Thryv Holdings Inc (THRY) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to R.H. Donnelley's third quarter results investor conference. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session. A copy of R.H. Donnelley's SCC filings maybe obtained by contacting the company, the website or www.SCC.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 the webcast live over the company's website at www.RHD.com. I would like to now turn the program over to Frank Colarusso. Thank you for using Sprint. Sir, you may begin.

Thank you, good morning, everyone. I'm Frank Colarusso, Vice President and Treasurer at R.H. Donnelley. On the call today are David Swanson, President and Chief Executive Officer, Steven Blondy, Senior Vice President and Chief Financial Officer, and Bill Dressler, Vice President and Controller. Certain statements made today might be forward looking within the meaning of the Private Litication Securities Reform Act.

We call your attention to yesterday's earnings release and management discussion and analysis of financial condition and results of operations in the company's annual report on form 10-K for the year ending December 31st, 2001, as well as the company's other periodic filings with the SCC which sets forth important factors to cause actual results to differ materially from those contained in or suggested by any forward-looking statements. Now I'll turn the call over to David Swanson.

Thank you, Frank. Good morning, everyone, welcome to R.H. Donnelley's third quarter investor call. Before we begin discussing results, I would like to take a moment to thank Frank Noonan for his contributions to Donnelley over the past 11 years. As I'm sure you saw from the press release, I will be succeeding Frank as Chairman effective after our December board meeting.

Frank had previously announced his intensions to step down as Chairman earlier this year when he turned over the CEO responsibilities. As all of you know, Frank has done an outstanding job of leading R.H. Donnelley. His industry, operational, and business expertise have proved invaluable during our initial phase as an independent public company. Frank was responsible for taking R.H. D. public in 1998, and has demonstrated an enviable record of creating shareholder value. On behalf of everyone at R.H. Donnelley, I want to thank Frank for his leadership, inspiration and countless contributions to Donnelley's success. Now, let's turn to the quarter. I will start things off with a brief review of the quarter's highlights and talk a little bit about our recently-announced acquisition of sprint's directory publishing business. Steven Blondy will take you through our financial results in greater detail and discuss our outlook for the full year after which we'll take your questions.

As you may have seen from our press release, earnings per share for the quarter were $.83 cents, unchanged from the third quarter of 2001, which we think is pretty good performance in today's challenging environment, and reflect our continued efforts to aggressively manage our operating costs. That being said, net income for the quarter of $25.1 million declined 2.3 percent, compared to $25.7 million a year ago. And calendar advertising sales, which represent the gross value of advertising we sold during the quarter were down 6.6 percent from last year. On last quarter's call, we stated that third quarter sales and operating income at Dontech were expected to be down and they were. We had planned changes in sales at Dontech that we knew would result in our calling on and servicing existing advertisers, representing approximately ten percent less revenue in the quarter than last year. Many of the advertisers that we call on in the third quarter are in the city of Chicago and our advertisers in not only the Chicago directory, but also many of the suburban directories around Chicago that publish in the second and third quarter of 2003. It's been our practice in the past to service all of these directories' advertising at the same time. When we service their Chicago advertising. This year, we're not doing that. Because of the cautious nature and mind set of the advertiser in today's market, we think it prudent to discuss only the portion of the ad program that needs to be discussed now. And service the remainder of the advertising in the first part of 2003 when hopefully the economic outlook is a little improved.

Second, while the change in servicing was the primary reason for the sales decline, the bottom line is that the improvement in business conditions that we had anticipated simply hasn't materialized. Consumer confidence in the quarter, as many of you know, hit its low point for the year. Another strong economic indicator for the Midwest, the manufacturing supplier survey also showed surprising weakness in the quarter. All of this is adding up to a weaker-than-expected economy, and a very cautious small business market, particularly in Chicago. As a result, advertisers are just not increasing their spend and new business sales continue to be below historical norms. On a much more positive note, results of Sprint have continued their rebound. Economic conditions in several of our largest Sprint markets have been improving, and we have started to benefit from the tighter credit guidelines imposed over the last 18 months. As a result, dollars from advertiser renewals and also cancellations do to the nonpayment of the advertising bill are either trending back or, in fact, are back to normal levels in many of these markets. In many of the sales campaigns that have closed recently for directories that we'll publish in the fourth quarter, we're posting solid gains in the mid single digit range. And with just a few weeks of selling to go, the sales campaign for the January issue of the Las Vegas directory is on track for a similar strong game. We're cautiously optimistic this positive trend will continue in the fourth quarter and next year. As a result, we're particularly excited about our pending acquisition of the Sprint directory publishing business and the new opportunities this will create for R.H. Donnelley.

The broader portfolio and the owner-operator model will not only substantially expand our scale and increase our growth in margin potential, but it will reduce the risk associated with regional economic conditions like we're seeing today in Chicago. The transaction will also build on Donnelley's core competencies to create a strong platform as the largest publicly-traded yellow pages publisher in the United States. Sprint directories are an extremely attractive business, and one that we know very well, having served as their partner since 1980. Yellow pages industry leader Peter McDonald will head the newly-created Donnelley Media Division and has begun leading the integration planning process with the key functional leaders at both R.H.D. and at Sprint Publishing.

The acquisition is expected to close in the first quarter of 2003 and is expected to be accretive to R.H. Donnelley's cash earnings per share in 2003 and beyond. With that overview, I'll now turn the call over to Steven Blondy, who will go over our financial results for the third quarter. Steve.

Thanks, Dave. For the third quarter of 2002, R.H. Donnelley reported diluted earnings of $.83 cents per share. These results were flat compared to last year. Nevertheless, total calendar advertising sales of $171.8 million for the quarter were down 6.6 percent from $183.9 million in the same period last year. Operating income in the third quarter was $46.0 million, down 2.7 percent from $47.3 million a year ago, and net income for the quarter of $25.1 million dollars was down 2.3 percent from last year.

Calendar sales at Dontech were $115.1 million, down 10.8 percent from $129 million a year ago. Third quarter operating income from DonTech was $34.4 million, down 11.8 percent from $39.0 million a year ago. As Dave discussed, this decline was due to lower servicing versus last year as well as difficult economic conditions in caution in the small business market. Turning to our Sprint operations, third quarter calendar sales were up 3.3 percent to $56.7 million, from $54.9 million a year ago. Third quarter operating income at DAS, which consists of our Sprint Operations and our Raleigh pre-press Publishing and Information Technology Center, increased 18.6 percent to $14.0 million from $11.8 million last year. Excluding one-time benefits in both the third quarter 2002 and the third quarter 2001, DAS OP income was up 19.0 percent to $11.9 million from 10.0 million last year. This increase reflects cost savings at Raleigh and improving sales at Sprint. General and corporate expenses in the third quarter were $2.4 million, down 31.4 percent from $3.5 million a year ago. So improved DAS OP income and lower general incorporative expenses helped to partially offset the decline at DonTech. Consolidated OP income of $46.0 million was down 2.7 percent, from $47.3 million a year ago.

Interest expense in the third quarter was $5.1 million, down 17.7 percent, from $6.2 million a year ago reflecting lower debt levels and taxes in the quarter were $15.7 million compared with $15.4 million a year ago reflecting this year's 38.5 percent effective tax rate. The company generated $27.4 million of cash flow in the quarter comprised of cash flow from operations of $28.2 million, Cap Ex and software investment of $1.2 million, and proceeds from the exercise of stock options of $400,000. We also prepaid $20 million of debt in the quarter so that net debt at the end of the period was $214.5 million. Year to date, we have prepaid over $60 million of debt. As we have said before, yellow pages advertising is less volatile than other media and 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 small business owner may elect to purchase a smaller ad program, yellow pages ads are rarely eliminated, and that's the reason why yellow pages weathers economic downturn better than other media. Still, advertisers and DonTech market, particularly remain cautious given economic conditions and weak consumer confidence. Thus, for the full year, we anticipate sales and OP income at DonTech to be down versus last year.

In the DAS segment, we expect sales to be flat and OP income to be up modestly from improving Sprint markets and the effects of productivity and tight costs management at Raleigh. Consequently, we anticipate full-year calendar sales to be down slightly and full-year operating income to be down by $1 million year over year. As a result, we expect 2002 earnings per share to be at the low end of our previously disclosed range of $2.40 to $2.44. With that, I'll turn it over to the operator for your questions.

Operator: At this time time, we'll take questions from the floor by asking anyone who has a question to dial star followed by one on your touch-tone phone. You will be automatically placed in the que until your name is announced. If you would like to remove yourself from the que, please press pound. Dial star followed by one on your touch-tone phone if you have questions.

Operator: Our first question is from Arnie Ersener of CJS Securities. Can you focus on the SG&A line, I have looked back and there was a very sizable drop you had in the current quarter. Can you walk us through some of the factors that cause that and the sustainability of the drop?

Arnie, this is Bill Dressler, I can take that. Some of the timing, you know, our first and second quarters were pretty heavy. The third quarter counterbalances the first and second, the other piece was related to some of the executive COMP issues. We have some costs last year that we don't have this year, basically the major part of the drop. For the full year, we expect corporate costs to be down with the cost management we have found. This is not the run rate but will be down.

Were there any deal expenses in there that are now being moved to, um, that are being capitalized rather than expensed now that you have gone forward on the deal?

What we did expense some of the deal-related costs in the second quarter that we, um, but we didn't expense anything in the third. Some of the things in the second quarter, we have consultants helping us. We didn't think it was appropriate to capitalize against the deal. We didn't expense nothing in the third quarter, um, for the full year, we expect a little in the fourth quarter for some help we're getting on integration side, and um, for the full year, it's probably worth about a penny, penny and a half, our EPS projections. In that regard, you know, the third quarter expenses, you know, we're kind of forced to -- we're forced to capitalize now that we have announced the transaction. Arnie Ersener: Okay.

Arnie: In -- and kind of a business issue related to Chicago, um, and it may come at you in two or three different ways. Last year's fourth quarter you felt the worst inpact of 9/11 because it impacted Q4 more than Q3, and yet your comparisons now in Q4 look much more challenging. Going back to what you were also indicating in Chicago, what are the factors you're seeing as you're outselling that made you change your strategy to defer going after these regional areas and expand a little more on what you actually see happening in the business that's causing the weakness in what is, you know, usually a very stable part of your business? David Swanson: Yeah, it's Dave. Let me take that. It is -- the reason's -- reason it's driven particularly in Chicago, and quite honestly, this is not unique to Chicago in, talking to other industry leaders, a lot of the major cities are seeing -- they're experiencing very similar types of reactions in the marketplace to what we're seeing, and because, again, the rate structure as you know is much higher in these very big, um, city markets, what we're finding is a -- a very cautious, um, advertiser out there, and small business person and I think it's, you know, because the rate structure is larger in the big cities, we're seeing -- that's why we're seeing it more so in the big cities than in the suburban and outlying areas, but the, you know, our decision was because of the high level of caution that we're seeing and, you know, they don't want to spend anymore money right now than they have to, it's our belief, Arne, that by holding their around a bit here, only handling the parts of their advertising program, that're necessary to handle that the point in time, and then coming back and talking to them again about the remainder of their advertising program, the advertising that is done in the outlying areas at a later time, um, net, net, will end up, um, with more advertising out of the customer than we would if we forced them to make a decision on the whole thing right now.

Dave, in your writing, you mentioned competition several times. Could you expand a little on the competition you're running up against there?

Yeah, it's -- as you know, we have had a new entrant into the Chicago marketplace, um, last year and traditionally, what we see, Arnie, and this has been true in every market that we've have had competition enter for the first time is it does create some added confusion in the marketplace for, um, for the first couple of years. Some of the advertisers will, um, feel that they have to participate in the, um, in this new product, which takes some of the available spend off the board for us, um, for, again, an issue or two, and, you know, generally that, you know, it has a small impact. I won't say it has a sizable impact, but has a small impact on our ability to grow for the first two issues and then traditionally, um, both, um, directories, companies like grow with their normal rate from there on out.

Final question for me for Steven Blondy. Steve, when do you expect to be out on the road in your timing on your high-yield road show?

Well, you know what, it's not appropriate for us to comment on what our specific financing plans are. When we have financing plans that we're able to discuss, we will, um, um, announce that accordingly. The transactions, um, supposed to close in the first quarter, so it will be sometime between now and then.

Okay, thank you.

Operator: Our next question is from Navine Farma of Deutsche Banc Security.

Great, good morning, guys.

Morning.

With regard to the three factors effecting DonTech, the timing of the sales campaign, the uncertainty in Chicago and the competition, you can brake down how much each contributed to DonTech's decline?

A lot of it is servicing. I think that we in, looking at it, serviced about ten percent less than we did in the quarter last year, so that's a sizable amount, you know, and what that suggests, I guess, is that if we serviced all of that revenue, um, um, um, the same amount of advertising this year, would have been flat. Um but, you know, that being said, you know, the performance on the advertising also was -- was down -- was down slightly and, on the advertisement that we did service.

Okay; and um, to the extent they have kind of split up the sale cycle, the canvassing cycle, what does that imply about 4Q revenue or 1Q revenue? Should it be higher because of that?

Great question. It's a tough one to answer. Some of it's going to depend on what the economic lookout is. If things are getting very rosy, we may push some of that into servicing that in Q4. If it continues to be, um, this type of environment, we will put off servicing that revenue, you know, as long as we possibly can, and quite honestly, that's advertisers prefer that as well. They don't want to have to make a decision any sooner than they have to, so it could impact Q4 a little bit positively, but likely more of that's going to get pushed into Q1.

Great, thanks.

Operator: The next question is from Jonathan Insel of Dreff Company of the West. Go ahead, sir.

Thank you, my question's been answered.

Operator: If your question has been answered, remove yourself from que by pressing the pound sign. Our next question is from Todd Morgan, CIBC World Markets. Go ahead, sir.

Thank you, good morning. I was hoping to turn back to the performance of DonTech, and attack the questions some of the guys asked previously differently. Could you talk about the breakdown of the roughly ten percent revenue drop? There has to be a turn number or is there a nonrenewal number down there, a reduced spend on some of the customers, some of the new business numbers in there. Can you give us us a sense of how this may have shaken out had you tried to renew all of this business?

I think I can give you direction on that. Again, the advertising that we did service in the quarter, um, we continue for DonTech, the renewable -- renewal portion is where we're feeling the impact the most, you know, we're still not seeing a rebound in kind; um, cancellations due to, um, nonpay or out of business are still, um, certainly -- kind of maintaining, it's like where they were before DonTech. We haven't seen a bounce there like in our Sprint markets, so, you know, I -- I would attribute new businesses off slightly but the largest chunk of it would be, um, you know, continued higher levels of the loss than we would normally see.

Good. Have you changed your rate card at all? In other words, typically you guys might increase your pricing moderately to what is now?

No, no real change in pricing; um, the advertising was a good value before and remains a very good value and it's just, again, primarily economic conditions. If people -- if people are out of business or don't have money to pay the bill, um, if it's less doesn't change that dynamic.

Fair enough. Last question. My sense is that you're kind of shifting some of your marketing efforts, especially in Chicago into future periods to go back and talk to folks about the suburban positions. Doesn't this mean that those sales resources are going to be tied up, sort of trying to get that ten percent of the business that you didn't ask for this quarter in future quarters, and doesn't that then impact their, you know, your resource levels in terms of trying to gain now business in other areas?

Yeah, that's a great question, Todd, we have looked at this carefully, and you know, this isn't something that we didn't plan for, um, and it's why we indicated this was going to occur on the last call. From a resource standpoint, we have pretty -- pretty much charted that all out. And while you're right, it does shift some of the, um, sales productivity into, um, the next two quarters, we have the busiest time that we have is when we're working the Chicago campaign and -- and, you know, from a resource utilization standpoint, it's -- we're less busy in Q4 and Q1 and can easily absorb the incremental there.

Okay, well, good luck with the Sprint deal. Thanks a lot.

Thanks, Todd.

Operator: Just a reminder, if you have a question, please press star followed by one. The next question is from Bob Sobel of Romen Capital. You have the floor, sir.

Good morning. We just wanted to ask what your, um, view was on the Sprint operation results overall of the businesses that you're buying as opposed to the ones that you're already selling on behalf of? How they were overall and how they're trending, um, if there is any notable pockets of strength or weakness regionally.

Yeah, I'll take that. If Steve has any other comments, he's obviously been more closer to the real due diligence. Directionally, Bob, what we're, um, what we're seeing is very similar to what we have seen in our other Sprint markets with the caveat. They have been effected by the economy just like everybody else. Their performance, um, hasn't been of late as, you know, what we would characterize as, um, as normal. Um, however, we're also seeing improvements in the performance of their markets. Maybe not quite to the degree that we have seen in our own, but directionally, they're headed the same way, and that's very encouraging us to.

And what --

I'm sorry, I would just add to that that, um, you know, even the markets that we're selling on behalf of Sprint already, you know, we get a sales commission on that but they still make a pretty descent profit on it, and, so our improved results in the market that we're selling also has had a, um, a significant impact in terms of, you know, a flow-through to their profits.

Does that mean since the markets you're selling on behalf of them, those are up three percent. So when you say their results are similar to those, are they trending upward overall at the moment? Year over year in revenue?

Yeah, well their accounting methods are a little different than ours, um, but, you know, I would think that their answer, you should expect theirs is about flat. And, um, but the point being that the flow-through of the sales in our markets to their markets means that, in fact, that they're, um, the Op income and the Ebitda of the business that we're buying is going to actually, um, meet or exceed the expectations at the time that we announced the transaction.

Gotcha. Thank you very much.

Thanks, Bob.

Operator: If anyone has a question, please press star followed by one now, star followed by one if you have a question. Our next question is from Andrew Goff of OSS Capital. Go ahead, sir.

Hi, hi guys. I had a question regarding -- I didn't hear the last conference call when you talked about the Sprint deal, but when you said the financing was fully committed, could you explain what that means exactly?

Sure, sure, um, we have, um, fully underwritten financing commitment from Bear Stearns, Deutsche Banc and Solomon Smith Barney, which, um, under -- to circumstances for example where, um, the financing markets might have gotten backed up and it proved that we couldn't, um, um, we couldn't sell any bank securities in the market for example, um, those three institutions have, um, committed to provide all the financing so that, um, we'll be able to close the transaction, um, on the expected date.

And you have said what the terms are of that in financing?

I don't think we have. No, but we'll be able to kind of clue you in on that once it becomes clear to us over the course of the next several weeks here

Okay, but basically, um, I guess one can assume is that, um, even if the junk bond market falls apart for whatever reason, the rates used tied in with the investment banks don't necessarily correspond to, like where the junk bond market could do go. Is that fair?

Well, there are -- there are some perfections for us in that regard. Doesn't mean that, um, we have it, we have no exposure.

Okay, all right, thanks.

Thanks, Andrew.

Operator: That's all the time we have for questions today, Mr. Swanson, at this time I'll turn the conference over to you.

Okay, well, I appreciate everyone joining us today. If you have additional questions, please feel free to contact either Steven Blondy or Frank Colarusso. Have a great day.