Thryv Holdings Inc (THRY) 2003 Q2 法說會逐字稿

Thank you. At this time, we are ready to begin the question and answer session. If you would like to ask a question, please press (star) (1). You will be announced prior to asking your question. To withdraw your question you may press (star) (2). Once again, to ask a question, press (star) (1). One moment. Our first question comes from Arnold Ersiner [ph] of CJS Securities.

Hi, good morning.

Hi Arnie.

First of all, congratulations on the quarter. Can you highlight two things for me if you would. On the $30m payment on-or where you don't have to pay cash taxes-is that sort of a one-time, or is that likely to continue into next year?

Yes, this is Steve talking, Arnie. That will continue to some extent next year.

Okay, but not the full $30m.

We're not really providing 2004 guidance in full, but we do know the accelerated amortization of some of these acquisition step-up is going to continue into 2004.

Okay, and certainly relative to my model, the biggest swing that I noticed was on the expense line. You mentioned three items, can you give us a little more quantification of the impact of each of the three items?

Well, the bad debt number is the largest of the numbers. We're not getting into specific details, but the bad debt number is more than half of it.

Okay. Will there be more details on bad debt on your Q?

The bad debt numbers are running very favorable to plan as we've said. And we're very pleased by that. But, the number is running under 6% in the Sprint business. Other than that, I'm not sure that we're going to provide details in the Q about bad debt on a specific basis.

Okay, and a final question from me is on the cash dividend on the [pick]. Wasn't that supposed to end in October of '04? And am I not correct that this is moving out about a full year?

We had expected that it would be two years, which would really take us to the 4th quarter of '04. So, I think the way to think about it is maybe an extra 3 quarters.

And what's caused the change?

Well, there was an ambiguity in the documentation, and it's reflected now in the inclusion of this BCF expense. And at the end of the first quarter, we didn't recognize BCF. Then we went back and looked at the documents again, and determined that there was an ambiguity between the respective documents.

Okay, thank you.

Mark Bagrin [ph] of Robert W. Baird, you may ask a question.

Good morning, congratulations on a good quarter. On the-just trying to get some sense of maybe how much incremental expense you're building into the forecast for the relocation to Raleigh. It looks like you did about $210m the first half of the year. And EBITDA, and given that kind of run rate, appear to be on track, due-- obviously much better than the $400m. So what is the expense assumption that you're factoring into that, keeping it at $400m?

The total costs are in the $12m range. And we're going to incur about half of that this year, on the P&L basis, half of that this year, and half of that probably in Q1 next year.

Okay. And then if I look at the guidance on the [225] of adjusted EPS, if I'm doing the math correctly here, it looks like you've done about a buck thirty-seven thus far in the first half, which obviously puts you on pace for something well north of that. Is there anything in the back half of the year in terms of incremental expenses beyond, obviously, the relocation expense that would cause some margin compression? Or is there some timing differences that you alluded to that would cause the back half to be a little bit weaker?

You know, it's really reflected in the same difference in EBITDA, Mark. You said [210] in the first half, and we're not raising our guidance on EBITDA to [420]. So, it's really kind of reflected by that same difference in EBITDA.

And could you walk through, I guess I'm not as familiar with what the specific accounting differences are between you and the old SPA business, and what impact that has in terms of shifting expenses from quarter to quarter.

Well, there are a number of things there Mark, I guess chief among them are some [true ups] that the Sprint folks took, especially lowering expenses in the back half of last year, prior to completing the sale of their business. And, also, there's a difference in the way we're treating expenses as related-between period expenses and deferred expenses. Sprint had been deferring and amortizing a number of expenses that we are now expensing as period expenses. And so certain items really aren't comparable on a quarterly basis, year-to-year.

So, you're saying that the '02 adjusted numbers, you're using the Sprint accounting methodology on those adjusted numbers versus in the '03 numbers you're reporting now, is you're taking the more-rather than accruing, you're actually taking them as period expenses.

That's correct.

And it sounds like the order of magnitude, the big expense difference we saw last year versus this year, the bad debt is really the larger driver of that, not any-

That is one of the main ones, yes. Remember that the pro forma numbers last year, and all the details are in our 8K filed at the end of the year that was filed in our annual report, reflect the old SPA business reported on a GAAP basis. The old Donnelley business reported on a GAAP basis, with eliminations and adjustments to reflect the transaction. And so, there's a lot of noise in that whole sort of pro forma process.

Okay, great, that's helpful. And then, a couple of quick final ones. On the Las Vegas Internet directory, and then the Spanish directory, did you see any revenue benefit from that in the quarter, or is that still more to come?

This is Peter. We have experienced some benefit with the Spanish, and there's no revenue yet associated with the Internet product.

Great. And then, finally, given the low interest rate environment currently, and obviously you benefited from some declines in variable rage debt, are you looking at hedging opportunities, or looking at locking anything in longer term basis, given that it seems like we're probably pretty close to where interest rates are going to go?

Well, certainly, we're looking at it very carefully on a day-to-day basis. At this point we don't have any plans to hedge any additional of our floating rate debt, but we are evaluating it constantly.

Great, thanks again and congratulations.

Thank you Mark.

Steven Wise [ph] of Bear Sterns [ph] you may ask your question.

Oh, hi. Good morning.

Hi Steve.

Nice quarter. A question on cost savings. I was wondering if you could give us a sense of how much of that initial $20m of savings you thought you'd hit by the end of, I think it was '04? How much of that number do you think is currently baked into your current operations? And then if, does this relocation result in any savings that would be additive to that number? And if so, can that be quantified, perhaps?

Okay. Well, the first question, relating to how much of the synergies are in this year-in the year-to-date numbers the cost to achieve the synergies are offsetting the actual synergies themselves. And we're going to provide updated guidance on next year and we'll be able to talk about progress with respect to synergies at the end of the 3rd quarter. As far as the synergies associated with the headquarters relocation-well, maybe there's a couple of million dollars of additional synergies. It's not being driven strictly by cost savings, but much more by operating effectiveness and better communications and building a unified corporate culture.

Okay, fair enough. But, from your comments it sounds like you don't feel that much of the $20m at all has been really reflected, if I understood you correctly, Steve, for this year.

In the first half of this year, there's not that much.

Yeah.

We have gotten to some of the operating efficiencies that we had talked about earlier.

Okay. And then, on the Internet Yellow Pages-by your comment on the last question, it sounds like it's just being packaged as part of the overall rate card to advertisers as of now?

The first year it's being given free, and after that we'll be charging for it.

Okay. Is it early to talk about tracking usage patterns and any of that stuff?

It's really about delivering some of our content in another way, and giving more value to the customer.

Okay. And then lastly, just going back to this whole year-over-year comparison-I'm just curious, what pro forma LTM number are you currently using, given all of these changes. I know this has come up in the past. Does the 8K solve that, or does the year-to-year quarterly, in comparability in some respects, still render that a tough exercise.

Well, it certainly makes the LTM number a bit of a cocktail, so to speak, between old pro forma numbers and new adjusted numbers as we're running the business. If you just look at the last four quarters you can piece it together. I haven't actually gone back and added it together, but it's a pretty simple exercise for you guys now.

Okay. I appreciate it, thanks.

Todd Morgan [ph] of CIBC you may ask your question.

Thank you, good morning.

Hi Todd.

Could you talk a little bit more about your Chicago performance? I think if I'm understanding it right, the right way to look at this is sort of a down 8% for the first half of the year, or excuse me, .8% for the first half of the year, sales run rate. Are you-first of all is that the right number, and secondly can you tell us, are there other extraordinary steps or plans that you would have? I would imagine that you would hope to be growing that number rather than seeing it shrink.

Hi Todd, it's Dave. The guide is the right number, on a calendar basis it's a little below that. On a published directory basis. And I think, obviously we'd rather be growing it, as I tried to communicate. We're really seeing kind of a nagging cold hanging over that whole Chicagoland area relative to just economic environment there, versus the other parts of the country where we're doing business. But, by all means, it's like we're going to try to do some things to stimulate that. One of those things that we're looking into right now is to also add a similar type of online product in the Chicago market that we're doing in our Las Vegas market. Kind of more to talk about the progress with that on the next call.

Okay. Then secondly, paper costs have been a little bit higher recently. Can you talk about, remind us the portion of your cost structure that paper costs represent, and perhaps talk about any hedging activities or other steps you've taken in that direction.

Yeah. The number is about, something like 7% of our total cost structure represents paper. And what I can tell you is actually there's been a-during the 2nd quarter we actually entered into a contract that fixed paper prices for the rest of the year. So I think we're in pretty good shape there. But it's really not as big of a component of our cost structure as you might think.

Okay. I guess, lastly, I know you talked about, I think you had been asked about trying to look forward into next year in terms of tax rates, and things like that. Can you-is there any sort of simple formula, or any formula that you could suggest that try and use to at least estimate what a tax number might be for next year?

In terms of cash taxes.

Cash taxes, yes.

I really don't have a good number right now. I can't imagine it's going to be more than that original estimate that we had for this year. But, I just don't have a good estimate yet, so I hate to be specific about it.

Fair enough. Well, that's a pretty big jump in cash flow guidance, so good job on that front. Thank you.

Ezra Gardner [ph] of Brahman Capital [ph] you may ask your question.

Hi guys, great job. A couple of things really quickly, just to push the tax question a little bit. Is it fair to say, given the fact that you're paying no cash taxes in this year that at least half of the reported taxes next year won't be a cash expense?

I'm sorry-basically-Ezra that's the same question that Todd just asked. I really don't have a good estimate for that yet. I do know that the shorter [lived] assets that we're amortizing for tax purposes is not a one-year life. Which is leading me to say that there will be a carry over of that savings into next year. What happens is, is that as we reduce our debt, we've got less of a tax shield from interest expense as well. So I just don't have a good enough estimate for you. We're going to be working on that during the next three months here, and we'll have a pretty good estimate for you at the end of the 3rd quarter.

Got it. And, just as a follow-up, I know you've talked before about trying to, one of the new initiatives you wanted to do, was try and sell the cover of some of the Sprint directories. Is that something that's been done yet? And if so, approximately how much have been able to do that for?

Ezra, we've looked, and we continue to look at that, and more to follow.

Okay, thanks a lot guys, good job.

Brian Watson [ph] of Stanfield Capital, you may ask your question.

Yeah, hi. Could you just give me the debt balances on your bank debt, and liquidity please?

Well, the total debt was $[2206], I think was the actual amount. And, hang on just one second, I'm just grabbing that piece of paper-the total bank debt was [1260].

And that's split between the B which is 500 or-

The B was 900.

Oh, sorry.

Yes, and the B, you know, in all the times we kind of offer to the B and they for the most part decline. So, the B number is still pretty close to 900. The balance is the A. We actually drew a little bit on the revolver at the end of the second quarter to make that $52m bond interest payment. Because we thought it was better to not take the negative carry-on, keeping cash on the balance sheet, and letting it build until the interest payment was due.

Okay. So, how much is on the A now, and how much is on the-or the RC, how much is drawn on the RC?

Only $24m. And I think that's actually been repaid since the end of the quarter. So, the A is something like the $330m range.

And how big is the RC again?

It's [125].

Okay. Thanks.

Thank you.

Andrew Goth [ph] of OSS Capital, you may ask your question.

Hi, it's actually Adam Leitzes [ph] here. Just curious if there's a way for you guys to talk about calendar sales in the Sprint directory specifically?

Adam we don't measure calendar sales at all on the Sprint directories, because it doesn't have any impact on anything. So it's not a metric that we even measure.

But when you say pub sales, you talk about representing directories published in the period. Is there a sense to get how current sales are, trying to sell into next year, and next half?

Well, from a management standpoint, we're monitoring sales campaigns, obviously, internally, against a number of benchmarks along the way. But we don't report out on the results until those campaigns and directories are complete.

Okay. And then, just one minor item on the tax thing. Just maybe ask it in a different way. Is there a way to quantify what the total assets that you've decided are more of a short-term amortization assets, and what the scheduled time period is for amortizing those?

Well, the answer is clearly yes, that's how we're doing it for our tax returns. But that's more detail than we're prepared to get into with you guys today.

Okay, and then, you mentioned further milestones on Sprint. Could you just relay what those are going forward into the second half? In the integration.

The integration milestone. Sorry. Yes, it revolves almost exclusively around this data conversion that we're right in the middle of right now, and it's just simply they're benchmarks for the testing of the data as we flow it through the new software. It's like, from one system to the other. And because there's a certain critical level of integrity it's like that says it's time to push the button and move it over. And that's what we're in the middle of right now. And those are the milestones that we're talking about that we will go through in the next 3-4 weeks.

Okay. And then, just one last thing, to my first question. On the pub sales, when were those books sold, the majority of the sales, and the Sprint numbers-when were those actually sold.

For the 2nd quarter books they would have been sold at the end of the 4th quarter last year and part of the first quarter this year.

Okay, thanks a lot.

Howard Bryerman [ph] of Deutsche Asset Management you may ask your question.

Thank you. Just to revisit the purchase accounting adjustment-confirm my understanding here. Year-to-date revenues have been adjusted by $236m and obviously the important factor here is the flip side of it, the receivable. So if we look at the cash flow statement, there's about $187m of working capital increase which I would assume is most of the receivable flowing through.

It's actually, in a strange way, it's actually a decrease, or sort of a source of cash from working capital. Because what's happening is, remember from a GAAP point of view, we're not able to record the revenue.

I understand that. So the receivable should be-but you do have the receivable, and that should be-you're collecting that presumably.

That's right.

The $187m represents.

That's right, so we're collecting a receivable that didn't make it through to revenue. Which means on a cash flow statement, when we start with net income, we actually add back the receivable, the sort of working capital, that we weren't able to reflect in the income statement. I know it's a little bit contrary to understand.

Is this actual cash coming in from the receivable, this $187, or a large part of that?

Yes, absolutely.

Okay, so the question really is, can you tell us what the adjustment, the purchase accounting sales adjustment will be for the 2nd half of the year, and how much of this purchase accounting receivable is left?

We estimated 290 was the total amount of revenue that was associated with directories which had published on the SPA balance sheet, and you actually can see that number in the annual report that we published-I'm just going to grab it here for a second-if you look at the annual report on page 88, actually, 264 was the number on here. I think there was, in addition to that, afterwards, we were not able to record revenue for January directories. So the net amount of January directories less amounts collected in January, I think the receivable balance, I think it was 290. And so if you look at this 236 number, there's about $55m left to go for the rest of the year.

And is there close to that in receivables, or have they all been collected at this point?

No, there's that amount in receivables-remember-for the most part we collect-we bill our advertisers on a monthly basis and we collect following them receiving their bills.

Okay, very good. Thank you very much.

Thanks Howard.

Eric Stominger [ph] of Cobalt Capital you may ask your question.

Yes, good morning. A couple of things. First of all an integration question. You've changes the comp plan for the sales force in the Sprint business. Just wondered if you could talk a little bit about how that's been received, your ability to retain sales people. Do you think you have the right crew there now with the new, fairly significant change in the incentive compensation structure, or do you still have some more plumbing to do there? Secondly, I know that you're reluctant to talk about calendar sales in the Sprint business. But maybe you could give us some sort of a qualitative sense of how current sales campaigns are going. Maybe compare it to the past couple of quarters. Just in a sense of a trend. And then, lastly, I just wanted to return to the second half EBITDA and your outlook. You articulated the $6m or so in expense that's going to be there due to the relocation, that you didn't see in the first half. But even with that, it seems like still the outlook is, the guidance is fairly conservative. Unless there's some additional expenses that are hitting in the second half that really weren't there in the first half. So, maybe you could walk through that in a little bit more detail, and just help us to understand that.

From the start. First with the compensation question-we discussed the compensation which is kind of a pay for performance environment. It's been well received and will be rolled out with the 2004 directories. And the sales turnover has actually declined or decreased from prior years.

As far as the calendar sales. We do everything on a pub basis because we are a publisher of the directories. But I'd say that the trends on calendar sales are in the right direction. As far as the answer to your second question Eric, about the back half EBITDA. Remember we talked about last year, we completed the contract we had with Yellow Book to perform pre-print services for those directories that we had sold to them 5 years prior. And so last year's back half EBITDA actually included some revenue from Yellow Book which is not going to be there this year in the 2nd half.

Okay, but even on a compared to the 1st half if you could, are there, just based on your revenue run rates, and the EBITDA that you did in the first half, the math suggests that if you did the same amount in the second half less the $6m or so in incremental expenses, we're going to get to a higher EBITDA number, and if your guidance is fairly accurate, it just seems like there's some more expenses hitting in the second half that weren't there in the first half.

Well, [the fact of the matter], Yellow Book, there was Yellow Book revenue in Q1 this year. So the first half included some Yellow Book revenue in Q1. And then in the 2nd half of this year, is when we're, a lot of the integration expenses are kicking in.

Okay. So that might be what's explaining the variance with what appears to be pretty conservative guidance. Okay, thanks very much.

Our last question comes from Arnold Ersiner of CGS Securities.

Hi. A very simple question on the SPA acquisition purchase price adjustments. Have you hit your last one or are there any more out there that could continue to occur.

The purchase price adjustment-as far as the $16m number I mentioned?

Yes.

That's the last one.

Arnold Ersiner. Okay, thank you very much.

I'd like to turn the call over to Mr. Swanson for closing remarks.

I'd like to thank everyone for joining us today, and certainly if you have any follow-up questions please contact either Steve Blondy or Jenny Apker. Everyone have a great day.

Good morning ladies and gentlemen. Welcome to the R.H. Donnelley second quarter 2003 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 for participating will be given at that time. Copies of R.H. Donnelley's SEC filings may be obtained by contacting the company, their 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 express concern of the company is strictly prohibited. Please note that today's teleconference is being recorded, as well as webcast live over the company's website at www.rhd.com. I would like to turn the call over the MS. Jenny Apker.

Good morning everyone. I'm Jenny Apker, Vice President and Treasurer at R.H. Donnelly. On the call today are Dave Swanson, Chairman and CEO, Steve Blondy, Senior VP and CFO, Peter McDonald, Senior VP and President of Donnelley Media, and Bill Drexler VP 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 our press release for the quarter ended June 30, 2003, and our Form 8K furnished to the SEC yesterday, July 23, which both discuss our second quarter 2003 results. As well as to an 8K we filed with the SEC yesterday that provides as adjusted pro forma results for 2002 on a quarterly basis in order to facilitate comparison to 2003 quarterly results. We also encourage you to review 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. During this call today, we will refer to several non-GAAP financial measures in discussing the company's performance. You can find additional information about these measures and a reconciliation between these measures and the comparable GAAP measures in the press release and related 8K. Our 8K disclosing 2002 adjusted pro forma results, and or 8K filed with the SEC on May 2, 2003, each of which is available on our website under 'Investor Information' SEC filings. Now I would like to turn the call over to Dave Swanson.

Thank you Jenny. Good morning everyone. And welcome to R.H. Donnelley's second quarter investor call. As you can tell from the nature of our press releases yesterday, we have a lot to talk about this morning. I think that said, the most important thing I'd like you to take away from today's call is that we've made just excellent progress in our first 200 days since acquiring Sprint Publishing and Advertising. And just couldn't be happier with the results and the outlook for that business. I'd also like to highlight the announcement we made yesterday that we will be consolidating our corporate headquarters functions that currently reside in Purchase, New York, and Overland Park, Kansas, and relocating them to the Raleigh-Durham North Carolina area by the end of the first quarter of 2004.

By locating a larger number of our employees and functions in a single operating headquarters environment we believe we can enhance our effectiveness and create a more cohesive corporate culture. After considering an number of choices, Raleigh-Durham was selected for a number of reasons. First it is centrally located to a large number of our customers, markets and sales offices. Significantly we also received substantial financial incentives from the State of North Carolina that will allow us to recover much of the cost of this relocation over the next several years.

Raleigh-Durham offers a business friendly environment. It is expected to provide the company with a lower operating cost environment, and outstanding labor market. And finally, the Raleigh area offers our employees an outstanding quality of life. We were also influenced by having over 240 employees already located in the area, which will really help to facilitate the transition. And we expect to complete that move, as I mentioned, by the end of Q1 of '04.

Now let me turn to some highlights for the quarter and an update of our integration efforts. Through the second quarter, our business continues to perform well with adjusted second quarter EBITDA of $112.5m, and adjusted net income of $28.4m, or .81 cents per share. Most important, free cash flow per share in the quarter was $39.7m or .99 cents per share. Better than we had originally forecast. This has allowed us to accelerate the repayment of our debt, bringing our total debt repayment year-to-date to almost $130m, well ahead of schedule.

Publication sales for the second quarter of the Sprint branded directories, were $132.9m up .3% from last year. You may recall that on the first quarter call, we told you that we expected pub sales in the second quarter to show only modest growth. Reflecting the impact of troop mobilizations in a number of our second [corner] markets that contain military bases, such as Fort Bragg, Elgin Airforce Base and Fort [Hood]. These directories represented almost 25% of the second quarter results. The good news is there are no other military markets scheduled to publish in 2003, therefore there should be no further impact this year.

For our non-military second quarter publications, both renewal rates and new business rates showed positive trends. Additionally, bad debt expense and customer claims experience, continued to trend well due to improved efficiency in our collections processes as well as a diligent focus on quality in the sales and production processes. At DonTech, calendar sales were $120.1m, down 4.1% from last year. As we discussed on last quarter's call, some advertising we would normally service in Q2, was actually serviced at the end of Q1, inflating Q1 at the expense of Q2.

Partnership income, which is driven by calendar sales, declined 3.6% to $35.3m. As DonTech's continued efforts at cost control helped to mitigate the effective decline in calendar sales. Through the first half of the year which normalizes the shift in sales between these two quarters, calendar sales were down .8% and partnership income was up about 1%.

DonTech continues to feel the effects of the underperforming Chicago land [ph] economy. Recent regional economic reports have not been encouraging. Current results have remained soft and business attitudes are less optimistic than we're seeing in our other markets. The combination of these is causing us to be a little bit more cautious with our guidance relative to DonTech, and we expect calendar sales and operating income to be flat to down slightly for the year.

I'd like now to focus for a few minutes on integration. And this is an area that we really have very good news. The integration is proceeding ahead of schedule. I know I speak for the entire management team when I say that we're extremely pleased with the results so far, while acknowledging that there is still a lot to accomplish. Peter McDonald and the Donnelley media team are coordinating the integration of the sales and marketing groups. A great deal has been accomplished in the first half of 2003. In addition to standardizing processes over the entire footprint our sales and marketing plans are being focused on putting our people closer to our customers. This will improve our productivity and relationships in key markets.

Modifications to our incentives and reward systems have been developed that will enhance opportunities for strong performers and will be rolled out with all of our 2004 sales campaigns. On the sales support side, we have evaluated [both] legacy organizations, have identified best practices and are implementing them throughout the organization.

The systems integration led by George Bednard [ph] and his team at Directory Services, primarily involves the consolidation of the two legacy publishing and billing systems onto a single platform and represents a critical component of our overall integration effort. Over 40 people from department throughout the company are currently performing extensive and comprehensive quality control tests on both the software and data of the integrated system. These testing activities represent a very important phase in the entire integration project. The test results and progress to date are extremely encouraging, causing us to be cautiously optimistic that we will complete the systems integration ahead of plan. That said, several critical milestones are scheduled to occur during the next few weeks. So we'll provide a more comprehensive update on where we are during our third quarter call.

Before I hand the call over to Steve, I'd like to tell you about some of the innovative new products that we're rolling out. We recently launched a new online Yellow Pages and City Guide product under the URL bestreadyp.com in our Las Vegas market. As one of America's fastest growing metro areas, plus over 35 million yearly visitors, Las Vegas is a great market to find both residents and visitors who want a convenient source of information about the area, that can be accessed from virtually anywhere.

The bestreadyp.com provides another venue for RHD to generate qualified leads for our advertisers, and an easy to use content rich resource for those searching for products and services. Some of the benefits of bestreadyp.com include offering consumers multiple ways to search for who sells the products and services they seek. They can either page through or search a digital version of the traditional Yellow Pages with all the rich ad content we've all come to expect from the Yellow Pages, or select the standard [list] response search inquiry, like some of the other online directory products you may have seen.

Further, this dynamic product allows users to contact advertisers via email, get driving directions, or click through to the advertiser's website directly from the online version of the Yellow Page ad. The product has been well received in Las Vegas so far, and we anticipate rolling this out in other markets over the coming months.

Additionally, we recently published our first Spanish language directory in the [inaudible] Florida market. I'll remind you, a direct benefit of the acquisition of Sprint Publishing and Advertising, is that we are now able to go to market with new products and services that respond to our advertisers and users. Something that was not possible for us when we were a sales agent. And products like these allow the company to leverage our advertisers existing content and deliver it in new ways and to new potential customers. By expanding our advertisers reach through these new distribution channels, we're enhancing the value added proposition of our product. Now we'll turn the call over to Steve.

Thanks, Dave. Before I discuss the quarter, let me remind everyone about our purchase accounting adjustments. As a result of the SPA acquisition, and the associated financing and accounting, there are dramatic differences between 2003 and 2002 GAAP results. Accordingly, we're presenting adjusted 2003 and adjusted pro forma 2002 results in order to better communicate, underlying operational and financial performance for the company.

Let me call your attention to the 8K we filed yesterday, which highlights our pro forma combined results by quarter for 2002 that many of you have been asking for. However, I'd like to reiterate that due to differences between legacy Sprint, and RHD accounting policies, adjusted 2003 performance is not strictly comparable to adjusted 2002 pro forma results on a quarterly basis.

Most noteworthy among the adjustments is removing the impact of purchase accounting on our P&L. Our adjusted 2003 second quarter results include $105m of revenue and $19.4m of expenses with respect to directories that were published prior to the acquisition, but that due to purchase accounting, we did not report in our GAAP results.

Now let's review the quarter. And overall we're very pleased with second quarter operating performance. The company generated free cash flow of $39.7m after CAPEX of $3m. Cash flow in the quarter was impacted by total interest payments of $70m, including semi-annual bond interest of $51.2m in June. Cash flow used in investing activities was approximately $19.3m. Beside CAPEX, this included $16.3m for a purchase price adjustment paid to Sprint reflecting better than originally estimated working capital on SPA's closing balance sheet.

Net cash used in financing activities was $35.6m in the quarter. This includes $39m of debt repayment which was funded by free cash flow generated in the quarter, as well as existing cash and $3.4m of proceeds from stock option exercises. At the end of the quarter, net debt was $2.2b, a reduction of $27m in the quarter. And in the 6 months we've repaid about $130m of acquisition debt, well ahead of schedule.

On the accounting side, adjusted revenue in the quarter was $143.6m, up 0.8% from $142.5m of adjusted pro forma revenue in last year's 2nd quarter. Adjusted operating expenses in the quarter were $82.8m versus $91.6m adjusted pro forma expenses for the 2nd quarter last year. This decrease is due to continued improvement in bad debt and claims, lower paper costs and importantly, the timing of expense recognition caused by the difference between Sprint and RHD accounting policies.

Adjusted operating income before DonTech was $60.8m, versus adjusted pro forma of $50.9m last year. Total partnership income at DonTech was $35.3m, down 3.6% from $36.6m for the 2nd quarter last year. And while not satisfactory, this result compares favorably to the 4.1% decline in calendar sales in the quarter, due to tight expense controls. As discussed earlier, the decline in calendar sales and partnership income is due to the impact of the economy and local media competition in Chicagoland [ph].

In total, adjusted EBITDA for the second quarter was $112.5m compared to adjusted pro forma EBITDA of $103.7m last year. Now, before turning over to guidance, there's one other item I'd like to review briefly. The company and Goldman Sachs have clarified an ambiguity regarding the company's right to pay preferred dividends in cash. The result is that without Goldman's approval we may not pay cash dividends on the preferred stock until October 2005, but we are free to pay cash dividends thereafter. Therefore, in addition to the stated dividend, the company will also record a [bean] dividend related to a beneficial conversion feature for each quarter in which cash dividends are not paid through Q3 of 2005. During this period, BCF will average about $1m per quarter. Reminder, BCF is a non-cash charge to net income treated as preferred dividends on the income statement.

Now turning to our 2003 guidance. We continue to expect pub sales growth of approximately 1% for our Sprint branded directories, which should translate into flat revenue for the year. At DonTech we expect calendar sales and partnership income for the year to be flat to down slightly. We're also confirming guidance for adjusted EBITDA of approximately $400m for the year, reflecting better than expected operating results to date, offset by incremental costs associated with the relocation of our headquarters. We continue to expect adjusted operating income of approximately $335m, after depreciation and amortization expense of $65m. Furthermore, we're increasing our guidance for cash flow from operations and free cash flow. We expect to generate cash flow from operations of $215m, up from our previous guidance of $170m, and free cash flow of $195m, up from $150m previously. We had originally forecast cash taxes of $30m for the full year 2003. However, it turns out that we're able to amortize some items related to the acquisition over a shorter life than originally anticipated. As a result we don't expect to pay any cash taxes in 2003. Additionally, we expect cash interest to be $175m, an improvement of $10m from our previous guidance of $185m, due to lower short-term interest rates and lower average debt balances than originally expected.

Lastly, we expect working capital uses to be $10m rather than our previous $15m estimate, largely reflecting better than expected collections experience. Our expectation for CAPEX remains unchanged at $20m, and assuming all free cash flow is used for debt repayment, at the end of 2003 debt will be approximately $2.14b, or about 5.4 times 2003 EBITDA. As a result of our revised guidance, on a per share basis, adjusted EPS will be approximately $2.25 per share, up from prior guidance of $2.10 per share. And free cash flow per share of approximately $4.80 up from prior guidance of $3.80 per share.

Now before turning the call over to the operator to take your questions, I'd like to invite all of you to attend an investor day we're hosting on November 20th at the New York Stock Exchange. Further details will follow. That concludes our prepared remarks, thank very much for your attention. And now let's turn the call back over to the operator.