions which require less paper, expense reductions that we're making and continued strong increases in Integrated Marketing. But, the math and the delta is very much advertising volume-related in the two businesses.

Catriona Fallon - Citigroup

Okay. And just to clarify, I mean, you speak of the 40% of revenue that's from non-advertising businesses, but in reality, if that's coming from Genex and Directive, it's basically custom marketing for a lot of clients as well. So it is marketing services-oriented although it's non-traditional advertising in your magazines or on your television stations, correct?

Stephen M. Lacy - President and Chief Executive Officer

Well, it's not exactly correct. It is very different than advertising for two key reasons. First and foremost, it doesn't come out of advertising budget, so it's not a matter of going back and reselling all the space in the magazines or reselling all the spots available on our television stations month after month after month. They tend to be multiple million-dollar contracts that are signed for multiple years. And it is not advertising-related moneys, we don't call on the same people we call on for advertising, and the decisions are made very high in the organizations and they tend to be quite strategic in nature. And for that reason we think of it and we call it out as non-advertising sources because it is non-advertising sources.

Catriona Fallon - Citigroup

Okay. Thank you.

Operator

And next we go to the line of Michael Meltz from Bear Stearns. Please go ahead.

Michael Meltz - Bear Stearns

Hi, I'll try to be quick here. Can you give us the revenue contribution from those three acquisitions in the quarter, and I have two follow-ups?

Stephen M. Lacy - President and Chief Executive Officer

How about giving me the follow-ups while I dig out the numbers you are talking about?

Michael Meltz - Bear Stearns

Sure. It sounds... in tone it sounds like on the online side it was a slower quarter for your Publishing properties. Can you talk a little bit about what you have seen there and what the expectation is?

Stephen M. Lacy - President and Chief Executive Officer

Yes, you are correct in that and I think I'll ask Jack to put some additional color around that. But the interesting thing you may recall that that was the business I ran day-to-day many years ago, our advertising in our consumer websites on the Publishing site has always mirrored and been the exact same clients that we were dealing with on the print side. And that's been mostly good for us and allowed us to do some cross-selling, and so we are really dealing with some of the same budget constraints on the Internet side that we are on traditional publishing. But I'll ask Jack to speak to that Internet while I get the other information.

John H. (Jack) Griffin, Jr. - President, Publishing Group

Yes. As Steve said, our revenue performance in publishing on the Internet in the quarter was weaker than we had hoped. Steve talked about some of the advertising category-related factors that go into that, and I think there are some other factors that are worth mentioning, as you look at the competitive construct of that business. As you all see every day, lots written about the advertising networks and particularly advertising networks that are social media and consumer-generated content. The amount of inventory that has now been rolled up and put in front of major advertising buyers from these non-branded sites is really remarkable versus a year ago. So it has put downward pressure on CPMs.

If you look at some of the social media roll-ups today they are doing CPMs in the $2 to $3 range. However, we're in the branded businesses... we're heavily in the branded business, and we've been very steadfast in holding our CPMs and maximizing our saleable inventory and riding through this period that I think is really quite a time in the online space. We are seeing, as we turn into the fourth quarter, May and June bookings that we think are encouraging and that validate what we've been doing to ride through this period of category weakness and fairly significant downward pressure on pricing as a function of all of this new inventory that is all of a sudden available to big advertising buyers. So --

Michael Meltz - Bear Stearns

Jack, was your online... at the Publishing Group, was your online revenue up in Q3 and are you expecting it to be up in Q4?

John H. (Jack) Griffin, Jr. - President, Publishing Group

Our online revenue was not... in Publishing, it was not up in Q3.

Michael Meltz - Bear Stearns

Okay.

John H. (Jack) Griffin, Jr. - President, Publishing Group

And we are expecting in Q4, we don't have the outlook for Q4 given that we're really in the third week of the first month.

Michael Meltz - Bear Stearns

Okay.

John H. (Jack) Griffin, Jr. - President, Publishing Group

The online business begins more like the Broadcasting business where we book it day-to-day.

Michael Meltz - Bear Stearns

Understood, understood. Paul, I've two questions for you. Can you give us... I don't think you mentioned political today, can you give us an update as to what you're seeing, and what your expectations are for political ad spending in your markets?

Paul A. Karpowicz - President, Broadcasting Group

Well, it's been spotty to date, and while there has been political activity out in the broadcast universe, it has been very specific. Obviously, Pennsylvania has seen a lot of money, Ohio saw a lot of money, Iowa saw a lot of money, New Hampshire saw a lot of money. If you were not in any of those states, you probably have not seen a lot of money to date. Currently, we are seeing some money in our Portland station, and we do have expectations as we get deeper into the political season that we've got some pretty compelling local races, whether they be gubernatorial in our Kansas City station we think we've got some opportunities on the House and Senate side in Arizona. But from a presidential perspective we don't see a lot of additional dollars coming through just yet. But, right now we are kind of tracking about where we thought we would be on political. We had not budgeted for a huge political year based on our knowledge of where the key local races were going to be. So we are about where we thought we would be in terms of political.

Michael Meltz - Bear Stearns

So as you look forward, is... I don't want to speak for you, is your sense, though, that the fiscal '09 may be closer to '05 than '07?

Paul A. Karpowicz - President, Broadcasting Group

Well, in '07, and I don't know if you remember, but we had a extraordinary year in '07 primarily because of the very unusual situation that happened in our Hartford market where Senator Lieberman ran against... there were three people in the race and that really kind of skewed our political revenue that year. So, yes, I think you are correct that our political revenue is going to be more in line with what we saw in '05 versus '07.

Michael Meltz - Bear Stearns

Okay. Last question from me. In the quarter, can you just... I don't know if you said this, I know you talked about auto being weak, what was the delta in local versus national advertising?

Stephen M. Lacy - President and Chief Executive Officer

Let's get... we'll dig that out and let me answer your earlier question on Integrated Marketing.

Michael Meltz - Bear Stearns

Sure.

Stephen M. Lacy - President and Chief Executive Officer

Okay. As I said earlier, if you look at the business in total, revenue was up about 50% and profit increased more than 150%. If you back out the acquisition, revenue was up about 30% and profit more than doubled from our traditional or our core business, and those acquisitions added about $5 million to the top line in the quarter.

Michael Meltz - Bear Stearns

Okay.

Stephen M. Lacy - President and Chief Executive Officer

Okay?

Michael Meltz - Bear Stearns

Thank you, Steve.

Stephen M. Lacy - President and Chief Executive Officer

Okay.

Paul A. Karpowicz - President, Broadcasting Group

Okay. On the difference between local and national, now this is for third quarter?

Michael Meltz - Bear Stearns

Yes.

Paul A. Karpowicz - President, Broadcasting Group

Okay, non-political local would be about minus 4 and national was about minus 8.

Michael Meltz - Bear Stearns

Got it. Okay. Thanks for your time.

Stephen M. Lacy - President and Chief Executive Officer

Thank you.

Paul A. Karpowicz - President, Broadcasting Group

Sure.

Operator

Next we go to the line of Robert Rodriguez from First Pacific Advisors. Please go ahead.

Robert Rodriguez - First Pacific Advisors, LLC

I was just curious as new to your company and all; have you done an overlay on your magazine distributions and subscriptions versus ZIP Codes so that you can identify whether you are getting a skewing in your recirculation, advertising, et cetera, so you can see whether it's pockets or whether it is more granulated across your entire advertising and circulation base?

Stephen M. Lacy - President and Chief Executive Officer

Okay, hit me again with that question because I'm having --

Robert Rodriguez - First Pacific Advisors, LLC

Okay, I'll go through it this way. There are collapses going on in this country right now, California, Florida, and Nevada. I can go down through that and down to ZIP Codes. You can do it by ZIP Codes in terms of what's going on in the housing sector. Obviously, you have circulations that are publications and advertising direct those areas. Have you overlaid ZIP Code with your circulation and advertising to see whether you're having a much more severe skewing in certain areas or is your advertising and circulation issues more granulated across the entire country?

Stephen M. Lacy - President and Chief Executive Officer

Okay. Thank you. Well, first of all our circulation base is not postal, so it tends to be more in the center of the country, really because of the type of publications we create and the audience that we speak to. But the advertising is sold on a national basis. And so we had a couple issues that Paul mentioned with weaker housing market in Phoenix and in Las Vegas on the television side, but there are no such factors really at play from a magazine point of view, because there is very little regional advertising. There was many years ago but that pretty well is not part of the business. And of course, as we said earlier, the readership numbers are actually up over this time period.

Robert Rodriguez - First Pacific Advisors, LLC

Okay. And a follow-up, I can see your period of time right now that you are facing with rising postal rates, rising paper, high energy prices that are hitting the consumer is very much analogous to the late 1970s. Have you taken a look at your business of what you are going through today vis-à-vis, shall we say, your late 1970s experience, and have you discerned anything from those?

Stephen M. Lacy - President and Chief Executive Officer

We have not specifically looked at the late 1970s, but even in all sincerity trying to look at the post-September 11th time period, we have such a very, very different portfolio of assets. We were very, very home-dominant back at that point in time, over about 40% of our revenue on the print side came from home and direct response. And then, since you are little bit newer to the story, we made a series of acquisitions that added a whole parenthood business into the market, and we have a much larger broadcast operation than we would have had in either of those time periods. But, we can go back and look at the 70s but this was just a much, much smaller and a much, much more narrowly focused company at that point in time.

Robert Rodriguez - First Pacific Advisors, LLC

I can appreciate that, but those trends right now, the consumers out there is getting hit with elements that I haven't seen since the early 1980s, and having been on the corporate side we experienced those, and it seemed awfully similar to what you guys are starting to go through right now.

Stephen M. Lacy - President and Chief Executive Officer

Well, that's very helpful, and we will take a look at that. Thank you.

Robert Rodriguez - First Pacific Advisors, LLC

Bye, bye.

Operator

Next we go to the line of Edward Atorino from Benchmark. Please go ahead.

Edward Atorino - The Benchmark Company

Hi, good morning. In one of the handouts you indicated you might get online revenues of 50 million bucks and when you view [ph] this year versus $35 million in FY '07. Given what was said earlier about the trends there, do you still think that's a target, number one? Number two, if you look at the non-public, non-advertising, non-circulation portion of the magazine group, could you maybe break down a little bit in terms of what's Integrated Marketing, what's new media, et cetera?

Stephen M. Lacy - President and Chief Executive Officer

Okay.

Edward Atorino - The Benchmark Company

And it's about... if I did my math right, it's about $81.5 million?

Stephen M. Lacy - President and Chief Executive Officer

In what time period, Ed, are you speaking about?

Edward Atorino - The Benchmark Company

Which --

Stephen M. Lacy - President and Chief Executive Officer

What?

Edward Atorino - The Benchmark Company

For third quarter.

Stephen M. Lacy - President and Chief Executive Officer

Okay, all right, thank you. Well, first of all from an online point of view, I think that $50 million number from online sources is a very safe number at this point in time, because we've had very good growth on both the video and the Broadcasting side and even in the third quarter with the softness Jack mentioned in Publishing, we are very much on track for those online measures. So I think your number is a safe number that --

Edward Atorino - The Benchmark Company

That's your number.

Stephen M. Lacy - President and Chief Executive Officer

Yes, from an earlier discussion. The mix is a little different, but I think the number is secure. Now you are looking on the press release, is that correct, in the other category?

Edward Atorino - The Benchmark Company

Well, I didn't... I don't think it's broken out in the press release, but if you take the total Publishing revenues of $323 million and if you deduct advertising and you deduct circulation, there's another number which I get as $81.5 million?

Stephen M. Lacy - President and Chief Executive Officer

Yes.

Edward Atorino - The Benchmark Company

I guess that's made up of Integrated Marketing, New Media licensing, et cetera, right?

Stephen M. Lacy - President and Chief Executive Officer

Yes. And the largest piece of that is the Integrated Marketing activity.

Edward Atorino - The Benchmark Company

Has [ph], I don't know... would you give any granularity to those numbers at all? Well, licensing... if licensing is going to be... I think you said $12 million whatever it was, and if I divide that by four, I would get a number for licensing, right? And if I take the $50 million in New Media and figure most of that's in Publishing, I can get a number for that, and what's left, only one, book publishing and Integrated Marketing, right?

Stephen M. Lacy - President and Chief Executive Officer

Yes, and the Integrated Marketing piece would be about half of that number... of the remaining number, Ed.

Edward Atorino - The Benchmark Company

Okey-dokey.

Stephen M. Lacy - President and Chief Executive Officer

Okay?

Edward Atorino - The Benchmark Company

That will work.

Stephen M. Lacy - President and Chief Executive Officer

Okay. Thank you.

Edward Atorino - The Benchmark Company

Bye, bye.

Operator

Next we go to the line of William Bird from Smith Barney Citigroup. Please go ahead.

William Bird - Smith Barney Citigroup

Yes. Hi, Steve. I was wondering if you could just give us how June finished up, what are ad pages expected to be down for June? And then I was wondering if you could just talk about Publishing ad pricing for the March quarter versus the June quarter?

Stephen M. Lacy - President and Chief Executive Officer

Sure. June isn't quite finished yet, but as Jack said, it was really the month that was quite weak in the fourth quarter to-date. And so, that would be certainly well into a double-digit decline in both pages and in revenue. But we're not quite finished yet and we're obviously working on July. So that's where we are, and I think I said earlier on the call that we are still seeing in those issues improvements in nets per page but the improvement is not as strong as it was in the third fiscal quarter.

William Bird - Smith Barney Citigroup

And what was it in the third fiscal quarter?

Stephen M. Lacy - President and Chief Executive Officer

Probably 4% or 5%.

William Bird - Smith Barney Citigroup

4% or 5%, and would you say it's maybe half that in the June quarter?

Stephen M. Lacy - President and Chief Executive Officer

Probably something like that would be my best guess, obviously not knowing where July is really going to come out.

William Bird - Smith Barney Citigroup

Okay. Thank you.

Stephen M. Lacy - President and Chief Executive Officer

Okay?

William Bird - Smith Barney Citigroup

Thank you very much.

Operator

Our last question is a follow-up from Barton Crockett with J.P. Morgan. Please go ahead.

Barton Crockett - J.P. Morgan Securities, Inc.

Okay, great. Thanks for taking the follow-up. I just wondered if you could comment on how you see your magazines trending versus the competitive set for the ones [ph] we have data. And in particular, just looking at one of the magazines that is relatively visible, the Martha Stewart magazine, they seem to have held up pretty well. If you can comment on what seems to be working there that isn't really benefiting you? Thanks.

Stephen M. Lacy - President and Chief Executive Officer

From the information that we have publicly to-date, and that is only two of the months that we are talking about here, we would see that we would have slightly less overall share by, maybe, a 10th of a point or two compared with the same period a year ago. And obviously, we don't have any of the data related to the fourth fiscal quarter where especially in the months of June and July we think we are going to have pretty weak issues. And the real reason that you see those changes have to do with what Jack mentioned earlier, which was those categories where we really over-index compared to the industry taken as a whole, and especially in the whole pharma area. And, Jack, if you'd want to add to that?

John H. (Jack) Griffin, Jr. - President, Publishing Group

Sure. I'm looking at data through May and the... I'm looking at Martha Stewart Living, for example, Barton, and through May it looks about flat from the prior year. If you remember, Martha Stewart Living as a magazine is coming out of a trough that was related to the difficulties in that company that go back to 2004. Through that period, the magazine Martha Stewart would run about 526 pages for the five-month period in absolute numbers that would compare to Better Homes and Gardens at 706 and a Family Circle at 602. So, I think that gives you some indication in terms of absolute numbers of the relative scale of the magazines.

There is no question that the public page numbers for some of our big titles have been off from the prior year. I talked about that a little bit previously. It's a function of the advertising categories, it's a function of the comps from the prior year and it's a function of this environment that is, as you know, quite difficult particularly in the home area and the pharma area. What I can tell you is that we have programs and plans in place at our senior management levels to get this advertising momentum story and head it in the direction that we want it to. We have special sales incentives. We have a major effort going on in terms of advertising category diversification. We have a new corporate marketing program hitting the streets, emphasizing the reach and efficiency of Meredith as a whole, which is incredibly important to major advertisers in this kind of a difficult economic environment, and we are continuing to invest in our group sales and Meredith 360 and cross-platform programs. So, we have a management team that is all over this in our magazine business and are out there working with clients and agencies to maximize every revenue opportunity in what is clearly an environment that calls for continued and renewed vigilance.

Barton Crockett - J.P. Morgan Securities, Inc.

Okay, all right. Great. Thanks for going through that.

Operator

Mr. Speaker [ph], we'll turn the call back to you for any closing comments.

Stephen M. Lacy - President and Chief Executive Officer

Okay. Thank you very much. We certainly appreciate everyone's attention and the questions that came through on the call today, and I will be available should there be any follow-on questions and would be happy to take those as well. Thank you very much.

Operator

Ladies and gentlemen, this conference is available for replay after 1 PM Eastern Time today through April 29th at midnight. You may access the AT&T Executive Replay Service at any time by dialing 1-800-475-6701, and enter the access code 916134. International participants may dial 320-365-3844. Again, those numbers are 1-800-475-6701 and 320-365-3844 with the access code 916134 and it is available after 1 PM Eastern Time today through April 29th at midnight.

That does conclude your conference for today. Thank you for your participation. You may now disconnect.

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Source: Meredith Corp. F3Q08 (Qtr. End 03/31/08) Earnings Call Transcript
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