Thryv Holdings Inc (THRY) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to R.H. Donnelley's fourth quarter and full year 2006 results investor teleconference. (OPERATOR INSTRUCTIONS). Please note that today's teleconference is being recorded as well as Webcast live over the Company's Web site, at www.RHD.com. I would now like to turn the call over to Ms. Jenny Apker, Vice President and Treasurer. Ms. Apker, you may begin.

Thank you and good morning, everyone. I'm Jenny Apker, Vice President and Treasurer at R.H. Donnelly. Hosting the call today are Dave Swanson, Chairman and Chief Executive Officer of R.H. Donnelly, and Steve Blondy, Executive Vice President and Chief Financial Officer. Peter McDonald, President and Chief Operating Officer, is also on the call.

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 and full year, ended December 31, 2006, and the Company's Form 8-K, furnished to the SEC this morning, both of which discuss fourth-quarter and full-year 2006 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. Copies of R.H. Donnelly's SEC filings may be obtained by contacting R.H. Donnelly, searching its Web site at www.RHD.com, or visiting the SEC Web site at www.SEC.gov.

This transmission is the property of R.H. Donnelly Corporation. Any retransmission or broadcast without the express consent of the Company is strictly prohibited.

During this call today, we will refer to certain non-GAAP financial measures in discussing the Company's performance. For example, we will be referring to adjusted results for the fourth quarter and full year, which unless otherwise indicated, reflect the consolidated results of R.H. Donnelly and exclude the impact of purchase accounting and include other -- certain other adjustments. You can find additional information about all non-GAAP measures, and the reconciliation between these measures and the most comparable GAAP measures, in the press release and related 8-K furnished to the SEC this morning. The press release is available on our Web site, and can be accessed by going to www.RHD.com and clicking on press releases. Please review the risk factors described in the Safe Harbor language.

Now I would like to turn the call over to Dave Swanson.

Thank you, Jenny. Good morning, everyone, and thanks for joining us. I am pleased to report that we had a solid finish to 2006 by exceeding our upwardly-revised guidance estimates for EBITDA and cash flow. We also came in a little better than our ad sales guidance, reflecting an improving trend in sales results we believe will continue into 2007.

In the fourth quarter, ad sales were down 1.6% -- a little better than we expected. Performance was driven by another solid quarter of growth in the EMBARQ markets, which have now grown for four consecutive years, offset by modest declines in Illinois and the Dex markets. The results reflect some final impact of reconstruction in the AT&T markets, particularly on national sales; further progress integrating and improving results in Dex, offset slightly in Dex by some lost sales opportunity due to some product overlap issues that we had to deal with; and finally, growing advertiser participation in our digital products.

Other activity of note in the quarter was the ratification of our new agreement with the CWA, which covers around 1100 of our Dex employees; the beta site release of our new DexOnline search platform; the consolidation of corporate finance and HR systems between us and Dex -- a big milestone in our Dex integration; and the conversion of our EMBARQ-branded products and business processes to our new Web-based platform. This represents the first phase of our enterprise-wide systems modernization and integration. This effort will continue through 2007 and well into 2008, as we bring the AT&T Illinois business and Dex onto the platform.

I'm pleased to report that the data transfer went extremely well. We do expect to see some modest impact on EMBARQ productivity in early 2007, as the sales and operations teams get used to the new processes and nuances of the new application.

As we look back on 2006, we shared -- about a year ago at this point we shared with you some key priorities that we had established. We said that we wanted to make significant progress integrating Dex. We wanted to complete the construction of a solid foundation in our AT&T markets to enable us to achieve sustainable growth and profitability. That we wanted to advance our digital strategy, and we said we wanted to stay focused on cash flow generation to repay debt. I'm pleased to report that we made significant progress over the year on each front.

Starting with the Dex integration, I am very happy with the progress we made in 2006, particularly in light of the sheer size of this effort. We are well underway implementing the RHD business process. In addition, we completed two union negotiations, eliminated many of the legacy IT systems issues that were causing published errors and billing mistakes. We reduced sales force turnover and strengthened sales training and incentive-based compensation at Dex.

And while all of these things are important, I cannot emphasize enough to you how important people are in our business. A skilled and enthusiastic sales force and support team are one of the most important assets a company like ours can have. And it represents a key value add differentiator over our competitors, both online and off. I am very pleased with the tremendous strides that were made in 2006, improving morale and creating a one-team environment at Dex.

Peter, Steve and I spent the month of January meeting with every single Dex employee to review the issues and performance of 2006 and discuss where we're going with the Company. The attitude and the enthusiasm that we saw was like night and day versus a year ago. It is clear that they are energized about being a part of R.H. Donnelly, and they want to win.

On the synergies front, while there's still more work to do, the successful integration execution through Q4 gave us confidence to increase our run rate Synergy estimates by 50% to $75 million. I feel very good about our progress with the Dex integration overall, and expect continued improvement throughout 2007.

Moving on to our priority to fix things in our Illinois AT&T markets. We invested significant time and money in 2006 to position those markets for improved, sustainable performance. In my 25 years in this industry, I have never seen more initiatives introduced to improve products and performance than this past year in Illinois. We improved the coverage areas, content and pricing of many of the directories, strengthened brand identity, improved the credit quality of our customer base, stepped up our marketing efforts, and launched new print and digital products. We are confident that these steps have created the foundation for sustainable growth.

I can tell you sales force optimism is up. Call volumes to advertisers from our print products are up. Online product sales are up. And the issues associated with product reconstruction, especially on national sales, are essentially over. As a result, we expect to see continued improvement in ad sales as we move through 2007.

Another of those '06 priorities was enhancing our digital strategy. And in that regard, we made a lot of progress on a number of fronts. The Dex acquisition brought us a platform and a competency for building a leading Internet Yellow Pages site. And the acquisition of LocalLaunch brought us key SEO and SEM expertise and fulfillment capabilities.

These two key actions were the foundation for our Triple Play strategy, the strategy that allows us to provide all of the local search products and services that small and medium-sized businesses in our markets might need to generate ready-to-buy customers. Triple Play allows our highly-trained marketing consultants to use any combination of our leading high-usage print directories, our own online search site, or the major search engines and other online sites, to market the business' message, generate prospects, and help that business grow.

These actions to advance our digital strategy in 2006 have set the stage. 2007 will be about product refinements, enterprise-wide implementations, forging relationships, building traffic, and continued improvement in sales execution.

I'm pleased to say we're already off to a positive start in 2007. Just yesterday we inked a three-year agreement with Google to further incorporate the Google AdWords solution as part of our portfolio of search engine marketing solutions. This relationship is very similar to what we established with Yahoo! Search Marketing back in early 2006.

Working with the major online search engines on these types of activities is part of our larger efforts to help local businesses extend their reach online and realize even greater value when purchasing a search engine marketing solution from R.H. Donnelly.

Finally, our fourth initiative in '06 was to focus on cash flow generation and to repay debt. In 2006 we repaid over $660 million of debt, and we believe that our focus on debt repayment is prudent at current leverage levels, and transfers tremendous value to our equity holdings. We're proud of the hard work and the results that the dedicated team of employees at R.H. Donnelly has accomplished in 2006.

As we enter 2007, we feel we are in a great position to build upon these accomplishments. With this in mind, let me share with you some of our key priorities for 2007.

First, grow ad sales. As discussed, we have had made significant investment in time and resources to make business improvements in our acquired businesses. While we are still a ways away from having all of the pieces in place to achieve our stated goal of 2 to 4% topline growth, we believe that 2007 should be a very positive step, and expect to deliver modest sales growth.

Second priority is we must continue to make significant progress on our systems modernization and integration, and we must do it with minimal disruption to our sales organization and product quality. This initiative is important for RHD to effectively and efficiently publish print and online products well into the future, and achieve our Synergy targets.

That said, we know that this kind of change has the potential to negatively impact both product quality and sales productivity. Ensuring that this is all managed effectively is a big priority for us over these next two years, as we manage EMBARQ's current transition, convert the AT&T Illinois business later this year, and convert the Dex business next year. We have a very seasoned and experienced team working on this, and I'm confident that we'll achieve our goals here.

Our third priority for 2007 is the consolidation of our Internet Yellow Pages sites around the new Dex site. We are currently making our software tweaks and enhancements to the beta site based on user and advertiser feedback, and will be officially launching that new search platform in the 14-state Dex region in just a few weeks.

As we complete the systems modernization projects that I just talked about in the EMBARQ and the AT&T markets, that will enable us to then load our rich content from those markets onto the new sites well. Following that, we will launch our sales and marketing campaigns in support of the new site in those East markets. As we discussed on last quarter's call, this will include a sizable advertising and promotion investment in 2007, designed to create awareness for the site in these non-Dex territories and drive site traffic.

Our fourth priority in '07 will be to scale up local launch, allowing us to leverage the skills and competencies that we acquired there to offer more sophisticated and effective SEO and SEM products to the market.

We currently are selling the Dex Web Clicks products in most of our markets across the enterprise. And while we've seen excellent growth from that product as our entree into SEM, we believe that we can create more competitive advantage and higher advertiser satisfaction with a more potent product that we've been testing, created and managed by LocalLaunch.

Finally, in 2007, we will continue to focus on cash generation to repay debt, while also making healthy investments to grow our business. We will be making investments in advertising, in companion directories, sales training and automation, and enhancing and expanding our digital offerings.

That being said, we plan to use all of our excess cash flow in 2007 to continue to pay down debt and transfer additional value to our shareholders.

In summary, 2006 was a year of enormous growth, transition and transformation for R.H. Donnelly. And the pieces of our Triple Play strategy began to come together, enabling us to deliver even greater value to advertisers and to increase ad sales. We believe R.H. Donnelly is in the best position to capitalize on this growth opportunity in our markets, by leveraging our local brands, delivering users the most content-rich and relevant results when they search our print or online products, and by acting as a trusted marketing adviser to the hundreds of thousands of local businesses in our markets. We believe that our 1800-member-strong local sales team is a sustainable competitive advantage that reflects our ability to recruit, train and deploy trusted marketing advisers to this hard-to-reach customer segment.

With that, I would like to turn the call over to Steve.

Thanks, Dave, and good morning everyone. Today, and for the last time, we will refer to adjusted results as if the Dex transaction closed January 1, 2006 and removing all purchase accounting entries. During 2007, we'll address GAAP results and call out two minor purchase accounting remnants, so you can readily adjust '07 for comparison with '06.

Also, today's references to EBITDA are before FAS 123 expense.

Before reviewing our detailed results, today we're filing for the standard 15 day extension on our 2006 10-K because we still need to finalize accounting for $30 million of non-cash deferred state tax assets. Consequently, today's press release schedules exclude tax-impacted accounts. Please carefully read our press release and 8-K for details.

In 2006 we generated $1.49 billion of EBITDA, while investing generously in value-driving initiatives for advertisers and consumers. We converted 49% of EBITDA into $736 million of free cash flow. We repaid $662 million of debt, achieving our 6.75 year-end leverage target, while also retiring 1.65 million warrants. Last, we raised our Dex synergy targets by 50%, to $75 million, without any incremental integration costs.

Fourth-quarter ad sales were a little stronger than expected, continuing our sequential trend since Q2. Full-year ad sales of $2.65 billion were down 1.7%, versus our -1.8 to 2% guidance. Fourth-quarter revenue of $666 million was flat with Q3, while full-year revenue of $2.69 billion achieved guidance.

Fourth quarter EBITDA of $354 million beat expectations, even after funding growth investments in [plus] books, marketing support, our new IYP site, and product R&D. 4 million of the EBITDA upside came from capitalized IT integration costs that rolled into Q4 CapEx from operating expense. Full-year EBITDA of $1.49 billion represents a strong 55.5% margin, as we funded growth investments from strong synergies performance, which protected profits. We captured $16 million of synergies in '06, versus our original $10 million plan, and within our integration cost budget of $20 million.

In Q4, we paid $157 million of cash interest. Total interest accrued in the quarter of $210 million included 17 million of PIK and $6 million of deferred financing cost amortization. During the full year we paid $664 million of cash interest, which included just one $90 million coupon on our Dex acquisition notes. Total 2006 interest expense of $844 million included $63 million of PIK interest and $25 million of deferred financing cost amortization.

CapEx of $37 million in Q4, and $80 million in 2006, reached guidance by $5 million, reflecting the capitalized versus expensed IT costs I mentioned earlier. We paid just $1 million in cash income taxes during 2006, and continue to expect annual cash income taxes to remain below $10 million through 2010. Q4 free cash flow of $165 million represents 47% of EBITDA. Full-year free cash flow of $736 million achieves guidance and represents 49% of EBITDA.

Now let's switch to capital structure. In Q4, we applied $127 million to retire debt and $53 million to repurchase 1.65 million warrants -- continuing to build shareholder value, both from delevering and opportunistically retiring equity. Recall we repurchased the warrants at $60, representing a discount to Black-Scholes value at the time, and 15% below recent trading levels.

In 2006, we repaid $662 million of debt, resulting in year-end net debt of just over $10 billion and leverage of 6.75 times. As of December 31, our weighted average pretax cost of debt was approximately 8%, and our after-tax weighted average cost of capital was 7.5%. Later this year, we expect to refinance high-coupon debt as it becomes callable, thus lowering our cost of capital.

In Q4, legacy Dex private equity investors sold their residual interest in RHD, as widely anticipated, thus eliminating the overhang and dramatically enhancing liquidity in our stock.

Before reviewing 2007 guidance, remember, we plan to report only GAAP results this year. However, we will specify two minor purchase accounting remnants so you can adjust for comparability with 2006.

First, we amortize the fair value adjustment on acquired Dex notes, which reduces GAAP interest expense by approximately $8.00 -- $8 million per quarter. This will last for so long as the acquired Dex notes remain outstanding, and you should remove this non-cash benefit.

Second, we'll accrue the final $32 million of deferred tax costs -- I'm sorry -- deferred cost uplift in 2007 that should be added back to EBITDA. Approximately $30 million of this amount will be recorded in the first half.

Finally, we remain confident about our standing 2007 guidance. Ad sales should grow modestly in 2007, with accelerating performance throughout the year, continuing recent trends. Improving Dex advertiser claims this year will soften the impact of '06 ad sales on '07 revenue.

We're investing aggressively in the business in 2007. After funding $44 million of investments in digital products, companion directories and sales training initiatives, in addition to our aggressive $20 million new brand launch, and $24 million of P&L impacting integration costs, we still expect EBITDA of $1.44 billion, implying a 54% margin.

Without getting into '08 guidance at this point, it's worth pausing to connect a few dots. In 2008 we expect $34 million of incremental synergies and $21 million of lower integration expense. All other things being equal, therefore, it might be reasonable to expect base EBITDA of approximately $1.5 billion in '08, before the impact of any ad sales growth.

Returning to 2007, roughly half of EBITDA will serve as cash interest of $745 million, including a second $90 million coupon we didn't pay last year. We've budgeted capital expenditure of $70 million, and we expect working capital and changes in other assets and liabilities to consume $10 million, deriving free cash flow of $615 million.

Net debt should decline to $9.5 billion by year end, and leverage should decline to 6.5 times. This modest delevering in '07 reflects the dual impact of our investment plans this year on both the numerator and the denominator of the leverage ratio. However, this equation should work to our benefit in 2008, allowing us to still track to our high-5 leverage target by the end of next year. As we approach this level, we'll be more specific about equity service alternatives.

Wet expect share count to be relatively flat this year, as our Q4 warrant repurchase mitigates normal dilution from options vesting, stock awards and stock price depreciation.

In conclusion, 2006 again proved the strength of our financial model, we delivered strong cash flow. We repaid $9.25 per share of debt, and we retired 1.65 million warrants -- together, generating robust shareholder value. We also achieved significant integration progress, enhancing synergies performance, which we've reinvested in growth initiatives to drive topline performance.

That concludes our prepared remarks. Operator, we're now ready to take questions.

Thank you. (OPERATOR INSTRUCTIONS). Paul Ginocchio, Deutsche Bank.

Just a quick question about -- can you talk about Dex market sales campaigns, and how that new compensation system is affecting sales campaigns? Second, a quick question about the Chicago consumer book. I think it's probably about closed. (indiscernible) just wondering how that looks. And then finally, it looks like unique users on the Web sites of DexOnline.com and BestRedYP.com are going negative or declining. Could you comment on that as well? Thanks.

If you don't mind, we'll take them kind of backwards. I'll take the first one, and maybe the second one, and I'll let Peter talk a little bit about Dex.

I saw the ComScore data that I think you're referring to as well -- saw the report, and it found it curious. Because we track results from a combination of sources, including some proprietary work that ComScore does for us on searches, as opposed to -- I think unique users is the one that you were referring to. And also, we obviously, like everybody else, analyze our internal logs, and I get these reports every month. And as well -- we track a more extensive set of metrics as well -- successful searches, click-through rates to advertisers, all that. While the timing and the methodology of our research differs slightly from the MediaMetrics survey, both the ComScore IYP report we get and our internal logs have shown modest but positive year-over-year trends for DexOnline and Best Red, in terms of searches and unique visitors. So I'm not quite sure what to make of that report.

We did actually expect to see a possible downtick early in the year, because we've not been advertising. We didn't want to drive more traffic to the beta site, actually, until we really tested it under load, which we've been doing. So we've been a little bit -- we've been quiet on the advertising front. But we haven't even seen a downtick show up in our logs as of yet.

I think -- one last thing; it's a very encouraging sign that we're seeing -- [it's like] in the new DexOnline site -- for our advertisers, since we launched the beta site, is that we are seeing a significant increase in the click-through rates to our advertisers' online listings and adds, which is one of the things that we're trying to accomplish.

So on that one, Paul, I don't really know. I think let's just keep an eye out. I can't explain why we saw that difference. On Chicago, Paul, we don't comment on -- especially forward-looking, we don't comment on specific directories. So I think that's one just wait and see. We'll have more to talk about in upcoming quarters on kind of what's happening there, and a little color on Chicago consumer.

Recently I went to Chicago and met with sales reps from all the different offices that are up there. And I can give you kind of the feel for up there. And I think that you know we've been investing in the business, and we've been doing the right things for the products and listening to the consumers. I guess to give you some color from up there, while -- the Chicago consumer is not finished, and we're not commenting on any individual book. I have to tell you that I was impressed with kind of the attitude of the sales force. We look at the other things in our business, internal metrics like the meters, how it's working with all the different products we have up there. And probably most consistently we've seen really the benefits of some of the investments that we've made. And even though it was -31, I think, when I went up there, wind chill factor, it was a very warm reception.

Relative to Dex, what we're seeing there -- we did work closely in making some compensation changes, but they weren't all that dramatic. There was a lot of good things that Dex already had going in the right direction there. What we're seeing there is we're very pleased. We've got through all of the issues that we had last year, relative to products and claims and that kind of stuff. We fixed those issues out there, and it's responding almost exactly as we thought. The smaller markets are -- we see the early returns moving in the right direction first, medium-sized second. And across the board, as we continue to implement many of the RHD business practices, we're seeing these things move in the right direction. Compensation is just one element; it's a combination of all these elements that start moving us in the right direction.

Maybe if I could just ask one quick follow-up, for Steve. Obviously, your nearest publicly-traded comparable is trading on a pretty tight dividend yield, and you could make some pretty interesting calculations based on where you will be when you get below six times leverage. Could you talk about -- I think you made a comment about how you're going to return cash to equity holders, looking at various options. Could you talk about a little how you view your competitors' dividend yield, and how that compares to you?

Clearly, they pay a dividend today and we don't. But, as I said, this year we're planning to focus our cash flow on debt repayment. We've got some callable bonds this year. And I think once we get through that, we're going to be staring at our target leverage by the end of '08. As I've said to a lot of you guys in the last months, we're not necessarily in a rush to get to our target leverage. So it may be that a year from now we start looking at dividends or share repurchases. We'll be more clear about that as we get through the year. But we're clearly focused on it. We understand from a lot of our investors and a lot of investors who don't own the stock, that having a dividend yield is an important factor for them, and we are taking that into consideration.

Karl Choi, Merrill Lynch.

I just want to get a little bit more color on the new product that LocalLaunch is developing. (indiscernible) you mentioned that it's higher value added; just wonder if you could give a little bit more color. Thanks.

For competitive reasons, we don't want to talk too much about that. It's -- all I can kind of tell you is we have been testing this slightly different approach to SEM for a year now in a couple very important markets of ours; been kind of comparing advertiser satisfaction; getting rep feedback on the differences between these two kinds of products. And it's very clear to us what direction that we need to go. But I really just don't want to be -- everybody will find out soon enough. So, for competitive reasons, I just would appreciate not having to comment on that.

If you could talk a little bit about your Google relationship that you mentioned, and how exactly it works, that would be helpful as well. Thanks.

I'm afraid I'm going to sound like a broken record here to you today. We don't like to talk about that in a lot of detail either for competitive reasons. But just kind of suffice it to say that the key points of these deals revolve around our ultimate acquisition cost on keywords that we purchase on their site associated with our SEM product offerings. We also through these deals get access to a different level of training and support, and some certain systems access, and other resources from these companies that really help enable us and competitively differentiate our SEM/SEO offerings.

I presume there is money changing hands between the two parties?

Yes.

One last question. I know you usually don't comment on individual brand sort of trends, but given the turnaround efforts in the AT&T market, just curious -- as you mentioned, you expect steady improvement in 2007. Do you think you can actually get to positive territory by the end of the year for that market?

What I will tell you is we are desperately on a mission to grow all of our businesses. Again, we're going to see steady improvement. My guess is that's a close one.

Frederick Searby, J.P. Morgan.

A couple of questions; if you can't answer these, that's fine. But I'm curious as to, given that we're two-thirds of the way through the first quarter, if you could talk about the tone of business in your three markets, and in terms of the goal of steady improvement. And [on] sales you have reaffirmed guidance, but do you have any concrete evidence that we're seeing this quarter even some steady improvement with your efforts? And then I wondered if you could give us some sense in the fourth quarter, help us break out sort of AT&T, Chicagoland and EMBARQ and Dex. Was EMBARQ still up? And Chicagoland, what you're seeing there, to get more kind of drilled down on this goal of growing [up] sales this year.

I'll take the first part; then I'll kick it to Peter for tone, what he's hearing and seeing in the field. As I said in my prepared remarks, Q4 was, again, good growth again out of EMBARQ, modest declines in both Dex and AT&T. And that's kind of as far as we go on the brand breakout. Peter, tone?

From looking at EMBARQ, [it's been] consistency. This is four years now that we've grown this business. We have -- I think Dave talked earlier about the people. One of the strengths that I see in this company is the quality of the people, and I think that that's helping with us (indiscernible) I think when you look at the markets and all the things we've been through, EMBARQ is a steady, constant performer. Dex -- we've gone through the integration. The tone of the trends out there -- the tone is very positive. Dave mentioned before that Steve and Dave and I had all -- in the month of January we spent time with every employee in the Dex marketplace. And I would have to say that it probably was one of the most enthusiastic groups that, I think, we've been with, and it's clear that they want to win. We can already see some of the trends consistently moving in the right direction.

Relative to AT&T, last year and the year before, making product changes in that business was necessary. And the good news is that's coming to an end. And I think that we're seeing it from an advertiser standpoint, from a rep standpoint. And I was just up there last month or so with the groups from all the offices, and it's been about as positive as I've seen in quite a few years. So I think the tone from the street, from the sales force is all very positive.

So in this quarter, so far in the first quarter, what are your thoughts? Should we see kind of a down one number pub sale would be -- I know you don't want to give guidance, but how much improvement in the first quarter do you think we can expect off the -1.6 sort of sequential going in from fourth to first quarter? I know you're saying steady improvement throughout the year. I just wondered -- I know you don't want to disclose for competitive reasons a lot about your Internet strategy. But, can you give us some sense of a goal you have for '07, '08 in terms of digital-type growth, and percent of revenues or something? We're looking at Superpages; it's small, but it's grown, I think, 25% in the last quarter. How should we think about your goals in terms of a digital strategy, and revenues and growth?

Fred, on that one, I've been really clear about this. Peter and I have strong philosophies about this. We don't set real specific goals about how much should come from online versus this or that. It's the market will tell us how much should be coming from our different product offerings, based on where the active market is shopping and where they get returns. So, again, we are very focused on we need to be growing. It's like our overall pie; we need to be utilizing all of these products that we have at our disposal to do the right thing for our advertisers and our prospects, and that's what's going to dictate how much is coming from these different avenues.

Just a question about first quarter, the tone of business. We're in March here. It's --

Again, Fred, I understand it's because the call is a little later [this year], but we really don't want to get in the habit of forward guidance like that on ad sales. We've been pretty -- we see a steady upward trend, and I think that's as far as we're going to go right now.

Peter Salkowski, Goldman Sachs.

I think, Dave, you talked about marketing spend on the launch of the new web site sort of starting now or going into the second quarter here. Just wondering if you can get a sense on how much you plan to spend this year incremental to what might have been spent in 2006 for marketing, and how that's going to fall across the year. Then I have a follow-up.

What we've said is that total advertising in 2007 budget is about $60 million, and that compares to about $30 million for 2006. And of the $60 million, what we're saying is that 10 million of that increase, from 30 to 40, is an ongoing investment that we intend to continue with beyond 2007. And then, 20 million is the amount kind of allocated specifically for the brand launch.

Can we expect that 20 million to sort of fall second and third quarter? I don't think you -- did you spend much of that in the first quarter? It sounds like you didn't.

It's going to be more skewed towards the back half of the year, I think, depending on -- it's going to be -- it's got to be kind of corresponding to when we actually do the -- we're ready to launch the new site and kind of take it out of beta.

Dave, you mentioned during your prepared remarks about sort of some interruption with the EMBARQ sales force, due to some system integration efforts that you're doing there. Can you elaborate on that a little bit more, in terms of what impact that might have?

It's a little hard for us to say. But it's -- anytime that we do these, these conversions, especially if we're changing from a -- I don't know what you would call the older one, it's like proprietary, but to a Web-based environment, and the processes of how you do things is different enough that there's a learning curve there.

EMBARQ is probably going to be -- is probably experiencing a little more productivity issues as we go through this, because the sales force is also being introduced for the very first time to sales force automation tools and laptops. They didn't have any of that before, so that's a pretty big change for them. Both Illinois and Dex have been on SFA programs before, so it will be less of an issue with them. So, there's no doubt that we think that it's going to cause the Q1 EMBARQ numbers to come in a little bit. The good news is, as we've said, we are seeing improvements in the other two.

Two last questions. One, on customer renewal rates, wondering what we're seeing in trends with regards to Chicago, not only in your incumbent book, but also in the companion books that you've launched into that area. And then finally, just a quick one for Steve. Current cash balance -- I know at the end of the year it was somewhere in the $150 million range. I assume you had an interest payment in January, and then that's come down since then.

I kind of missed the first part of that question.

The first question was on customer renewal rates, looking more at the Chicago market and seeing what kind of rates you're having there in terms of customers coming back to the books now that you've sort of made some changes with the product over the last year plus. And not only in the incumbent books, but also in the companion directories that you launch into that market. And then the second question was just simply cash; current cash balance, given you had fairly high cash balance at the end of the year. I assume you paid some interest in January, so that's probably down.

Relative to the renewal rates, if you recall last year, one of the things that -- initiatives we had was to get tighter on credit and to clean it all up. And really what we're seeing is a little bit of the impact of that, which is driving the renewal rates in the right direction, as well as, candidly, the value we're delivering to the advertiser today in those markets. With the investments we've made in advertising the products, both the print core books and the plus directories, or companion directories -- are all very positive.

As far as the cash balance, that's right, Peter. We did have an interest payment that we carried over into January.

And your current cash, somewhere in the low teens, I assume?

No, no, no. Remember, we, I guess, a year ago put cash on the balance sheet to help ensure that we had sufficient cash to service Corp., RHD Corp. notes issued as part of the Dex acquisition financing. And we've been using that cash to service that as we get through purchase accounting to be able to kind of refill our -- replenish our cash availability. So, I'm not sure what the exact payment was, but I'd guess it's still over $100 million, something like that.

Lisa Monaco, Morgan Stanley.

Peter, I'm wondering if you could just give us a little bit of color on what you're seeing in Florida. Other newspaper publishers have cited some softening in the market, largely on the real estate side. Just wondering if there's any impact that you're seeing as well.

I think that we are -- I think there is -- that's a reality down in Florida, that I think everybody got caught up in the real estate down there. So it's, clearly, a softer market in that -- and has impacted us in some of the headings. The good news is it's not a huge part of our business. But there's been a little bit of an impact there.

I'm wondering if you could comment on -- obviously, you have this new partnership with Google, I think last quarter it was cited that there was some data conversion problems in the Eastern markets. Can you tell me where you stand on that?

They're really two different kinds of deals. The one that we just announced has more to do with our search engine marketing products and initiatives. The issue that I talked to you about last time is more our distribution or content syndication deals with Google, and we're still in that same place. Until we get through this, again, the systems conversions for EMBARQ and AT&T, we're going to continue to have trouble getting that, passing the data from those markets properly onto Google. But we'll continue to work on those.

Steve, I know you don't want to be too specific on this, but is there anything or any situation which would cause you to look at potentially implementing a dividend before you reach your high-5's leverage target, which is most likely, as you point out, not until late next year?

Let me clarify. I'm not -- I think that if we wait until we get to the high-5's, and that's our target, then that sort of implies that we're going to then use 100% of cash flow to repay debt, because we're at our -- to pay a dividend. So, what I'm saying is that I'm not sure why we necessarily have to be in such a hurry to get to that high-5's level. I think that once we get through this year, we've got this refinancing; it's going to allow us not only to lower our cost of debt; it's going to allow us to -- give us some more flexibility as well. I think that a year from now, we should be having this conversation with greater specificity.

Maurice McKenzie, Signal Hill.

Can you give us an update on the number of markets offering companion directories, and then just some color around how those markets have fared competitively relative to markets without companion directories?

I don't actually have the number of how many markets we've introduced those in. It's not -- against the whole base, it's not that much. Again, I would mind you, we use plus an awful lot as a way to drive usage share in our markets, drive value up, drive usage up. And I can tell you they are having the desired effect on our business.

Just one second question. Can you talk a little bit about tiered pricing? You had talked about some initiatives last year. Have you seen any traction with that initiative?

You know what? It's an initiative (indiscernible) that we think has got some real potential for us. We haven't really expanded our efforts in that area to a great degree; it's like we've just had so much on our plate, and there's only so many things that we can introduce at a time. I don't think there's really any new news to report there, other than that we think that those kinds of advances in pricing probably are going to have some potential for us in the future.

Anthony DiClemente, Lehman Brothers.

Just to follow up on Fred's question on online and digital, and the comment that it would -- kind of the growth rate would be dictated by the market. Just wondering if you could elaborate a little bit more on what you are seeing in the marketplace. Is the groundswell of digital growth coming more from your existing print customers, or is it more incremental, in the sense that you're getting new customers coming to your SEM platform? And even if it's just anecdotal, or even if it's expressed as a percentage of print customers that are online, just to give us a better idea of what you are -- an updated idea of what you are seeing in the marketplace for demand for SEM products. Thank you.

Thanks, Anthony. I'll start, and I'll let Peter -- Peter is pretty close to this as well, so I'll let him (indiscernible). When it comes to the new -- are we seeing a lot of new customers coming in versus more of our existing customers in that regard? I think that we're not yet. But we see that as maybe the greatest potential for us of these products as we get further into it. And certainly, as we think longer-term about our business, that's a huge component of it. But I think Peter can give you a little more color on what we're actually seeing, and the level interest and penetration and all that.

It's really pretty interesting. I was in a call, actually, with a customer in Fort Myers not too long ago, the last month or so. And the customer -- it's interesting -- every customer -- all day long every customer wanted to talk about it. And they were thrilled that we would actually be there and in person to be able to help them understand it and help them go through it. And one of the customers who actually had purchased some other digital marketing with another company (indiscernible) association, it was interesting because they -- when they found out that our rep could take care of not only their print, but their online and SEM-type requests, the demand is high.

What's happening is because of the interest in almost every call that we seem to be on, it's actually taking us a little bit longer on every call. So it's there. And you don't have to push the reps. You don't have to push the customers. They like the fact that we can service them, and kind of the Triple Play has a lot of value as we look to kind of deepen the relationship that we have with every one of our customers out there.

If I could just make one follow-on comment to all of that. How we talk about this being market-based; there's so much sex appeal around some of this stuff that we're coaching our reps very closely on -- you know what? There are some customers that get a much better return from further investment in our print products as opposed to diversifying them across some of these other platforms. It isn't a one-size-fits-all out there. And again, we're trying to be the best marketing consultants to the small and medium-size business that we can be, and use that knowledge to help them understand better how to invest their advertising dollars to get the greatest returns.

I imagine the question is also for yourselves in terms of where do you get the greatest return of the ad dollars that are being spent. Even within the online opportunity, it's sort of SEM versus your own existing Internet Yellow Pages Web sites. And obviously, that would kind of beg the question of what do the economics look like of your deals with the larger Web engines. I'll just leave [with this] and then give someone else a chance. Can you just give us an update as to how you look at the risk return of the ad dollars that are placed by your clients, IYP versus SEM? That's what I haven't really figured out.

The return for us as a company, Anthony, or the return for the advertiser themselves?

Meaning I would imagine that the dollars placed on your own existing Best Red YP URL is probably a higher-margin dollar as opposed to the Google relationship that you have in place and have extended. But, potentially the number of dollars that are coming from the SEM deals are much greater. So what's the -- how do you think about the give and take of that? Is it -- are you looking for a maximum number of revenue dollars, or are you more focused on the margin of those incremental dollars? I don't even know; I'm just asking. How do you think about that interplay?

It's much more complicated than (indiscernible). We have -- when you look across the spectrum of product that we offer, there's different margin all across the board, and it's how it all kind of lumps together. But on some of these new products, Anthony, it's too -- it's very soon to tell what the real margins are going to be, because there's not enough critical mass developed in some of these new products yet.

But (A) we don't -- we don't focus on margins. Our first step -- and we tell our salespeople always about don't sell what's necessarily the most profitable product for R.H. Donnelly; sell what's the best thing for the customer. And we'll figure out, through an awful lot of diligence that we do internally, to -- what we should -- as we have to make investments in some of these other product strategies, what kinds of dis-investments [it's like] that we're going to make as a company as well to ensure that we continue to grow (technical difficulty) on behalf of our shareholders.

Jeff Shelton, Bleichroeder.

If I could ask the online question in a slightly different way. Are you starting to see an acceleration in the number of your customers as you roll out the product, train the sales force there? Second question, you mentioned some issues on the national front and the AT&T markets in the fourth quarter. Can you comment on how national was overall for the Company in the fourth quarter, and any expectations for 2007 versus 2006? Last question. Have you seen any changes in the competitive environment? Thanks.

Let me try to knock these out. On the national issue for AT&T Q4, it's -- again, national, as we've talked about on some of the other calls, when we reset a market, they get disproportionately hurt just because of the way that that whole process seems to work. And national had to absorb one of those again in Q4. So that's really all there is about that.

In terms of -- with the rollout of the online products seeing an increase in customers, again, what we've talked about is we've done very -- we feel very good about EMBARQ, but we're still not really deploying strategies yet to help us with that -- introduce a lot of these new kinds of products to new kinds of customers. That's in our future. We're not there yet today, so we're not getting the advantage of that to the extent that we think that we can in the future. Was there a --

Competition, I think. Relative to competition, again, we continue to see great value. We focused on providing value. We really talk about value in the field, and delivering the leads to our advertisers. And almost every single one of our markets has three, four, five different other independent directories. And that's not a new phenomena. I think there's nothing new to report there. I will say, too, national, although we went through some product changes there in Illinois, we had some very positive results in the other brands for '06.

Can you say what percentage of your existing customers take some sort of online product from you now?

I don't have the number off the top of my head. But again, we're still rolling this out and there's significant interest. And our customers know they've got great value from the print product, because it's the end of the buying cycle and they're very high-quality leads. And they're still learning about the Internet.

Michael Meltz, Bear Stearns.

I know you're fighting the clock here, so just two questions for Steve. Steve, are you confident -- this sounds like a minor issue, the tax, non-cash deferred tax issue. Are you confident this has no impact on the tax shields?

No impact on the tax shields. That's right, Michael. It's got no cash impact at all. It's a state deferred tax asset that we're trying to get our new auditors through.

And the refi opportunity later in the year; is that in your guidance right now?

No, it's not in our guidance right now. That's probably -- Q4 is where most of this stuff happens, so it's really going to impact 2008 interest expense.

Of everything that will be callable in 2007, how much of your debt is callable?

By the fourth quarter it will be about 1.5 billion, something like that.

Average about 10%?

It's probably a little higher than that.

I'd like to thank all of you for joining us this morning. As I think you gleaned from us, we remain very excited about the strength of our products, our diversified set of markets, our well-known local brands and our top-notch sales team. And we believe that it's going to translate into strong improvement in our topline performance in 2007. We appreciate your time this morning.

This concludes today's conference. You may disconnect at this time.