Meredith Corporation
Q3 2019 Earnings Call Transcript

Published: 12 May 2019

[Operator:]

Good morning. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to the Meredith Corp. Fiscal 2019 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question-and-answer session. [Operator Instructions] Thank you. Mike Lovell, you may begin your conference.

[Mike Lovell:]

Good morning, and thanks, everyone, for joining us. Remarks this morning will include forward-looking statements and actual results may differ from our forecasts. Some of the reasons are described at the end of our news release that was issued earlier this morning, and in some of 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 earnings release, which is available in the Investor Relations section of our website. Finally, an archive of the call will be available on our website later this afternoon. Now I'll turn the call over to Meredith President and Chief Executive officer, Tom Harty.

[Thomas Harty:]

Thank you very much, Mike, and good morning, everyone. I hope you've had the opportunity to see our news release that was issued earlier this morning. For the last year, we've been laser-focused on our plan to integrate the Time Inc. acquisition. You'll hear from National Media Group President, Jon Werther, who will update the progress we've made so far. At the same time, we continue to deliver outstanding performance in our Local Media Group, and you'll hear from - more from Patrick McCreery, our President. Finally, there's been a great deal of work done behind the scenes from our corporate staff to combine 2 public companies and sell noncore assets. Chief Financial Officer, Joe Ceryanec will update those initiatives along with our fiscal 2019 outlook. We have spent the last year focused on our integration plan, and synergies are a key part of that plan. We will deliver $550 million of cost savings from our integration work, though we are adjusting the timing of when we expect to capture those savings. That said, you can't cut your way to sustainable growth and as our work has progressed, we have targeted opportunities to position our National Media Group for organic growth over the long term. This includes new digital platforms, more robust video production and initiatives to grow consumer revenue such as Apple News+ and our e-commerce activities. We're also investing in more profitable sources of subscription acquisition, particularly because we inherited some low-margin, agent-sourced subscriptions from the acquisition of Time Inc. As we have with prior acquisitions, we're in the process of transitioning those to more profitable sources, but that takes time as the opportunity for margin improvement happens when they renew, one example of our most recent subscription solicitation campaign, which Jon Werther will detail in a few moments. As a result, we expect to deliver revenue performance in line with our prior estimates, but we are reducing our adjusted EBITDA outlook for fiscal 2019 a bit. Joe will provide more detail in a few moments as well. Before he does, there are some important accomplishments and trends to highlight from our third quarter performance. During our last call, in early February, we cited the improvement we were seeing in advertising trends in both our National and Local Media Groups in early calendar 2019. Today, we are pleased to have delivered these results for the quarter. In our National Media Group, total revenues were up 15% in the third quarter of fiscal 2019. Total advertising-related revenues grew 17%, and we're down in the mid-single digits on a comparable basis. This is a significant improvement compared to what we experienced in calendar 2018 as we work to integrate the Time Inc. brands. While it took longer than we initially expected to turn around the advertising performance around at the legacy Time brands, we are now in line with Meredith's historical and expected long-term performance. Looking into the fourth quarter, we anticipate the National Media Group advertising performance being better than the third quarter. In our Local Media Group, total revenues were up 11%, nonpolitical advertising were up in the mid-single digits. For years, Meredith has been viewed primarily as an advertising-driven company, but we've always had a robust consumer business and we are very focused on growing these revenues. Fiscal 2019 third quarter total company consumer-related revenues grew 28%. This was driven by strong newsstand and affiliate marketing performance in our National Media Group, along with favorable renewal of retransmission consent agreements in our Local Media Group. We're particularly excited about the recent launch of Apple News+, a subscription service that offers digital access to more than 300 publications including more than 30 Meredith magazines. As one of the most successful consumer-based companies in the world, Apple's launch of Apple News+ is a strong testament to the power of premium paid content from trusted brands. While we are not at liberty to discuss specific terms of this agreement, the economic benefits to Meredith flow from 4 areas

[Jonathan Werther:]

Thanks, Tom. Fiscal 2019 third quarter National Media Group operating profit was $54 million. Excluding special items, operating profit was $65 million and adjusted EBITDA grew to $120 million. Revenues rose 15% to $556 million. These results exclude discontinued operations. As you can see in our P&L this morning, we've made significant progress on the key strategic initiatives that we put into place upon acquiring Time Inc. to integrate and maximize our new portfolio. To start, we said we would improve the print advertising performance of the acquired Time Inc. properties to Meredith's historic levels over time, and we did. To accomplish this, we executed 3 key initiatives

[Patrick McCreery:]

Thanks, Jon, good morning, everyone. Fiscal 2019 third quarter Local Media Group operating profit was $42 million. Adjusted EBITDA was $52 million and revenues grew to $188 million, all records for our fiscal third quarter. For the first 9 months, Local Media Group operating profit was $216 million, adjusted EBITDA $246 million, and revenues grew to $665 million, including $103 million of political advertising, all records for the fiscal 9-month period. Looking more closely at fiscal 2019 third quarter performance, total advertising revenues grew 4% from the prior period. Nonpolitical spot advertising revenues grew 6%, driven primarily by strong performance from our CBS affiliated stations, which benefited from having the Super Bowl. From an advertising category standpoint, growth was broad-based as we saw increases in 7 of our top 10 categories, with particular strength in professionals services, media and furnishings. Consumer-related revenues increased nearly 20% to $85 million due to growth in retransmission fees from cable and satellite television operators. These increases were partially offset by higher payments to affiliated networks. Our consumer connection remains strong. The number of pay TV subscribers across our markets was approximately even in the third quarter of fiscal 2019 compared to the prior year period, driven by growth in over-the-top subscribers. Additionally, our stations delivered strong performance during the February rating period, with stations in 8 of our 12 markets ranking either number 1 or 2 sign-on to sign-off. And as we've stated in the past, local broadcast television is still the most effective medium that driving retail traffic. Our connection to our viewers, along with the strength of the PEOPLE brand, led us to develop a daily syndicated show based on the PEOPLE brand that we've committed to launching in fall of 2020 on all 17 of our local television stations. The show will air Monday through Friday evenings and will highlight the most popular features from PEOPLE magazine, including entertainment news, exclusive interviews, feature stories, beauty, crime and more. The show will be produced by Four M Studios, Meredith's in-house television production company. Now I'll turn it over to Chief Financial Officer, Joe Ceryanec.

[Joseph Ceryanec:]

Thanks, Patrick, and good morning. I'll start with an update on our integration and asset sales. From an integration standpoint, our third quarter accomplishments included

[Thomas Harty:]

Thank you very much, Joe. We're proud of our revenue performance in our fiscal third quarter and the trends we're seeing in the fourth quarter. Our Local Media team continues to perform at a very high level and our National Media team is making significant progress in turning around a business that was twice its size. In closing, while there's still more to do, we've accomplished a great deal since we closed on the Time Inc. acquisition. We're encouraged by

[Operator:]

[Operator Instructions] Dan Kurnos with Benchmark. Your line is open.

[Daniel Kurnos:]

Great. Thanks. Good morning.

[Thomas Harty:]

Good morning.

[Daniel Kurnos:]

I was waiting for it Tom. So look I - just a couple of things here. Joe, can you just - housekeeping on the synergy delay or whatever you guys want to call it. You've got - you called out 3 different buckets. Can you kind of just size up those buckets for us just so we have a sense of kind of timing on all that stuff? And how it might filter through and what actually some of the reinvestment is?

[Joseph Ceryanec:]

I guess, Dan, if you walk through kind of the numbers I gave and compare those to what we've said in previous calls as we've arrayed the synergies, there's about $20 million that we would say would push from 2019 into 2020. I broadly put those in a couple categories. One, the asset sales obviously have taken us longer than we originally anticipated, so though there's some stranded costs, things like facilities and keeping people around to service those brands that we would have thought would have left the organization by now. So that, again, is a timing difference. As we're integrating all of the back-office functions to make sure we do it right, we've held some people longer than we anticipated or initially with those more in the IT, accounting and finance areas to make sure we support the business. So those are really the costs. We feel like it is a timing difference on realizing those synergies. And so those will push into 2020. As we said, we're committed to the $550 million in total.

[Thomas Harty:]

And Dan, when you see the Q, you'll see the detail. A lot of the expense investment has been on the subscription side and around as we mentioned, acquiring more profitable subscriptions and swapping out lower-margin source subs that we had from Time Inc. Jon mentioned the recent direct mail campaign that we had where it was cash-neutral, in other words, in year 1, and then those subs become 90% margin subs when we renew them in a couple years. So I think when you see the detail of the Q, you'll see expense increases in our sub line from an expense standpoint.

[Joseph Ceryanec:]

And Dan, you've heard us talk about this on many of the acquisitions whether it was Martha Stewart or Rachel Ray or SHAPE, where we've inherited brands that have a larger mix of load of little margin customers and it does take us some time and investment to move those customers over to a more profitable platform. Interact with them whether it's through mail or through getting the online auto-renewal sub. So we're seeing a little bit of higher expenses due to the inherited base, but again, that's something we're working to shift as we move into 2020.

[Thomas Harty:]

Yes. And the other area that I would point is, the Apple News+ platform. If we're here a year ago, Apple hadn't even committed to buy the Texture product to committed to this. So this is something that we're very excited about. It's really just getting going in our Q4. It took some, not insignificant investment, for us to get our brands on that platform. And again, we talked about some of the economics that are involved with that. But as we look into the future, obviously, we're going to have to see about consumer adoption. But from a marginal economic standpoint, we think, from a sub count, if we can get people to consume it on the Apple + platform, it could be close to $10 increase from a margin perspective on our subscriptions.

[Daniel Kurnos:]

Got it. That's all super helpful color. Just before I get into that the circ strength which I think was kind of telling and for what it's worth, just on your past commentary, I was less concerned with the underlying margins in the quarter. Just trying to understand that the push out of the synergies. But just on the sales process, obviously, you guys have talked about making this 1 or 2 - making this 2 stand-alone, does it go to 6, because, obviously, Viant owned XUMO, you've got fan-sided within SI, I'm assuming that's probably what's dragging this out. Is there just - I mean is there any thoughts on how you kind of wrap this up? And is that really the primary sticking point?

[Joseph Ceryanec:]

Yes, Dan, you hit that on the head. And even though we say SI and Viant, there's actually 4 separate processes going on with the - upon the sub brands under SI with fan-sided and with XUMO under Viant. So that is adding to the complication.

[Thomas Harty:]

And also, most of these, just like we did with FORTUNE and TIME, both purchases don't have a publication platform to take these businesses forward. So it's a very complicated negotiation as we're going to continue to do some back-office operations for them under a GSA contract. So we have multiple parties still very interested in the process for all of these brands, and we're looking forward to bring it to the end in the near future.

[Daniel Kurnos:]

Got it. Jon or Tom, I'd love to get some more color on the circ strength in the quarter. In National, it was - that was, I think, where most of the upside came versus our expectations anyway and seem to drive some margin accretion there. Can you just help us a little bit understand better was it renewals of TIME products? Was it better improvement as you guys mentioned in shift to auto-renew in the customer channel, and in that profile? Just help us kind of understand exactly what drove the circ strength and sort of what you're seeing on a go-forward even without, say, Apple +?

[Thomas Harty:]

Yes. I think, obviously, there's a lot of things that go into the circulation business. There are a variety of different things and actually there is, this year, we faced a little bit of an accounting change from revenue recognition and how we recognize some of the revenue associated with our subs. Historically, Meredith has always grossed up the sub price of our agent sources. This was something that historically the industry didn't do including Time Inc. Well, lo and behold, Meredith was right, because when the new accounting standard came out, the entire industry has to switch to that. So part of that is - some part of it is driven by that, other parts of it are driven by the direct mail campaign. So one source that we talked about, we mailed close to 27 million pieces of mail during the winter campaign. This was the first campaign that we did for the new Time Inc. acquired brands, some of these were where we actually - the Meredith's standard of actually bundling different magazines together to create more value for the consumer and their response rates to this were close to 4%, which is just incredible and we've had certain titles, like southern living magazine had a 47% increase in their response rate under the Meredith's standard. At the same time, that direct mail campaign that we executed was 14% cheaper for us to do as a combined company with the strength of our sourcing activity, so that's one way we added the margin. And Jon also mentioned that our team has finally cracked the code on looking at direct-to-publisher, using social media Facebook ads, and then December was our best month in the history of the company where we generated 50,000 paid orders through that source that will become all automatic credit card renewals into the future. So the circulation side of our business is really, really strong. We've talked about that for a long period of time. Women still love magazines. And then we also have a lot of different consumer activities around e-commerce and other things. So we're very excited and we've been talking about this for a while and it's great to start seeing the - see the top line growing.

[Daniel Kurnos:]

Perfect. Super helpful. Just - Joe just a housekeeping. What was print and digital on a comparable basis, the decline and the growth?

[Joseph Ceryanec:]

In digital, we're combined I think down about 5 - I think we said mid-single...

[Daniel Kurnos:]

You said down mid-single, but each one individually, I think, Jon said up slightly, and so print was what, down like kind of mid-to high single?

[Thomas Harty:]

Q4 - I'm sorry, Q3 as a combined portfolio, print was down minus 7% and digital was up a couple percentage points. That's how you got that kind of 4%, 4-ish down, but significantly improved. When you look at the last 2 trailing quarters for the print combined portfolio, it was down 16%. So from 16% down to minus 7%, and actually we see trending in the fourth quarter that it's going to improve again. So we're finally getting the portfolio of the Time Inc. side turnaround. I'll turn it - Jon will give you some color.

[Jonathan Werther:]

Yes. One thing I would add to that is, one of the key reasons for our course correction is that we can print it. So we continue to take share in the market place through large agency holding company, strategic deals and client-facing efforts. And if you look at the first three quarters of our fiscal '19, we picked up nearly two points of share from both the industry and comp set perspective. But particularly if you look at the first three months of this calendar '19, where these strategic deals are largely kicking in, we picked up 2.5 points of share against the industry but 9 points against our competitive set. So we're really starting to see the impact of these large wins that we've secured, and we're very, very excited about that, and look forward to continuing to grow our entire portfolio or operate our entire portfolio in line with historic trends from a print advertising perspective.

[Daniel Kurnos:]

Yes. No doubt, people didn't think you guys would be able to do that. So congrats at least on that front.

[Operator:]

Kyle Evans with Stephens. Your line is open.

[Kyle Evans:]

Hi. Thanks. Good morning, guys.

[Thomas Harty:]

Hi Kyle.

[Kyle Evans:]

Jon, maybe a little bit more on the underlying trends in the National Media Group. An update on pharma and other key verticals? And then you also mentioned the challenging digital backdrop, could you provide a little bit more detail on what you meant by challenging?

[Jonathan Werther:]

Sure. Obviously, there's a number of trends that we're seeing in the marketplace from shift to performance from a more of a branding perspective from video continuing to be in high demand across platforms from a desire for greater transparency and demand for higher quality first party gave an insight and obviously, a continued desire for big ideas, innovative insights, across the board. Obviously, there's formidable competitors in the marketplace, we also partner with them in the triopoly. And I think those are some of the trends that continued to create challenges for us. From a print perspective, I think what we're seeing in terms of Q3, we've had some strength in nonprescription drugs, travel and home. And in Q4, those travel trends in particular, we expect to continue. In terms of some of the challenges as you can imagine from a print perspective, food and beverage, direct response to a degree, retail CPG have been challenged categories and those are some of the areas that we continue to navigate through from a print perspective. It's up and down a little bit on the digital side. Digital pharma has actually done a little bit better for us there and there are some categories that improving. But by and large, those are some of the trends that we're seeing across both platforms.

[Thomas Harty:]

Yes. Kyle, when we say the marketplace for digital, obviously, is challenge when I look at it 2 perspective, obviously, Amazon coming in and the big guys taking more share. Also, there's a trend on the programmatic side of driving down some CPMs. But we're rock-solid from an engagement perspective, and when you look at our performance recently, actually Q3 was significantly better than what we saw in Q4, where we - I'm sorry Q2, where we were down slightly and then we were actually flattish in Q1. So up 2% is a great trend for us and actually we see Q4 actually being better than Q3. Now on the pharma side, one thing I'd like to mention on print, which is an interesting development, and you might have saw it this week. But there's been a big push from a regulatory perspective that you actually have to put pharma pricing in television advertising. And we're actually starting to hear from some of our bigger pharma clients that they may be interested in shifting some media dollars away from television and back into print because of this development, it's much easier for them to disclose former pricing in print than they actually do it in audio on television.

[Jonathan Werther:]

And one other thing I would add to is that we continue to focus. And there's a remember on reasons why we still feel very good about our future. Obviously, our ad scale brand portfolio we think is second to none. We have merged the cross channel experiences that really reach consumers that represent $2 of every $3 spent in every key category. We have a real 360 degree focus on consumers that Tom alluded to. As consumers can shift their consumption behavior, we're staying with them where they go whether it's OTT, whether it's voice, et cetera. And we have really differentiated data insights around our 175 million consumers that allow us to predict trends. Those types of things are what we feel will continue to position us for growth. And one other thing I would add is that when you factor in our advertising growth with our digital consumer revenue growth, our actual growth rate for the combined digital business is really trending more towards the higher single digits for Q3 and that's how we look at the digital business and its entirety.

[Kyle Evans:]

Got it. A few questions for Patrick on the Local side, maybe some commentary on core in the quarter. Could you please quantify the Super Bowl since we're going to be backing it out a year from now? And then talk a little bit about the pacing in the current quarter?

[Patrick McCreery:]

Sure.

[Kyle Evans:]

And then also just phasing on the 60% of renewals on subs?

[Patrick McCreery:]

Got it. So core for third quarter was up plus 6, and that obviously was heavily impacted by the Super Bowl because we're a CVS-heavy affiliate group. So I'd say, without the Super Bowl, it was up slightly. The retransmission 60%, we have 60% of our renewals coming up in fiscal '20, and that's spaced throughout the year pretty evenly with some up at the end of this calendar, some up at the beginning here in July then at the end of the calendar, and then in May of next year. So that 60%, it's for virtually 20-20-20.

[Joseph Ceryanec:]

Yes. Kyle, I think you asked about where we're pacing I mean, right now for Q4, we're pacing up slightly. And that's probably where we would expect to end of the quarter.

[Thomas Harty:]

Consistent with the Q3 without the Super Bowl.

[Joseph Ceryanec:]

Yes.

[Thomas Harty:]

Some of the final force.

[Joseph Ceryanec:]

Up a bit.

[Kyle Evans:]

Got it. And then lastly, auto and the LMG. Where it was last quarter? Or where it's pacing in your outlook for the calendar year? Thank you.

[Patrick McCreery:]

Yes. So auto last quarter was minus 6, and that's breaking that out domestically and foreign, domestic was flat, and foreign was minus 10. And we really see that pacing continuing into the fourth quarter. I think right now we've got auto down 7.

[Thomas Harty:]

Professional services.

[Patrick McCreery:]

Yes. But it's offset by professional services, which was up 18 in third quarter and its pacing plus 26 in fourth quarter.

[Kyle Evans:]

Great. Thank you so much.

[Thomas Harty:]

Thank you.

[Operator:]

Eric Katz with Wolfe Research. Your line is open.

[Eric Katz:]

Good morning, all. It sounds like there's quite a bunch of exciting things going on your product offerings and with regard to investment. So I'm just trying to understand how much of this is new versus maybe originally built into your guide? And how much is, I guess, incremental versus maybe repurposing your typical organic investments? And then just sort of looking further out, are these the type of ongoing investment sort of at these levels that you'd expect going forward?

[Thomas Harty:]

Yes. So this is Tom. So I think - not trying it out to the penny, but I would say that all or almost all of these investments that we're talking about weren't in our original guide. Obviously, we gave that guide at the beginning of the fiscal year last August and when things come up, we're running this business to maximize shareholder value for the long term, and when something like Apple News+ comes about and Apple engages and buys Texture, we've got to lean in because you heard about the economics that we have about that. When we got in and we start running the Time Inc. side of the business, some of their circulation practices weren't best practices from our perspective. So you can cut short-term investment and add sources that aren't going to be as profitable longer term. So I mentioned, the circulation business of our business historically has always been that usually you're investing upfront and those subs as they love our products and renew down the road, that's where you really start to print money. So those were things that we looked at as we got into the source files and really started running the business that we decided to make investments. So it's always hard in some of the digital stuff that Jon is developing. We're going to be in front of our board and we're kind of finishing the fiscal year, we're going to make some of those tradeoffs on long-term investment. But I wouldn't think that it's going to be that much more significant than what we've done this year.

[Eric Katz:]

Got here. I'm going to take a shot here. I know you've historically said you were a buyer of TV stations and there's been some speculation out there that you're looking to potentially sell now. Is there anything that would cause you to sort of rethink your strategy on the broadcast side?

[Thomas Harty:]

Well, we're expecting that question. So there's - I know there's been a lot of rumors out there, there's been some stuff in the press. But we are not, and I underline not pursuing a sale of our broadcast business. We continue to be excited about both sides of the business and we continue to have long-term goals of growing the National Media Group and the Local Media Group. Obviously, the last year, the Time Inc. acquisition was the biggest acquisition in the history of the company. And the management team has been laser-focused on making sure that we get this integration and this acquisition done right. And at the same time, Patrick and his team, for the first time in Meredith's history, are really seeing opportunities between the Local Media Group and the National Media Group with some of the brands we acquired, all our PeopleTV and things like that. So we continue to watch the market place, but again, we maximize shareholder value over time and we're looking every single deal that comes up on the broadcast side, we're participating and reviewing those and deciding if we're going to participate.

[Eric Katz:]

All right. Sounds like some fickleness [ph] out there. Thank you very much.

[Thomas Harty:]

Okay. Thank you very much. Thanks for everyone for participating on our call this morning and we look forward to having future discussions, and we'll get back to work here at Meredith. Thank you very much.

[Operator:]

This concludes the Meredith Corp. Financial Fiscal 2019 Third Quarter Earnings Conference Call. We thank you for your participation. You may now disconnect.