Meredith Corporation
Q3 2020 Earnings Call Transcript

Published: 14 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Meredith’s Fiscal 2020 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.I would now like to turn the conference over to your host, Mr. Mike Lovell.

[Mike Lovell:]

Good morning, and thanks, everyone, for joining us. Our call will begin with comments from President and Chief Executive Officer, Tom Harty; followed by Chief Financial Officer, Jason Frierott. Remarks this morning will include forward-looking statements, and actual results may differ from our forecasts. Reasons for differences are described at the end of our news release that was issued earlier this morning and in our SEC filings.Certain financial measures that we’re discussing on this call are expressed on a non-GAAP basis and have been adjusted to exclude the impact of special items. Reconciliations of these non-GAAP measures are included in our slide presentation, which is available in the Investor Relations section of meredith.com.Finally, an archive of the call will be available on our website later today. Now I’ll turn the call over to Tom.

[Tom Harty:]

Thank you, Mike, and good morning, everyone. I hope you’ve had the opportunity to see our news release issued earlier this morning. I want to introduce Jason this morning, who joined us in March. He was most recently at Wabtec Corporation. Jason is a 20-year plus veteran of General Electric, where he held senior finance roles in its Transportation, Power & Water and Energy businesses. Jason brings with him strong financial analytic capabilities and attention to detail while still being able to see the big picture, experience focusing on cash flow and liquidity and most importantly, strong leadership skills. We are glad to have him lead our financial organization and be part of our senior leadership team. As we announced last year, Jason succeeds Joe Ceryanec, who retired during the quarter.We’re doing things a little differently today, which you’ve probably already noticed, starting with our press release. We’ve also posted a presentation that Mike referenced to our Investor Relations website to complement our fiscal third quarter earnings release and our update this morning. They include additional disclosures, we think you’ll find very useful.I’ll start with Slide 3. The outbreak of COVID-19 and efforts to slow it has created an environment unlike anything we’ve seen. Amid great uncertainty, we are adapting quickly and focusing on what we can control and our strengths. Our top priorities are

[Jason Frierott:]

Thanks, Tom. Good morning, everyone. I’m really excited to join a company with such a proud history and demonstrated success at growing the portfolio of so many well-known and relevant brands. It’s clear Meredith’s brands matter more to consumers now more than ever. I’m looking forward to partnering with Tom and the leadership team and our Board of Directors to successfully navigate Meredith through this challenging environment. Echoing Tom’s comments, we’re introducing some changes to our earnings presentation with a goal being of being greater clarity, transparency with our stakeholders.Let me begin on Slide 5. Given the current environment, we announced on April 20, a series of targeted measures to conserve cash and provide as much financial flexibility as possible as we evaluated areas of opportunity to conserve cash, our actions impacted a variety of stakeholders, including our shareholders, employees, suppliers and partners. We also initially focused on actions that can be executed quickly with immediate impact.The first item was our Board’s unanimous decision to pause our dividend, giving us maximum financial flexibility during the downturn. In this economic environment, financial prudence and flexibility are critical. The Board remains committed to resume the dividend in the future when circumstances permit. And we will – and we see three factors when considering our dividend policy going forward. Seeing a path to economic recovery and in particular, the advertising market recovery, our cash flow needs, including investment to support future growth and ensuring compliance with terms in our debt and preferred stock agreements.Second, we implemented a series of compensation and salary reductions, including reductions in Board of Director fees and officer, executive and other employee salaries. These reductions affected 60% of employees and increased an impact for higher-earning employees. The third area is eliminating capital expenditures. We will continue to prioritize business-critical investments above discretionary items. But for the short and medium-term, we, like many others, are managing with reduced investment. The fourth focus area is working capital. We’re closely monitoring accounts receivable and accounts payable.On the AP front, we’re optimizing scheduling with our suppliers and vendors to be consistent with market norms. For the month of April, AR and AP combined, we are seeing net cash activity consistent with recent history. Finally, we continue to evaluate other costs across the company as we seek to optimize capital allocation and align the organization to be as efficient as possible.In terms of impact, while we don’t know the duration of all these measures and much can change over time, on an annualized basis, the buckets break down as follows

[Tom Harty:]

Thanks, Jason. Clearly, we are experiencing an environment unlike anything we’ve ever seen. While we do not know when the advertising environment will return to normal or what the new normal will bring, we have adapted swiftly, focusing on what we can control and emphasizing our strengths. That includes continuing to create, without interruption, content and products that inspire and inform consumers across all media platforms. We are encouraged by the engagement we’re seeing across digital, social, television, video and print.We know that connection with the individual consumer who accounts for approximately 50% of our revenues will also inform our advertising and performance when the advertising recovery happens. Until then, we have and we will continue to take strong measures to protect and grow our cash position, enhance our financial flexibility and position Meredith for the future. This includes the cash conservation measures discussed this morning.As Jason mentioned, these measures are already driving results. At April 30, we had $150 million of cash with no change in our revolver utilization. I want to reiterate the Board’s intention to resume the dividend when circumstances permit. The framework we’ll use to evaluate includes the factors Jason mentioned

[Operator:]

[Operator Instructions] Your first question comes from the line of John Janedis with Wolfe Research.

[John Janedis:]

Hi, good morning, guys. Tom, I think your category mix in national and local are very different. So can you talk about what you’re seeing from your large national categories like prescription and non-prescription drugs? Are those holding it better? And based on the way the money flows in, do you think national print will continue to outperform local? And then can you give us some color on national digital, is the traffic being offset by CPM pressure?

[Tom Harty:]

Thanks, John. Yes. So and I’ll also ask Patrick McCreery, who’s on the phone, to kind of chime in a little bit about the Local Media Group categories. But what we’re seeing on the national side, not a surprise, the categories that are feeling pressure

[Patrick McCreery:]

Yes. I mean, obviously, the largest – the most impacted on local media was automotive. And our largest category now, as has been for the last year, is professional services, and that seems to be suffering less than some of the other categories.

[Tom Harty:]

Yes, John, on your question on rates, yes, so the demand isn’t there. So when you look at the programmatic area from a digital perspective, when there’s not a lot of demand, you’re actually seeing CPMs fall. In the last couple of weeks here, in the last two weeks, we’re seeing some firming of the rates. Actually, rates are starting to increase a little bit, which gives us a little bit of optimism, but that really is – it’s a demand-driven inventory model that we’ve seen decline. So we have huge increases in traffic, but not as much demand, and that puts the CPMs down from a programmatic standpoint.

[Tom Harty:]

Thank you very much.

[Operator:]

And your next question comes from the line of Dan Kurnos with The Benchmark.

[Dan Kurnos:]

Thanks, good morning. Tom, just maybe to go back on some things you commented on, I guess, based on this environment. Does this give you sort of the opportunity to accelerate sort of the rightsizing or the way that you want to go about frequency changes within your portfolio? And then we’ve heard a lot from private and sort of other channels and certainly in this environment that there’s been more of a shift towards an e-commerce focus given the shelter-in-place orders, and I know that magazine has historically been more of like a catalog. But can you maybe speak to if you’re thinking about getting even more involved than you already are in the affiliate channel with some of your brands?

[Tom Harty:]

Sure. So we don’t have any plans, Dan, on the frequency change. We’ve done a lot of work on frequency in the past. We kind of take a once-a-year view where we go and look at the frequency that we have, rate bases, et cetera. So currently, we don’t have any plans to do that. Actually, on the consumer side, as we mentioned on the call, I think one of the biggest learnings and the biggest surprises that we’ve had is the such – the increases in demand for magazines. I make a lot of comments in the past that we’re past the point where consumers are looking at one medium versus the other. We have – I always like to say that I have two sisters that are 10 and 12 years older than me that are both digital natives now and they consume magazines and they consume digital.So in the last six weeks, we’ve seen incredible demand for printed magazines. We run direct mail campaigns for People Magazine on a quarterly basis, so it’s a regular thing. Every quarter, we’re running these, and the one that we just dropped in March saw a 50% increase in demand versus the prior year. So huge renewals for People are up 13%.So when others – some of our competitors are looking at lowering rate bases and change in frequency, we’re being kind of leaning in, actually, in the last month and actually have been making investments to go out and acquire more magazine subscriptions because the lifetime value is there. And actually, the media that we can engage is actually a lot less to go out and acquire subscriptions. So we don’t have any plans, but we do look at that in the future on an ongoing basis. Your second question was related to…

[Dan Kurnos:]

A shift towards e-commerce and affiliate.

[Tom Harty:]

Yes. Yes. So we’re seeing – again, we’re seeing great demand from our e-commerce affiliate. Early on in the crisis, actually, Amazon was putting a little bit of a halt to some of our links to some of our products because they weren’t being treated as critical. So that was a little bit – it only lasted a couple of weeks. But actually, now we’re kind of reengaged in getting that back up. So we’re seeing – as not unexpected, you’re seeing huge shifts in consumers buying and transacting online for goods and services. And our investments that we made a few years ago in e-commerce, affiliate marketing has really paid dividends, and we’re seeing big, big increases in that.

[Dan Kurnos:]

Just housekeeping. I’m assuming your – one of your latter responses to one of John’s questions that in terms of the timing of recovery, part of the national timing issue is because April and probably some of May were already printed, correct?

[Tom Harty:]

That’s correct. So I think the early May and April, I don’t think April was completely closed yet, but May was. But we have People Magazine now, so it’s a little different. Obviously, we’re still closing People Magazine in the quarter, but that did help some of the demand. But historically, and we believe this is true, that the magazine demand will be better than what we see in local broadcast and digital for the current quarter and possibly into the future.

[Dan Kurnos:]

Can you just talk about People a little bit, Tom, and just in general, how it’s performing? Obviously, given sort of the big – being a big profit center and sort of relative also in general to what you’re seeing in trends at newsstands.

[Tom Harty:]

We had newsstand overall, early on in the crisis because there was so much demand with people going to the grocery store and retail. We actually had large increases in the first couple of weeks, not surprising. Longer checkout lines, more checkout lines open. Then we saw some not insignificant decreases and actually now that’s actually starting to rebound. So the current – the last week, we have some early reads on People Magazine and the last week’s issue was almost back to pre-COVID from that perspective from a newsstand sale. Again, it’s early.

[Dan Kurnos:]

Got it. Super, helpful color. Thanks, guys.

[Operator:]

And your next question comes from the line of Jason Bazinet with Citi.

[Jason Bazinet:]

Thanks for the April piece. I just had a broader question in terms of what your sales people are saying about the environment. I can imagine advertisers – one leg of this was just the lockdown where everyone’s at home. And then there’s the sort of second part, which is the recession. If – based on what your salespeople are saying, is there any way to sort of tease those apart, so we can get a better sense of how that environment might improve some even if we’re still in a recession given the sharp drawdown? Thanks.

[Tom Harty:]

Yes. Jason, what’s – we kind of look at it in three buckets. And again, you’ll understand that this can change day-to-day, week-to-week. But what we’ve been seeing early on from our largest clients, we would say that we have three kind of buckets. One being that they’re taking a complete pause. So we’ve had – some not insignificant clients have turned and said, "For the next quarter, we’re going to go dark, and we’re not going to be advertising at all." We’ve had another bucket of clients that are calling and saying, "We don’t know how to react to what’s going on in this crisis. So we’re actually going to keep our commitment. We’re going to tell you that – and we’re going to move these so like insertions in the magazine, we’re going to move the insertions from June to August." So we have that bucket.And then we have other, not an insignificant bucket of advertising, some of our largest, specifically in the consumer packaged good arena, that have actually – haven’t changed at all, haven’t decreased, see it as an opportunity for them to build share. Their business is actually doing fairly well, and they’re remaining their commitment. So I can’t give you a specific dollar amount for each but that’s how we’re kind of looking at it from when we look at, obviously, at the corporate account side.

[Jason Bazinet:]

And can I just ask one follow-up? For that first bucket where people just went dark, are there – I can understand travel or maybe auto to the extent no one can go buy a car. But are there other buckets that went dark, where you sort of – it was a little bit of a head scratcher?

[Tom Harty:]

Well, I think – yes, I think that to your example, right, so if you’re in the cruise line business or you’re in the luxury travel, you’re understanding, you’re trying to drive people to get online and sign up for a cruise or to book a vacation, and that actually stops. So those are the ones that do that. We have a smaller number of people that were taking a pause. There were some beauty clients that actually took – they took a pause. They weren’t saying they’re going to go dark forever, but they turned around and say, "Hey, this quarter, we’re going to come back, and we’re going to say we’re going to go dark for this period of time." But overall, I would say that it’s kind of across the gamut.And then we get new news every single day. We get news, like I mentioned, actually early on, the food category was doing really well. And then we have some specific advertisers with the current demand where there’s not enough meat because some of the meat processes are closed down that they’re actually pulling some of their advertising. So it just kind of changes the demand, and that’s what you would expect through this crisis. If they don’t have product, they’re not going to advertise in the short term.

[Jason Bazinet:]

Understood. Thank you.

[Operator:]

And your final question comes from the line of Kyle Evans with Stephens.

[Kyle Evans:]

Welcome, Jason. A few on magazines first. Should we view the adjustments that you’ve been making to the portfolio, frequency on People and closing down Family Circle and Money, is that an ongoing process where we’re going to be continually adjusting going forward? Or do you expect to pause on that front?

[Tom Harty:]

So we didn’t make any adjustments to People Magazine, but we did – the changes were related to Family Circle and some of the others, right? So I think it’s something that we’ve done, if you look historically back, at Meredith in the 16 years that I’ve been here, we’ve always kind of looked at that. We’ve actually – in some cases, we’ve increased rate bases. We’ve decreased rate bases. We’ve actually closed magazines or converted them to a newsstand-only title.So it’s just something that I think that isn’t going to end. I think it drives some of our analysts crazy because you got to do the comparable and figure that out. But as we sit here today, we don’t have any plans for any changes in frequency or rate bases. But again, that’s something that’s not saying we’re not going to make any of those changes into the future. But that’s just – as we look at our business model, it’s all built on profitability and shareholder return, and sometimes we make those choices to increase profitability and also put our resources against where we think the brands are that should have and have the biggest opportunity for growth.

[Kyle Evans:]

Got it. I misspoke. I meant Entertainment Weekly, sorry about that. Expanding on an earlier question on newsstand for People. Can you just kind of step back and talk about newsstand at a higher level? How much of that is airport versus grocery store? It’s hard to believe that you’re back to pre-COVID on newsstand People. And maybe I don’t understand exactly where those newsstands are.

[Tom Harty:]

Yes. So I think – listen, overall, the newsstand side of the business for Meredith as a whole, as we’ve talked about previously, isn’t such a big part of our business. So when we look at the number of copies that we use for rate base to generate our guaranteed advertisers, we’re like 90-10. So we’re 90% subscriptions and only 10% newsstand. We have a very big, what we would call SIP, or special interest publication, business where we create one-offs and sell those for bookazines and things for over $10 a pop. But when we look at the short term, to your point, exactly right, that – obviously, people aren’t traveling and the newsstands at airports are way, way, way down. And then what we saw, as I mentioned, we saw grocery store sales up.So it’s – overall, what I would say is that it was down significantly, let’s say, around what we were seeing from a print decline where we mentioned as we kind of came out of the gate. Overall, and again, we had some channels that were up and some were down, but obviously the changing retail patterns. And then as we kind of moved through kind of week-to-week in the last couple of weeks, we’re starting to see that come back. We’re not back to being flat, but we’re seeing some things that make us a little bright side on something. And again back to People, it wasn’t quite back last week to what we would say was the average before pre-COVID, but it was – what I would say is fairly close on a percentage basis.

[Kyle Evans:]

Got it. And then last one on magazines. I know it’s hard to judge the progress you’ve made on the digital side when CPMs are getting pressed on this as hard as they are. But maybe just an update on those digital investments with some specifics around projects. And then what are some longer-term milestones that we should be tracking on the digital side?

[Tom Harty:]

Yes. So our digital investments, we are – again, we were making those investments through three quarters of the year. Some of those are capitalized expenses, investments that we make. We’ve talked about that. We are still on track to get us on a unified platform the last I heard. So that was – we had put that out as a benchmark that we were going to be on our one platform by the end of the fiscal year or by June, we’re right around – we’re going to be right around that target. But we might be – what I would say is we’re probably pulling back, as Jason has talked about, on capital expenditures.So some of that investment might be pulled back. But the big areas that we’ve been – we’ve talked about in the past is video. So we – that was a huge part of the digital investment that if we knew if we could create more video, we could monetize that, and that’s been our plan, and we’ve been doing that. And then obviously, content to commerce, as we talked about, was Dan’s question. If we create more content online that is shoppable, that’s an area that we’ve been making investments in also.

[Kyle Evans:]

Got it. So switching over to TV. Thanks for those answers. Could you give most recent quarter sub count trends on the retran side, maybe just some speculation on how you think the sub count would look for kind of the rest of this calendar year? And then a more pointed question, do you expect the retran growth as you look out one, two and three years?

[Tom Harty:]

Great. So I’ll turn that over to Patrick McCreery to give you kind of his take on what he’s seeing from a sub count perspective.

[Patrick McCreery:]

Yes. Good morning. Our sub count trends are very much in line with the industry that we’ve seen year-over-year decline. What we’re seeing in the most recent set of numbers is, what I would say, about a 1% decline, and I think that’s right on target with what we’ve seen. We’ve successfully concluded our negotiations with all of our CBS affiliates. And so to answer the second part of your question about what we’re going to see in growth, I think we still have a few turns of the screw at retransmissions growth.

[Kyle Evans:]

On a net basis?

[Patrick McCreery:]

Yes.

[Kyle Evans:]

Okay. And then while I have you, Patrick, the 3Q political, could you square that up against the 2016 and 2018 cycles just in terms of what you saw there? And then kind of how much of that growth, which I expect is significant, was Bloomberg? Thanks.

[Patrick McCreery:]

Yes. I don’t have the exact percentage of Bloomberg for the breakdown, but it was – our political was double the previous cycle, and a big chunk of that was Bloomberg. I don’t have the exact breakdown, but I can get that for you after the call.

[Kyle Evans:]

Awesome. Thank you, sir.

[Tom Harty:]

Great. So we don’t have any more questions. We appreciate everyone’s time this morning, and we hope that all you and your families stay safe and healthy and well, and we look forward to talking to you in the near future. Thank you very much.

[Operator:]

Ladies and gentlemen, this does conclude today’s conference call. Thank you for your participation. You may now disconnect.