Thryv Holdings Inc (THRY) 2004 Q3 法說會逐字稿

Good morning ladies and gentleman welcome to R.H. Donnelley's Third 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 and instructions will be given 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 would now like to turn the call over to Jim Gruskin. Mr. Gruskin you may begin.

Thank you and good morning everyone. I am Jim Gruskin [inaudible] of Finance at R.H. Donnelley. On the call today are Dave Swanson, Chairman and CEO of R.H. Donnelley, Steven Blondy, SVP and CFO, and Peter McDonald, President and COO. Certain statements today may be forward-looking within the meaning of the Private Securities Litigations Reform Act.

We call your attention to our press release for the quarter ended September 30, 2004, and our form 8-K furnished to the SEC yesterday, October 27th, which both discuss our third quarter 2004 results. We also encourage you to review the company's other periodic filings with the SEC, which set forth important factors that can cause actual results to differ materially from those contained in or suggested by any forward-looking statement.

During this call today we will refer to certain 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 8-K furnished on October 27th.

The separate 8-K filed yesterday explanation of the Non-GAAP measures mentioned in connection with the recent SBC transaction. The press release is available on our website and can be accessed by going to www.rhd.com, under investor information. Now I would like to turn the call over to Dave Swanson.

Thank you Jim. Good morning everyone and welcome to R.H. Donnelley's Third Quarter Investor call. I'm going to take the next few minutes to provide you with a brief review of our third quarter performance and highlights. Afterwards Steve Blondy will take us through the company's third quarter financial results in detail and will highlight the financial impact of the SBC transaction that closed on September 1st. We'll then be happy to answer your questions.

The third quarter was an exciting time for us here at R.H. Donnelley and one in which we continued our trend of transformation and growth. With the closing of the acquisition of SBC's directory business in Illinois and Northwest Indiana at the beginning of September, we completed our strategic transformation to an owner-operated publisher of print and online yellow and white page directories. With full control over a business with 389 directory titles and distribution of approximately 28 million copies serving approximately 260,000 local and national advertisers.

While we've been busy with the SBC transaction and integration over the last several months, I'm very pleased to report that our team has also kept focus on the day to day business of delivering solid results and executing our game plan as expected.

Our third quarter numbers reflect the continued benefits of our Sprint integration, including the systems conversion and implementation of our RHD business process. Particularly in our larger markets, which have received the most attention. We grew the Sprint branded products that published in the third quarter by 3.2%, representing our best quarter yet for year over year sales growth and our seventh consecutive quarter of improved year over year sales growth since acquiring that business in January 2003.

The quarter's strongest contributor was Las Vegas where strong economic conditions are driving above average growth. Across the board in our Sprint markets we're seeing strong advertiser renewal rates continue. Advertisers see the superior return on investment that our products offer, and this translates in the strong revenue performance for RHD. Meanwhile, the improved credit and collections processes that were put in place last year continue to help us reduce bad debt expense, which continues to enable more sales to convert into cash flow.

Relating to our online initiatives in our Sprint markets, as we said going into 2004 we set a goal establishing online city guides and digital searchable versions of our yellow page and white page products in 50 of our largest Sprint markets by the end of the year. As of the end of the quarter we have sites up and running in 45 of these markets, and traffic for these sites continues to grow.

We have also continued to add new and exciting functionality to the sites when new ones are released. A great example is the improvement in leveraging the rich, robust content that's imbedded in our print ads. To facilitate effective keyword searching, we are now electronically extracting the details in every advertisement that appears in those print directories and loading them into a structured database. Users of the site can effectively and efficiently use a single search box to type in whatever they're thinking.

As a result of the sophisticated taxonomy imbedded in the software and the sites ability to search all of this rich and robust data associated with the yellow and white pages, we are providing users with an intuitive search tool and results that we believe are unmatched in our local markets.

So to sum up our Sprint markets, I'm very pleased with our progress, but I also believe that we can do even better. Our sales trends are encouraging but we still see room for improvement both in our new business sales and in increases from our existing advertisers.

Meanwhile the integration of the newly acquired SBC directory is on track. Yesterday we announced that Peter McDonald has been promoted to President and COO of the company. This change allows us to efficiently align all of our operating resources under Peter's direction and greatly facilitates the integration process and the implementation of our RHD business process into Illinois, as well as continuing in our other 18 states.

We're focused on numerous opportunities and initiatives to improve performance in Illinois and Northwest Indiana, which showed a slight decline in publication sales for the quarter, reflecting the continued softness in the Chicago area economy. At the beginning of October we launched the first phase of a significant advertising campaign in the Chicagoland area to raise awareness among advertisers and consumers of the value of our products.

We also launched our new ChicagolandYP.com local search site, which allows Chicago area residents to quickly find all the information in our Chicago directories online. We've already loaded onto this new site all of the listing content from our 78 directories that comprise the Chicago [MSA]. Additionally, more than 40 of those Chicagoland directories are currently live in our popular look and feel format, and by the end of the year we will have all of these books available in both our listing and look and feel formats. Our strategy is to extend the reach of our advertiser's messages by publishing their information in print and on the entire RHD Illinois digital network, which includes SMARTpages.com and our online city guides.

As I said when we announced the SBC transaction, while we're confident in our ability to improve results in Illinois and Northwest Indiana, it's not going to happen overnight. It's going to take hard work and it's going to take some significant investment. I think Peter and I would both characterize Illinois for the next four to six quarters as an orange cone zone or under construction, much like Sprint was in 2003. So stay tuned.

Turning to some of the other important performance numbers, and unless I mention otherwise, I'm going to be referring to adjusted pro forma numbers that reflect combined results, as if we had completed the SBC transaction at the beginning of each of the years discussed. In the third quarter of 2004 we generated adjusted pro forma EBITDA of $159.8m. Bringing YTD adjusted pro forma EBITDA to $471.4m. Adjusted pro forma income before preferred dividends in the quarter was $51.8m, or $1.22 per diluted share.

Net debt at the end of the third quarter was approximately $3.19b. While this is higher than at the end of the second quarter, it is lower than we had initially forecast when announcing the SBC transaction at the end of July. It's worth noting that from the time we completed the Sprint transaction in January of 2003, to the second quarter of 2004, we've repaid over $390m of debt, and reduced our leverage ratio from 5.8 times EBITDA to 4.7 times. Our ability to continue to generate significant value for our shareholders through de-leveraging remains an important factor in our decision-making.

Now, before I turn the call over to Steve, I'd like to say just a few words about the hurricane that hit some of our Florida markets in August and September. Punta Gorda, which is one of our very important fourth quarter directories, as many of you know, took a direct hit right in the middle of our sales campaign. But I am extremely pleased to be able to tell you today that in spite of the horrific damage that was done down there, we were able to finish the sales campaign on time and will publish that directory on time in the fourth quarter.

I think what's even more impressive is that the team posted one of the best sales gains that they've had there in years. Our team handled our advertisers' unique issues with compassion and patience, through what was a very difficult time for many of them. So in some ways the storms helped us as consumers and business owners turned to our print and online products in record numbers to find the businesses that could help them rebuild and get back on their feet. Many business owners commented that in such a difficult time they noticed the impact of their yellow page ads more than ever before. The dedication of our employees in Florida helped us serve our communities and also led to successful campaigns in Punta Gorda, Tallahassee and Orlando.

Orlando, which publishes in the first quarter of '05, has been a bit more of a challenge for us due to the fact they were literally hit by three of the four major storms that tracked through Florida. It caused us enough lost productivity to hurt a little bit, but the good news is that it also will publish on time and will publish with a sales gain. I want to thank all of our Florida employees who worked so hard to make up for lost time and ensure that our advertisers and users in these markets will continue to receive the quality products and service that they've come to expect from us.

So to sum up, I'm incredibly excited about what's happening here at R.H. Donnelley. During the third quarter in our Sprint markets we continued to deliver on the plan that we outlined last year. Meanwhile, the SBC transaction, we now have control of our destiny in all of our markets, and we look forward to improving results in Illinois as we execute the integration plan and implement our proven business processes. With that overview, I'd like to turn the call over to Steve.

Thanks Dave. While the SBC transaction was clearly big news in our third quarter, equally important we continue to deliver on commitments in our Sprint markets, reporting a 3.2% publication sales growth in the quarter. Since closing the SBC deal on September 1st, we've been laser focused on integration, which should allow us to implement our business processes in Illinois expeditiously.

We are also pleased to confirm our 2004 EBITDA guidance on which I'll expand in a moment. Meanwhile, our leverage at the end of Q3 at under 5.4 times is lower than previously expected, thus prompting us to also reduce our debt target for 2004 year end.

Before reviewing the quarter in greater detail, allow me to cite a couple examples of the new alignment of our integrated business model. For the first time in years our Illinois sales and marketing activities are coordinated with all professionals marching to the beat of one drummer, Peter McDonald. Over the course of the next couple quarters, we'll also transition control of all Illinois billing and collection operations to our same professional team in Kansas City that has been so effective in managing bad debt in our Sprint markets.

This integrated approach to business is also now reflected in our financial statement presentation following the SBC transaction. All the economics of the Illinois directory publishing business will be reflected in our revenue, income and cash flow, and good riddance to equity accounted partnership income.

Unfortunately, as in the Sprint deal, the associated purchased accounting treatment will disrupt our GAAP financial statements for the next four or five quarters. During this period we will provide pro forma adjusted income statements to illustrate our underlying operational and financial performance, just as we did following the Sprint transaction in January of 2003. Those of you familiar with our adjusted accounting presentation during 2003, will hopefully find this not too unbearable.

More specifically, as a result of the SBC and Sprint transactions and the associated financing and accounting, there are significant differences between third quarter, YTD 2004 and 2003 GAAP results. Accordingly, we are presenting adjusted pro forma results for both years, as if both deals had been consummated at the start of 2003, and reversing the impact of the purchase accounting anomalies in order to better communicate our underlying operational and financial performance.

However, let me emphasize that due to differences between RHD and predecessor accounting policies, our adjusted pro forma 2004 and 2003 results are not strictly comparable. In particular, the SBC carve out financials forming a significant part of our pro forma statements do not necessarily reflect the fully allocated economic cost of running that business during 2003 and the first eight months of 2004. We have not attempted to normalize those costs for this pro forma presentation. In this regard we suggest a good sense check for you to evaluate our performance is to apply a mid-50's percent EBITDA margin to our pro forma reported net revenue. Additionally, and perhaps most important follow the cash flow. Our ability to continue repaying debt should remain a good indicator of our economic health.

The 2003 and 2004 pro forma adjusted results reflect deferred revenue and matching deferred expenses with respect to directories, which were published prior to the Sprint and SBC acquisitions, but due to purchase accounting were not reported in our GAAP results. In this regard, while we decided at the start of 2004 not to present adjusted results for this year, merely to remove the $5m tail from the Sprint purchase accounting, because we're now providing adjusted statements to reflect the SBC deal in both years, we have likewise cleaned up our 2004 Sprint presentation by reversing those legacy Sprint purchase accounting adjustments.

You can review the details of these pro forma adjustments in the schedules to yesterday's press release in our 8-K filing, that includes an explanation of all Non-GAAP measures presented in connection with the SBC transaction. Additionally, a detail will be available in our third quarter 10-Q and in the 8-K for the transaction that will be filed in November.

Now lets review our performance for the quarter. First, publication sales, which represent comparable same store sales, highlighting our recent performance and the seasonality that's masked by our deferral revenue method. Sprint publication sales grew 3.2% during the third quarter to $153.4m, reflecting the impact of our business processes that have been rolled out throughout 2004, and a strong Vegas economy. This compares to 2.0% in last years third quarter and brings YTD Sprint branded publication sales growth to 2.7%.

Third quarter publication sales for our SBC directories was $72.0m, down 0.8% from last year. This compares to a 3.3% decline in last years third quarter, and brings 2004 YTD publication sales decline in Illinois to 2.2%. With full control of our operations in Illinois and Northwest Indiana, we should be better positioned to capitalize on opportunities there once our proven business processes take hold.

Turning to the rest of the details, adjusted pro forma net revenue was $259.8m in the quarter, up 0.7% from adjusted pro forma net revenue of $258.0m last year. Under the deferral method, current quarter publication sales performance amortizes into revenue over four quarters.

Adjusted pro forma operating expenses before D&A in the quarter were $100.0m versus $100.5m in the Q3 last year. Remember that adjusted pro forma expenses do not include the fully allocated costs of the SBC carve out entity we acquired during Q3 of last year or in July and August this year. Underlying improvements in operating expenses were also masked by the transaction costs and transition services fees in addition to the ongoing costs of Sarbanes-Oxley.

Resulting adjusted pro forma third quarter EBITDA was $159.8m compared to $157.5m in Q3 last year. This brings YTD adjusted pro forma EBITDA to $471.4m versus $465.2m last year. And remember that in the first half of 2004 we also absorbed approximately $8m of expense from our headquarters relocation.

Adjusted pro forma interest expense in Q3 was $52.3m compared to $59.1 of adjusted pro forma interest expense in Q3 last year, Largely due to lower debt levels reflecting pay down of the Sprint acquisition debt versus last year. Adjusted pro forma income tax provision in 2003 was $34.0m versus $27.5m last year, reflecting this year's higher adjusted pro forma pre-tax income and our effective rate of 39.5%.

As a result of these items adjusted pro forma income before preferred dividends in Q3 was $51.8m versus $47.4m last year. Adjusted pro forma earnings diluted per share in the quarter were $1.22 versus $1.16 last year.

Now lets review cash flow. Cash flow from operations in the third quarter was $170.2, including a $58.9m federal income tax refund. Free cash flow in the quarter was $164.2m, after $6m of CAPEX. To finance the $1.4b SBC transaction, we borrowed $1.33b from our amended credit facility and contributed approximately $93m of cash we had accumulated during July and August.

During September we repaid debt of $82.2m, leaving net debt at the end of Q3 at $3.19b, approximately $85m lower than we had anticipated in July when we announced the SBC transaction, and pegging leverage at under 5.4 times. You'll also be keen to learn that our current debt portfolio is just over 70% fixed, as we executed $950m of interest rate swaps since late June.

Now here's another way to look at Q3 debt and cash flow activity. Add the $82m of debt paid down in September to the $93m of accumulated cash used in the SBC financing, and you get $175m of effective debt reduction in the quarter, which was funded from four sources. $62m from operating cash flow in July and August; plus $59m from the tax refund; plus $46m from post closing cash flow; plus $8m from lower cash balances at quarter end versus June 30th.

Our lower leverage also relates to the larger than expected federal tax refund received but previously excluded from our debt balance forecast, as well as the timing of advances from SBC as part of our billing and collection transition.

For full year 2004 the following items replace our previous guidance. We currently expect total publication sales growth of approximately 2.5% in our Sprint markets, smack in the middle of our original guidance for the year. In our SBC markets we currently expect a decline of approximately 2.5%. Our previous guidance for 2004 DonTech publication sales of minus 3% was for local advertising only.

Full year 2004 adjusted pro forma net revenue is expected to be just over a billion dollars, up slightly from full year 2003, and in line with our July 28th guidance, following the announcement of the SBC transaction. Adjusted pro forma full year 2004 EBITDA is expected to be approximately $610m versus the $586m guidance provided on July 28th. However, this $24m delta consists three components. $5m related to the residual Sprint purchase accounting adjustments; plus $12m of unexpected first half SBC true ups for bad debt and claims provisions; plus a net amount of $7m representing other items, both pluses and minuses, including substantial SBC operating expenses not allocated to the acquired carve out entity.

Our revised estimate for debt outstanding at the end of 2004 is $3.15b, down from the $3.24b previously estimated. Remember that also, in addition to all the operating benefits we expect to glean from this acquisition, we also obtained a full tax basis step up, which carries substantial economic value for shareholders over the next 15 years.

Now before concluding, many of you have been asking about our 2005 guidance. We intend to provide all guidance for next year in early December at the New York Media Conferences. Thanks for your patience while we focused on integration and the best ways to continue delivering strong shareholder value. That concludes our prepared remarks. Now let's turn the call back over to Josh for your questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one. You will be prompted to record your name. To withdraw your request, press star two.

One moment please for the first question. Mr. Paul Ginocchio of Deutsche Bank you may ask your question.

Yeah, thank you. Just two questions, one, what was the underlying cost growth of the Sprint directories if you have that? And two, I was wondering if you would make a comment on the BellSouth/Google deal. Thank you.

Paul, I'll take the Google thing first while Steve is trying to answer your first question. Quite honestly, the announcement on the reseller deal of Google by BellSouth, these are exactly the kinds of relationships that we have long said would be the way that the [space] was likely going to begin to evolved. You and I Paul had these same conversations. Search companies with their technology and traffic forming relationships with publishers with their content, their large sales organizations and the existing relationships that they've got with the SME market. It just makes sense and I believe we're going to see more of these kinds of relationships.

That said these remain very small opportunities today. All the publishers that I'm aware of it's like are looking at these same relationships, but the importance of them to overall usage, to advertise their ROI and to publish their revenue growth are really still a ways out.

Hey, Dave, does that mean the sort of the bid ask spread between what they want for their traffic versus what you're willing to-what you want for your content is getting closer?

Well, I'm not sure, I don't want to go there Paul. It's, hey listen, the fact that we're seeing some deals indicates that there is-that everybody's becoming more rational. I don't really want to comment much further than that.

Thank you.

Yeah, Paul, as far as the underlying cost growth, I think the first thing to point out is that last year in our third quarter we had some pretty substantial bad debt true ups, which did not recur again in the third quarter this year. So that's a pretty significant variance and you can go back to look at our last years quarter. I think just on the bad debt line alone it's probably about 5 million bucks, something like that.

In addition, we had, as I mentioned, some transition services expenses and certain other transaction costs, which we were-that we did not capitalize, which is another couple of million bucks, something like that. But versus last year we've got the benefit of some synergies in the publishing and IT area and there's a bunch of other puts and takes.

So if you [inaudible] all that out. So excluding those though was Sprint cost down year on year?

The Sprint costs, well, the Sprint costs were down year on year excluding the bad debt provision and the deal costs and transition services, yes.

Great. Thanks.

Mr. Karl Choi of Merrill Lynch you may ask your question.

Hi, good morning. A few questions here, one, you mentioned that Las Vegas was strong in your publication sales number for the, I believe, the July book. Could you tell us a little bit, give us a little bit more color as far as the sales campaign that's going on there for, I believe, the January book if there is any change in competitive dynamics as you face competition from Yellow Book. And two is I wonder if you can update us on what the incremental D&A from the SBC transaction should be. It looks like from the performing numbers it was around $21m, $22m for the nine month. So it should be $28m, $29m through the reg run rate. Thanks

Good morning Karl, it's Peter. Karl, the Vegas campaign, as we said, was strong in the third quarter. The first and third quarters are when we published the Vegas campaign directory. There has been increased competition. We had anticipated this as we've talked about before. I can tell you the team out there is a very talented team, a very experienced team. We have literally hundreds of years of our relationships within the marketplace. The product is a strong product. We compete with many publishers in all of our markets, no different than in Vegas. We continue to execute on our competitive plan. So we feel pretty good about how things are going.

Okay.

As far as the D&A expense goes, Karl, I think the right numbers to be thinking about are somewhere in the $80m to $90m per year in total. So it's probably you're right about maybe between $20m and $25m incremental.

Okay. Could I ask a follow up question? Could you also comment on the competitive dynamics in the Orlando market? Any changes there? Thanks.

Karl, there's a lot of competition in almost every single market we have today. It's pretty normal. What happens when competition comes, Karl, the market expands to some degree. What we're finding is that we maintain a solid value of proposition and we continue to have recurring revenues in excess of 90% from our existing customer base because we deliver good value. And it seems like there may be some of the independents that are out there, or competitive directories that come in may be taking money from each other, but we continue to see progress with all of our products.

Great. Thank you.

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

Good morning. I wanted to ask the question, Steve, on the $610m of EBITDA guidance for fiscal '04, I look at the first nine months it implies a Q4 number somewhere, I guess, just under $140m, which is excessively down substantially. Is that just seasonality or does that also reflect some incremental spending on your part to try to boot the SBC brand.

Well it does reflect some incremental spending, but I think that the answer is more in the $12m bad debt true up that SBC took in the first half, which added the income. The $5m of Sprint purchase accounting adjustments was all in the first half, and, as I mentioned, the first eight months reflect the carve out entity included in our financials on a pro forma basis, without us trying to normalize or allocate costs there that were not being allocated by the parent company.

So I think the best way to think about it is focus on $586m. Remember we started the year with $415m of EBITDA guidance and we said we purchased about $171m of EBITDA. That gets you to $586m, but that $415m excluded that $5m of Sprint purchase accounting adjustments. You take $586m and add $5m, you get to $591m, and again, that's burdened by about $8m of headquarters relocation costs. So maybe it's $599m on a go forward basis, but you're not going to see that because we didn't back out those headquarters relocation costs from our pro forma numbers.

Okay, so the $600m is kind of the right base to think about on an annualized basis as we look into '05.

That's correct.

Great, that's helpful. Then just as it relates to the $7m of carve out expenses, those, to understand that correctly, those are expenses that essentially stayed with SBC that we can think about as not being in the expense base for you guys going forward?

That's not true. That's not true.

Okay.

In fact, going back to your previous question, I just want to be real clear about that, is that while we've incurred and we will incur in the fourth quarter some expenses associated with investment in Illinois, the $600m number that you quoted does not include the expenses associated with those investments. What we've said is about $20m over 18 months. We're six weeks into that. So I think that while you start with $599m, I think you need to anticipate that we're going to be making investments to improve performance there.

Some investments offset, I guess, by gains within your properties?

Well there would be some. I mean, as I mentioned, the publication sales performance in Sprint this year is not fully reflected in our revenue because of the amortization, the deferral and amortization method. Then going back to the second part of your question there, Mark, about the carve out entity, this is a small piece of a division, kind of a segment of a very large telephone company. So the financials are not necessarily carve out financials. We're going to include both audited and interim un-audited financial statements for the acquired entity in our November 8-K, and you'll see them for yourself. The point is that those financials do not reflect the full allocation of all the economic cost associated with running that business.

What we haven't tried to do is to somehow normalize our EBITDA numbers by estimating what those cost allocations might have been. The only thing we've said is we think that the purchased EBITDA is about $171m. I think when you see those audited statements you'll see EBITDA numbers higher than that and you can already see it in the nine months YTD and in the adjustments that we provided in our schedules to our press release.

Yeah, that's helpful. Just looking forward to Q3 '05 numbers so we don't have to do all this. A couple of other very quick questions. On the outstanding debt you mentioned you're about 70% fixed now. What is the blended rate of your debt at this point?

The blended rate in Q3 was about 6.5%. But if you go back and look at the pro forma numbers, the way the pro forma rules apply, we had to go back and look at the standing interest rates at the beginning of the year and apply those rates to the principal balance at the beginning of the year, assuming no new acquisition debt was paid down. So, if anything, the interest expense in our pro forma adjusted financials is probably a little bit overstated because of the way those rules work.

Let me just come back for one second though because you made another statement after my last comment about you look forward to Q3 next year. Q3 next year is still going to have this, sort of this, still there's going to be a little tail of this purchase accounting stuff going on, and it may even spill over into Q4 next year. I think that we should all expect that by 2006 we're going to be looking at a clean slate.

Okay, fair enough, and then one real quick final one. Could you give us what the contribution was in the quarter on a revenue basis and maybe even a possibility basis from your online property?

That's not something that we're talking about in sort of that level of detail. I think the most important thing is that we're focused on growing the whole pie, not any individual piece of the pie. I think that's the most important thing because I'll tell you what, if we told you that our online growth rate was 82% and yet our overall growth rate was minus 1%, I don't think anybody would be too happy about that. So we're focused on the whole pie, not just any individual piece.

Okay, thanks a lot.

Thank you Mark.

Bill Myers of Lehman Brothers you may ask your question.

All right, thanks, and I apologize but I missed part of Karl's question. A couple of things, first off, can you quantify your incremental promotional spending in Las Vegas sort of in 3Q and 4Q ahead of [EL's] launch. And number two, do you have any sense in terms of your all price points, what they're targeting for that marketplace. I guess number three is sort of a related question, do you still expect the revenues in that market for you guys to be at least flat in '05?

Well I'm not sure that we've got a whole lot of specific answers for your questions Bill. I mean those are good questions and clearly we are keeping close tabs on how much we're spending in Las Vegas, in all of our markets for that matter. But to talk about how much we're spending specifically in our promotional activities in Nevada is really not something that we're disclosing. As far as the all price points, I don't know.

They're about half of what I think our normal rates are.

Which is normal. Pretty much all the markets that we compete with them in, it's kind of the same story.

And as far as '05 goes, as I mentioned, we're going to talk about '05 guidance in December.

And also are they planning to do one directory or are they going to have two publication cycles during that 2005?

Bill, as far as we know they're planning on one directory in that marketplace.

Great, thanks very much.

Michael Meltz of Bear Stearns you may ask your question.

Hey there. Steve, just a couple follow ups, on your guidance you made a comment about a 55% margin, can you clarify that as well as I think you stopped guidance at the EBITDA level. Can you talk about your pro forma EPS expectation for '05, as well as CAPEX? And separately, are you guys going to provide pro forma from the fourth quarter of last year, as well as full year '03? Thank you.

Let me, I'm not sure I got all the questions, Michael, but let me try here. What I said was a mid-50's EBITDA margin, I didn't put a 55% point on it. I think mid-50's is a good place to expect. You said something about '05 guidance and I'm sure whether you meant '04 or '05.

I'd like, I'd love both but '04 is fine.

We're not planning to talk about '05 until December. Look, as far as the last question, the pro forma Q4 numbers this year and last year, we will be providing that information when we report year-end results. As far as giving you full year '04 guidance below EBITDA down to net income and earnings per share, that's not something that we've focused on at this point.

Okay, can you clarify your free debt?

Now we did provide a year-end debt balance, so I think you can do some calculations as far as interest and our tax provision rate is unchanged at 39.5%. So I think you can get there.

Sure. Can you remind us of your free cash flow guidance for full year and I guess I'm just a little confused, if you're not providing pro forma's for all the quarters last year, I just think it would be helpful to have that, as well as further-

I said we were going to provide the pro forma's for the quarters.

But not until you report the next [inaudible].

I'm sorry. I misunderstood your question Michael. Our intent is, just like last year, last year we reported a [Red G type] 8-K in May, talking about the reconciliation of GAAP to Non-GAAP measures. And then in July last year we showed all four quarters laid out for the prior year. We're going to do the same thing. We've got all that information and we're going to give you all that information. Probably next month when we file our 8-K for the transaction, okay.

Got it.

As far a free cash flow for the year, I think what you need to do is we just gave you free cash flow for nine months and told you what debt balance was at the end of Q3 and told you what our expectation is for debt balance at the end of Q4. So I think we've given you all the components.

Okay, and lastly in terms of the disclosure you're going to give, are you going to be reporting by the Sprint and then DonTech operating segments going forward?

Yeah, we intend to continue to provide Sprint and SBC branded publication sales, dollars and growth rates. We will not provide any other branded sort of segment type analysis. I mean we're really in one business we're in the directional media business. We're not in two different businesses and we think that one segment is appropriate.

Okay. All right, thank you.

Thank you Michael.

Arnold Ursaner with CJS Securities you may ask your question.

Hi, good morning. Real quick question to ask you on the Sprint business. You have delivered seven consecutive quarters of increasing growth. In the fourth quarter either that trend will break or you will achieve the guidance you've given us. I'm assuming it's nothing other than the seasonality of the Vegas directory but could you expand on that a little?

Hi Arnie, it's Dave. I don't think that that's quite right. In Q4 '03 I think we posted about 6% growth. I think if you look at what we've said, the growth in Q4 '04 is going to exceed that. I think the best way to think about it is Vegas publishes in Q1 and Q3 and that has an influence on it. If you look at in Q2 of '04 we reported 2.2% growth. I think it's fair to assume that Q4 is going to be in the same ballpark.

I think be careful, we didn't say seven consecutive quarters of growth, we said year over year growth. So Q3 this year was better than Q3 last year. And Q3 last year was better than Q3 the year before.

Right.

I think that's a better way to think about it as opposed to looking at Q3 over Q2 over Q1 in any particular year.

I think most of my other questions have been answered. Thank you.

Thanks Arnie.

Todd Morgan of CIBC you may ask your question.

Thank you. Just a clarification on the full year change in the pro forma EBITDA. The $24m change, it sounds like most of that is sort of one time non-recurring. Am I taking that too--is that the case or really is there more recurring items in that as well?

No, in fact, the recurring item is the Sprint purchase accounting adjustment. That $5m is a permanent change. We just had previously chosen not to provide or to present adjusted statements in '04 just because there was a $5m change. I mean it's a lot of work for us to produce these pro forma adjusted statements. We just decided that we could tell you if there was $5m of purchased accounting adjustment that we were going to end up eating in '04. Now that we're providing pro forma adjusted statements for the SBC transaction anyway, we figured that that would give you a better apples-to-apples view. The $12m of bad debt true ups from SBC, they took that in the first half of this year, is a non-recurring item. The other $7m is a bunch of puts and takes, the largest piece of, we believe, is the economic cost of operating the business in Illinois that were not being allocated to the SBC business. So we think that's a temporary thing also.

Good, well that makes a lot of sense. Thanks for the help.

Thank you Todd.

Maurice McKenzie of FBR you may ask you question.

Good morning, congratulations. Can you just touch on your overall collections trends, what you're seeing in terms of bad debt on both the SBC, as well as the Sprint side of the business? Also, could you touch on the local economy in the Midwest, any changes that you see currently in that market?

Well I'll cover the bad debt stuff and then maybe, Peter, you can look at economy. The bad debt trend in Sprint are continuing to go well. In Illinois the bad debt trends are also as good as we've seen in a while but they're still higher than in the Sprint markets. On average I think we're coming in at about 5%, something like that, between the two.

Maurice, this is Dave. Kind of the Midwest economy I think both Peter and I still see that as kind of sluggish. It's interesting because you saw the [base] report this morning it kind of indicated that consumer spending in that area continues to be far below the national average. Consumer spending is really what drives our business and that's kind of consistent with what we see. It's, like, they're not jumping for joy in that part of the country when we're talking to small and medium sized businesses.

Thanks for the update.

Eric Martinuzzi with Alex Brown Investment Management you may ask your question.

I just have two quick questions regarding the intangible that can be used to offset taxes. First, how big is that intangible? And second, at what rate can it be used per year and over how many years?

Well, I think the best way to think about that, Eric, is virtually the entire purchase price is deductible for taxes in general over 15 years. I say that in general because some of those assets are intangible and some of them are tangible, and the tangible portion is amortizable more rapidly. We saw that in the Sprint transaction where we took $2.2b, we were able to get about 10% of that to deduct for taxes in the first year, whereas, the rest of it was deductible over 15 years. I think we should expect a similar situation with the SBC deal.

Great. Thank you.

Adam Spielman of PPM America you may ask your question.

Thank you. Just in terms of the SBC territories, how much, when you think about that decline in revenue, is there some portion of that that's not related to the economy and related to Yell stepping up efforts?

Adam, I think when you look at the marketplace there, the economy probably is the number one driver I think that we're seeing. Because as we look at some of our properties that are also in the Midwest we see similar types of things. The [inaudible] is slower there than all the other markets. Competition will have some impact on you, but it's been a few years and typically what happens is there's more of an initial reaction to the marketplace and then it levels out, and I think that's more of what we're seeing right now.

When you think about independent directory competition in general it seems, as you look across the country, not all the independents are created equally and one consistent thing we hear is that the folks at Yell do a pretty good job. I guess do you, when you think about other people that might enter the business or perhaps people that are exiting the independent business, I guess Verizon comes to mind, what are your overall thoughts on how the independent competition is going to change?

Well, Adam, I've spent quite a few years an independent in this business is a very difficult business. I think that when you look at it from the RHD perspective here, we pretty much try to keep focusing on delivering value to the customers and if we keep focusing on the disciplined RHD business process, we find we do pretty we. In many of our markets today there's two, three, four and even five different competitors in there, and we find that the best solution or the best thing for us to do is to keep focused on driving value and results for our advertisers and our users and it's a good formula for success.

Thank you.

Just one other thing I'd just add to that Adam about the economy, etcetera. One of the things that we expect from aligning our sales and our marketing activities together is to be able to affect results as well. So I think that you didn't ask about the economy versus the competition versus execution. I think that we are in a good position to improve execution.

This concludes our question and answer portion.

Well I'd like to thank everyone for your attention and continued interest in R.H. Donnelley, and we look forward to updating you on our continued progress. Have a great day.