Harte Hanks Inc (HHS) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Harte-Hanks first quarter, 2003, earnings release. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Richard Hochhauser. Mr. Hochhauser, you may begin.

Thank you. With me today good morning, everyone. With me today are Larry Franklin, our chairman; Jacques Kerrest, CFO; Dean Blythe, VP Legal; and Jessica Huff, our Corporate Controller. The comments we make on this call will include forward-looking statements that involve a number of risks and uncertainties which can cause actual results to vary materially. After I make a few opening comments, Jacques will give some financial details and then we'll take your questions.

We're not pleased with our first quarter results. With revenue up less than a %age point, we were unable to drive profits to a desirable level. That issue was most pronounced in direct marketing and was also true for Shoppers to a much lesser degree. The $16.3m of free cash flow that's net income plus depreciation and amortization minus capital expenditures continues to make our financial health a competitive advantage in these tough times. Even though our results were somewhat less favorable than we expected, we continue to have the financial strength to aggressively pursue our plans.

We'll get into more detail in Jacques' remarks and in the Q&A, but this quarter was marked by a continuation of the relatively strong Shopper performance, that is, 4.5% revenue growth. We also grew EBITDA at 1.4%. The consecutive direct marketing improvements we saw last year in quarter-over-quarter results did not continue into '03. And while our pipeline and new business wins are relatively strong, current clients are just spending less than they have in the past.

On the cost side, we misjudged the market, mostly due to the war, and didn't respond as quickly as we should have. We did not intend to keep margins at the current level. They we do not intend. They will improve. While this environment surely makes it harder than ever to have stable margins, our people remain committed to continuing to deliver reasonable profit performance. This, despite the fact that we have not seen any fundamental changes in the behavior of our clients, caution and uncertainty continues to describe their behavior.

Revenue from our health care and pharma and financial segments were down double digits. Retail, our largest vertical at 27% actually grew slightly. And that's after an early decline a few years ago. This market has remained reasonably stable. High tech and telecom was also up 1% and we do appear to be winning some share in that market.

There continues to be some exciting things happening in our select market group, which is now approaching 19% of our revenue, up from 15% a year ago. This market grew 18%. It's exciting to see this relatively new business development effort gain traction. Automotive continues to be the leader in this group.

While the economy is affecting Shoppers, our revenues were still reasonably strong. We did not have positive leverage in Shoppers, but did grow profits. We also took some steps to reduce cost structure going forward. We'll continue to invest in this business to improve readership and to grow circulation.

Before turning this over to Jacques, I wanted to take the opportunity to repeat and to reinforce what has already been said both here and in recent press releases. While we feel the economy will remain difficult for the full year in '03, we do think there will be some improvements over time. We are committed to delivering increased earnings per share. We will deliver reasonable profits regardless of the environment. We are excited about the progress we're making on some of our strategic initiatives which started less than a year ago.

Pricing pressures and delays in decisions have been and look like they will for a time continue to be the realities of the markets we serve. We are on a path to significantly grow circulation in Shoppers, particularly in Northern California. Though disappointed with this recent performance, I am proud of our people, who continue to find new ways to make it happen for all of our stakeholders. Jacques?

Thank you, Richard, and good morning. As Richard indicated, we had a difficult quarter, especially in our direct marketing unit. Here are the highlights.

One, revenue for our two businesses combined was up [inaudible] for the quarter with direct marketing down 1.5% and Shoppers up 4.5%. Two, our direct marketing units did not perform well, with revenue down, as I said, at 1.5%, and operating income down 28%. Three, our Shopper unit had a solid revenue performance up 4.5%, but operating income was up only 1.2%. Four, for the quarter, free cash flow, which we define as net income plus depreciation minus CAPEX, was $16.3m compared to $25.2m in Q1, '02. We now expect free cash flow for the full year to be in the range of $80m to $90m, and this is primarily due to higher CAPEX related to Shopper facility expansion in California and companywide strategic initiatives.

We expect our CAPEX to be between $30m and $35m for the full year for the two businesses combined.

Let's look at our two businesses separately now. For Q1, 2003, our direct marketing revenue was down, as we indicated, by 1.5%. Operating cash flow was down 23%, and operating income, down 28.3%. Cash flow margin declined 430 basis points while OI margins declined 280 basis points.

Margins significantly declined for the following four reasons. One, the economic environment continues to cause delays in decisions, as Richard indicated. Two, pricing pressures; we continue to see pricing compression in existing clients, and we are experiencing pricing pressures when we take on new work. Three, investment in new products and programs, we have a number of new initiatives that were started in the latter part of 2002. Four, timing of expenses; We saw some expenses hit in Q1 at a much higher rate than normal, including bad debt, pension, write off of alliance partners software, recruiting, severance and legal.

Let me now give you some details about our vertical markets and direct marketing for the quarter. The largest industry we served in direct marketing was the retail as Richard indicated, was 27% of direct marketing revenue. High tech telecom was 23%. Finance, which includes credit cards, diversified finance, insurance, mutual funds and retail banking, 21%, Health care/pharmaceutical, 11 %. And select markets, 19%.

In this first quarter, our international business represented 7% of our total $135m of revenue in direct marketing. Our top 25 customers represented 38% of our $135m of revenue. And our largest customer this quarter represented approximately 8% of our total direct marketing revenue.

Turning to Shoppers, in this weak economy, we had very good revenue growth of 4.5% for the quarter, in which .5% represented circulation expansion. This growth was primarily due to growth in both ROP and distribution products. Operating cash flow increased 1.4% while operating income increased 1.2% compared to the prior year quarter. Margin declined slightly, 60 basis points for the quarter, at both the operating cash flow and the operating income level.

Margin decline was primarily due to higher promotions in the Southern California market, higher pension costs, and difficult comparison to prior year where operating income was up 12.4% in Q1, 2002, compared to Q1, 2001.

Regarding costs paper costs decreased 6.1% in the quarter compared to the same quarter last year, and overall postage costs increased 4.5% due to rate and volume.

I'd like to make some comments about our balance sheet. We were showing a net cash balance at the end of the quarter of $10m. Our book equity at March 31st was $524m. Our net accounts receivable were $127m compared to $138m at December 31st, 2002. Our DSO at the end of March, 2003, was 54 days against 53 days at the end of last year and 55 days at the end of the first quarter, 2002.

During the quarter, we bought back 1.4 million shares at a cost of $25m, and in March our board of directors authorized an additional 6 million shares in the company's repurchase program.

This concludes our prepared remarks. We'll be happy to answer your questions. Operator? Stephanie?

Thank you. At this time, if you have a question, please the one on your touchtone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound sign, one moment for questions.

Our first question is from [Sarah Guben].

Hi, good morning.

Hello, [Sarah]. How are you?

Good. How are you? I had two questions, first about Shoppers and then about pricing pressure and direct marketing. In Shoppers, we're impressed that it continues to perform well. And I'm wondering if it would be possible to discuss the major ad categories in Shoppers and the percent of Shoppers' revenue that they represent. I know that there are many small advertisers but I'm wondering if it's possible to categorize it at a broad range. And then specifically, I'm wondering if auto is a large category and if it's come under pressure.

My second question is about pricing pressure in direct marketing, and I'm wondering if you could discuss in a bit more detail the pricing pressure you're feelings in terms of the average contract today versus a year ago, and wondering if this pressure is expected to be permanent. I'm also wondering if you do think that it would be permanent, if you'd then need to realign your cost structure to match perhaps new pricing structure in the market.

And then one other question in pricing pressure which is I'm wondering if what area of direct marketing is experiencing the most part of pricing pressure.

OK. Let me see if I can answer the second one first while we see if we can gather up some information on the first one for you. The pricing pressure does continue to exist. It is more pronounced now than it was a year ago and was more pronounced a year ago than it was the year before that. So it is a continuation of pricing pressures.

There is no way for me to assess whether it will be permanent. There are a lot of things that will happen, I'm guessing, as we move forward. For example, capacity creates pricing pressure, but capacity won't be there forever, so you don't know what happens when capacity begins to shrink and other dynamics occur in the marketplace.

Will we need to realign our cost structure to deal with the realities of pricing? I think we have done that to some extent. I think the earnings from each of the past five quarters would suggest that we've done that. So the answer is yes, you do need to align cost structures, but you also need to align the approach that you take to business to make it different. Quite frankly to reinvent yourself in dealing with the new realities of our marketplace.

I'm going to ask Jacques to try to address the Shopper numbers for you.

Yes, Sarah. Let me just give you an indication, because we sometimes talk about [Karl Mart] which is the automotive business for us, also real estate and employment. Basically, as we said, in the last couple of quarters on the REP side of the business [Karl Mart], what we call automotive, if you want, was down in middle single digits. Real estate was up quite a bit. And the employment area was down slightly. On the distribution products, we really don't break it down between vertical markets, if you want, so it's pretty hard to tell because we have, as you know, a number of customers in that area.

OK. One follow up question on the pricing pressure side. Can you give us a sense of what if there's a particular area within direct marketing...

Yeah, you did ask that and I forgot to answer it. It is all over, all industries. There is not one place that we can hide from that pricing pressure. It is just it's a phenomenon that I think exists for most companies in most industries, quite frankly. We are putting the same pricing pressure on those who supply us with services and we're getting the same pricing pressure from our clients.

OK. And is there any sign you mentioned that pricing pressure is partially a function of capacity. Is there any signs that the industry is beginning to consolidate to relieve that excess capacity?

You know, it's interesting. I would have expected more of that to have occurred by now. We have seen some signs. There was you know how we define our competition it varies so much by the industry that we're serving and it varies so much by the offering. But in one of our industries in one of our offerings, one of the companies that we saw a competitor a few years ago on most of the deals that we were going after is no longer around. Now, it's a relatively small company, so we're not talking about a big deal, here. But it was a factor. It was growing, and it hit a wall. We have not seen as much of that as I would have expected, given the climate. I don't know when the next set of cards will fall, but I think when they do, that will be the time that we may see some turnaround.

Right. Thank you very much.

Thank you. Our next question is from Fred Searby of JP Morgan.

Good after good morning, I guess, gentlemen. A couple questions for you. I wondered if you could drill down on just credit card you know, Capital One, of course, released numbers and it appeared that they dropped marketing substantially. Is Capital One a customer of yours? And can you give us some insight on the credit card marketing? Just in general, the industry from a demand perspective? And then you talked about delays in the business, and I guess you probably field this question a thousand times, but is this pent-up demand is there going to be a snap back, is there a sense? Or is this just lost business, do you think?

And then we were kind of surprised on the pharma side, that you were talking about a double digit decrease. Can you talk about what's driving that? That's historically, and at least I thought last year, been one of the most resilient sectors.

I'll deal with your last question on pharma and health care. It is, to some extent, driven by some large clients, and our revenue for some of those clients in the first quarter was down. And that contributed to that. And some of it's in our hands. Some of it has to do with just how well we're able to deal in the marketplace. And the contrast to that is high tech where I think we're really making some strides in a very, very difficult market. And pharma, where the market is less difficult I think we should be doing better.

On the financial side, we don't mention our clients. I can tell you that that market in general, to answer your question, has been a soft one, the credit card market. So what you're reading is from Capital One, what you're reading is factual. And I did not hear the end of your pent-up demand question. So could you repeat that?

Sure. I mean the question is, you talked about delays due to the war and everyone's kind of saying, "Well, things project work was put on hold." I mean is there a snap back? Are you seeing that in the second quarter...

Right.

You know, can you give some sense...

You know, we have...

...whether that's pent-up demand or lost business?

We have not been talking about delays because of the war specifically, although we did mention it. The fact is that we've been talking about delays in decision making now for probably a year and a half. The war certainly exacerbated it, but it's not as if it created a pent-up position, because the decision processes are just slower, and have been for quite some time. It preceded the war and our best guess is it will continue after the war.

So you're not seeing in the second quarter kind of any kind of pick up in demand?

Not so far.

OK. Thank you.

Just Fred...

Yep.

Credit card also, just to add to what Richard said we said that our total financial is 21% of the total. Credit card is a very, very small...

No. I know that. That's why I asked you to drill down to specifically address credit card. I know you but I appreciate that.

Thank you. Our next question is from Troy Mastin of William Blair and Company.

Good morning. Thank you. I wonder if you could comment on the unit that you used to call response management. I'm curious if you expect to see any dramatic changes in some of the demand drivers of that business, given recent new legislation or at least rulings coming out of the FTC and the initiation of a Do Not Call list nationally by the end of the year.

Well, let me briefly comment on it and if Jacques wants to add to it.... Most of what we used to call our response management business, and in fact we still do because it pretty much describes what we do manage responses most of it is business to business. And the Do Not Call list is not affected does not affect business to business.

So from that perspective, we don't see very many issues. It is a business, though, that has been a little bit more commoditized. Some calling is now being done overseas, not all. So there are some changes taking place in that business, as there are in all others. But we're comforted by the fact that the business-to-business aspect of it puts us in reasonable shape there.

Well, I would be concerned that you could see a substitution affect from those that compete in the business-to-consumer sector or even the outbound telemarketing sector to fill those seats. So do you see any early signs of that happening yet?

Well, we've seen those companies try to get into this space for many years. Some of them have been moderately successful, but quite frankly it's our competence. It's a different business. We think we're better at it. And, you know, we reported our high tech revenues up a little bit. I think that's testimony to the fact in this environment and since much of that revenue is in response management, as you refer to it, that we're doing pretty well. So I'm not concerned about it. Yes, everybody's going after everything. I mean it's the nature of this marketplace.

OK, second question. I wanted to ask about some of the investments that it sounds like you were making in the quarter, if you could give some more detail on specifically product lines or verticals that you're investing in. And then you did seem to mention a little bit more than maybe is typical about initiatives for future growth. If you could give some details on where that future growth might be coming by division, by vertical, and whether that will be more influenced by acquisitions or internal investments.

Well, our goal, as you know, is to continue to make acquisitions. We have found it harder, not easier, to do that in these depressed times. So that remains our goal. We continue to look at acquisition opportunities and we will do that in the future. We've looked at a few this week so far. The strategic initiatives vary. They're both in our Shopper business and our direct marketing business. For example, a color in our book in Shoppers is a strategic initiative. It is helping our readership. It is helping to grow our revenue because it is more premium priced. So that strategic initiative we know from history has worked, and we expect it to continue to work as we roll more of it out.

And there are a few others which I'm not going to comment on yet because, you know, we don't like to talk about all the things we're doing until we get some releases and some evidence that they're going to work. But in direct marketing we're putting together a small business database off of our CI Technology database, and while we're not all the way there yet, we are optimistic about the market reaction. So the answer to your question would be that is aimed more at the high tech space than anywhere else.

We're also building a marketing portal. We have had some market success with that already, even though the product is not completed yet. I know that we have one client. I think that we have two. And I say that, I think, because we don't report things until they're real. And it's not just the verbal commitments ,which is where I think we are on the second, and we have a strong indication from a third, as well. That marketing portal is not only a revenue stream, but a driver of subsequent revenue, because what you do with it is you identify opportunities to communicate with people and then it triggers the communication. So not only do you have the front end, which is the marketing portal, but you have the back end, which is the direct marketing solution.

We're very excited about that. It's pretty new. As I say, we haven't even finished it yet. We have made some sales, and we see that as potentially having some momentum for us toward the end of this year and going into next year.

Can you characterize your investment in new product development by division, Shoppers versus direct marketing, and where it stands today versus in the past and where you think it might be for the rest of the year? So, increase? Decrease? Any order of magnitude? That type of quantification.

Well, it's an increase in general terms for both business. And in both businesses it's more than we've done in a few years. We're committed at looking at new ways to create revenue. We think it's the time to do that. It's a time when others are hard pressed to do it, so we're taking advantage of the financial strength of our company. So it's greater now than it was a while ago and it's I don't know the exact dollar amounts, but it's significant in both businesses.

I think, Troy, you might relate this to the fact that we've indicated that our CAPEX for the year this time is higher than we had said earlier. And I think that's a reflection of some of these investments that we're making in some of these strategic initiatives.

Well, what was CAPEX in the quarter?

CAPEX in the quarter was $8m.

OK. Thanks very much.

Thank you.

Thank you. Our next question is from [Bob Latell] of [MD Sass].

Yes, thank you. I wonder if it would be possible to quantify the approximate size of the pricing pressure that you've been seeing year over year? Are we talking just a couple percent? Are we talking double digit?

You know, there are some clients that we are fortunate to have flat pricing with. Every once in a while we get a little lucky because of some new offerings and the way we approach some products to actually have some price increases. That's rarer these days, although in Shoppers we have been pretty effective in rolling out price increases. And on the down side, when there's pricing pressure, the pricing pressure varies. It could be a percentage point or two and in some cases it could be double digit . It really depends on the service offering. It depends on you know, whether we'll participate in that pricing change depends on how profitable the work is.

So it's...

It's all over.

OK. And, Jacques, I wonder if you could give us actually the dollar numbers for sales and operating income for your two segments.

Do you mean revenue?

Yes, revenue and the operating income. You gave us the rates of change but you haven't given us the sales, except for direct marketing I think you said was $135m. But the other Shoppers revenue and the operating income for the two segments, you didn't give.

OK. It's attached to our press release. We have one page which gives you the breakdown between the two businesses, but...

I must not have all the pages, then.

Sorry about that. It's call "Business Segment Information."

Yeah. Don't have that.

You want operating income for direct marketing and Shoppers?

Yeah.

For the quarter, operating income for direct marketing was $14.370m. Shoppers for the quarter was $15.696m. And there's a corporate expense and so the total operating income for the company overall is $27.833m for the quarter.

And the sales for the revenue for the Shoppers?

It's $81.748m, and for the...

OK.

[inaudible] $134.572m.

Got it. Thank you.

Thank you. Our next question is from [Brad Eikler] of [Stephans, Inc.].

Good morning. Three questions. First, I know business has been soft for some time, but can you talk about during the quarter did you guys see any fall off, one month to the next?

We really, Brad, don't want to comment about it. In fact we saw the month of March being stronger than the first two months of the year. But we don't think that it's a clear indication of what's going to happen in the future.

OK. Outside of credit cards and financial services, what else is contributing to the weakness?

Well, mutual funds haven't been doing too well recently, and so that's an area where we've been soft. You know, we're in a whole bunch of areas in financial and some of them are stronger than others, but clearly credit cards and mutual funds have been weak.

You mentioned credit cards were just a small piece of that. What makes up the majority of that business?

Of the total financial, of the 21% that we talked about?

Correct.

Is that what you're asking?

Yes.

Mutual funds is the biggest portion of it. Retail banking sorry, retail banking is the biggest portion of it. Then mutual funds, insurance, credit card and diversified finance.

Thank you. And then the final question is, could you comment a little bit on sales of Trillium in the quarter and progress you’re making there?

Well, I think we had normal, good growth for Trillium in the quarter. We really don't give these numbers out, even for the year. So we had much better growth than what we've seen for other software companies in that area.

OK, thank you.

Thank you, our next question is from [Chris Owen] of [Think Equity Partners].

Good morning. Two related questions, if I might. First of all I was wondering if you could provide a little bit more of a sense as to what we should expect for direct marketing margins going forward or at least if we can how soon we might reasonably expect some normalization there. And the second related question is SG&A appeared to be out of historical norms, and can you discuss a few potential reasons? I was wondering if you could give an indication as to which are more important or any additional reasons.

Well, the one thing that we said about our margins in direct marketing is that they are going to get better. It's a little bit too early to talk about exactly what that means, but we are committed to moving those margins back to the close to historical levels.

And just for the Shoppers side, we have said over the last two quarters that we expected margins this year to be lower than the margins that we've seen in the past, slightly lower because of the investment that we're making there, too. So and that's consistent with what we've said before. What was the second part SG&A?

Right. And which are the most important factors there?

I think I've listed a number of factors that we consider somewhat one-time or a big hit for the quarter if you look at the variance in bad debt expense in the first quarter this year compared to last year, also pension expenses. As I indicated before, we had a small write-down of Alliance Partners Software and also some legal and labor-related expenses.

And so no one of those accounts for significantly more than the others, or...

Well...

None of them is an ongoing...

Well, you know, it's all timing also about bad debt expenses. So but, you know, they were I mean that was the biggest item on the list.

Right. Thank you.

Thank you. Our next question is from [Charles Delagua] of Harte-Hanks. [no response] Mr. [Delagua], your line is open.

Maybe we should go to the next...

Thank you. Our next question is from Alexia Quadrani of Bear Stearns.

Good morning. The strength that you're seeing in certain verticals in the direct marketing side are those coming from sort of increases in existing client spending or more from new business wins?

Could you repeat the question, Alexia? Sorry. We had some noise here. We couldn't...

The areas where you saw, you know, strength in the direct marketing business, like the high tech and the telecom are those aided by new business wins or are you seeing good growth in existing client spending?

The new business wins were reasonably strong in the first quarter and I don't know specifically within high tech whether that was the case, although I think so, particularly the way we define new business. But the current clients, overall, are spending less. So when we had good situations going, it tended to be from the new business wins.

And would you say that's the same in retail? It's more you’re winning markets there? It's not that your clients are spending any more at all?

I don't know I'm less confident of saying that in retail. I would really have to look at the details of the numbers to say that. My instincts are that it's not the case in retail.

And I think you mentioned that you saw some strength in the month of March but it's just too early to read anything into it?

It really is.

OK. And then just a follow-up question on the margins in direct marketing. Could you just give us some color on where you think you can still cut costs in that area?

Well, we had some severance costs in the first quarter. That's one area. We are continuing to look at the way we run the business and redefine how we run the business. We are looking at some fixed-cost areas where we think we can reduce some of our costs. Probably won't see that until the beginning of the third quarter. But all of those are operative and each one is going to contribute a little bit to improved profitability from the levels that we're currently at.

And just lastly on the Shoppers business, you know, we had [Tribian] saying how phenomenal their L.A. pre-print business was in the quarter and [Advos] saying they had strength in L.A., too. Any change there in the competitive environment?

We compete against these two companies that you mention. We really don't like to talk about our competitors. I think our performance of our unit in that area is very similar to the performance that we show for the total Shoppers unit. So we don't we believe that we're holding our own and we're doing very well in that market.

OK, thank you.

Thank you. Once again, if you do have a question at this time, please press the one key on your touchtone telephone. Our next question is from Kevin Sullivan of Lehman Brothers.

Hi, good morning. Richard, I know you didn't want to get too specific, but can you just give us some sort of color on whether the price pressure that you're talking about is it more intense on the marketing services side of the business or the direct marketing side? And secondly, Jacques, if you could just give us the performance of those two groups in the quarter.

Well, you know, I think the answer that I gave earlier is really all I can talk about in terms of pricing. It's not in any one area. There has been for quite some time now a movement toward bidding work out, purchasing departments putting pressure on pricing. We're seeing that in all industries. So it's just a continuation of what we've been seeing. It has not abated yet.

OK, fair enough.

Kevin, you wanted a breakdown between the...

CRM and marketing services.

Sixty/forty.

Sixty/forty? OK. And then lastly, if I'm doing my math right, here, your tax rate was 39.5% in the quarter. Is that the right number to think about going forward?

Yes.

OK, great. Thank you.

Thank you. Our next question is from Bill Warmington of SunTrust Robinson.

Good morning, gentlemen.

Good morning.

A couple of housekeeping questions. First, is I just wanted to check what cash from operations was in the quarter.

Cash from operations, before or after CAPEX?

I think you gave the $8m you said CAPEX was $8m so I'd take it before CAPEX.

Cash flow from operations was $35.6m.

Great. Also, I wanted to ask when do you think you'll start to see some of these project investments generate revenue and earnings? Is it pretty what's the lead time typically there?

I mean it's already it is already doing that. It's not a matter of will it do it. It's a matter of when it will build. I wish I had a crystal ball on that. You know, some of it's started. We're very hopeful. We think some of it has traction. Some of it is creating excitement for our other offerings. And so sometimes you introduce something and, you know, it represents half a % of revenue but some of your other things get charged up as a result of doing it. And quite frankly, we're at this for less than a year now, these initiatives. So it's not particularly clear to us, other than we have comfort in the fact that every one that we've put on paper so far continues to be with us. Now, I don't expect that will be true, because, you know, you don't bat 100 %. But so far, that's the case.

OK, and then one other thing, just wanted to see if I could get you guys to comment on the thought about potentially spinning off Shoppers. That's something that has been talked about from time to time. And you've mentioned acquisitions is one potential. But how about doing a divestiture? Is that something that would make sense at this point?

Well, I think it's a pretty quick answer. The answer is we are not planning any divestiture [inaudible].

OK, All right. Well, thank you very much.

Thank you.

Thank you. Once again, if you do have a question, please press the one key. Our last question is from Mark Bacurin of Robert W. Baird.

Good morning, guys. A couple of things, I guess. Jacques, it looks like debt went up a little bit this quarter. And I'm just curious you know, you've been pretty aggressive on the share repurchase. Would you , you know, given some of the investment in some of these new initiatives, would you be comfortable taking on some leverage to further accelerate the share repurchase program?

I'm not quite sure where you saw that debt went up a little bit because the debt outstanding at I mean at the end of the quarter was $21m with $31m of cash and that's why I've talked about the $10m net cash.

Yeah, I think just not net cash. I was referring to just I think it was $16m at December.

Oh, OK. So that's the $5m increase. And I guess your question is would we be willing to take debt in order to accelerate the stock repurchase?

Correct.

It all depends on the price, I guess, of the shares. And, you know, we've said continuously that we would feel comfortable if we for some reason, i.e. acquisitions or others, that we had to borrow some money, we still generate as you know, last year we generated $183m of EBITDA. So I am sure we could leverage the balance sheet a little bit. I mean that's the answer to the questions.

OK. On the and, Richard, maybe you'd comment on the Shoppers business you know, you've obviously grown in Northern California. If you look out maybe three to five years for that business, are there any distribution goals in terms of I think you're going to be close to $11m now with the Northern California expansion. Where would you see that business maybe over the next three to five years in terms of, you know, distribution and, you know, could you accelerate it from that 4% to 6% trend-line growth?

Well, we're somewhere in the $10m range now. Goal is to grow at about 20%, most of which will come from Northern California. The Northern California expansion has not started yet and it will start in the first quarter of next year. We originally thought we could get to it by the fourth quarter of this year, but the building that's going on that we talked about is just going a little bit slower than we'd hoped. So we have ourselves a three- to five-year plan, actually, to use your numbers, to do that rollout.

It doesn't happen overnight. You know, you've got to get into the building. Then you've got to stabilize. Then you have to expand and then you have to deal with your expansions. It's you don't just snap your fingers and do it. So the three- to five-year plan is to do if you think about an extra 20% of circulation, which is what we're talking about here, it's pretty significant. There will also be some expansion in Southern California and a little bit of expansion in Southern Florida.

Now, the question is what happens after that. That's a long time from now. We don't do three- to five-year plans anymore because we don't have three- to five-month horizons with what we're looking at today. But clearly, there are other opportunities. We'll start addressing them as the time is right.

Great. And then, Jacques, based on, you said, $35m or so of operating cash flow and if you just take net income plus depreciation, that's roughly $24m. What were the other positive adjustments on the working capital? I assume those are big non-cash charges and/or working capital adjustments in there?

I think there was a decrease in accounts receivable. About $10m, I believe. Yeah, if you compare this to the first quarter of last year, the $36.6m this year compared to $39.1m last year in terms of cash flow from operations before CAPEX.

OK. And then just finally you know, the direct marketing business seems to be sort of you know, stabilized, but no real significant acceleration in growth. Is there anything you can do outside of, you know, an improvement in the economic environment to really, you know, get that business back on the path of, you know, producing top-line growth again, other than I know you're discussing these initiatives, but I mean is that are we really sort of waiting for the economy before we see any significant uptick in that business?

Well, we are certainly not waiting for the economy. Life is in our hands and it's in our control. Those strategic initiatives are in our control. The way in which we sell is in our control and we're doing a number of things to improve on that, in fact have done some things. It just takes time to get them rolled out. So we take responsibility for it, independent of the environment. It would be nice if the environment improved. It would be easier for us to see some of that. But, you know, we're driven to make this happen regardless of the economic environment.

Care to venture whether or not we might see some improvements in the back half of this year?

You know, [inaudible] it's unfortunately getting pretty boring saying the same thing like, I don't know, what? Six or seven quarters now. You know, we were laughed at about seven quarters ago when we started saying it, but it's just been true. There's very little visibility and times are tough. And I wish we saw things getting better, for, you know we see a month, but we get excited because it's depressing in some other months. And then we go back to a more normal sort of no-growth environment and so the excitement abates and goes away. So rather than try to comment on it, we're going to wait until we see a couple, three, four quarters in a row where we can then say to you, "You know, things are beginning to look a little better." It just hasn't happened yet.

Fair enough. Thanks, guys.

Thank you.

Thank you. Our final question is from Mike Kupinski of AG Edwards.

I know that you guys are pretty much embedded with your clients, and in talking to your clients in direct marketing, do you have a sense if your clients are shifting budgets to other traditional advertising mediums, possibly following your competition? Do you feel that direct marketing as a proposition of their total budget may have gone down? And possibly maybe a couple of clients have shifted away from promotional spending and moved towards more traditional or more less promotion, in other words?

Well, the I mean the promotional revenue in our company is mostly in the retail area. And we do not in retail see signs that there is a I mean any given client, there are changes. Some are going to television; some are going more to newspaper. Some are going more to direct marketing. But overall, we don't see any significant changes in that promotional part of the budget. And I think you know as well as I that all of the media have been hurt through these past whatever it's been, six, seven quarters. And, you know, I don't see a fundamental change in the market at all.

OK. All right. Thank you.

Thank you.

Thank you. I'm showing no further questions at this time.

Thank you.

Thank you.

Bye.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a good day.