Thryv Holdings Inc (THRY) 2002 Q2 法說會逐字稿

Good morning ladies and gentlemen. Welcome to R. H. Donnelley's second quarter 2002 results investor teleconference. 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. Copies of the R. H. Donnelley's SEC filings may be obtained by contacting the company, its website, or the SEC website at www.sec.gov. This transmission is the property of R. H. Donnelley Corporation; any retransmission or broadcast without the expressed consent of the company is strictly prohibited. Please note that today's teleconference call is being recorded as well as webcast live over the company's website at www.rhd.com. I'd now like to turn the call over to Mr. Frank Colarusso. Sir, you may begin.

Thank you and good morning. I am Frank Colarusso, Vice President and Treasurer at R. H. Donnelly. On the call today are Dave Swanson, President and Chief Executive Officer; Steve Blondy, Senior Vice President and Chief Financial Officer; and Bill Drexler, Vice President and Controller. Certain statements made today may be forward looking within the meaning of the Private Securities Litigation Reform Act. We call your attention to yesterday's earnings release and management's discussion and analysis of financial conditions and results of operations in the company's annual report on Form-10K for the year ended December 31, 2001, as well as the company's other periodic filings with the SEC which set forth important factors that could cause actual results to differ materially from those contained in or suggested by any forward-looking statements. Now I will turn the call over to Dave Swanson.

Thank you Frank. Good morning everyone and welcome to R. H. Donnelley's second quarter investor call. I will start things off today with a brief review of the quarter's results, provide you with some details on operating results, and then briefly touch on our outlook for the full year, and of course we will take your questions. So lets take a look at the quarter. Donnelley's second quarter results were in line with our expectations. Earnings per share was up 6.1% to 70 cents a share. Net income was up 2.9% to 21.2 million supported by modest growth in operating income and the impact of lower interest expense. We are pleased with this performance in what remains a difficult economic environment. We have continued to control costs and improve productivity, to be able to deliver good earnings despite the impact that the continued weak economy has had on our sales results. Second quarter calendar sales of 178.2 million were unchanged from last year. As most of you already know, calendar sales represent the gross value of advertising sold in both DonTech and our Sprint operations during the period. Calendar sales of both DonTech and Sprint were both flat with last year, as weak economic conditions and below average business confidence continued to impact both businesses sales results. Operating income rose 3.1% to 40.4 million in the quarter. Operating income growth was due in part to lower depreciation and amortization cost at Raleigh. Additionally, in the 2001 period, the Sprint operation had incurred some one-time cost related to the CenDon partnership.

Operating income in the quarter included 200,000 of restructuring expenses related to the charge we took in the fourth quarter of 2001. Actual restructuring payments in the quarter were slightly higher than amounts that we had reserved, so they were trued up. Interest expense in the quarter was down to 5.9 million reflecting lower average debt and taxes were 13.3 million reflecting a tax rate of 38.5%. Operating cash flow in the quarter before taxes and restructuring payments was $20 million. Cash tax payments were about 16 million and restructuring payments related to the charge we took in Q4 of last year totaled about 7 million. The net of capex and software spending and stock option proceeds was a modest source of cash. Consequently, we used 1.6 million of net cash in the quarter. The second quarter is seasonally a low cash flow quarter for us due to the timing of tax payments. We effectively make 2 quarterly tax payments, one in April and another in June. So we ended the quarter with net debt of approximately 242 million. There were no shares we purchased during the quarter. Lets take a closer look at operations. Second quarter sales while flat were on target, and while flat sales are disappointing for us, it was something we had anticipated and factored into our previous guidance. Across all media, the recovery in advertising budgets has been slow to develop. We did, however, see some good news in the second quarter sales numbers. Dollars from advertiser renewals as well as cancellations due to nonpayment of the advertising bill have trended positively now for the second straight quarter.

We've seen a reduction in the number of business failures in the marketplaces and fewer businesses are cutting back their ad programs at this point to weather the economic storm. This is an important trend that generally signals that the worst is behind us. That being said, however, these are not exactly traditional times and we continue to see that our advertisers are not increasing their ad programs at their traditional levels. Another sign of caution we are seeing in the marketplace is that businesses buying in our directories for the first time are buying smaller ad programs than we would normally sell. I think it's important to know that in general the impact on Yellow Pages including RHD has been less adverse than the overall advertising market. As we have said before Yellow Pages advertising is for many small businesses, the single most important and often the only form of advertising that they do. So while a business order might elect to purchase a smaller ad program, Yellow Pages advertising is rarely eliminated. And that's the reason that the Yellow Pages have weathered economic downturns better than almost any other media. Looking specifically at DonTech, the economy appears to have begun to stabilize somewhat in the DonTech markets and renewal rates have continued to inch up. In Chicago, DonTech's largest market, hotel occupancy has been coming back and the number of flights coming out of O'Hare is almost back to pre-September 11 levels. However, the risk of more job cuts remains in Chicago, and the jobless rate is predicted to climb in coming months. Business confidence levels, while appearing to be improving in the outlying areas, remains relatively low in and around the city of Chicago.

With this backdrop, advertisers are cautious. And while renewal rates are stabilizing, new advertisers appear to be buying smaller ad programs than they've typically purchased in prior years. DonTech has taken additional actions to control costs that will help to mitigate the effects of the economy in this operation. In our Sprint markets, business conditions appear to be improving, especially in the smaller markets. As a result, advertiser renewal rates showed improvement in Q2, and we anticipate that trend to continue in Q3 and Q4. Even in Las Vegas, our largest Sprint market, hotel occupancy is up, conventions attendance is climbing, and the casinos have begun rehiring; all good signs. However, once again advertisers have shown to be reluctant to buy more, and the flow we are seeing from new business remains below normal. These general trends seem to indicate more single-digit growth in most Sprint markets for the remainder of the year. So I think the general message here is that we are finding a recovery in business confidence and ad spending in the larger markets like Chicago, Las Vegas, and Orlando; still taking some time, while with smaller markets even the medium sized markets appear to be recovering at a faster pace. Second, we are seeing advertiser renewal rates trending positively. But the same advertisers are not increasing ad spend at traditional levels, and third, new advertising continues to be held down by fewer new business startups and smaller ad programs. Within this environment, we continue to anticipate achieving flat sales in operating income for the year based in part on our assumption of slightly improving economic conditions and advertiser attitudes.

I would also add that due to some shifts in the scheduling of our third and fourth quarter sales campaigns, we anticipate third quarter sales and operating income to be down slightly compared with a fairly aggressive third quarter campaign scheduled last year. Our fourth quarter, we expect to be up accordingly. As a result, we continue to expect to achieve our previous full year earnings guidance of $2.40 to $2.44 per share. Finally, before we open the call up for questions, let me make one last point. On the April earnings call, we've said that given the stepped up pace of M&A activity in our industry, we plan to carefully evaluate these new opportunities that increase Donnelley's marketshare of the Yellow Pages industry and create sustainable value for Donnelley's shareholders. At this time, we have nothing definitive to report. I don't think it's appropriate to answer specific questions about any particular transactions, so with that said operator, I think we are ready to open up the call for questions.

Very good sir, at this time we will begin the question and answer session. If you would like to ask a question at this time please press "*1" on your touch-tone phone. I will announce you prior to your question. Again please press "*1" now if you would like to ask a question. And our first question does come from Arnie Ursaner from CJS Securities. Sir, your line is open.

Hi! Good morning. Relative to my model one of the big surprises for me was your DAS revenue was dramatically higher than I had built in, could you comment a little bit more about what may have driven that?

Hi Arnie! It's Frank Colarusso, I think DAS; it might have just been a pickup in what you were thinking. I think the DAS revenue was kind of on par there was a pickup in the income from DAS though and that may be causing some of your concerns. That was driven a little bit out of the lower depreciation at Raleigh in the one-time call of the old CenDon partnership in 2001 not 2002.

Okay, and I know Dave you mentioned you didn't want to comment on any specific actions related to any properties but could you comment in general we have seen things like the [_______________] transaction getting yanked. We've seen one round of bidding on properties, could you comment in general about what trends you are seeing in pricing over the last two to three months, and how that might impact your decisions on the go-forward basis?

Arnie, it's Steve Blondy, good morning. You know clearly the [_______________] transaction protends, sort of, reflects a general choppiness in the equity markets at large, and I think in that transaction was being attempted in the European markets where I think there were several other IPOs that were also pulled at the same time. I think that clearly our view is that all asset classes have experienced the decline in values and you know Yellow Pages would seem to be susceptible to the same trend.

As I said would that change your view of being more aggressive, less aggressive towards opportunities that are out there?

I don't think it would change our level of aggressiveness. I think, you know, we would be expecting valuations to come down.

Okay thanks very much.

As a reminder, if you would like to ask a question please press "*1" now, and our next question does come from Jonathan [_______________]. Sir, your line is open.

Thanks, just a quick question on the cash flow. It's said in the press release that you paid debt down 7.5 million, I think you indicated that though you burnt cash for the quarter, was that the 11 or 12 million or so cash that was on the balance sheet at the end of last quarter?

Right Jonathan, it's Frank Colarusso. Yeah we did, we used that. We ended this quarter with only 2 million of cash.

Okay, and in terms of your outlook for the coming quarter you indicated sort of guidance down slightly for the third quarter. From a cash flow standpoint, is third quarter likely to be a cash generating quarter or cash using quarter?

Both the third and fourth quarter, the cash flow is pretty ratable over the balance of the year. Second quarter is down, as Dave mentioned I think in his comments tax payments and also the restructuring payments and typically with that tax payment that's our seasonally the lightest quarter. The balance of the year should be pretty even and they are both fairly strong in the $15 million range of cash generation.

15 million...

One five, each quarter...

Each quarter. Okay, great. Thank you.

Our next question comes from Harry [_______________] from Tudor Investments. Your line is open, sir.

Yes, good morning. In light of the precipitous decline in the stocks since you announced your intention to pursue growth, I am wondering you know how you are reconciling or how you are trying to balance the value creation from share repurchase versus the growth initiatives that you are currently considering.

Well, hi Harry! It's Steve again. You know, I think that we do see an opportunity in the marketplace to increase our marketshare of the Yellow Pages industry as Dave referred and clearly focused on creating shareholder value, and what we've decided is that during this time it's prudent for us to maintain maximum financial flexibility in order to be able to pursue what may become very interesting opportunities for us. So, you know, clearly we don't like it when our stock price goes down, but we are very focused on the opportunities that we see in the marketplace.

Okay, next question, given the seemingly sliding scales from the sellers perspectives due to management changes etc., etc., and given your own forecast and your own cash flow generations, how much longer are you willing to, kind of, sit in this holding pattern before you buyback stock?

Could you clarify what you mean by sliding scales?

Yeah, it just seems like the sellers intentions or desires are being pushed back in time. I mean, there was, you know, one property was for sale, it got pushed back, another has a new management team, they want to revisit things. You know, how much time are you willing to effectively sit on the sideline before you say you know what, we can buy stock now and if the property comes in and we buy it terrific, and we'll issue equity then?

Well, I think that our decision to [_______________] our share repurchase program is something that we think about on a fairly regular basis. It's not something which is kind of off the radar screen. I think we continually review that, and I think that we expect that the various opportunities that we are looking at are going to be resolved before the end of the year.

Okay, next question in light of, once again, in light of the decline in the stock and I recognize the mass majority of it is market related, but in light of that what confidence can you shed to us that the seller, you know, that these transactions that you are looking at in fact will be accretive?

Well, I am not sure I understand the relationship that you are referring to between the, I think, our stock price has been declining kind of in lock step with the market.

Right, agreed.

In fact, depending on which index you look, at we are performing less bad than the market. I'm not sure how bad.

Well, I guess, what I'm asking is if you are going to be prepared to bid, I am making up the number because I don't know the circumstances, 7 times EBITDA to buy one of these properties yet you can buy your own property at a value level of 6 today, I am just trying to understand how we reconcile that in the creation of shareholder value?

Well, I think that we are focused on the economics. We are looking at this kind of cash flow valuations as our primary basis to establish what's a fair price to pay as far as what sort of valuations are appropriate if we were to make an acquisition.

Okay, and final question, and if you were to apply the same disciplines that you are in looking at potential acquisitions, could you offer any guidance for valuation you come up to for the cash flows of your own asset?

I don't think it's appropriate for us to respond to that at this point.

Okay, so then in conclusion is it fair for us to assume that the roughly 15 million, give or take, of cash flow that you generate per quarter for Q3 and Q4 until these other properties come for sale will just accrued to the balance sheet and/or to pay-down that, that's kind of the interim goal between now and year end?

I think that's correct.

Okay, terrific. Thank you very much for you help.

Thank you.

Our next question comes from [_______________] from [_______________] & Company. Sir, your line is open.

Hi! This, sort of, may have partially been covered in this last series, but on the Sprint call yesterday or day before at [_______________] about their directory sale they said that, first and now free cash flow positive as a total entity including their PCS business, I think the question was in that regard but they answered it in the context of, you know, we really we are never selling this for liquidity, we will only sell it if we can get "sort of a fair price and the system that hits our offer" and assuming they have less interest in going forward, that may not be the case, but assuming that I applaud your efforts, sort of, like a bigger scale of business long term, it's a good thing, but assuming that doesn't happen, this was the year I think when your debt levels got to a certain level when may be just recapping your own business or pursuing as an internal transaction seemed to make coming to a head but the markets are really awful. How do you just look at that perspective assuming that you don't come up with either of the deals that are out there?

Well, I know, this is again, this is something, and thank you [_______________], this is something that we are thinking about every day as we evaluate what's the right thing, what are right decisions for us to make, and we can't come up with an investment opportunity that is more attractive from a shareholder value creation opportunity than, you know, buying back our own stock which is I think is essentially what you are suggesting, then we wouldn't do it.

Are there any benefits to gaining marketshare in the concept in your business, I am not sure if it's, you think I don't know if there is [_______________] it work or is it just a bigger, [_______________] in public format?

Well, gaining market share obviously depends, if the benefit of gaining market share depends I think on, kind of, what you are starting with, but there clearly are economy to scale in the business, and I think if you look at the other companies that report publicly, you'll see typically that they grow earnings faster than they may grow revenue and I think so that would sort of suggest one of the benefits.

You do that?

Right, we do.

Are there any purchasing, I mean where are the cost benefits? If you have lower costs.........

I think the cost benefit associated with publishing acitivities, those cost benefits, I mean we are the largest cost to our publishers in printing paper activities, there is, you know, purchasing power opportunities there, you know that we can leverage your technology platform and your G&A and overhead expenses as well.

Thanks a lot.

Once again as a reminder, if you'd like to ask a question, please press "*1" now, and our next question does come from Arnie Ursaner CJS Securities. Your line is open sir.

Hi! One of things that might help all of us is if you could give us a feel for what you view as your borrowing power relative to your EBITDA, can you give us a sense of your level of that that you would be comfortable with and also you have filed a shelf, I assume that's only equity related or primarily equity related would not include additional debt that you might take on?

Yeah, well, as far as your first question goes, I think that because of the high visibility and predictability of our cash flow is because of the Yellow Pages value proposition that our business does have a significant amount of debt capacity, and I think that's exemplified by the fact that other people interested in investing are guys that, you know, like to use financial leverage to drive shareholder returns, you know, the private equity guys. As far as the specific borrowing power of our cash flows, I am not sure I want to be specific about it. It's considerably larger than what we got now. As far as the shelf, I think we filed the universal shelf, but I think the majority of public companies out there have a universal shelf. Because of the universal shelf, I mean, we have flexibility to issue whichever sorts of securities that we deem appropriate under the circumstances. You know, it really would be speculation to give you anything more specific about this at this time.

Okay.

Again as a reminder, if you'd like to ask a question please press "*1" now. Mr. Swanson I am showing no further questions at this time. I'll turn things back over to you.

Thank you and thank you everyone again for joining us this morning. Please call Steve Blondy or Frank Colarusso if you have additional questions. Everybody have a great day.

This does conclude today's conference call. We thank everyone for their participation. All parties may disconnect at this time.