Thryv Holdings Inc (THRY) 2005 Q2 法說會逐字稿

Welcome to the RH Donnelly second quarter 2005 results investor teleconference. [OPERATOR INSTRUCTIONS] Please note today's conference is being recorded as well as Webcast live over the Company's website at www.rhd.com. I would now like to turn the conference over to Mr. Jim Gruskin. Mr. Gruskin, you may begin.

Thank you and good morning, everyone. I am Jim Gruskin, EVP of Finance at RH Donnelly. On the call today are Dave Swanson, Chairman and Chief Executive Officer of RH Donnelly; Steve Blondy, Senior Vice President and Chief Financial Officer; and Peter McDonald, President and Chief Operating Officer. Certain statements made today may be forward looking within the meaning of the Private Securities Litigation Reform Act. We call your attention to our press release for the quarter ended June 30, 2005 and our form 8-K furnished to the SEC yesterday July 27 which both discuss our second quarter 2005 results. We also encourage you to review the Company's other periodic filings with the SEC which set forth important factors that could cause actual results to differ materially from those contained in or suggested by any forward-looking statements.

During this call today, we will refer you 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 July 27. A separate 8-K filed on February 24, 2005, includes an explanation of the non-GAAP financial measures mentioned in connection with the SBC transaction. Today we will be referring to adjusted pro forma results, which unless otherwise indicated reflect the combined results of our RH Donnelly and the directory business acquired from SBC. Assuming the transaction took place at the beginning of the period presented. The press release is available on our website and can be accessed by going to www.rhd.com, under investor information. Copies of our RH Donnelly'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 RH Donnelly Corporation and any retransmission or broadcast without the expressed consent of the Company is strictly prohibited. And with that, I now would like to turn the call over to Dave Swanson.

Thank you, Jim. Good morning, everyone and welcome to RH Donnelly's second quarter 2005 investor call. I'm going to take the next few minutes to provide you with a brief review of our second quarter highlights and afterwards Steve Blondy will take us through the Company's financial results in detail. We will then be happy to answer your questions.

During the quarter, we made considerable progress toward our goals for 2005. We delivered 5.3% publication sales growth in our Sprint markets, an outstanding quarter and the best performance since we acquired the business in January of 2003. Our online products continued to gain momentum in both sales and traffic. We continued with the reconstruction of our SBC business in Illinois, and for the most part, completed all integration and transition services initiatives. And we also used free cash flow to repay approximately $73 million of debt.

A little more color on some of the operating details for the quarter, three things primarily drove our better than expected Sprint results for the quarter. First and foremost is the cumulative impact of the RHD business process implementation, as a result of driving the process deeper into the organization, we grew sales across a broader cross section of markets, both large and small. National sales were also a strong contributor in the quarter. Second, we got some lift from having online product to sell in all of our markets rather than a select few. You will recall on last quarter's call we announced that we completed our infrastructure buildout for our online products and now offer local online search in every market that we serve. And third, we had an exceptionally strong performance out of several of our Florida directories publishing in the quarter.

Over and above the process and execution improvements we have made, these markets received a lift in economic activity surrounding the services sector as a result of last season's hurricanes. The post hurricane rebuilding efforts have expanded the market for the service businesses that are our bread and butter customers. This is translated into increased advertising sales for us, as more new businesses move into the area to fill the increased demand and existing advertisers have more cash to broaden their messages. The underlying strength of our Sprint business and anticipated second quarter results led us to raise our guidance for June for full year 2005 Sprint publication sales growth from 3.5%, to 4%. While we expect solid sales growth numbers in Q3 and 4, we do not see them coming in quite as strong as Q1 and Q2.

Now, I will turn to our SBC markets. We had another very productive quarter of integration activity and that process remains right on track and is for the most part complete. That said, we have a lot of work in front of us in terms of product, process, and execution before we are going to see meaningful improvement in sales growth. Publication sales for the quarter were down 2.7%, reflecting the fact that we are still in the middle of our rebuilding effort. As we said when we announced the SBC transaction last summer, building a foundation for growth will be disruptive at the outset. And our investments in the market will not generate results overnight.

In June, we lowered our guidance for SBC publication sales to negative 2% from negative 1%, reflecting the near term impact of three actions to position the business for long term sustainable growth. First, we are no longer allowing advertising on the covers of our products. Our research showed that this was making it more difficult for Yellow Page users to differentiate between the different products in the marketplace. As a result, we have removed the clutter, added the RH Donnelly brand and introduced a clean, new look to all products in the market. While causing some short-term pain, we believe the benefit to usage share over time is a good trade.

Second, as I mentioned on last quarter's call, we are rescoping and consolidating some of our directories together to create products that more appropriate reflect the expanded shopping areas and patterns of our marketplaces there today. This is a project that was long overdue in the Chicagoland suburbs. In some cases however, this has resulted in some lost revenue among advertisers who were already paying for ads in all of the consolidated directories.

And finally, since transitioning the billing, credit, and collection function, from SBC to RHD in the first quarter we have implemented our proven process and policies regarding extending credit to new customers and not allowing existing customers with significant past due balances to continue to advertise. We are deploying the same kind of discipline to this process that we use in our Sprint markets which over time have led us to enjoy some of the highest advertiser renewal rates and lowest bad debt expense rates in the industry. Unfortunately there's a near-term price to pay and we are canceling or denying the privilege of advertising to more customers than we originally planned for. This issue is also making it more difficult than normal to forecast sales results for the next few quarters. Until we have gone through a full cycle under this policy. Our visibility into third quarter indicates that the impact of this will be worse than the second quarter, as only a portion of the second quarter directories were impacted by the change. We believe at this point that some of these issues will begin to lessen in Q4, and as a result we're holding our full year 2005 pub sales guidance for Illinois at this point. That said, I want to reiterate that because of all the changes we are making, we have less visibility and predictability than usual regarding near-term results.

What I do have more certainty about is that we are making the right decisions for the long-term prospects of this business, and those prospects remain unchanged. We have begun implementing our business process in Illinois, and we expect to see similar trends there as we did in our Sprint business once our process gains momentum and we get beyond some of these near-term issues. Chicago remains a very attractive Yellow Pages market with high usage relative to other major cities, and the local economy is starting to show signs of improvement. These factors give us additional reasons to believe that performance will improve as we move through 2006.

Let me wrap up with some color on our online initiatives, as things continued to accelerate during the second quarter. Last quarter I mentioned that we had moved listing and advertising content from all of the directories in our Sprint and SBC markets into our online database, ahead of schedule. We entered the next phase of our online execution strategy during the second quarter. And I'm pleased to report that traffic to our sites as measured by unique users, searches, and page views, was up sharply in the quarter. And we continue to see encouraging signs from advertisers.

First, adoption rates are high, over 60% of display advertisers who have been offered our online product have purchased. And as we have gone into our second year in some markets, renewal and recurring revenue rates for our online products have been as high as those of our print products. We continued to invest in improving the features and functionality of the sites as well as the quality and relevancy of the search results. Later this year, we plan to add a robust map-based search capability to our sites and in just a few weeks we will be launching a prototype for an exciting new online business-to-business product serving the Chicagoland market and per our plans we will continue to increase our efforts in investment in creating awareness of our sites in our local markets later in the year.

We have become increasingly more comfortable with our micro or local strategy approach to local online search, versus trying to oil the ocean with a national play. We believe that as this plays out over time, the key success factor will be the quality and relevancy of the search result. No one collects more data about who sells the products and services consumers want and need in our markets than we do. And our plans are to do even more in this area than we have done in the past and increase our competitive advantage that we derive from delivering relevant and robust search results. Our goal is to be number one in online local commercial search in our markets just as we are in print. And we will compete for that share on a market-by-market basis, making product and investment decisions based on what's necessary to win the local user in that market. Just as we do in print.

So to sum up, these just continue to be very exciting times for us at RH Donnelly and in the second quarter, we remained on track, with respect to our key priorities for 2005. Being, continuing to improve performance in our Sprint markets, building the foundation for long-term growth in Illinois, and accelerating the development of our online strategy by growing adoption of our online search offerings in the markets that we serve. With that overview, I will turn the call over to Steve.

Thanks, Dave. Once again, this quarter was about execution. As we just heard, our business process continues to deliver in Sprint markets and we're making the tough calls in Illinois. We are making good progress with our marketing and Internet investments, and our EBITDA margins remain strong. Here are the details: Sprint pub sales grew 5.3% in Q2 compared to 2.1% in Q2 '04. Our current full year Sprint pub sales outlook of 4% compares to original '05 guidance of 2.5%. SBC Illinois pub sales declined 2.7% in the quarter, versus a 1% decline in Q2 '04 and full-year '05 outlook of minus 2%.

Turning to the rest of the results, and these P&L figures are all reported on a pro forma adjusted basis assuming the SBC deal closed January 1, last year, and all purchase accounting entries are reversed. Net revenue of $260.6 million in Q2 '05 is up 1.1%, versus $257.7 million in Q2 '04. These figures reflect the impact of our deferral revenue method as current pub sales get recognized over the succeeding 12 months. Operating expense, excluding D&A in the quarter was $107.5 million versus 101.3 million in Q2 '04. Sales commissions, accelerated Internet rollout, and advertising expense all exceeded last year's Q2 figures reflecting our deliberate investment in these key areas.

Also recall that last year's expense reflects SBC carve out statements for Illinois, which excludes certain costs not allocated to the acquired entities. Reported Q2 '05 expense also excludes $1.5 million of FAS 123 expense as we expect to adopt the new standard retroactively in Q3 this year. However, we did record $1.8 million of comp expense in the quarter under APB 25, which would have been included in Q2's total FAS 123 charge had we adopted in Q2. Resulting Q2 '05 EBITDA was $153.1 million, versus 156.4 million in Q2 last year. Reported EBITDA margin for the quarter, of 58.7%, will revert to full-year guidance of 56%, once we adopt FAS 123, and reflecting our stepped up investment in digital initiatives during the second half of the year.

Last year's pro forma Q2 margin of 61% did not reflect the full costs of running the business in Illinois. Cash interest payments of $72.8 million during Q2 compared to reported interest expense of $58.3 million reflecting bond interest paid in Q2 that was accrued in Q1. Cash flow from operations in Q2 '05 was $81.8 million, and free cash flow of $75.3 million was used to repay bank debt. Net debt of $3.22 billion at June 30, was approximately 80% fixed rate and represented just over 5.5 times leverage. Our weighted average interest rate at June 30, excluding deferred financing cost amortization was 6.7%. At this time, we affirm all guidance provided at the Deutsche Bank media conference which we also filed using Form 8-K on June 7. That concludes our prepared remarks. Thank you for your attention, and now we'll turn the call back to the operator for your questions.

[OPERATOR INSTRUCTIONS] Our first question today comes from Karl Choi of Merrill Lynch.

Hi, good morning.

Karl.

I just wonder if there's a way to sort of frame the amount of investments, stepped up investments in the second half, versus the pace that you set in the first half, because it looks like you are looking for a pretty big difference in EBITDA margins in the second half.

Well, Karl, it's Steve. We continued to ramp up our Internet investments. We spent more in the first half than we had originally budgeted for and we're continuing to ramp that up in the second half. We also, while we did book about 2.7 in the first half in APB 25 associated with comp expense relating to equity compensation, our full year number has been $11 million. So there's still some amount to go in the second half of the year, as well. And we've got another -- a bunch of other initiatives. We have got our IT modernization project ongoing, our Amdocs upgrade and so we are continuing to invest in the marketplace.

Okay. And as far as your online initiatives are concerned, is there any plan to more broadly roll out the online pay for performance products in the second half or maybe later on in 2006?

Karl, it's Dave. We don't -- we aren't selling a pay for performance product right now. We are using pay per click -- we are buying traffic through pay per click, through Overture, Google, et cetera, but we are not actually selling a pay for performance product at this juncture.

Are you experimenting with some of these products or at this point no plans yet.

We are experimenting with a couple of different things in the search engine marketing area and a few others, but, we're -- we stay kind of tight lipped on that stuff until we actually really decide we are going to go to market with something.

Thank you.

Yes.

Thanks, Karl.

Thank you. Our next question comes from Douglas Arthur of Morgan Stanley.

Yes, actually Lisa is going to ask the question.

Just a follow-up to Karl's question. Steve, are you still targeting your investment spending at roughly 19 to 20 million over six quarters?

Okay, well, Lisa, just remember when we announced the SBC deal, we talked about investing $20 million over 18 months in Illinois to try to sort of make up for lost ground over the last sort of three to five years where we felt the business had been kind of underinvested and we are still on track in that regard, but that's only our investments in Illinois. That doesn't reflect investments that we're also making in our Sprint markets and other investments related to digital initiatives and other areas.

Okay. Great. And then just a couple of other quick questions. On the -- can you quantify specifically the amortization of deferred financing costs in the quarter? And then also can you just delve a little deeper into why the Sprint outperformance in the quarter? Thanks.

Why don't you go first and I will get that.

We'll give Peter the Sprint question while Steve gets the other one ready.

Hello, Lisa, this is Peter. Sprint and I think Dave covered it in the -- in his script there, that we were helped by first, I think the biggest thing is the RC (ph) business process which is really focused on execution, is really working. And I think that if you track the last couple of years with Sprint, we have continued to gain momentum in the process so execution is one. I think some of the markets that we have been involved were helped, especially in Florida and I think that's really a good reason to take -- those are the top two reasons why we are performing a little bit better than our expectations.

The deferred financing cost amortization was $4 million. It's basically the same in Q2 as it was in Q1.

Okay. Thanks.

Thank you. Our next question comes from Paul Ginocchio from Deutsche Bank.

Just two questions. On the Sprint markets could you maybe break down volume versus price on that 5.3% in the quarter and, second, I guess, what kind of visibility do you have on that fourth quarter for SBC? I would guess that the books aren't going to close for a few more books -- for a few more months on most of those. But just maybe give me a little color on what gives you the confidence on the fourth quarter. Maybe, is it the current sales campaigns? Thanks. And, I guess, how many books in the fourth quarter? We are thinking it's about a third of all of your books are published in the fourth quarter for SBC. Thanks.

Paul, it's Peter. On the Sprint, the volume versus price, I think that we are increasing the volumes. We are not getting there on price. I think that's the way to look at that. Our sales, our customers are increasing and I think it's part of the overall process that we have there. Again, focusing on execution and delivering a good ROI for all of our advertisers. Relative to Q4 and SBC, you are right, it is the largest quarter in the SBC markets by far, and it will -- we still don't have the kind of visibility we'd like, but I think that the signs that we are getting by some of the changes and processes that we put in place are encouraging. And I think as David has indicated, it's a rocky road getting this business where we want to. Looking at third quarter, we are still investing and doing things we think that are setting the foundation for a really good future in this market which we think has a lot of opportunities. So Q4 is our largest quarter, where Q3 is not.

I'm sorry, if I could just follow-up on that, when do most of your sales campaigns close for that Q4 quarter?

We will be working those right through October.

Okay. And maybe a question for Peter and Dave when was the last time you worked for an incumbent that had growing customer volumes?

Next question.

We're pleased, I think, Paul. The take away is that, as you know, Dave and I are very focused on execution and we continue to build a terrific team out there, and you can see the power of people across the country. Because we didn't -- in the Sprint markets, especially, it wasn't just -- we had some terrific performance in places that were outside of Florida. So we are very encouraged in New Jersey and Texas and others. So the process is working as it has for many years.

Thank you.

Thank you. Our next question comes from Bill Meyers of Lehman Brothers.

Thanks. A few quick questions. It's tough to follow up that question. First off, if you can compare the bad debt expense renewal rates for recurring revenue for your Sprint and SBC markets? That's number one. Number two, I know that you have competition across virtually all of your marks but can you comment on new incremental competition across your key markets? We've been hearing some talk about new entrants in Charlesville and Tallahassee. And then just thirdly, could you break out how much of your revenue growth in the quarter came from incremental online sales versus traditional print?

Want me to go to that one?

Which one?

Bill's got five questions. Okay. The bad debt, I think the way to look at the Sprint and SBC, the bad debt, I think that Sprint is obviously, I think, a little bit ahead of SBC, but we're seeing the same kind of trends there and that is impacting our renewal rates and our renewal rates are recurring revenues in the Sprint markets are very encouraging. We continue to see good news in those.

Bill, relative to competition, we are not going to talk market by market, but you are right, there's books that are popping up all over the place across the country, not in any one specific area. This is -- they are all trying to say this is a great business, let's go try it and what's happening when they do this, is they are actually taking share from other independent publishers versus really hurting us as an incumbent. So we continue to see, quarter over quarter over quarter, where we continue to grow, you know, as the incumbent in our markets. So as much as there is competition, it's nothing that we haven't seen at all, and we're very comfortable with it.

And, Bill, on the growth coming from online, as we've said in the past, we really just don't like to go there. Our job -- Peter and I take it very seriously. We got to grow this whole business, and we use all of the levers that we have available to us to do that. Suffice it to say that online is -- is giving us incremental lift, but we would be growing nicely without it.

Great. Thank you.

Thank you. Our next question comes from Arnie Ursaner of CJC Securities.

Hi, it's Arnie Ursaner of CJS Securities. Good morning.

Hi, Arnie.

Real quick question I ask you. Can you, Steve Blondy, could you perhaps remind us of your ideal capital structure and -- why don't we start with that?

Well, good morning, Arnie. We have spent a lot of time over the last -- really over the last nine months focusing on that question, and have kind of changed our focus to some -- to some degree on what's the -- kind of the leverage that we're comfortable with. And when we first announced the Sprint deal we talked about getting to four times leverage and we worked pretty hard up until about a year ago, we were completely ahead of pace. We made the SBC acquisition and got back up into the high 5s and so today we're at 5.5, and I think we're -- we're feeling pretty comfortable in the 5 to 5.5 range. So -- and as I believe you know, Arnie, the remainder of the preferred stock that we have outstanding is redeemable by us in January, and we think it is a good corporate finance decision for us to redeem that even if that means that we'd have to borrow some more money to do it. So -- I think hopefully that answers your question.

Well that's exactly where I was going. To the extent you are able to do that, it might take you very briefly above 6, but is there any reason mechanically it would --(multiple speakers)?

No, I don't think it would take us above 6. We are at 5.5 now.

Right.

We are halfway through the year. We will probably be by 5.3 or so by the end of the year.

Correct.

And then that's about 5 million shares. It will be 5.1 million shares I think by January, and you can do the math, with the stock trading at the mid-60s, that gives you about $325 million, which is relative to our EBITDA, it's about 0.55 or something like that. So it would take us back up to 5.8, 5.9, something like that.

Is there any mechanical or other reason you could highlight why it would not be as accretive for shareholders as the prior repurchase was for any--?

Well, the price in the prior repurchase average I think was about 57 bucks.

Right.

Now the stock is up to 64 and change. That would really be the only reason, I guess, depending on what interest rates are at the time, when we have to borrow that money. We borrowed the hold co (ph) notes at 6 and 7/8th, so those are kind of the factors to consider.

One other quick question if I could. The Las Vegas book is obviously very critical and you have performed quite well there. The book will be finished in July. Can you give us any sense at this point now that it's essentially complete how it's performing?

Arnie, I think again we feel real good about how we have done in Vegas. We continue to feel good about the value proposition and that's driving our results.

Okay. Thank you.

Thank you. Our final question comes from Maurice McKenzie of FBR.

Hi, this is Ryan Viniard stepping in for Maurice. I was hoping you could give us an update on bilingual books and any rescoping opportunities outside of the Midwest.

Really there's not a lot of updates for bilingual to talk about on this call.

Okay.

And we're always looking, Ryan, at our markets, so we've got a very disciplined process that looks at most of our markets across the country, looking for the right opportunities and as we see them, we are going to continue to extend but we are not going to comment on market by market.

Okay. That's all for me (ph). Thank you guys.

Yes.

And at this time, we have no further questions.

All right, well, I would like to thank everyone for your interest, and obviously if there are any follow-up questions, please feel free to contact Jim Gruskin, and have a great day. Thank you.