Thryv Holdings Inc (THRY) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the R.H. Donnelley third-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 will follow at that time. Copies of 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 express 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 program over to Ms. Jenny Apker.

Thank you and good morning, everyone. I'm Jenny Apker, Vice President and Treasurer at R.H. Donnelley. On the call today are Dave Swanson, Chairman and Chief Executive Officer; Steve Blondy, Senior Vice President and Chief Financial Officer; Peter McDonald, Senior Vice President and President of Donnelley Media; 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 our press release for the quarter ended September 30, 2003, and our Form 8-K furnished in the SEC yesterday, October 28th, which both discuss our third-quarter 2003 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 the reconciliation between these measures and the most comparable GAAP measures in the press release and related 8-K, our 8-K disclosing 2002 adjusted pro forma results filed with the SEC on July 23, 2003, and an 8-K discussing non-GAAP measures filed 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 third-quarter investor call. As you saw from the release, we've been very busy. And I'm pleased to discuss the impressive accomplishments of our management and employees this quarter. Now there are three key messages that I want to make sure that you take away from the call today.

First, we've completed the systems conversion phase of the SPA integration plan about six months ahead of our original timeframe, allowing the Company to achieve synergies earlier and to begin operating from a core operating system sooner than we'd anticipated. Second, cash flow continues to be strong allowing as to repay debt at a faster than anticipated rate, putting us ahead of our year-long deleveraging targets. And third, in spite of the weakness in local advertising markets, we continue to find ways to perform in our operating business with full year EBITDA expected to come in slightly ahead of our earlier estimates.

Now let me summarize the results of the quarter. Adjusted third-quarter EBITDA came in at 107.9 million with adjusted net income of 29 million or 71 cents a share. Most important, free cash flow in the quarter was 92.2 million, or $2.26 a share, even better than our last forecast. This has allowed us to continue the accelerated debt repayment. Through the first nine months of 2003, we've repaid about $220 million of debt, well ahead of schedule.

Publication sales for the third quarter's Sprint branded directories were $160.3 million, up 2.2 percent from last year. This is an important quarter for us from a publication sales perspective because it includes two of our largest markets, Las Vegas and Southwest Florida. Although we're pleased with the performance, we do continue to feel the effects of a less than robust economic climate in several markets. Advertiser renewals in the Sprint markets have returned to near normal levels. However, increased and new business have not. Generally, we continue to find that small to medium-size businesses are cautious about increasing their investment in advertising until proof of a recovery is actually evident in their pockets.

This is particularly evident at DonTech which continues to struggle to achieve our sales growth targets, particularly in the Chicago metropolitan area. DonTech calendar sales for the quarter were 110.2 million, down 4.3 percent from last year. Our partners at SBC and the team at DonTech are reviewing the specific factors impacting the success of our sales and marketing efforts, and continue to develop initiatives aimed at improving DonTech's performance. Nevertheless, the combination of weak new business formation and job growth in the Midwest with tough local media competition there continue to present challenging dynamics for DonTech.

Now I'd like to focus for a few minutes on integration. The systems conversion phase of our integration project was completed during the third-quarter, a full six months ahead of our original plan. This conversion involved consolidating SPA's publishing, sales performance reporting, commissions, billing, and customer service systems to our Raleigh information center platform. As you can imagine, converting this plethora of systems and 20 million data records was no small task. And since these processes represent the lion's share of our back office functions, this was clearly the riskiest element of our integration process.

I am pleased to announce that not only with this important milestone completed ahead of schedule, but it also exceeded our established quality benchmarks enabling us to commence publishing the former Sprint books from our Raleigh facility within nine months of acquiring the SPA business, and doing it with the same high-quality data that our users have come to expect from us. This is just an outstanding achievement.

Completing this initiative also allow the Company to achieve two key integration objectives earlier than originally planned. First, previously announced run rate synergies will be realized a full six months ahead of our original target date of mid 2004. Second, it enables R.H. Donnelley to establish one operating philosophy supported by common processes and information reporting systems. Important objectives when trying to align two cultures and compensation systems.

So the good news is we have a very difficult and expensive part of the integration behind us. Our challenge going forward now is to train and perfect the processes that this single platform affords us. This will acquire our employees to think and act differently in performing their day-to-day management of our business and it will take some time before everyone is comfortable.

On the Internet front, last quarter I told you that we had initiated our first online city guide product in Las Vegas. Launched as a prototype in July, we actively began selling this product in August along with the January, 2004 Las Vegas print directory. Advertiser support has been strong and is contributing to one of the better sales campaigns that we've seen in a while. Since the Las Vegas rollout, we have also launched online city guides in three Florida markets and have a goal to be up and running in 50 markets by the end of 2004. Now I'll turn the call over to Steve to discuss specific financial performance and updated guidance for 2003.

Thanks, Dave. Before I discuss the quarter, let me remind everyone once again 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 adjusting pro forma 2002 results in order to better communicate underlying operational and financial performance for the Company. However, to reiterate, due to differences between legacy Sprint and RHD accounting policies, adjusting 2003 performance is not strictly comparable to adjusted 2002 pro forma results on a quarterly basis, particularly with respect to expenses.

Most noteworthy among the adjustments is removing the impact of purchase accounting on our P&L. Our adjusted 2003 third-quarter results include $53.2 million of revenue and $12.7 million of expenses with respect to directories that were published prior to (technical difficulty) acquisition, but that, due to purchase accounting, were not reported in our GAAP results. All that said, we are pleased with third-quarter performance in the SPA business, although DonTech does present challenge.

The Company generated free cash flow of $92.2 million after CAPEX of 2.4 million in Q3. Net cash used in financing activities was 86.4 million, comprised of 91 million in debt reduction offset by 4.6 million of proceeds from stock option exercises. At the end of the quarter net debt was $2,109.5 million. In the first nine months of combined operations, we've already repaid 219.7 million of acquisition debt. Adjusted revenue in Q3 was $142.5 million, essentially unchanged from $142.3 million of adjusted pro forma revenue in last year's third-quarter. Remember, under the deferral method, it takes a while for pub sales gains to show up as revenue.

Adjusted operating expenses, excluding D&A in the quarter, were $67.2 million compared to 67.1 million adjusted pro forma expenses for Q3 last year. Expenses this quarter include relocation costs of $5 million related to the Company's headquarters relocation to Raleigh Durham, North Carolina. Having a positive effect on third-quarter expenses was a $6.5 million adjustment to bad debt reserves related to prior year directories based on favorable collection experience this year. We've also benefited from releasing 2.3 million of printed paper accruals which had proved to be too high. As a result, adjusted EBITDA before DonTech was $75.3 million compared to adjusted pro forma of 75.2 million last year.

Total partnership income from DonTech in Q3 was $32.6 million, down 5.2 percent from 34.4 million for the year -- I'm sorry, for the third-quarter last year, reflecting the decline in calendar sales that Dave mentioned earlier. In total, adjusted EBITDA for the third-quarter was $107.9 million compared to adjusted pro forma EBITDA of $109.6 million last year. Now let's turn to an update on synergy and operating efficiencies as a result of our acquisition and integration efforts.

First let's review operating efficiencies. At the time of the SPA acquisition we anticipated approximately $15 million of operating efficiencies being those cost savings that would result from the more efficient use of resources without significant capital outlay before we could begin to realize savings. Primary among these was better receivables collection about which we're quite pleased. Bad debt expense continues to turn well due to affective billing and collection processes combined with credit policies that make sense for our business.

Remember that unlike most incumbent publishers, Sprint established independent billing and collection processes for all directory advertising separate from the telephone bills during the 1999 and 2001. And as a result, we now have direct control over all billing and collections which allows us to effectively manage this critical customer interface. I'll embellishment in a moment on the significant impact this has on cash flow and shareholder value. But for now I'm thrilled to report that we expect to achieve $14 million of these operating efficiencies during 2003 which is well ahead of pace.

Now to synergy. Unlike efficiencies, achieving synergy requires investment to integrate systems, operate software, move people, modify programs, etc., in order to achieve cost savings in the future. We originally estimated annual synergy of approximately $20 million after investing 20 million. Today we estimate our accelerated conversion activity and investment so far will allow us to achieve 9 million in gross synergy during 2003, ahead of our original plan for $6 million. More important, successfully accelerated conversion well position RHD to achieve our targeted 20 million run rate synergy by Q1 next year which is six months ahead of our original schedule.

As to be cost to achieve synergy, we now expect the total cash outlay to be $16 million rather than the original 20 million. These investments include expenditures associated with the recently completed systems conversion, cost to close or consolidate offices, and investments in the initial integration efforts on the sales and marketing side. Of the 16 million total, we will have invested about $11 million in 2003 of which approximately 6 million will be expensed in this year. None of the remaining 5 million we'll put to work next year will hit the P&L.

As a reminder, our headquarters relocation will cost approximately $12 million incremental to our cost to achieve synergy. About half of this amount will be expensed in 2003 with the remainder in the first half of 2004. However, approximately 11 million of the actual cash payments are not expected until next year. So what does this add up to for 2003? Well, at this point we have excellent visibility for the balance of the year. We continue to expect 2003 pub sales growth of approximately 1 percent for the Sprint branded directories which should translate into flat revenue for the year. At DonTech we now expect calendar sales and partnership income for the year to be down 2 to 3 percent versus pro year guidance of flat to down slightly.

Nevertheless, we are increasing guidance for 2003 adjusted EBITDA to 407 million from $400 million previously, reflecting better than expected operating results to date, improving bad debt performance and the early achievement of synergy offset by incremental costs associated with our headquarters relocation and lower DonTech income. We expect adjusted operating income of approximately $342 million after depreciation and amortization expense of $65 million, an increase from earlier guidance of 335 million.

Furthermore, we're increasing our guidance for 2003 cash flow from operations and free cash flow. We now expect to generate cash flow from operations of $247 million, up from our previous guidance of 215 million and free cash flow of $230 million up from 195 million previously. This improvement in cash flow guidance reflects our expectation of higher EBITDA, it also reflects these three components. First, we now expect working capital to be a 10 million source of funds in 2003 versus previous expectations that it would consume $10 million reflecting our continued better-than-expected receivables collection management in addition to relocation expense recorded this year to be paid out next.

Second we expect $5 million of lower cash interest payments to $170 million from 175 million previously due to continued lower short-term interest rates and lower average debt balances. As a reminder, we pay interest on our bonds in June and December each year. In Q4 this year we expect total cash interest payments of approximately $54 million. The third item, we expect $3 million lower capital expenditures to $17 million from $20 million previously. And assuming all free cash flow is used for debt payment, at the end of 2003 our net debt should be below 2.1 billion or below 5.2 times 2003 EBITDA. As a result of these adjustments we now expect adjusted EPS to be $2.50, up from $2.25 previously, and free cash flow per share to be $5.69 versus $4.80 previously.

Before turning the call over to the operator to take your questions, I'd like to remind everyone that R.H. Donnelley will host an investor day on the morning of November 20th at the New York Stock Exchange. Because of the limited space of the exchange attendance is by invitation only. If you've received an invitation and have not RSVP'd already, we ask that you do so as soon as possible. If you haven't received an invitation but would like to attend, please contact Bill Bradtmiller in our investor relations department. And for those of you not able to attend in person, the presentation will be webcast live at www.RHD.com. That concludes our prepared remarks. Thank you for your attention. And now let's turn it back over to the operator to take your questions.

(OPERATOR INSTRUCTIONS) Arnold Ursaner of CJS Securities.

Good morning. A question actually on the revenue side. Obviously the situation in Chicago does not appear to be improving, you were up against pretty easy comps there. Can you perhaps give us a feel for the types of steps either you or SBC are taking to kind of kick up revenue a notch?

Some of the things that are going on are, first off, we've put in place additional sales associates up there to try to enhance our new business prospecting and our market coverage, it's just tougher going than it's been in the past, so we're trying to beef that up. They have -- the DonTech group has continued to roll out a few more multicultural products in the marketplace, they've also added a multicultural sales channel to try to more deeply penetrate some of the areas that have tougher demographics for us there. They've begun some what they call heading development builder programs where we're offering some pricing incentives in there for categories of the directory that aren't as well developed as we would like them to be to try to incent people to get in there.

We have launched one of these online city guides as we're launching in some of our markets in the Chicago area, and we've increased -- our friends at SBC have increased the advertising and promotion programs in place for the fourth quarter of this year. That's kind of what's going on, but I can tell you it is just a more difficult market there than what we're seeing in other parts of the country.

Staying on that for a second, there's been talk or I guess additional competition coming in some of your Florida markets, could comment on that as well?

Yes, we have -- not only in Florida but other places we've been experiencing additional competition. It's really not something that's real new. It may be a little different, but relatively speaking things really haven't changed because in every single market, as we've said before, we have probably two to three competitors there already. And it's not just the directors we compete against, it's other local media. So the relative impact is really not different than anything in the past.

A final question from me. Obviously the success of your integration is a tremendous milestone and I applaud you for that, and it seems like the major benefit from that will occur in '04. Is your plan at the moment to discuss '04 at your analyst day and not prior to that?

That's correct.

Thank you.

Carl Choi (ph) of Merrill Lynch.

Good morning. I just wanted to follow-up on Chicago again. How much of the revenue decline -- sorry, the calendar sales decline that you saw in the quarter, was it more due to volume or was it more due to price? And when you're talking about local media competition, are you referring more specifically to the Yellow Pages or more broadly speaking? And with regards to Yellow Pages, how are they doing relative to how you're doing?

The shortfall in the quarter was just primarily a combination of higher cancellation rates, lower increased rates than we would normally expect and lower new business and new business start ups in the area. So it's across the board. It's not volume of servicing in the quarter. We didn't really shift anything out there. As it relates to local media competition, it's not -- we're not experiencing more or feeling the effects more of Yellow Pages competition in the market, it's just local media in general.

It seems that everybody in the Chicago market that we follow anyway is struggling in that marketplace, and as a result everybody from local newspaper to magazines to local TV to local radio are really fighting for a piece of a smaller pie there and look to be offering significant pricing deals, etc., that have just created options for our advertiser base in Chicago to the likes of which we've not seen before in the past. It's a real mixed bag. It's not just one thing and it's clearly not just the impact of the competition that entered that marketplace a few years ago.

Just a follow-up, a housekeeping question. Your forecast for CAPEX for the year, 17 million, looks like -- given how much you've spent year to date it looks like the fourth quarter will be a pretty big quarter in CAPEX spending. I just wondered if you could give some more color on that? Thanks.

It is going to be bigger than the first few quarters, and it relates to some of the cost associated with the integration and the -- some of the -- what's happened is that while we were in the integration process, our IT group, who normally accounts for a large portion of our CAPEX budget, was distracted focusing on the integration and didn't get to a lot of the other hardware and software purchases that they would normally get to more evenly throughout the year.

Thank you.

Kevin Gruneich of Bear Stearns.

Hi, this is Michael (indiscernible) here with Kevin. Just a couple of questions for you. Dave, you mentioned there were a few markets that were particularly soft in the quarter, can you elaborate on that? And also give some color on sales campaigns that recently closed for the Q1 '04 book? Thank you.

First off, I referenced that it's soft in several markets, maybe that would be better characterized as in almost all of our markets local ad sales continue to be soft. As you know, our expectations for growth are higher than what we're reporting today. There are a few bright spots out there and I'd say Las Vegas is clearly one of them. The economy in Las Vegas is pretty vibrant, it's recovered very, very well. But for the most part, everywhere else that we look at across the country is off to some degree from what we would normally expect. Michael, the second part of your question was?

Q1 of '04 -- sales campaigns for Q1 '04 books such as -- you mentioned Vegas, but Orlando, Ocala and southern New Jersey?

We really don't talk much about -- give guidance on specific sales campaigns. But I think it's the same message generally. The Vegas economy is doing well, and we feel more softness just about everywhere else in the country.

Okay.

Mark Bacurin of Robert W. Baird.

Congratulations. A couple questions. Steve, first of all, looking at the interest expense for the quarter, given the continued debt pay down and your comment on improved interest rates, I was curious why the interest expense actually ticked up in Q3 versus Q2?

It's actually because what's happening is because we're repaying debt faster than we had planned the accountants tell us that we have to amortize the deferred financing costs faster than we had planned. So there's a couple million dollars in there of non-cash interest expense associated with higher than planned deferred -- sorry, amortization of deferred financing costs.

Perfect, okay. And will that be the case then -- should we expect kind of a 2 million per quarter number in there?

No. It's really not a -- it's not a kind of a ratable kind of even -- amortization schedule. We have an amortization schedule based on the scheduled repayments of the bank debt, and also the maturity of the bonds. But what's happened is that we continue to pay back faster than planned and so what's happening is we keep adjusting our amortization schedule as a result of that. And if you think about it, I mentioned Q4 we've got a big interest expense -- a big cash interest expense payment and as a result of that our ability to repay debt sort of the principal amount on an accelerated basis is going to be hampered by that large bond interest payment we make in the fourth quarter.

I see that the tax rate in the quarter was slightly lower. What tax rate assumption should we use for kind of Q4 and then looking ahead to Q --?

The right rate is to continue to use 38.5 percent. We had a onetime settlement of an old tax case in the third quarter which had a slight impact on the rate in the quarter, it's not a continuing benefit.

And then on the bad debt in the paper and print accrual reversals, you indicate you're continuing to see favorable trends there. Is there room for additional positive adjustments going forward or do you think you're pretty much back on track with --?

Let's talk about those two separately because they're really different things. As far as the print and paper goes, it's really a -- it's a onetime event that relates to accrual rates that proved to be too high, it's basically just a onetime event. And I think with respect to the bad debt, it's a separate issue although it's also a onetime event. And I think that for planning purposes the right rate to be thinking about is in the 5 percent range as far as kind of what we think is a good number for bad debt as a percentage of revenue.

Okay. And then just finally, looking at next year, you just said 38.5 percent is a good tax rate, if we look at the '04 -- I'm sorry, 38.5 percent.

That was 2003, by the way.

Oh, so it may be different in '04?

We haven't provided guidance for '04 yet.

Understood. Could you give us some general sense of what your cash tax payments may be in '04, maybe not on an absolute dollar basis but sort of as a percentage of the tax liability?

Again, we haven't provided guidance on that yet, although it's -- we have this large step up that we're increasingly working on to find ways of accelerating the ability to get the deductions earlier as opposed to amortizing over 15 years.

Thanks a lot.

Bill Meyers of Lehman Brothers.

I apologize if these were asked but I got dropped from the call. So two quick things. First off, if you could just walk us through the timing of the moving expenses, what you're going to be incurring this year and what you're going to be paying for both this year and next year. It seems like there are some book issues versus some cash issues as well? And then just with respect to new competition, obviously we've seen a step up I guess in both Jersey and Florida, are there other markets where you're aware of new -- where there have been material new market entrants?

Why don't I take the first part of your question, and then you guys can take the other part. With respect to the relocation costs, and actually I've mentioned this in the script that of the total cost of 12 million for the relocation, we will book about half of that this year and the other half will come probably in Q1. And we took five of it in Q3 this year. So about another million dollars to go this year in Q4. And then in Q1 next year you'll probably see the rest of it. That's from an accounting point of view. From a cash point of view we'll only -- there will only be about a million dollars of cash this year and the rest of it will be next year.

Bill, relative to new competition in the marketplaces, and you talked about Florida, New Jersey, there really isn't much of a material change at all, different competitors have been there going back to the early '90s. So it's not -- they may come out with a different book or a different name, but all in all I don't see any meaningful or significant new changes in the competitive landscape at this time.

And how about Verizon versus Yellow Book in terms of their aggressiveness? Any changes that you've seen over the last quarter or so?

Verizon versus Yellow Book.

I think that each competitor has his own benefits, but I think that we focus primarily on our customers and trying to provide them a good value. And our business models are different, and I think that we've proven to be affective in our marketplaces and in the Sprint branded marketplaces we're doing (technical difficulty).

Thank you.

Todd Morgan (ph) of CIBC.

Great job on the operating progress this quarter. Could you help me understand, is the speed with which you've moved forward due more to conservative planning on your part or were there some sort of unexpected steps that made this a lot quicker?

It's actually a combination of things. Probably the biggest contributor is once we got under the covers of these systems and began to test transferring the data between one system and the other, we found the compatibility of the two systems to be -- to exceed our expectations. The data without a lot of intervention was transferring particularly well. That's one thing. The second thing is, because -- this was a heck of the team that we had on this project, and we had so much confidence going down the structure of this when we began to really understand it better that it allowed as to do what we call a fast cut conversion so that we just simply moved the data from one to the other without having to run redundant systems for a long period of time which is what we had in our original planning. And our ability to successfully do that is what really allowed us to shorten up the time frame.

And secondly, on the trends in the number of customers and revenue per customer, I think you've shied away from talking about specific numbers. If you can do that great, otherwise could you give me a sense of how those two items are interacting this quarter?

We haven't previously given guidance on that. What I can tell you is that all trends are positive.

So the number of customers just continues to grow and the revenue per customer continues to grow as well?

I think we just want to stick with trend guidance on that, Todd.

That's fair.

I just would add that in the Sprint business, I think is what Dave's referred to, and DonTech it's -- there are still challenges in that department.

Lastly, on the city guides, could you give us a sense of how we should be thinking about those in terms of their contribution to the business going forward? Is this a means of attracting and keeping advertisers, is there a real near-term revenue boost that you expect or how should we be thinking about that?

I think we've tried to keep everybody levelheaded about this. First off, we do it as a highly defensive play too, we think that users are going to want to try and find products and services online as well as in print products and we don't know exactly how that evolution is going to occur so we just think it makes good common sense to be able to support the value proposition of this great business that we have by offering it both ways.

That being said, I think our early reads are that we can expect a point or a point and half of lift in our sales campaigns as we roll these out. It's no silver bullet by any stretch of the imagination. But it's a good product that's being well received in the market.

Great. Well, that's a lot of cash flow. Thanks a lot.

Sherie Tu (ph) of Morgan Stanley.

This is actually Julie Roseman (ph) calling for Sherie. Just one quick question. In terms of your pension contributions for fiscal year '03, what are they expected to be and how much of the contribution have you already made throughout the year?

We're in a situation where our pension fund is actually still overfunded. So we're actually not making a contribution this year.

Okay, great.

Wayne Cooperman of Cobalt Capital.

I was actually on your Vegas site, and it seems like you guys might be underselling it. It was pretty impressive, actually. My question is sort of use of the free cash as you guys keep paying down debt. You know, it's a relatively -- you're paying down the low-cost debt; you're not getting a very high return on your free cash. I just wonder if you could talk about maybe alternative uses for free cash that might generate a higher return.

You're right, Wayne, and we have though set pretty strict discipline around getting our leverage down. And that will give us flexibility to do things, to do other things with our free cash when other things become compelling. I think that that's really kind of how we are approaching it. We initially set out targets to get down to four times leverage by the end of 2005, and initially thought that that would be really difficult and we weren't sure how we were going to get there. And at this point, I think we're feeling maybe that we'll get there sooner than we had initially expected.

Anything that we do other than repay debt, the standard is to look at our stock price, and if we think it makes more sense to repurchase stock than other things, then we'll do that. If we find other ways to put capital to work that will generate significant IRR in excess to cost of capital, we will be studying that pretty carefully.

When could you or might you think about buying back stock? Do you have to get below a certain leverage first?

Currently, our credit agreement precludes us from doing that. As we reduce our leverage, we gain additional flexibility in that regard.

Should we think that that's an '04 event, or is that even --?

We're not giving guidance for '04. I certainly wouldn't comment on that right now.

Okay, thank you.

Brian Watson (ph) of Stanfield.

Just some housekeeping, could you give me the balances on the A and the B term loan, and I guess your revolver is undrawn at this point?

Yes, the revolver is undrawn. The terminal B started out at 900 million, and it currently stands like 890 or something like that. The way this debt repayment works is we have to offer it to the A and the B, but the B lenders have basically declined. I'm just looking at what Jenny's got in front of me here. At September 30th, the B loan was 893, so I was right, low 890s, and the A was 276.

So whatever the B's reject, the A -- it gets taken out of the A's?

That's right, and there is nothing drawn on the revolver.

I guess just looking at your free cash flow guidance then -- and you might have touched on this; I got on the call late -- you're pretty much done -- I guess you've done 218 free cash through the first nine months, and you're looking at free cash flow guidance of like 235, 230, I guess?

230, yes. One of the things that is happening is that -- I mentioned is that we pay interest on the bonds in June and December. So we have to accrue the expense, but we don't actually pay the cash out. So we've got an accrual on the books at September 30th for the third-quarter bond interest expense, and then December. I mentioned actually earlier, just in case you didn't get it, Brian, $64 million of cash interest in Q4.

So that depresses the free cash in the second quarter and the fourth quarter?

That is correct.

I see. Okay, thank you.

Adam Tuckman of Golden Tree.

Just with regard to free cash flow and creating equity value, has the company or management pursued any options with regard to refinancing the convertible preferred stock? Just given the fact that it's accruing at 8 percent, it seems to be hampering the benefit of the free cash flow to the stock?

Right. Well, it's actually not hampering free cash flow at all, because we're not paying the dividend in cash. But it does affect shareholder value, because it's accruing at this 8 percent rate. We have the ability to call that security in the first quarter of 2006, assuming that the stock price is 200 percent of the conversion price for a minimum -- a certain number of trading days, and I think it's 45 trading days or something like that. So until then, the company doesn't have the ability to redeem that or to refinance that.

Thanks.

(OPERATOR INSTRUCTIONS) Michael Lewis of JL Advisors.

Could you just talk about the trade-off between managing bad debt and growth at DonTech?

At DonTech?

Yes.

Well, remember at DonTech we don't control credit policy, and we don't control billing and collections. The flip side of that is because we don't control those things, we have a cap on our exposure to bad debt expense at DonTech of 3.7 percent. So our maximum exposure there, at least in the current year, is 3.7 percent in any current year. However, it's not to say that we are immune from bad debt at DonTech beyond that because remember, if an advertiser doesn't pay, it doesn't get in the book next year. So it affects our renewal rates. But again, that's not something that we have control over.

Michael, I would just add that the credit risk policies at DonTech are not dissimilar from what we have in our own business either.

I guess my question is, do you think that -- I understand that you don't control, but do you think that the partnership is -- perhaps the credit constraints are too tight and the bad debt should be higher, and that maybe that's a constraint on growth right now?

Well, it's really not what's going on. As Dave said, the credit there is not that different from the credit policies in our markets. It's really --

That's not it.

It's a good line of reasoning, but we've been down that path. That's really not what we see as the big problem there.

Okay, thanks.

Douglas Kahn (ph) of JP Morgan.

Good morning, gentlemen. Just a quick question. We've heard actually today on the call, and we've heard other directories' operators talk about the competition from other media in your local markets. Can you highlight what kind of customer you guys are both competing for, maybe give us a little sense of scale and size so we have an idea of where you sort of size up against other media in each local market?

As you know, we have a pretty wide array in our customer base, but it's primarily the small and medium-sized business, and a lot of that is service businesses; landscapers, plumbers, chiropractors, carpet cleaners, all those kinds of things. And quite honestly, those types of businesses have traditionally, primarily advertised in Yellow Pages, and in many cases only advertised in Yellow Pages. What we've seen, particularly in the major markets like Chicago, is that other kinds of media that traditionally didn't pursue those service businesses particularly hard in efforts to try to shore up their shortfalls are now soliciting those kind of advertisers much more intensely than we've seen in the past.

Thanks.

This concludes today's question-and-answer session.

I'd like to think everyone for joining us today. As always, if you have any follow-up questions, please feel free to contact either Jenny Apker or Bill Bradtmiller. Everyone have a great day.