Meredith Corporation
Q3 2014 Earnings Call Transcript

Published: 24 Apr 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Meredith Fiscal 2014 Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd like to turn the conference over to our host, Mr. Mike Lovell. Please go ahead.

[Michael Lovell:]

Hi, good morning, and thanks, everyone, for joining us. Our call this morning will begin with comments from Chairman and Chief Executive Officer, Steve Lacy; and Chief Financial Officer, Joe Ceryanec. And then we'll turn the call over to your questions. Also on the line this morning are National Media Group President, Tom Harty; and Local Media Group President, Paul Karpowicz. An archive of today's discussion will be available later this afternoon on our Investor website, and a transcript will follow that. As you know, our remarks today will include forward-looking statements and actual results may differ from our forecasts. Some of the reasons why are described at the end of our news release that was issued earlier this morning and in some of our SEC filings. With that, Steve will begin.

[Stephen M. Lacy:]

Thank you, Mike, and good morning, everyone. I hope you've seen our news release issued earlier today detailing our results. Here are some highlights from our third fiscal quarter. Our Local Media Group delivered record revenue and operating profit performance for our fiscal third quarter. Growth was driven by higher retransmission-related revenues, along with strong performance from our stations in Nashville, Phoenix and Las Vegas. We closed on our acquisition of KMOV in St. Louis, the newest addition to our television station portfolio. KMOV had tremendous viewership and sales momentum when we agreed to buy it in late December, and the station hasn't missed a beat during the transition. Our National Media business posted strong growth in its non-advertising-related activities, particularly those with direct-consumer touch points. This includes circulation and brand licensing revenues, both of which were up in the mid-single digits. We also attracted record traffic to our websites for our fiscal third quarter. Finally, we continue to execute against our successful Total Shareholder Return strategy. In the quarter, we raised our dividend 6% to $1.73 on an annualized basis. Today, it's yielding a healthy 4%. We also continued to buy back stock, repurchasing approximately 200,000 shares, bringing our year-to-date total to 1.4 million shares. Early calendar 2014 advertising experienced a slower start across our print, broadcast and digital platforms. The impact of the severe winter weather across most of the country on consumer spending has been widely reported and we experienced related softness in ad categories such as food and beauty, professional services and home furnishing. That said, we are experiencing a much more positive advertising trend as we enter the fourth quarter of fiscal 2014. Our local television advertising business is pacing up, demand for our digital inventory is strong and declines in magazine advertising are moderating. As a reminder, industry experts have predicted full year calendar 2014 magazine and digital advertising performance will resemble that of calendar 2013. We also expect a significant increase in television advertising from the midterm elections this coming fall. Additionally, our ongoing execution of strategies to grow new revenue sources is delivering results. Our branded products continued to perform well at retail, translating into revenue and profit growth for our brand licensing business. In the television activity, profit contribution from retransmission fees is at record levels and continues to grow. As we detailed on these calls, at our investor presentations and one-on-one meetings, we manage our business to produce growth that's sustainable over the long term and we have a proven track record of outperforming our industries over time. With that said, we expect to deliver higher revenue and a double-digit growth in earnings per share for our fourth fiscal quarter of 2014. That's the period we're currently in, that will end on June 30. Now let's take a closer look at our 2 major business activities, beginning with our National Media Group. Fiscal 2014 third quarter performance for National Media Group was mixed, with declines in print and digital advertising revenue partially offset by growth in both circulation and brand licensing. Starting with advertising performance in the quarter, 3 categories

[Joseph H. Ceryanec:]

Thanks, Steve, and good morning. As Steve mentioned, the Local Media Group delivered record revenue and profit for the fiscal third quarter. Revenues were up 14%, and that's on top of 10% growth in the year-ago quarter. We achieved this growth primarily through strong growth in our retransmission revenues, which is the result of renewing our agreements with our subscription television providers during our fiscal 2013. Retransmission revenues continue to rise and that is helping us partially offset the absence of political revenues in this fiscal year. Our nonpolitical advertising was up 6% during the third quarter, which was helped by 1 month of KMOV operations, along with gains in the restaurant, home and retail categories. As we look at ratings, we continue to strengthen the connection with our viewers. Nearly all of our stations grew morning news viewership during the most recent February ratings period, with Hartford, Saginaw, Portland and Las Vegas being the leaders in their market. In late news, St. Louis, Portland and Las Vegas were #1, while Hartford and Saginaw were #1 in sign-on to sign-off. Meredith Video Studios continues to grow its national syndicated programming and branded entertainment custom video creation business for our clients. The Better Show, which is our daily lifestyle entertainment program, has been renewed for its eighth season. The Better Show is now syndicated in over 160 stations nationwide and also reaches another 90 million homes via its agreement with the Hallmark Channel. Meredith Video Studios continued to grow its branded entertainment custom video business as well, working with such clients as McCormicks, Fisher-Price and Lowe's. As we look at our digital initiatives, advertising revenues from the local media websites grew more than 25% this past quarter. We're packaging desktop and mobile traffic for advertising clients and offering clients access to our social media footprint, all of which are helping us deliver continued growth. And as Steve mentioned, we're excited to have KMOV in our portfolio. St. Louis is the nation's 21 largest television market. So we now own 7 CBS stations in markets including Atlanta, Phoenix and Hartford and are very familiar with the impact the strong CBS prime time and sports lineup can make in a market. In addition, between KMOV and St. Louis and KCTV in Kansas City, we're well-placed to serve consumers and advertisers across the state of Missouri, as well as in neighboring Illinois and Kansas. Now before turning to our earnings outlook, which I'm sure you saw in our press release, our fiscal 2014 third quarter results included special items of $13 million net of tax or $0.29 per share. These items really related to 3 things

[Stephen M. Lacy:]

Well, thank you very much, Joe. And before we jump into the Q&A, I just want to remind everyone that we're aggressively pursuing a series of parallel paths

[Operator:]

[Operator Instructions] And our first question comes from the line of Jason Bazinet with Citi.

[Jason B. Bazinet:]

I just had a quick question regarding how you all are thinking about price elasticity of your magazines and sort of the price you're charging either at the newsstand or for a subscription. Do you think there's opportunities to raise prices to sort of extract more aggregate cash flow even if the rate base declines as a result of those actions?

[Stephen M. Lacy:]

Yes, thank you, Jason. And let me start with that and then I'm going to ask Tom to add to that work. So probably a little over 1 year ago, we began on a very aggressive strategy to do some further segmentation of what is a very, very loyal subscription customer base, looking at, I would say, really 3 critical opportunities to improve circulation results

[Thomas H. Harty:]

I think, yes. Just to add on to Steve, we went through that. We talked about this on a previous call. We're calling it our consumer revenue transformation initiative. The early work that was done is all about doing regression analysis and doing the math associated with that. That happened last summer and fall. It pointed us in the right direction. And now we're executing on thousands of different tests and the results are pointing us in a very positive trend for us to be able to yield more from our subscribers. And it takes a little bit of time because of the term that we sell subscriptions on. You're going to see us be able to increase our yield over the next 2, 3 years.

[Jason B. Bazinet:]

And if things go well as the implementation begins, we'll begin to see something that will be visible externally to all of us sort of next year? Is that the right way to think about it?

[Thomas H. Harty:]

Yes, you're going to see our trend begin to pick up in fiscal '15, that's correct.

[Operator:]

Our next question comes from the line of John Crowther with Piper Jaffray.

[John D. Crowther:]

The first question, just wanted to focus on National Media Group advertising trends. I think, in the call you sort of talked about that industry data is sort of suggesting that this year's calendar spend, calendar '14, should shape up relatively similar to calendar '13. Wondering how you view your -- sort of your shaping up versus calendar '13, given you've had a little bit more time here to sort of understand how the year is going to fall out. And laying on top of your expanded sales guarantee plan, which I think sort of laid it out a little bit better some visibility into your magazine advertising trends.

[Stephen M. Lacy:]

That's really a key question, John. And again, let me give you a little data and then I'm going to ask Tom to add a little color. So if you really look at what the first half of our fiscal year was, we were kind of down in the mid-single-digit range in advertising. And then our third quarter, which again is the fourth -- I'm sorry, the first quarter of calendar '14, it was like twice as bad as that. And I think sort of caught everybody in the industry a bit off guard. We're seeing the fourth fiscal quarter kind of return to what we experienced in the first 2 quarters of the fiscal year with kind of 5% to 7% decline in print, but a nice increase in digital that kind of blends back to a mid-single-digit decline. And that is really what the industry pundits have said will happen for all of calendar '14. Now, obviously, if you do the math on that, that would say that things should get stronger as we go into the early couple quarters of our new fiscal '15 that will start in July. And I guess, that kind of remains to be seen. We have some major volume-based contracts with some large advertisers and should they fulfill against those to hold their current pricing and rates, that's been pretty heavy in the first half of our fiscal '15. And I guess time will tell. But that's just sort of how the math plays out. And, Tom, whatever color, because you're very close to it day-to-day, you'd like to add for John on advertising, that would be great.

[Thomas H. Harty:]

Yes, I think, to Steve's point, I think the third quarter or the first calendar quarter caught a lot of people by surprise. With the way that the closings work for magazines, a lot of those decisions are made in the calendar fourth quarter because the issues obviously close earlier than their distribution date. So there were some macro issues going on with consumer spending in the fourth quarter. And from both a digital and print perspective, in our third quarter, again, calendar first quarter, we were -- everyone, I think, was caught off guard. What we're hearing, and again, this is really related in the consumer packaged good arena. And I think you can kind of read the press about what's going on there. They're facing very tough consumer growth numbers in a lot of their categories and they're fighting over price and promotion to kind of try to steal share from each other. We are seeing, as Steve said, better trends for the next quarter. And when we talk to our top advertisers about the quarter that we just closed, they're saying, telling us that things will be okay for the balance of the year. Again, the proof is in the pudding, and a lot of these clients are managing their business month-to-month, quarter-to-quarter. So we're feeling a little bit more optimistic coming out of this quarter as we kind of trend through the rest of the calendar year.

[Stephen M. Lacy:]

John, does that answer your question?

[John D. Crowther:]

Yes, that's -- the color is very helpful. Maybe if I could just do one follow-up question to that.

[Stephen M. Lacy:]

Of course. Of course.

[John D. Crowther:]

On the digital side. So Steve, it sounds like that digital was also pressured in the third quarter, but seeing some nice trends here. Wondering if you could maybe sort of give us sort of an update on how Allrecipes is performing, specifically? And then maybe you could kind of give us an idea of how much video advertising is a portion of your National Media Group advertising revenue? And sort of where you think that could potentially go here over the next couple quarters?

[Stephen M. Lacy:]

So at a macro level, again, the digital revenue, from an advertising perspective in the third quarter was down just about as much as print. They were almost even. As we turn to the fourth quarter, digital looks like it's going to be up very, very nicely again. And in the third quarter and in the fourth quarter, Allrecipes is outperforming the industry and outperforming the rest of our digital business. And I think that's, again, because of its leadership position in the food category. And, Tom, you may have some other thoughts on digital, third quarter and fourth.

[Thomas H. Harty:]

Yes. I think, I guess it really does point to kind of what we saw macro out there when you have digital performing the same as print. We haven't seen that in a long time. And as Steve mentioned, the trends are improving. One thing that we are focusing on that we've just kind of launched is that we're getting into participating in programmatic selling and buying. And we're seeing some positive trends there. So we're doing a lot of work kind of segmenting out our digital inventory and, basically, looking to grow our yield curve higher by participating in different marketplaces. So we're still all about selling premium inventory and doing integrated deals with our key clients. But then we're also out now, which we hadn't been in the past, in the programmatic marketplace and we're seeing some very positive trending on yield price in that area. And we think it's an opportunity for us.

[John D. Crowther:]

Great, that's helpful. And maybe then just one last quick question here. Steve, you have 1 month of KMOV in last quarter. It's been underneath your sort of the parent company now for 2 months. Just wondering if you could give any update on your thoughts in terms of -- not necessarily an exact number, but just thoughts on accretion from that acquisition. Are things sort of shaping up better than you had initially thought, in front of the acquisition? Seems like you talked very positively about it here on the call today.

[Stephen M. Lacy:]

Yes, I'll give you the data and then I am going to ask Paul Karpowicz to fill in how he's feeling about the station. He's quite excited because we finally bought a station in his hometown, St. Louis. So that will be good. It was about $0.01, John, in our quarter. $0.01 accretive net -- that's net of the interest and all of that. And so we'll have a little bit of benefit in the fourth quarter as well. And Paul, why don't you -- you've been to the station several times, so why don't you talk about how you feel it's integrating and how they're performing. Because I think we're fortunate to be coming off some really strong ratings and sales results there.

[Paul A. Karpowicz:]

Yes, exactly. We're quite pleased with the way everything is going there. The integration into the Meredith systems have gone very smoothly. The station has tremendous momentum right now in terms of both ratings and generating revenue. So, honestly, we're ahead of schedule relative to where we thought we would be with the station. So again, they had a very strong February rating book. The May rating book looks like it's going to be positive as well. And we're seeing some interesting political races develop in both Missouri and Illinois that the station will benefit from. So we're quite optimistic about how that station looks going forward and how they have fit so well into the Meredith portfolio.

[Stephen M. Lacy:]

Just a reminder to everyone, that is a CBS affiliate in St. Louis. And we -- also, for 60 years, have owned a CBS affiliate in Kansas City. Both pretty good political arenas and the opportunity in Kansas City to bleed across Missouri and Kansas. And when you go to St. Louis to move into Illinois and benefit from political there as well. So we think both of those stations fit very, very nicely together and give us a good opportunity in that part of the country.

[Operator:]

Next we'll go to the line of Craig Huber with Huber Research Partners.

[Gregory R. Stein:]

This is Greg Stein on behalf of Craig. Just actually a follow-up on the St. Louis CBS station. What was the revenue and EBITDA contribution for the 1 month and fiscal third quarter? And then what do you expect it to be for the fourth quarter?

[Stephen M. Lacy:]

I'll ask Joe Ceryanec to answer those detailed questions.

[Joseph H. Ceryanec:]

Yes, Greg. So for Q3, KMOV was about 4% of the total Local Media Group revenue. And as Steve said, it was about $0.01. For Q4, because we'll have a full quarter, we expect the revenue to be about 10% of the total Local Media Group revenue and, probably, about $0.02-accretive in the fourth quarter.

[Gregory R. Stein:]

Okay, that's great. Can you talk a little bit about the transition of Ladies' Home Journal to a special interest publication? I mean, obviously, this is kind of a big change.

[Stephen M. Lacy:]

Sure. I'll start, and again, I'll ask Tom to add to that. Ladies' Home Journal in the traditional women service field has been challenged from an advertising perspective, in particular, primarily due to its higher-than-normal, if you will, median age, which takes it out of a number of the buys. So the objective here and the strategy here is to continue to make the brand available to the individual consumer who has been loyal to Ladies' Home Journal by moving it to a newsstand-only publication. It's, basically, significantly eliminates any advertising dependency and a lot of the costs that go along with creating that business. So as we move in, there's really no impact in the balance of fiscal '14 to any modeling or anything anybody might be doing. But in fiscal '15, when we provide guidance and we have timing and everything worked out, it will result in lower total revenue but higher margins and profitability for the National Media Group going forward. It's all fiscal '15 impact.

[Gregory R. Stein:]

Okay, great. Last question. And I know it's a little bit of a direct one. But, obviously, there was a lot of talk last year about you merging with Time Inc. And Time Inc. is about to be spun out. Are you still considering a merger with Time? Just any thoughts on that would be very helpful.

[Stephen M. Lacy:]

Yes, I want to, first of all, be very, very clear, for the record, that there have not been any interactions, any discussions or conversations between Meredith and Time Warner and/or Time Inc. since we made the announcement in early March, a year ago, that we were going to end our discussions. So no interaction. They've been very focused on their spin strategy which we, obviously, respect their decision in that regard. Having said all that, for many, many years, we were public at lots of different forums about certain of the assets in that portfolio that are very akin to our large 100 million female-consumer audience that would fit in nicely with our portfolio. The question will be somewhere downstream, I'm guessing 1 year plus from the spin, how they think about their portfolio. Clearly, they are aware of our interest level. But we are not and have not been in any dialogue with them for, now, well over a year.

[Operator:]

Your next question comes from the line of Barry Lucas with Gabelli & Company.

[Barry L. Lucas:]

I want to come back to the kind of 1 month's experience with KMOV. And are you and Paul excited enough by what you've seen to think more aggressively about additional M&A in the space, on one end? And how much additional opportunity do you think might shake out from the rules that are being promulgated, the new ownership rules that are being promulgated by the FCC?

[Stephen M. Lacy:]

Well, again, let me start, and then, certainly, ask Paul to add any color. We are very enthusiastic about the early results of KMOV. And it was a wonderful opportunity and a great addition to our portfolio. We're equally excited to resolve and bring the Phoenix stations into our portfolio. And I think we believe, net-net, if we ever really sort of really understand the new rules for engagement going forward, that it should result in incremental opportunity for Meredith because we have not built our business on the whole JSA model, so to speak. So as some of those might, when it all shakes out, need to be unwound, I would certainly think that we might be a logical candidate because we, obviously, have a very clean portfolio and an aggressive open to buy. So -- but, as you know, Barry, you are close to this industry, there's a lot of cloudiness around all of that right now. But there are other portfolios that were sort of put together around historic rules that may not be the future for that industry. And, Paul, what would you like to add? Because you're very close to all the industry goings-on as it relates to this.

[Paul A. Karpowicz:]

Yes. I think, most importantly, as it relates to our portfolio and how we have looked at acquisitions, we've always been more concerned about quality versus quantity. So I think, going forward, and we all know that there will be plenty of opportunities out there because of the new FCC rules, that will open up a number of markets and open up a number of stations. And again, whether it's the LIN Media general transaction that's going to result in a dozen stations being available, the Sinclair transactions that are going to result in a number of stations being available, those are all out there. But our focus will continue to be, as it always has been, on major- to medium-sized markets, top 4 affiliates and in markets that we find attractive. So I do think there's going to be plenty of opportunity, which we will aggressively pursue, but I think we will also continue to be very selective about the stations that we want to go after.

[Barry L. Lucas:]

If I can squeeze a couple more quick ones in, particularly with Paul. Any read if you've had the opportunity to look at the transcript from the oral arguments at the Supreme Court the other day on Aereo, would you be feeling better, worse about the prospects when the decision is handed down in June?

[Paul A. Karpowicz:]

It's very interesting. And I think I've read everything and watched every different analyst try and determine, "Was Justice Roberts trying to say this?" "Was Sotomayor trying to say this?" It's -- I think it's very hard to predict. On total, I would say it was probably a very good day for broadcasters at the Supreme Court. But until we actually hear their ruling at the end of June or early July, I just think it's premature to open the bottles of champagne.

[Barry L. Lucas:]

Maybe just switch gears back to that Ladies' Home Journal issue, Steve and Tom. Just to flesh it out a bit more, I'm trying to sort of square that. Is there any result in the current quarter in terms of share gain in the competitive set? And/or what does it say if you're switching gears and moving Ladies' Home Journal to a special interest publication? What does that say about the category, if anything?

[Stephen M. Lacy:]

Well, again, Barry, let me start, and I would, obviously, ask Tom to add in. I think you know that we focus very, very aggressively on shareholder value. And it causes us to look with a pretty tough eye at this time of the year on every business that we operate. We're putting together our next 3-year plan, our budget for 2015 and deciding what to lean into and what to lean away from. The amount of advertising in Ladies' Home Journal would not change any of the directional numbers that we have talked about in terms of share or any of that. And I think, again, it allows us to take those resources and focus them on our very robust parenthood category, where we absolutely lead with the Parents brand and related brands

[Thomas H. Harty:]

Just to Steve's point, we -- our business model has 2 revenue and 2 profit streams, one with the consumer and one with the advertiser. And this decision really has nothing to do with consumer demand. But when you put them both together, and you look what's happening with the advertising environment, and then we think about our portfolio that we have existing, can we get some of those corporate accounts that are advertising in Ladies' Home Journal today to spend that same amount of money in the rest of the portfolio? So net-net, not lose the revenue. And then we'll transition those subscriptions, those people that are buying LHJ subscriptions to other magazines in our portfolio. So again, the brand, as Steve points out, will continue in a different format, both digitally and in our SIP business. But we have a very robust print portfolio that exists, that we can serve both our consumers and our advertisers.

[Operator:]

The next question comes from the line of Edward Atorino with Benchmark.

[Edward J. Atorino:]

Actually, my questions have been, actually, answered, believe it or not.

[Operator:]

[Operator Instructions]

[Stephen M. Lacy:]

Okay. Well, we certainly appreciate your participation this morning in the Q&A and the dialogue. Again, as I mentioned, and as Joe mentioned, our fourth fiscal quarter revenues are looking up and we're going to deliver a nice increase in earnings per share based on everything that we know today. So we're aggressively focused on closing out the year and moving forward into fiscal '15, where we'll have the television station acquisitions and moving into a political advertising cycle again. So there's a lot of excitement here at Meredith and a lot of good work going on, on many different platforms. We will be available for the balance of the day, as we always are on earnings release day, for any follow-up questions that anybody might have as you go about your work and your modeling. And again, thank you for your ongoing support of Meredith. Have a good day.

[Operator:]

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