Thryv Holdings Inc (THRY) 2004 Q1 法說會逐字稿

Good morning, Ladies and Gentlemen. Welcome to R.H. Donnelley's first quarter 2004 results investor teleconference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. To ask a question at that time you may press star 1. Copies of R.H. Donnelley's SEC filings may be obtained by contacting the company, it's 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 would now like to turn the call over to Miss Jenny Apker. Miss Apker, you may begin.

Thank you and good morning. 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, Tom D'Orazio, Vice President and Controller, and Jim Gruskin, AVP Finance who recently joined RHD. Jim will be assuming responsibility for our investor relations activity. 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 March 31, 2004, and our form 8K furnished to the SEC yesterday, April 27th, which both discuss our first quarter 2004 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'll 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 most comparable GAAP measures in the press release and related 8K and an 8K discussing non-GAAP measures filed on May 2, 2003. Each if which is available on our website under investor information SEC filings. Now I'd like to turn the call over to Dave Swanson.

Thank you, Jenny. Good morning, everyone and welcome to RH Donnelley's first quarter investor call. I'm going to take the next few minutes to provide you with a brief review of our first quarter financial and operational highlights. Then Steve Blondy will take us through our Company's first quarter financial results in detail. We will be happy to answer your questions, following our prepared remarks. On our February conference call, I told you about the accomplishments of the management and employees during 2003 and integrating the Sprint Publishing and advertising business and creating a platform for growth and performance excellence that would benefit our stakeholders in 2004 and beyond.

I'm pleased to report today, that in the first quarter we saw tangible benefits of the successful systems conversion and business process changes implemented in 2003. These benefits are reflected in both our top-line revenue performance and improved operating efficiencies. I'm particularly encouraged by the improved performance in advertiser renewal rates and the number of new business accounts that were sold in directories published in the quarter. The higher renewals are directly related to the improvements put into the credit and collections processes last year. It reflect a discipline of accepting advertising from solid businesses that are likely to pay and continue to be good customers well into the future. This discipline also has had a very positive impact on bad debt expense, which has continued to trend very positively.

We believe our credit, billing and collection group are the most effective and efficient in our industry and this really helps us convert our top-line sales into cash flow. . The increase in the number of new business sales reflects changes that were made to the compensation plans of our sales force as we began selling into our 2004 publications, providing more incentive to do the canvassing required to impact this important part of our sales mix. While I'm pleased with the first quartet results, we still have much work to do over the next three quarters. As I said, renewal rates and new business are very solid, but the increases we are getting from our existing advertisers remains below our expectations and below pre economic downturn norms.

It's an indicator to us that the confidence levels of the small and medium-sized business, relating to the economic recovery, remain a bit guarded. In short, we're executing on our business plan and we're performing better but we're still not as good as we think we can be. Now let me turn to some of the numbers. In the first quarter, we generated EBITDA of $101.1 million and income before preferred dividends of 28.1 million or 68 cents per diluted share. In addition we delivered $85 million of free cash flow which enabled us to pay down $88 million of debt in the quarter. We've continually said that reducing leverage would be a priority for us and it has been. Since the acquisition, we've repaid over $330 million in debt, reducing our leverage a full turn to 4.8 times EBITDA from 5.8 times.

Publication sales for the first quarter Sprint branded directories were $151.3 million up 2.6% from last year. Overall, we're pleased with these pub cycle results. Substantially all of our markets performed better, driven by the implementation of the RHD business process throughout the organization as well as an improving economy in certain regions of the country. In some markets, like Las Vegas, we're definitely seeing the affect of a stronger economy. In others, it's less apparent, but we're hopeful that the recovery continues to make it's way into all of our markets and into the cash flows of the small and medium-sized businesses that buy our advertising solutions.

Now, let me provide you some operational highlights for DonTech. Our perpetual partnership with SBC Communications, which sells yellow pages advertising in Illinois and northwest Indiana. DonTech Pub sales were down 5.1% reflecting the economic issues, including the lack of job growth in Illinois and particularly in the Chicagoland MSA during the third and fourth quarters of last year,that I discussed with you just a couple of months ago on the year-end conference call. Remember that Q1 2004 pub sales represents advertising being sold in Q3 and Q4 2003. Calendar sales for the quarter, which represent the value of actual contract signed in the period, were up 1.3% from the previous year.

That growth was driven more by the timing of servicing of accounts, than an improvement in the business climate. And while we haven't seen improvement in DonTech results as of yet, we are getting reports from the field that the attitude of the business person in Illinois is improving. If that continues, we may begin to see a modest rise in performance later in the year, enabling us to deliver results in line with our original DonTech guidance. We remain cautious, however, because history tells us that there is a very strong correlation between employment levels and our ability to grow sales, and that region remains troubled in that regard. Now let me spend a moment updating you on our online product initiatives.

I told you in December that one of our goals for 2004 was to establish online city guides and digital, searchable versions of our yellow pages products in 50 of our markets by year end, reflecting our commitment to provide users with innovative new ways to find who sells the products and services they want to buy, and also reflecting our desire to give our advertisers a great return on their investment. As of the end of Q1, I'm proud to report that we had sites up and running in 15 of our most important markets and we remain on tract to achieve our very aggressive full-year goal. Advertiser support has been strong, with the vast majority of our display advertisers electing to be represented in the online products. The real significance of this is that users searching online are having a great experience when they use our products because they're finding what they're looking for, relevant, complete, accurate, and content-rich information and we believe that's what wins in the end.

To sum up, in the first quarter we continued to execute on the plan we outlined last year and we look forward to continuing to deliver results for our shareholders for the rest of 2004 and beyond. Now, let me turn the call over to Steve.

Thanks, Dave. As Dave reports, execution is our theme, again, in Q1. We're reporting solid pub sales and EBITDA growth, we continue ahead of pace on debt retirement from robust free cash flow and we're benefiting from substantial synergies and process improvements. More specifically, Q1 '04 pub sales grew 2.6% while Q1 '04 EBITDA grew 2.5%. Free cash flow of $85.1 million, equal to $2.05 per share, allowed us to repay $88.6 million of debt in the quarter. Q1 operating expenses before D&A were down 2.8%, reflecting synergies and efficiencies, notwithstanding $2.7 million of residual cost uplift from purchase accounting and a 15% increase in benefits cost per head.

Now, to the details. Q1 '04 pub sales of $151.3 million were up 2.6% from $147.5 million last year. Last year's Q1 pub sales growth was 1.4%. Nevertheless, net revenue in Q1 '04 of $143.8 million was essentially unchanged from 143.5 million adjusted net revenue in Q1 last year. This reflects both our deferral and amortization revenue recognition as well as the lack of pre-press revenue from a third-party customer who's contract ended in Q1 last year. Adjusted operating expenses before D&A in the quarter were $66.6 million, down 2.8% from 68.5 million of adjusted expenses in Q1 last year. This improvement reflects both process improvements in print, paper, distribution, and billing and collection operations, as well as publishing and IT synergies from the SPA acquisition.

In addition, Q1 '04 expenses include a $3.0 million favorable adjustment to bad debt expense partially offset by $2.6 million of headquarters relocation costs. Our original guidance assumed all $8 million of relo cost would be incurred in Q1. We now expect the balance of these costs will occur in Q2. First quarter DonTech calendar sales and partnership income were both up 1.3% from last year. Calendar sales, which represent the value of actual sales contracts signed in Q1 '04 were $86.4 million while partnership income derived from those sales was $23.9 million. As Dave mentioned, this modest growth was driven more by timing and reflects an increase in the amount of advertising service in the quarter, rather than any underlying improvement in DonTech performance.

As a result of the foregoing, Q1 '04 EBITDA of $101.1 million compares to adjusted EBITDA of $98.6 million in Q1 last year. Total residual purchase accounting effects reduced EBITDA by 3.4 million in Q1, including the cost uplift mentioned earlier, plus $700,000 of for-gone revenues relating to pre-acquisition directories. Most of the remaining million dollars of purchasing accounting impact will affect our Q2 numbers. Interest expense in Q1 '04 was $40.3 down $6 million or 13% from 2003 adjusted interest expense due both to lower average interest rates and lower debt balances. Included in our '04 interest expense is $1.2 million related to redeeming our legacy $21.2 million of senior subordinated notes in February.

Income tax provisions for Q1 '04 was $18.3 million versus $14 million last year, reflecting this year's higher pre-tax income and our effective rate of 39.5%. As a result of these items income before preferred dividends for Q1 '04 was $28.1 million up 26% from an adjusted $22.3 million last year. Adjusted earnings per diluted share for Q1 '04 were 68 cents up 19% from 57 cents last year. Q1 free cash flow of $85.1 million includes $11.9 million of federal income tax refund related to 2002. However, stronger pub sales performance, incentive payments, and relocation costs all consumed working capital in the quarter. Net cash used in financing activities was $83.5 million including $88.6 million of debt retirement and $2.6 million of stock option proceeds.

At March 31, 2004, net debt was just under $2.0 billion or about 4.8 times estimated 2004 EBITDA. To conclude, we're updating 2004 guidance. As a result of the income tax refund, we are increasing guidance for operating cash flow to $272 million from $260 million, and for free cash flow to $257 million, or $6.09 per share from $245 million or $5.80 per share. All other guidance provided in our 2003 year-end earnings release, issued February 26th, remains unchanged. This concludes our prepared remarks. Thank you for your attention. Now, let's turn the call back to the operator for your questions.

Thank you. At this time we'll begin the form question-and-answer session. To ask a question, please press 1. You will be announced prior to asking your questions. To withdraw your question, please press 2. Once again, to ask a question, please press 1. One moment, please. Our first question comes from Carl Choi of Merrill Lynch. You may ask your question.

Hi, good morning. A couple of questions here. One, I wonder if you could quantify the increase in renewal rates and the increase in business formations as well. Two, if you can give a little bit more color regarding the geographic differences you mentioned at Las Vegas was strong in the quarter, some other areas a little bit less strong, so just wondered if you could talk about specific areas. Thanks.

Hey, Carl. On the renewal of new business we don't provide that specific a guidance. It's up, it's healthy, it's at what we would deem to be on a pre-economic downturn levels but we doesn't like to be more specific then that. What was the second part of the question, Carl?

Regarding the geographic performances.

We mentioned Las Vegas, I guess what you're asking is whether geographies?

Yeah. You mentioned some areas were less strong, compared to Vegas. Just wondering if any particular spots of weakness or they're pretty uniform, other than Vegas. Thanks.

Carl, this is Peter. I think the way to look at this is Vegas, I think we're pleased with how we're seeing the economy out there. And actually across many of our markets we've seen improvement. If there's an area, it's probably the upper Midwest part of the country that's a little bit softer. But we had some good results from Texas and New Jersey and Florida as well.

Great, thank you.

Paul Janokio of Deutsche Bank, you may ask the questions.

Hi, there. Just a couple of questions. One, it looks like based on your guidance, you're not moving it, you're not looking for any kind of acceleration of publication sales for the Sprint-branded directories going forward, could you comment on that? And talk about maybe the investment in sales force in DonTech looks like going forward, maybe where costs go (inaudible) DonTech, the remainder of the year? And finally, talk about interest rates. I wish you would look at your floating rate debt, how we should sort of monitor that going forward? Thanks.

Okay. Paul, it's Steve. I'd remind you that last year we recorded 1.4% pub sales growth in the first quarter and we finished the year at 1.2. So, our guidance for the year is 2 to 3% and this year we reported 2.6% in the first quarter and we're still thinking that 2 to 3% is a good range.

But, I guess a year ago we had decelerating local ad revenues and here it looks like, from what we're seeing for newspapers and radio, that we got accelerating local revenues.

Well, that may be true. I think the one thing you might also keep in mind is that relative to a lot of other media, directories tend to lag on the economic cycle, so that may be part of the other equation that you might want to focus on.

Paul, Steve. One other thing that I might add there is the reason why is it doesn't flow through exactly even, either. If you recall, second quarter last year was a bit more of a problem quarter for us, a lot of the military markets, and, well, again, we think we're seeing things better across the board. We still have issues with those military markets, et cetera. So it won't be exactly an even flow-through all year long.

Okay. Great.

Could you repeat the second? We're having a little bit of static on your line, Paul. If you could repeat the second question, had to do with DonTech?

Looks like costs are up (inaudible) investment in the (inaudible) sales force there?

We can't hear you, Paul. Something about investment and DonTech?

Can you hear me now?

Okay.

Sales force investment in DonTech.

Sales force investment. There's really nothing different there, Paul. A few quarters ago we began an uptick in the sales staffing there to try to enhance the new business sales, with some limited success. But we're pretty much at a steady-state environment there right now.

Great. Finally, on interest rates?

On interest rates, we've got 66%, I guess, as of the end of the first quarter, 66% fixed, 33, 34% floating. As we mentioned on the last call, back in December, we amended our credit agreement to reduce the spreads over LIBOR, and our interest expense in the first quarter, as I mentioned, included the redemption of the old 9.125 notes so that should benefit us going forward because we won't be paying that on the $21 million. I'm not sure does that kind of help you answer the question?

It does. What are you currently choosing as a spread over LIBOR? Is it three months or 1 year, and how often can you change that?

Pretty much in three months.

Our softer version is three months LIBOR.

Yeah. Three months and the spreads at 2.25 now.

Great. Thank you.

Thank you Paul.

Arnie Ursaner of CJS Security, you may ask your question.

Steve, a question for you first. On the $3 million favorable adjustment to bad debt expense, should we assume there are no expenses that you offset against that? Does that come directly to your bottom line?

Well, those amounts are related to directories which have already completed their billing cycle. And what I can tell you is $2.4 million of that was related to directories which had completed billing for which we believe the amount of allowance that we had in the reserve was too high and then $600,000 of it related to recoveries on directories which had previously been written off. As far as the offset to that, what we've said is that at least when you're totaling the expenses, we had relocation costs in the first quarter but I'm not sure that really answers your question.

The relocation expenses were totally expected, you had fully disclosed those several times over the last few quarters. The adjustment to bad debt is somewhat new information?

I see where you're going. Look, we think that the budget and the guidance that we got for bad debt this year are still pretty good indications of where we're going to end up for the year. One of the things that we've talked about before is that when we increase the number of new advertisers in our portfolio, that new advertisers either, it's generally a new business that has been formed, will experience bad debt at a higher rate than recurring customers. We just think it's too soon to declare victory on that front.

Two questions for Peter, if I could. Peter, you mentioned you have 15 sights, hope to have 50 online sites by the end of the year. In the last call you had talked a little bit about revenues and I think your view was you would give us additional information as these developed. Can you share some additional thoughts there on revenues?

I think the guidance that we've from last November on is 4 to $6 million range and it still is in that range. Again, I think that this is part of our strategy and thinking about delivering value to our customers and I think that as we, we're just launching these things, we're seeing that we're giving additional value to our customers and the revenue is being realized, not only from electronic sales, if you want to call it that, but also I think that's improving the customer renewal rates as well.

My final question, for you, Peter, is we've all focused on the expense side in the R.H. Donnelley story. But I think your part of it has been revenue growth once you integrated in the SPA sales force in places like Florida. Can you give us a feel for how the cross selling and market expansion sales efforts are going?

Arnie, I guess the best way to look at it is the RHD business process that we put in place, really, last year, is driving things the way they were looking for them to go. I think that the process involves a lot of marketing efforts, just a lot of incentives and compensation and it's driving the type of results that I think we're looking for and I think we're going to remain in the 2 to 3 range for this year. Thank you.

Mark Bacurin of Robert W. Baird, you may ask your question.

Good morning. Steve, probably a question for you. I'm trying to get a sense of the right operating expense level run rate is. I know we had, obviously, the relo cost of 2.6 and then the bad debt adjustment of 3, but if we assume those two offset and take 66.6 million, am I hearing correctly that we'll get an incremental 5 or so in Q2 for the rest of the relo expense?

That's true. About 5, maybe 5.5.

And then going back to Q3 we should see it, assuming there's no more synergies to be recognized, back closer to that 66 to 67 million range in Q3 and Q4?

As far as operating expenses for Q3 and Q4. You're in the ballpark.

Okay, just making sure, I want to follow those two correctly. Then, as we look at your payables have spiked up over the last couple of quarters and I understand that interest is only paid semi-annually but are there any other adjustments? It looks like from Q3 up to Q1 now the payables have ramped up, they're almost doubled. Are there any other items in there that are going on?

Well, certainly, the payables and accrued expenses include the bond interest that is to be paid in Q2. I'm not sure I got the same conclusion.

You would have seen the same. I guess I'm asking, I think you were at total payables of kind of something around $20 million as of Q3. And it went to 33 in Q4 and then up to roughly $60 million in March. I know know some of that, again, is interest expense, I'm just wondering if there's any other payable items that have ramped up?

I think it's really primarily interest expense. I tell you what, Mark. Let me do some research on that and get back to you.

Great. Just finally, heard in the marketplace that maybe Bell South is looking at launching some competitive direct series in Florida, particularly, I know, Tampa, which is not one of your markets, but have you seen them doing more competitive upstarts, particularly in Florida market or anywhere else?

We really haven't seen much out of Bell South with that kind of activity, no.

That's good news. Also, just wondering, strategically, as the Yahoos and the Googles of the world obviously want more local ad content, are you guys seeing desire out of them to maybe have you guys serve as a sales agent through your directories to provide revenue to them or are there any opportunities to partner or some sort of strategic relationship you could form with the guys?

I'm not sure I understand the question.

I'm sorry, Mark, can you say it one more time.

Yahoo and Google obviously very interested in getting more to local merchant advertising on their web pages and I've heard that Bell South might be even starting to sell some ads on Yahoo and Google as a sales agent on behalf of those guys and pulling some of their merchants through to those websites. I'm just wondering how that strategy plays out relative to your launching of your own online directories and whether or not you would potentially serve as a sales agent?

That's an avenue that we continue to explore and we do talk to both of those groups. To date, we haven't found a model that (inaudible) we thought that attractive for us, but that's something that we constantly have an open mind about.

Great. Thanks a lot. Kevin Gruneich of Bear Stearns, you may ask your question.

Hi, this is Michael Meltz Kevin is on, also. I have three quick questions for you, Steve. I don't think I quite understood your comment on bad debt. Are you saying you may expect that positive trend to subside going forward? That's my first question. Secondly, excluding the headquarters cost, what was G&A expense in the quarter? And third, it's a two-parter, what was your average interest rate in Q1 and what was it at quarter-end? And Kevin may have a followup.

On the bad debt trend, I don't think that we see, necessarily, a change in the trend, but I think what we're saying is that we're not prepared to change our expectations for bad debt for the year, notwithstanding these trueups in the first quarter. I think it's really kind of too soon to be doing that. As far as the expense breakout between G&A and other operating expenses, we don't, generally, provide that until we file a 10Q, which is, I think, the filing deadline is the 10th of May. As far as the average rate goes for Q1, the average rate for Q1 was 6.8%, that's all in. I'm not sure that there's necessarily a distinction between the average rate for Q1 and the rate at the end of Q1. Maybe the rate at the end of Q1 would be down slightly from that because the Q1 interest included one month of interest on that senior subordinated notes. But it's not going to be that significant because it's only $21 million.

Hey, Steve, if I could followup? I just want to make sure I'm clear on what you said regarding timing at DonTech. Was there any time shifting in sales that came from, maybe, different schedule or publication delivery, and, if so, can you provide a revenue number on a normalized basis?

There was no change in the pub cycle at DonTech. But, look last year, again, at DonTech last year, Q1 was a positive 4%, 4.3% calendar sales. And then it was minus 4.1% in the second quarter. We finished the year at minus 2. So again, I want to kind of temper your enthusiasm about what that necessarily portends for DonTech.

Okay, thanks.

Thank you Kevin. Michael.

Fred Searby of J.P. Morgan, you may ask your question.

Hi, it's Jason (inaudible) for Fred. Have you guys seen any change in the competitive environment regarding RBOCs and also do you anticipate further benefit cost increases in year.

As far as change in the competitive environment, do you mean, Jason, RBOCs entering competitive markets?

Yes. Have you seen?

There really hasn't been. Horizon has been doing their thing, other than that, not much. There's a couple of markets around the country where there's been a little activity. Lincoln, Nebraska, I think there's 4 RBOCs competing in Lincoln, Nebraska right now and there's's a couple of other spot markets like that. We haven't seen a ground swell that way.

Okay.

On the benefits costs, that's a annualized amount. We don't expect any change throughout the year that's an annual amount and that's just the first quarter element of that.

Okay, great. Thank you.

Thanks Jason.

Andy Van Houghton of Deutsche Bank, you may ask your question.

Thank you. I just have a couple of housekeeping questions. In terms of accounting for the tax refund, that's not included in your bank definition of EBITDA is it?

It wouldn't be, no. That's a tax bill. EBITDA is before tax.

Right, right, just double checking. I was wondering if you could just go over the outstanding amounts on the debt portion of your capital structure starting with revolver and term loans and then working down just as a housekeeping item

Well, the revolver outstanding is zero.

Right.

The total bank debt was 1078, which included 158 million Term Loan A and and 920 million Term Loan B. And then the senior unsecured notes is 3.25, the senior sub notes is 600.

Great, thank you very much.

Bill Meyers of Lehman Brothers, you may ask your question.

Thank, just a quick question. On previous calls you mentioned that you were seeing some increased competition from the traditional broadcasters from radio and TV companies as they were scrambling for dollars in a pretty tough environment. As their business has gone, you're markedly better over the last couple of months? Are you seeing any change in their approach, are they kind of staying away from some of your customers, sort of any change in the competitive landscape as it relates to the broadcasters as opposed to the RBOCS or the (inaudible)? Actually what I'm getting at.

Most of that has been in the Chicago MSA where we've been seeing that since the economy got rough there. It's still pretty intense there, as we see their numbers get better we would like to think that that's going to lighten up a little bit, but that particular part of competition has pretty much been confined to Chicago.

Thank you.

David Voit(ph) of Brahman Capital, you may ask your question.

It's actually Mitch. I had a question for Peter. Firstly, congratulations on accelerating the Sprint growth so sharply from Q4 to Q1. And wanted to know, from a longer-term perspective, where you thought we were in the Sprint revenue growth story, 2-3%, full year, this year, what do you think is a reasonable target, longer term? And what remains to be done to achieve that in the big picture?

Mitch, thanks. I think we do see the two to three this year. All of our plans are going pretty much exactly the way we had hoped they would go. And I think that if we get this business going the way we'd like to be, as we said in the past, we see this as a 3-5% growth business.

And is there anything that has to happen, logistically in a material way that hasn't happened yet, or from here out it's really just execution and the same stuff you've done in the past?

It's really implementing the business process and execution and changing some cultural and some habits of way people may have done things for the past 20 years in different places. But, execution is the key.

Great. Thanks a lot. And, again, great job job on the results.

Thanks, Mitch.

(inaudible) Shake of Guggenheim Partners, you may ask your question.

Thank you it's been answered already.

Operator, I think the question had already been answered.

Mark Bacurin of Robert W. Baird you may ask your question.

Actually just one more followup, Steve, on the D&A had declined 2.5 million bucks or so sequentially, is the new 14 million and some change level, is that the right rate going forward and could you comment on what the sequential decline was.

That is the right rate going forward, Mark. Last year we accelerated the depreciation on old software that Sprint had implemented in their pre-press facilities, which we closed down last year so that's no longer on the books.

Great. That's it, thanks.

Once again, to ask a question, please press star 1. There are no further questions at this time.

Well, I would like to thank all of you for your attention and interest in RH Donnelley and we look forward to updating you on our continued progress as we get to our next quarter call. Thank you very much. #