Thryv Holdings Inc (THRY) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to R.H. Donnelley's fourth quarter and full year 2003 earnings conference call. 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, its Web site, or the SEC Web site at www.sec.gov. This transmission is the property of R.H. Donnelley Corporation and any transmission or rebroadcast without the express consent of the company is strictly prohibited. Please note that today's teleconference is being recorded as well as Webcast live over the company's Web site at www.rhd.com.

I would now like to turn the call over to Miss Jenny Apker. Miss Apker, you may begin.

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, Bill Drexler, Vice President and Controller, and Tom D'Orazio who will become Vice President and Controller as of April 1st.

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 December 31st, 2003, and our Form 8-K furnished to the SEC yesterday, February 26th, which both discuss our fourth quarter and full-year 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 the 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 a reconciliation between these measures and the most comparable GAAP measures in the press release and related 8-K filings. Our 8-K disclosing 2002 adjusted pro forma results filed with the SEC on July 23rd, 2003, and an 8-K discussing non-GAAP measures filed on May 2nd, 2003, each of which is available on our Web site 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 fourth quarter and full-year investor call.

Well, this has been a very busy and exciting year for the company, and I am pleased to discuss the impressive accomplishments of our management and employees for the quarter and for the full year. Over the course of 2003, we invested a tremendous amount of effort to integrate two great companies and create a platform for growth and performance excellence that we are confident will benefit our stake holders in 2004 and beyond.

Among the most significant of these accomplishments were the fact that we migrated the new company onto one operating and technology platform, supported by best demonstrated business processes, and we accomplished this well ahead of even our most aggressive plans. We reduced the headcount of the new company from 1600 to 1300 employees, again well ahead of schedule.

And I really want to take a moment to add and thank our management that accomplished this very difficult task as they did it with a tremendous amount of compassion towards the good people who were unfortunately affected.

We converted some 20 million directory records from Sprint Publishing over to our Raleigh information center and began publishing all 260 Sprint-branded directories out of that center within nine months of the acquisition. Our technology advisors believed that we would not reach that milestone until the second half of 2004.

That accomplishment, combined with the swift action on the headcount reductions, were primary contributors to our ability to achieve the $20 million in run rate synergy savings we had promised a full six months ahead of our original plan.

We executed a significant turnaround in top-line sales for this business. After two consecutive years of sales declines, we posted a 1.2% gain.

The directory business, it's really like a freight train, and it does take some time to get it moving again from a dead stop, but once you do, I'll tell you, it has a tremendous amount of momentum, and we believe that we're just beginning to get this train moving again.

We reduced the run rate for bad debt expense by more than 25% this past year. And we believe that we now run the most efficient and effective stand-alone billing and collections functions that you can find anywhere in the yellow pages industry.

We launched our first online city guide including a digital searchable version of our print yellow pages product in Las Vegas. And we've begun to implement this integrated media and distribution strategy across our footprint.

And we began the process of consolidating into a single and lower cost corporate headquarters in Raleigh, North Carolina, allowing us to better manage the demands of the larger company and to better position us to take advantage of future opportunities.

Now the experts will tell you that some 65 to 85% of all mergers and acquisitions fail to meet the promises made at the time of that acquisition. It's because of that startling statistic that I'm particularly proud of our 2003 financial results.

We generated nearly $411 million of EBITDA, significantly better than our initial $400 million goal, and even more impressive when you take into account that it includes approximately $12 million of unbudgeted restructuring costs and a $3 million miss at DonTech. We're also pleased to deliver this type of earnings performance before enjoying the benefit of what we know is going to be an improving revenue growth environment for us in future years from our Sprint business.

Finally, we said at the beginning of the year that we were going to really focus this organization on cash. And we're very proud of the $236 million of free cash flow we generated this year allowing us to significantly reduce our acquisition debt and total leverage to near five times EBITDA.

The sum of these accomplishments helped us to deliver a 36% increase in stock price to our shareholders in 2003 and a 68% increase since the day that we announced the Sprint deal, an achievement that we're particularly proud of.

Now let me turn to some of the operating details.

Publication sales for fourth quarter Sprint-branded directories were $109.9 million, up 0.5% from last year. While most of the fourth quarter publications experienced growth and improved results from prior year, results in a couple of our markets were impacted by our sales reorganization and systems integration effort.

During the sales periods for these fourth quarter campaigns, we were converting the former Sprint publishing and advertising offices on to the RHD management and commission systems. We also at this point in time were closing three of the 13 regional sales offices as part of our integration plans.

Through very diligent planning and persistence we did manage through these disruptions actually better than we had originally forecast, and as a result our full year came in at 1.2%, slightly better than the 1% guidance that we previously offered.

DonTech continued to struggle in the fourth quarter with publication sales down 4.8% compared to the fourth quarter last year. Calendar sales for the fourth quarter at DonTech, which represents the value of actual sales contracts signed in the period, were $79.4 million, down 1.6% from the previous year.

Now, I know this is beginning to sound like a broken record from quarter to quarter, but we are simply not seeing the same signs of an economic turnaround in that region of the country that we're seeing in some of the other regions. We think the economic issue is tied to this lack of job growth in Illinois and particularly in the Chicagoland MSA.

Our advertisers continue to complain there that their cash receipts have not improved and they're not buying more advertising. Simply stated, the increased marketing, staffing, and advertising efforts introduced by the DonTech and SBC teams did not overcome this economic undertow in these Illinois markets.

Now let me spend a moment updating you on our online product initiatives. As of the end of the year we had online city guides and digital versions of our print yellow page products up and running in seven of our most important markets.

Plans are to have an additional 43 of these sites up and running by the end of the year, reflecting our commitment to provide users additional ways to find who sells the products and services they seek and to continue to provide our advertisers that high-quality stream of prospects that drives the return on their advertising investment.

Just as I mentioned earlier that from a financial perspective we have a keen focus on cash. From an operational standpoint, we maintain a very keen focus on the usage of our products.

And one of the reasons that we were so interested in acquiring the SPA business to begin with was the strong usage of their products in the markets that they serve. And we believe that our initiatives with these online products will allow us to not only maintain this outstanding usage but ultimately increase it.

The net of all of this leads us to be optimistic that 2004, while not back in full stride, is going to be modestly better than 2003, with sales from our Sprint-branded products growing in the 2 to 3% range and calendar sales from DonTech down slightly. Our first quarter results to date, which we'll be talking to you about in April, seem to be confirming these expectations.

Finally, before I turn the call over to Steve I'd like to give you a quick status report on the headquarters move.

We've signed a lease for office space in the Raleigh, North Carolina area, and the buildout of that space is underway. Many of the consolidating departments have already moved and are operating out of either our existing space in Raleigh or temporary space pending the completion of the new headquarters. We expect to be fully operational in our new space during the second quarter.

So in spite of 2003 being our year under construction, so to speak, we feel like we've really accomplished an awful lot and have been very successful in taking a positive step forward rather than the half-step back that often occurs when a company makes an acquisition of this magnitude. We look forward to continued success as we move through 2004 and beyond.

Now let me turn the call over to Steve.

Thanks, Dave.

Before getting started, I'd like to take this opportunity to introduce all of you to Tom D'Orazio who takes over from Bill Drexler as Controller effective April 1st. Tom brings a wealth of experience that will benefit RHD at our new headquarters in North Carolina.

Let me also acknowledge Bill's immeasurable contribution and tireless effort at RHD over the last 12 years without which the SPA acquisition and integration work would not have gone so smoothly.

Now to the results.

In 2003 pub sales revenue and EBITDA all came in modestly ahead of our guidance. Cash flow was much stronger than originally anticipated. In all, 2003 was truly a great year for RHD.

During the year, we increased guidance for free cash flow several times as we achieved improvements. Specifically, cash taxes improved to 0 from $30 million, cash interest payments improved to $168 million versus $185 million originally estimated, other working capital became a source of $6 million rather than a use of 15, and Cap Ex ended up under $13 million versus $20 million originally anticipated.

We achieved these improvements in addition to exceeding our EBITDA guidance by $11 million all while delivering ahead of schedule on the synergy and efficiency commitments we made to you at this time last year.

Now, as a result, some of you have commented that we've been conservative with our guidance, but remember we had just closed on an acquisition roughly three times our size and we had a lot to prove. We take our commitments very seriously here at RHD. Hopefully we're living up to your expectations.

Before I discuss Q4 and full-year details, let me remind everyone about our purchase accounting adjustments and the reconciliation to our GAAP results in the schedules to yesterday's earnings release.

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.

However, let me reiterate that due to difference between RHD and legacy Sprint accounting policies adjusted 2003 performance is not strictly comparable to adjusted 2002 pro forma results on a quarterly basis.

In 2004, for easier presentation and as discussed at our investor day last November, we've elected not to report adjusted operating numbers even though this will negatively impact our reported results for Q1 and 2 by $13 million comprised of a $5 million tail from purchase accounting and another $8 million of headquarters relocation costs. We will continue to report pub sales and adjusted EPS consistent with our 2003 presentation.

Now to the details.

In Q4 we generated free cash flow of $17.8 million after Cap Ex of $4.7 million and cash interest payments of $61.9 million. That brings total free cash flow for the year to $236 million, or $5.84 per share.

Net cash used in financing activities was $15.9 million in Q4 comprised of $23.2 million for debt repayment and $0.6 million from stock option exercise proceeds net of checks and transit. For the year, for the full year 2003, we repaid $242.9 million of acquisition debt. At year end debt was just under $2.1 billion, or approximately five times estimated 2004 EBITDA.

Both pub sales and adjusted revenue in the quarter were up about half a percent. Q4 pub sales were $109.9 million versus 109.3 last year. Adjusted revenue in Q4 was $142.7 million versus $141.9 million adjusted pro forma revenue last year.

Full-year pub sales were $548.2 million up 1.2% versus $541.7 million last year. Full year 2003 adjusted revenue was $572.3 million versus $571.3 million pro forma in 2002.

Adjusted EBITDA for Q4 was $92 million compared to adjusted pro forma EBITDA of $101.9 million last year. This decline reflects higher reported expenses and lower DonTech performance in Q4 '03 as I will review further in a moment. Full year 2003 adjusted EBITDA totaled $410.9 million versus $407 million adjusted pro forma last year.

Adjusted operating expenses before D&A in the quarter were $73.2 million compared to $64.2 million adjusted pro forma expenses last year. Q4 '03 expenses include $2.6 million of headquarters relocation costs and $1.5 million associated with costs to achieve synergies offset by a $2.3 million favorable adjustment to bad debt expense.

Pro forma adjusted Q4 '02 expenses reflected the reversal of bad debt accruals of $6.6 million. While differences between RHD and legacy Sprint accounting policies rendered Q4 expenses not strictly comparable, adjusting for these items, expenses in the quarter were essentially flat year-to-year.

For the full year, adjusted operating expenses before D&A were $275.5 million, versus $281.4 million last year. The decrease in adjusted operating expenses includes a $10.4 million reduction in bad debt expense, and that's excluding recoveries and accrual adjustments due to improvements in our collection performance.

Synergy savings of $10.10 million and a $5.9 million decrease in print, paper, and distribution costs, again, excluding accrual adjustments. These decrease were offset by $8.5 million of additional corporate costs, $7.6 million of costs to achieve synergies, $7.3 million related to our headquarters relocation, and $4.3 million of additional advertising expense.

As we've said consistently we're investing in advertising and promotion to continue to support our value proposition and drive the top line.

Q4 partnership income from DonTech was $22.5 million down 7% from $24.2 million last year reflecting the decline in calendar sales Dave mentioned and the timing of expenses. Full year partnership income from DonTech was $114.1 million, down 2.6% from $117.1 million last year.

Interest expense was $42.6 million in the quarter and $177.6 million for the full year, lower than 2002 pro forma expense by $4.1 million and $7.6 million for the quarter and full year respectively. The decreases are the result of both lower average interest rates and lower debt balances.

Income tax expense for Q4 '03 was $12.6 million versus $14.6 million last year, primarily due to lower net income offset by a modestly higher tax rate. For the full year income tax expense was $63.7 million up from $58.8 million last year, reflecting both higher net income and a higher tax rate.

As a result of the foregoing, adjusted results for Q4 '03 versus pro forma Q4 '02 were as follows: Net income before preferred dividends for Q4 '03 was $20.1 million versus $24.5 million pro forma last year. For the full year net income before preferred dividends was $103.8 million versus $9.3 million pro forma for '02.

Earnings per share for Q4 '03 were 49 cents versus 62 cents pro forma last year, full year 2003 EPS of $2.57 compares to 2002 pro forma EPS of $2.50.

Now let's review the 2004 guide appears shared with you at our investor day presentation in November and offer a couple of updates.

For 2004 we expect DME pub sales growth of 2 to 3% or approximately $562 million if you use the midpoint of the range. This should translate into approximately 1.3% gross directory revenue growth next year or approximately $558 million under our deferral revenue method.

We expect 2004 operating expenses of approximately $274 million, only modestly lower than $275 million in 2003, anticipating that we've achieved our full run rate for synergies by Q4 last year much of which was already reflected in 2003 results.

2004 expenses also reflect three the $5 million total purchase accounting impact and $8 million of headquarters relocation costs in Q1 and 2 this year. As a result, we expect reported EBITDA before DonTech of $303 million in 2004. At DonTech we expect calendar sales to decline 0.8% to $393 million and partnership income to decline 1.8% to $112 million.

The local economy is a primary driver of yellow pages advertising. The loss of jobs in the Midwest manufacturing economy has hit this area worse than in our Sprint markets.

Consequently our near-term DonTech outlook remains cautious as employment levels in Illinois are not expected to reach pre-recession levels until at least mid-2005. As a result, we are confirming our guidance for 2004 EBITDA of approximately $415 million after the mentioned $13 million from purchase accounting and the headquarters relo. However, we do have modest improvement to cash flow and EPS guidance.

As you may already know, in December we amended our credit agreement governing about $1.15 billion of bank debt comprised of $223 million Term Loan A and $923 million Term Loan B. The amendment decreased the borrowing spread in our Term Loan A from 325 basis points to 225 basis points and on the Term Loan B from 400 basis points to 225 basis points.

While we paid a $9 million call premium associated with this amendment in 2003 we estimate the cash savings will be approximately $18 million in 2004, about 70% of which was already baked into our previous 2004 guidance.

The amendment also provides us additional flexibility to manage the business. Among other things, specifically allowing to us redeem the remaining $21 million of 9 1/8 notes which we completed on February 6th. Although this redemption won't have as dramatic impact on 2004 results it should reduce cash interest expense by about $1 million in 2005.

As a result of these items today we are updating our 2004 free cash flow outlook to $245 million from $240 million previously specifically reducing cash interest expense to $145 million from $150 million previously.

Our estimates for Cap Ex working capital and cash taxes remain unchanged. Should we apply all free cash flow to debt repayment, at year end net debt would be $1.85 billion or less than 4.5 times 2004 EBITDA.

While cash interest is revised down by $5 million we also expect the non-cash amortization of deferred financing costs to increase from $14 million to $19 million due to faster debt retirements than initially anticipated and the premium paid in connection with the amendment. As a result our guidance for net income remains unchanged at $116 million.

Nevertheless, we are increasing EPS guidance to $2.75 from $2.70 and free cash flow per share to $5.80 from $5.59 as a result of reducing our expected 2004 weighted average shares to 42.2 million from 42.9 million shares previously due to a smaller impact from common share equivalents than previously calculated.

That concludes our prepared remarks. Thank you for your attention. Now let's turn the call back over to the operator for your questions.

Thank you. At this time if you would like to ask a question please press star one. To cancel your question that's star two. Once again, that's star one to ask a question. One moment, please. And our first question comes from Bill Meyers with Lehman Brothers.

Thanks. That's a very comprehensive analysis. Thanks for that. A couple quick questions. On the Internet side it looks like you're currently operating at about 14 sites if I just go to the site myself. How much have you spent to date rolling it out? What are you budgeting per market? And what's typically breakeven on a per site or per market basis? And I have a couple of quick follow-ups.

Bill, I'll take a shot at that one. I'm not sure I have exactly the numbers you're looking for but I believe it's like that we've invested a little under $1 million to date. I think we have $1.5 million or so, it's like in revenue generated we expect around 4 to $6 million of incremental revenue in 2004.

Okay. So these are obviously --.

Bill, I'd just add -- this is Peter. I'd just add, I think we're planning on spending the 2 to $3 million range in the upcoming year and it's already profitable.

And that would be 2 to $3 million for the additional 40-plus Web sites?

Yes.

Okay. So it's an incredibly low cost per site. Also, on the relocation I thought that the previous budget was about $12 million. Has that moved up to about 15 or $16 million, or has something happened given the original --.

There's a couple things going on there, Bill. First of all, we're actually getting at it a little bit faster than we had planned, and so you see our Q4 relo costs were a little bit higher than the $6 million that we initially estimated. At the investor day we actually had identified 2004 of $8 million and what's happening is that there's a non-cash amount associated with the headquarters lease abandonment that we hadn't previously mentioned.

Okay. Then just one last question. In terms of the overall competition, not necessarily by the insurgents of the independents but are you still seeing sort of traditional radio or TV going after some of your client base? I know that was an issue that came up, given their sluggish environment over the last couple of quarters. So have they been making further inroads or have they gone back to focus on their core business?

Bill this is Dave again. I think in the Sprint-branded markets, we don't see it as much, and in the Chicagoland area it just continues to be the same. Everybody is struggling in local media in that marketplace that we can see, and as a result, you know, there's a lot of pressure on all those sales forces to go out and try to get things turned around. As a result, they're going after customers that weren't traditionally kind of high on their radar screen in the past and that environment continues.

Thanks very much.

Thank you. Our next question comes from Arnold Ursaner with CJS Securities.

Hi. Good morning. My question is for Peter McDonald. Peter, in focusing on the Sprint revenue growth assumptions you're making for the upcoming year, I don't think they make a lot of sense to me so maybe you could expand. The economy's expected to grow well above 3 or 4%. You've changed your comp plan and you've got the systems in place and you put in quite a few mechanisms to have them cross-sell in adjacent territories. Why is your sales expectation so low?

Arnie, that's a great question. I think the way to look at it is, 2004 sales, we did a lot of the integration work towards the third and fourth quarters of 2003. And during this time we had already started sales into some of the 2004 publications. So the impact of all of the work that we've been doing doesn't have kind of the full year benefit that I think that we would like to have. So I think that you're going to see 2004 go up in the range that we've given guidance to. And you think that's the main driver.

The economy, you know, in some of our markets, which we have military, et cetera, it has not totally rebounded. I think that, you know, our local advertising, many would say is tied to job gains, and as you know, from a local perspective this has been a little bit of a struggle.

So I think that when you put the lag effect into place, you know, the impact of all these things, and, Arnie, when you put in the new business processes, day one they don't work as effectively as they do as you go further out. So hopefully that gives you an idea of I think why the results come in in the 2 to 3 range.

With the new comp plan have you seen the either desired turnover or any comments on sales force turnover that we should be made aware of?

Arnie, actually glad you asked that question. Right now the turnover is significantly lower than it was in the past. The initial responses to the compensation or incentive plans is very positive. We're getting the type of behavior that we're looking for. So I feel real good about it.

If you annualize our first month, January of this year, it's under 20%, which is significantly different than it was in the past, as you know. Real quick question for Steve Blondy, if I could. On capital spending for the upcoming year, Steve, last year you had put in new systems and made some systems transformation. Remind us what Cap Ex was last year. The $15 million seems a little bit high relative to what I would have thought for this year.

It's interesting, Arnie. We actually started out thinking that it was going to be higher than it turned out to be. The actual came in I think it was $12.6 million for the year, and I think what happened was that we got after the publishing and IT system conversion associated with AMDOCS faster than we initially planned but to some extent the IT folks didn't get after some of the other projects that they had in the cards because of the focus on the publishing system, so I think that the $15 million is pretty good number for this year.

Thank you.

Thank you.

Thank you. Our next question comes from Mark Kieran with Robert Baird.

Good morning. Congratulations. Maybe to follow up on the growth question with regard to the SPA growth, 2 to 3% for next year. Could you give us some sense what's baked into that assumption with regard to pricing? Are you able to push through any price increases in most of your markets this year?

Hi, Mark, it's Dave. I think if you take a look across the board we're probably in the 2 to 3% range, which again, another way to think about that would be that's a couple points below what our traditional environment would generally be.

But, again, that is the price, the rate current pricing increase, and those not the fully realized increase, obviously.

Right.

I guess I'm trying to figure, if you're getting kind of average 2 to 3% price increases plus maybe another 4 to $6 million from online I would tend to agree that hopefully you guys are being conservative, but I think being conservative is not necessarily a bad thing.

Mark, I would just respond, I think that we have a lot of different programs for advertisers where we're trying to motivate them to buy additional headings and to add additional directories and sometimes we offer them special programs to motivate them to do that, which tends to work against that kind of rate card price increase, so don't think about the 2 to 3% as a realized price. Okay?

Okay. And, Steve, could you comment on, with the amendment that you got on your credit facility, did it give you any additional flexibility with regard to when you might be able to start looking at share repurchase, you know, is there a magic leverage ratio number that opens that up, or just internally is there a number?

We did not ask for that in our amendment at this point because we thought that we wanted to focus on getting a lower rate and we wanted to be able to call the 9 1/8 notes which, you know, were subordinated to the credit agreement. We've also stated from the get-go that our leverage targets were to get to 4 times by the end of 2005, and we spent a lot of time looking at our weighted average cost to capital and trying to optimize that.

I believe that our weighted cost to capital actually continues to go down as we delever even from where we are today. And the only reason I conclude that is that the stock price doesn't seem to me to reflect what I would call an optimal weighted that kind of a cost of to equity and so I believe that, you know, we have a little ways to go. So our kind of target was for four times by the end of '05. We want to just continue to do what we said we were going to do.

Is there a point when you can go out and start attacking that more expensive 10 7/8 subordinated notes as well in terms of the credit agreement?

Not really. Those notes are not callable for another four years, and so while we could go buy them in the market they've been trading at a pretty big premium to par.

Could you refresh my memory on where you stand right now with regard to what you've locked in under fixed rate agreements under your facility versus what's still floating?

We're about 65% fixed rate now. I think we've got about 405, I think it is, the total amount of swaps floating to fixed.

Great. Congratulations again.

Thank you, Mark.

Thank you. Our next question comes from Paul Denotio with Deutsche Bank.

Hi there. Two questions. Sorry for the background noise. First, maybe, Dave, could you give us some color on both DonTech and the Sprint directory, Sprint-branded directories on potentially what's driving the changes in both the display side, the retention, and new customers and how that affects the change in sales? Second, could you just refresh our memories what your plans would be for new directory launches in '04, if any?

Okay. Let me start on kind of the retention and things like that. Let me start with the Sprint-branded markets. Things are really very good there.

It's like we've seen just consistent improvement, and from a retention standpoint, renewal rate standpoint from existing customers, I'd say we're pretty healthy there. That's where we continue to see the effects of the economy is more in the increase, it's those advertisers still aren't buying as much more additional advertising as we would see in a really healthy environment.

In Illinois, we have not had a return to the same level of health in renewal and retention, and suffer from the same types of increase problems that I just referenced in Sprint, maybe even more so. And I think one of the other reasons, but it's difficult to tell how much is economy and how much is just a change in operating strategy, because Peter's doing a lot of things in the Sprint business to stimulate new business, and new business is doing better in the Sprint markets.

It continues to be down in DonTech. We're actually selling more new accounts in terms of numbers because we've staffed up there. That was one of the initiatives that we took. But, in fact, the average value of an account has gone down, so that the net amount of new business dollars actually hasn't gotten any better there so. Does that kind of hit the mark, Paul?

That's great. Thank you very much. On the new launches, if any, what's sort of your plan for next year?

We have nothing specifically on the drawing board that we think will hit in 2004 from that regard.

And as a final follow-up what would it take for you to start launching? Where do you have to be with the Sprint and the DonTech business for you to start thinking about launching new directories into independent markets?

Well, it's kind of hard to say. It's like we'll kind of know when it we see that environment and when we're ready and when we see an opportunity that we think is the right one. I think what you see us do, what's more likely that you'd see us do, kind of near-term, Paul, is edging out as opposed, you know, from the existing boundaries a little bit as opposed to actually doing new launches in what I'll call the near-term.

Great. Thank you.

Our next question comes from Wayne Cooperman with Cobalt Capital.

I had kind of asked the same question I asked before as a little bit of a follow-up. You guys just five minutes ago acknowledged that your cost of equity given your stock price was way too high and your cost of debt isn't so bad. Why, I mean, why wouldn't you want to start buying back your own stock when it is at such a high cost and clearly at a very low multiple of the free cash flow that you're generating?

Well, you know, we think that our weighted average cost of capital is going to go down as we delever, and we also are continuing to do what we said we would with respect to, you know, debt retirement.

So your highest cost of capital is your equity, and if you buy it back, at say your weighted average cost might go down a lot faster. Other than that you've been generating a lot of free cash flow but you're taking the free cash flow and paying down your bank debt at an extremely low interest rate yielding you a very low return on your free cash flow, which we feel could all be better off doing something else with the cash.

We are currently also building financial flexibility to be able to do that, and, you know, we're, like I say, we sound like a broken record, but we're doing what we said we would do.

No, I understand. Just figure we could all make a lot more money if we were taking advantage of our low stock price now, being a little more aggressive and then wait until the market figures out what's going on here. Just, I guess, an observation and a comment.

Okay. Thank you.

Thank you. Our next question comes from Carl Choi with Merrill Lynch.

Good morning. A few questions. Number one, I wonder if you could talk a little bit about the spread of the headquarter relocation cost of $8 million between the first quarter and second quarter? And second, regarding bad debt expense do you see some more room for improvement in '04 or do you think you pretty much reached where you should be? And third, going back to earlier comments about edging out existing boundaries of territories, just wondering how that's going and have advertisers been receptive? Thanks.

With respect to the headquarters costs, Carl, probably about 3 in Q1 and 5 in Q2, something like that.

Okay.

With respect to the bad debt expense, I think we're really pretty much in the sweet spot right now. We've talked about it being kind of around 5%, or just under 5%. That's where we think is a good place to be.

If we tighten our credit policies we could, perhaps, get it lower than that but we don't think that's in the best interest of the business. We think we can improve top line by going after a lot more new business.

Carl, it's Dave. On your third question on the edge out, what I said before is we're currently not doing any of those edge outs. There's things on the drawing board but our primary focus right now is in rolling out these online city guides. One of the things we learned a long time ago is you don't want to give your sales force a whole lot of things all at once to have to deal with and we think this is the right thing to focus on right now. Got it. Thanks.

Thank you. Andrew Van Houghton with Deutsche Bank is next.

Thank you. I wanted to focus a little bit on DonTech. I know that obviously the primary reason for the numbers there is the lack of job creation and the slow economic recovery but how do you think about the dynamic of extra competition in that market and how has that affected sales?

Hi, Andy, it's Dave. The fact of the matter is, is this is an industry that is migrated to a duopoly kind of environment everywhere and I don't think it's different in Illinois than it is in the other regions of the country that we do business. We're really, quite honestly we're really frustrated with this nagging job growth problem in Illinois that remains some still 3.5% below what it was in 2000 while the rest of the nation is now, actually has job growth that's a percent or so over what it was then, and it's just, we just keep hearing this same problem there that, you know, my income is down, or my cash flow is down from these small businesses, and that's just what's going on.

Great. Thank you.

Yep.

Thank you. Our next question comes from Kevin Grunig with Bear Stearns.

This is Michael Mounts here. I have a couple questions for you. Can you please discuss the trend in national advertising, what was that up for you at your directories in '03, and of the 2 to 3% pub sales growth what are you factoring in split between local and national? And a second question for you, regarding the adjustment to your shares out, are you just expecting less people to exit, or can you just elaborate a bit more on why you're reducing that expectation?

Yeah, Michael, it's Steve. With respect to the share counts, I think we were just a little bit too cautious when we did our calculations last fall, and we sharpened our pencils after several of you actually kind of asked us how we were getting to our numbers. So it's really, you know, in 2003, we had some pretty significant share exercises, or option exercises, based on some of the departing senior management, the old senior management, and so I think the number that we've put out there now is a more reliable number.

As far as the difference between local and national sales, I mean, I'm not sure we really want to be providing a whole lot of specificity there, you know, I don't know, Peter.

We have about, it's about 85/15 split. It varies market to market. And we've had positive results on a national basis, and we continue to see this as a, you know, as a good operation, and with good opportunity.

Do you expect national to outgrow local this year?

I think it's in the same range.

Okay. And last question for you. What was your G&A expense in the quarter and what do you think a good run rate is for '04?

Well, you know what, the G&A expense, we didn't break that out did we? Yeah, we didn't break that out, but you know what, Michael, the G&A expense in the fourth quarter included some items which we don't expect to be repeated. And other items that are repeated. Some of the numbers that I've talked about, but I can tell you that the increased cost of corporate governance is showing up there.

Last question for me. In the press release you mentioned timing of expenses at DonTech. Is that something new? It seems like that's been going on for a while.

No, no, the timing issues at DonTech in previous quarters more had to do with the sales campaigns, not the expenses. In this quarter, there were some issues associated with expenses that had in previous years were paid in January that we paid in December this year.

What was the magnitude of that?

Michael, it's Bill. It's under $1 million. It's timing, because if you look at the full year, DonTech is pretty much flat year-over year so it's just a fourth quarter blip on timing.

Okay. Thank you.

Thank you. Our next question comes from Todd Morgan with CIBC.

Good morning. Thank you. You guys are generating a lot of cash flow but I did want to kind of focus back on the DonTech situation. You made a couple comments about that but I guess if I look at other Chicago area media properties, I look Tribune or even some of the radio market data they talk about modest growth last year, you know, that definitely positive in contrast to the negative results at DonTech. I'm just wondering if you could talk a little bit more about that. Are there specific categories that are challenging? Are there sections of the region that are challenging? Is the revenue per customer, the customer counts really evolving in any way? And can you talk a little bit more is the strategy simply to kind of wait out the upturn in the economy or are you trying to more aggressively trying to rejuvenate the story there?

As Dave mentioned we're definitely not just waiting out the economy. There's things that we're doing but we're just not able to, just not powerful enough to overcome the effect of the economy.

As far as other companies, you know, it's interesting, because we actually do take a look at what other companies in Illinois are doing, and I'll actually quote from a, this is a Carl Choi report, in fact, Lauren Fine and Carl Choi report on Tribune, January 28th, which says, "within help wanted, for Tribune, within help wanted, New York and L.A. were up 4% and 2% respectively while Chicago fell 7%. And with respect to circulation revenues, daily volumes were flat in L.A., down 4% in Chicago, and flat in New York."

So I don't think that we would concur with your assessment that Tribune is actually reporting favorable results in Chicago. They may be reporting favorable results elsewhere, but that Midwest economy is just, is really not, it's not, you know, hitting on all cylinders yet.

Okay. I think I saw them talking about lineage increases over last year. Would that suggest though that there's perhaps some pricing flexibility that they're trying to use to drive the volume and you guys are not at least not trying to?

I don't know really what Tribune's doing. Although remember, newspaper advertising has kind of attracts a lot of advertiser categories that we don't focus on, like retail and auto dealer kind of incentive type advertising. So it may be that it's in some of those areas. I don't know.

All right. Well, thanks a lot. I appreciate it.

Thank you. Our next question comes from Jason Miller with Miller Asset Management.

Have you given any thought to selling DonTech?

You know, that's really not something that we spend a lot of time thinking about, because remember, our heritage is in Illinois, we think that it's a good business, and we just, you know, we need to just do a better job there.

It just seemed that every quarter there's, you know, a problem in Illinois, and to one of the earlier questioners comments about perhaps using capital to reduce the highest cost part of your capital structure, maybe it's something to think about. I don't know. At what point you get tired of waiting for the turn to come.

Jason, it's Dave. I can assure you, it's like we're already past the point where we get tired of the turn to come. I want to be clear that we view DonTech, it's a critical part of our business. We don't believe that selling it our best interest or strategy, and we absolutely believe that it is going to get better. It's just we just need the economy to turn around. And it will.

Okay. Thank you.

Thank you. Our next question comes from Ellen Gibbs with CRI Partners.

My questions have been answered.

Nice to hear your voice, Ellen.

Thank you. Our next question comes from Eric Strominger with Cobalt Capital.

Just wanted to ask Peter a little bit about the Internet related businesses, and maybe you can focus in on Las Vegas which is your first market, and talk a little bit about the growth rates you're seeing in traffic on the Web site, you know maybe break it down monthly or weekly basis. And also growth rates on the actual click-through for the advertisers.

In addition, can you talk about some of the success that you've had in terms of implementing some of the other online strategies? You've talked about direct e-mail marketing as a potential offer to your customers, search optimization. Again, if you can give any specifics at all in terms of what kind of revenue per customer you're generate when you do make those sales it would be helpful.

Okay, Eric. First, the Internet experience that we've had in Las Vegas, I think we're very pleased with. Our take rate is across all the advertisers is about 45%, which in our industry that's just amazing. And with the larger advertisers it's actually higher than that. So we think we're provide ago pretty good product there.

I'm not going to get into, you know, the click-throughs and all that. The product just really launched in January. That we're really starting to see the growth, but I think the results we're seeing are very, very favorable, and I think by giving additional exposure for our advertisers, or additional distribution makes a lot of sense with the customers with the sales force, and with our business plans.

As far as e-mail, we're always looking for ways to try and generate more value for our advertisers, and ways to connect advertisers and users, and we've had some experience with this, and we're still trying different business processes to see if we could find the one that makes the most sense in the marketplace. I can't say that we've solved that problem yet.

Relative to search, we really don't have a lot to talk about that's meaningful at this time. But I think that we all agree that, you know, we need to stay focused on that and I can assure you that we are, but I think that we're going at it with a very disciplined business approach to how we do anything relative to the Internet online.

Peter, just a follow-up. When do you think you'll have enough experience with at least some of the early markets, like Las Vegas, to be able to come back to us and say, you know, here's what we see in terms of growth rates and click-throughs? We're very interested in this as a potential growth driver for the company going forward, and it would be nice to have something tangible to look at.

I think that, you know, each quarter we're going to be on the call here, and I'm sure that this will come up every single quarter, and I think to comment after literally a few weeks would be inappropriate but each quarter I'm sure that we will give a better definition or a feel for how it's going. Our initial reaction is very positive.

Eric this is Dave. One kind of bit of perspective that I think might help you with this. We've tried to really say, this is not a silver bullet and we're not trying to guide people to look at this as a huge growth situation.

And as an example of relativity here, take an auto parts store in Las Vegas that has a quarter-page ad. We're getting that auto parts store probably 1,000 calls a month on average. And we know that through these metered ad tests and things that we do.

If you take a look at all of the Internet sites combined in Las Vegas and if you bought on every single one of them you'd be generating about 40 calls a month. So it's still, you know, while there's a lot of big headlines and a lot of things going on, it's like the actual amount of commerce that's happening through this, it is small and to try to lead people down the path that this is going to really take this, what's already a very big business, and really change the growth curve, I think is leading you down the wrong path.

Okay. Thanks very much.

Thank you. At this time I'd like to turn the call back over to our speakers.

Once again, thank you everyone. We appreciate your interest. Should you have any additional questions please feel free to contact Jenny Apker. Thank you, and have a great day.

Thank you for joining today's teleconference, and you may disconnect at this time.