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Lingo Media has established the
relationships necessary to penetrate the educational publishing market in
China, which has the largest primary student body population in the world
Services
Educational Publishing
(LNGMF-OTC: BB)
Lingo Media Inc.
151 Bloor Street West –
Suite 703
Toronto, Ontario
Canada M5S 1S4
Phone: 416-927-7000
Michael Kraft
President & CEO
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
Published - December 7, 2006
BIO:
Michael Kraft - President & CEO
Michael brings over 19 years of experience in international marketing,
publishing and finance with a specific focus on China. His established
relationships in publishing industry were a key factor in development of
Lingo Media's publishing business in China. Prior to Lingo Media, Michael
held several senior executive positions in marketing and publishing
industry. Michael received his Bachelor of Arts (Economics) from York
University (Toronto)
in 1985 and has served as a director of several private and public
companies.
Company Profile:
Lingo Media is a leading publisher of English language learning programs in
China. The Company incorporates print, audio/video cassette and CD-based
products for students and teachers from pre-school through university.
Founded in 1996, the Company has an established presence in the Chinese
educational market of more than 200-million English language students.
Lingo Media has built strategic relationships in the educational and
publishing sectors in China. Using a consultative and collaborative
approach, the Company has proven its business model by securing long-term
partnerships with the key players in the publishing market in China. Working
with authors and editors from both Canada and China, Lingo Media and its
Chinese co-publishing partners have successfully created effective English
learning materials for the school, home study, and self-study markets. The
Company products have already generated unit sales in excess of 120 million.
CEOCFO: Mr. Kraft, what was your vision
when you came to Lingo and where are you today?
Mr. Kraft: “Our vision started with us
recognizing the opportunity with the growing market for the English language
learning in China. After careful consideration, we decided we were going to
enter the market, and came up with a plan to open the channels and create
the right product to satisfy the market need. Our vision is to be a leading
content provider and producer of student textbooks, student activity books,
audio and visual components and teaching materials for the school market in
China.”
CEOCFO:
What does Lingo know about teaching a language that others do not?
Mr. Kraft: “I think Lingo recognized the
needs of the marketplace in China and the fact that English as a Second
Language in North America is usually taught by native English speakers,
whereas in places like China, there are very few native English speakers.
The teachers that are teaching English have less teaching experience than
the West, so we designed our materials recognizing the market conditions.
Our materials are much easier than the products that are used in North
America or the UK to teach English to new immigrants. Our program allows
teachers to be more effective and generate results. The materials fit the
market need in China.”
CEOCFO:
What are you providing that is unique?
Mr. Kraft: “Most of our competitors, are
large multi-national publishers, including Pearson, Oxford University Press,
Cambridge University Press MacMillan McGraw-Hill (NYSE: MHP). Those
companies are essentially selling existing materials that have been designed
and developed for what is called English as a Second Language, which is
taught in countries where English is the first language. Lingo Media was
prepared to make the investment in developing new materials. Being a smaller
company and more entrepreneurial gives us a competitive advantage, because
we can react much quicker with lower costs, so it was easier to justify the
investment to create new programs specific to the China market. The other
advantage was relationships as we spent a lot of time, effort and resources
on building key relationships with the Ministry of Education and those
relationships opened up the door.”
CEOCFO: Are
you primarily selling to what would be the equivalent to city, state, school
districts, and boards?
Mr. Kraft: “The market is public
schools, which is by far the biggest market in China. In fact, you have a
student body of close to 100 million students in the primary level of grades
one to six, which is probably the largest primary student body in the world.
In September 2001, China mandated that that English be introduced to primary
level students beginning in grade three through grade six. That was a huge
opportunity and we won the adoption and now have 60 to 65% of that market.
There are 3 major players that control 90% of that market and about 25 other
publishers that control the 10% balance. We were able to use that
opportunity and adoption and that was our market entry strategy that we were
successful in implementing and built market share in China.”
CEOCFO: Do
the schools choose or do you have a package?
Mr. Kraft: “The package of components
that we offer are created around the State Ministry of Education’s mandated
curriculum and components. All students use a student textbook. In addition
to the textbook, all the other components are ancillary and subject to the
individual school. There are ten components for each level; student
textbook, student activity book, two audiocassettes for the student
textbook, one audiocassette for the student activity book, student
flashcards, teacher’s resource book, teacher flash cards, wall charts and
overhead transparencies. The schools decide which components to purchase. In
some cases, it is for a district level, in some cases it is for the whole
city or municipality, and in some cases, it is a decision that is made for
an entire province. We created two basil textbook programs; one for the
grade 3 to 6 market that was adopted and is by far the market leader. We
also developed a program for grades 1 to 6. That program was launched in a
suburb of Beijing called, Haidian, which is the high-tech district. Today we
have developed 285 different product components; all original new product
for the China market.”
CEOCFO: Do
you have a sales force that speaks Chinese?
Mr. Kraft: “The business model for
foreign owned companies is restricted as we are only allowed to develop
content then license or co-publish with Chinese state owned publishers. That
model has its constraints. The Chinese publisher does the manufacturing and
sells the finished product. We are in essence, a content provider licensing
this content, and co-publishing with the Chinese publishers who has their
own sales and marketing channels. We support teacher training, but it is
ultimately our partner, Peoples Education Press (which is owned by the State
Ministry of Education) who does the sales and marketing. The market is
opening up under WTO (World Trade Organization) market reforms in the media
sector, which includes print media. Lingo Media is now getting involved in
moving up the supply chain and joint venturing and building print media
assets so we can establish a top line and sell finished products.”
CEOCFO:
Will you tell us about the Phoenix Publishing & Media Group?
Mr. Kraft: “Phoenix Publishing & Media
Group is a provincial owned publisher in the province of Jiangsu, China,
which is one of the most economically advanced provinces in China. More and
more we are seeing decentralization in education, as the provinces
themselves are allowed to adopt their own curriculum once it has been
approved by the state. We have never sold our programs in Jiangsu. We signed
a general cooperation agreement that opened up the doors in many ways.”
CEOCFO:
Will you tell us about the financial picture of Lingo Media?
Mr. Kraft: “In 2000, we signed a
long-term co-publishing royalty agreement with Peoples Education Press. That
agreement has a life of up to 12 years. There is a four-year program from
grades 3 to 6 and with a four-year revision cycle as well as the program
called Starting Line, which is for grades 1 to 6. It is a 12-year royalty
contract. Both programs have a value of approximately $12 million of
royalties. Every year we generate approximately $1 million of royalty
revenue under the current model. The growth potential for Lingo Media
through the China Business Expansion Plan, is to sell the finished products.
Our royalties represent approximately 5% of the less price so the finished
product sales have a wholesale value of $10 million in revenues. We have
sufficient cash flow and we are reinvesting all of our free cash flow into
executing our China Expansion Plan.”
CEOCFO: Why
should investors be interested?
Mr. Kraft: “Lingo Media is a great
market entry success story. I believe we are a window on the Chinese
education market. We represent an innovative entrepreneurial approach to the
growing China education market. We believe that this company and our
strategy will reward our shareholders as we grow. We have very strong
distribution channels and now it is a matter of exploiting those channels
and moving to the next step. I think we have been able to demonstrate our
core competency in terms of product development and management bandwidth. As
a young new company, we have secured very large contracts under the radar
screen of some very large competitors. I am confident we will continue to
develop our programs and our market presence. There are different ways for
investors to look at the China market, but I think there are only a limited
number of companies that are specifically focused as a pure-play on China’s
English language learning market.”
CEOCFO: In
closing, please tell us what is ahead for Lingo Media.
Mr. Kraft: “In
addition to our China Expansion Plan, which is in the traditional print
media area, Lingo Media is looking at new media and is encouraged with the
120 million plus internet users and 65 million broadband users in China. The
company is actively exploring new media models that compliment our market
and our core competency in China. I believe that over time, we will move
into new media and it will be part of our diversification strategy in China
in a way that supports the current business and allows us to grow faster. I
think that publishers need to address the fact that it is the consumers that
have the spending power in China. There is more disposable income; and we
have to address the fact that there is an opportunity to now cater to the
needs of individual consumers that want to learn English. We are looking at
the best way to do that and new media seems to be an interesting
opportunity.”
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