Thryv Holdings Inc (THRY) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the R.H. Donnelley third-quarter 2008 results investor conference call. 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. Please note that today's 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 Mr. Jim Gruskin.

Thank you and good morning, everyone. I am Jim Gruskin, VP, Finance at R.H. Donnelley. Hosting the call today are Dave Swanson, Chairman and Chief Executive Officer of R.H. Donnelley, and Steve Blondy, Executive Vice President and Chief Financial 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 September 30, 2008, and the Company's Form 8-K, furnished to the SEC this morning, both of which discuss third-quarter 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. Donnelley's SEC filings may be obtained by contacting R.H. Donnelley, searching its website at rhd.com, or visiting the SEC website at sec.gov.

This transmission is the property of R.H. Donnelley Corporation and any retransmission or broadcast without the express consent of the Company is strictly prohibited.

During today's call, we will make references to certain adjusted figures, such as EBITDA, free cash flow, and net debt. Certain of these figures exclude costs, such as restructuring charges, FAS 123 expense, restricted stock unit expense related to the business.com acquisition, and goodwill impairment charges.

Some of the items we will be discussing are non-GAAP financial measures, and additional information about non-GAAP financial measures, as well as a reconciliation between these items and the most comparable GAAP measures, can be found in the press release and related 8-K furnished to the SEC this morning. The press release is available on our website and can be accessed by going to rhd.com and clicking on Press Releases.

Please review the risk factors described in the Safe Harbor language. With that, I would like to turn the call over to Dave.

Thank you, Jim. Good morning, everyone. Thanks for joining us today. I think to say that this has been an interesting quarter would be an understatement. Let me just start with a few headlines on what's happening here specifically at R.H. Donnelley.

First, despite the very challenging economic environment in the quarter, we delivered revenue of $648 million and solid EBITDA once again of $334 million. Second, we maintained focus on delevering the balance sheet and lowered net debt by more than $150 million in the quarter.

Third, published ad sales for the quarter declined 8.3%, as expected and in line with Q2. However, ad sales in recent weeks that will show up in our Q4 results have trended worse, reflecting the unprecedented economic events and fears surrounding the banking crisis, and as a result, we have revised our guidance for full-year 2008 ad sales to the low end of our previous range, down approximately 8%.

Fourth, we recognize that the operating environment is likely to remain challenging through next year, and we continue to make meaningful progress on our initiatives to improve efficiency and eliminate unnecessary costs in the business.

And finally, in spite of the pressures we are facing to reduce costs in this environment, we remain committed to our strategy of broadening and constantly improving the platforms we use to deliver our advertisers' message to consumers seeking the products and services they provide.

Let me provide some color on what we have been seeing in our markets, and this is probably going to sound familiar, given what you've been hearing elsewhere about the economy and other local media companies. Deteriorating consumer sentiment and a lack of available credit have put enormous pressure on small businesses and have forced many to dramatically cut costs in order to remain profitable or even stay in business. While the environment had somewhat stabilized over the last two quarters, the events of recent weeks triggered even more distress and caution among small businesses. With all of our leading indicators turning modestly lower once again, we have become slightly more bearish with our guidance.

According to the most recent National Federation of Independent Businesses survey, expectations for sales growth among small businesses is at its lowest level in over 28 years. Meanwhile, in Visa's latest quarterly small-business survey, more than 40% of companies cited staying in business as a critical or a major concern.

These survey results are consistent with our observations in the field. We are seeing weakness in all markets, across virtually all business categories and among local and national advertisers of all sizes. Large metro markets continue to perform the worst, but even smaller markets are feeling the effects.

Recurring ad sales from existing customers continue to be challenged by higher than normal decreases and defectors, as well as significantly lower increase to existing ad programs. The majority of our advertiser cancellations are coming from businesses that have fallen too far behind in their monthly payments to be allowed to renew or have gone out of business altogether.

Now, as bad as this may sound, it's important to note that the vast majority of our customers are continuing to advertise. They may not be buying or increasing their programs as much, but they know the value and continue to see us as the go-to solution for driving prospects to their place of business.

As I mentioned earlier, we are actively managing our cost structure to adapt to an environment that may remain challenging for the next several quarters. We are prudently managing down expenses and improving our productivity and efficiency along the way. Employee-led teams across the entire Company continue to work closely with experienced consultants to improve our processes and systems in every area. Year-to-date, our initiatives have yielded a 13% reduction in headcount across the enterprise. This comprehensive project will continue through next year.

Finally, we continue to build the foundation for long-term growth by extending the reach of our advertisers and constantly improving upon and expanding the platforms available for consumers to search our content-rich and highly-accurate database on local businesses.

This month, we rolled out our exciting new voice search platform, 1-800-CALL-DEX, across the 14-state Qwest region. This service allows consumers to use their phone to search our accurate and comprehensive database of local business information, as well as locate businesses near landmarks or other convenient search criteria.

By year-end, we will launch the beta for DexKnows.com 2.0, our next-generation local search site. In addition, in the first half of 2009, we will be launching the Dex Search network and a new DexKnows.com platform for mobile, continuing to increase consumers' ability to access our unique and up-to-date content over additional convenient platforms.

Also of note, at the most recent Search Engine Strategies Conference in San Jose, a leading international conference for online search, Dex Search marketing won an award for best search engine marketing technology platform for small- and medium-sized businesses. Our goal is to be the market leader in providing local search solutions for the small- and medium-sized business, and this award is another indication that we are well on our way to achieving that goal in search marketing, in addition to our print and Internet Yellow Pages solutions.

It's important to remember that it's increasingly difficult for advertisers to generate the consistent volume of leads they need on their own due to complicated technology and increasing consumer fragmentation. And this service is yet another example of how we can leverage our strong advertiser relationships and track record for delivering results. In other words, we allow local advertisers to focus on running their business, while we manage getting that steady stream of ready-to-buy prospects to their door at an accessible price and an attractive ROI.

With that, I will turn it over to Steve.

Thanks, Dave, and good morning, everyone. Third-quarter net revenue of $648 million declined 3.5% from Q3 last year, as stable ad sales in the back half of '07 continued to average into this year's results. We also benefited from business.com for the full quarter this year versus only one month last year. Versus Q2, revenue was 2.4% lower.

On the expense side, we continue to take a disciplined approach, aggressively rooting out inefficiency, while continuing to invest to support advertiser value. We are on track to achieve our '08 cost savings targets and our cost restructuring program.

Normal operating expenses of $314 million were 1.6% higher than Q3 last year, after absorbing a significant increase in bad debt expense and healthy investment in our digital solutions. Costs were lower in headcount, manufacturing, and advertising versus Q3 last year. Versus Q2, normalized operating expenses increased to $16 million, or 6%, again due to bad debt and further digital investment.

Q3 restructuring expense of $14 million brings the year-to-date total to $19 million of our announced $40 million plan. The program is designed to benefit both our cost structure and productivity initiatives to support ad sales.

Q3 bad debt expense of $38 million represented 5.9% of revenue, compared to $34 million, or 5.2%, in Q2 and just $21 million, or 3.1%, in Q3 last year. Our DSO also rose to 39 days in Q3 versus 35 days in Q2 and 30 days in Q3 last year. These numbers evidence the cyclical impact on our business, and unfortunately, we don't see any tangible evidence they will recover in the near-term. Approximately 40% of our increased write-offs from last year represent advertisers going out of business. Q3 EBITDA of $334 million declined $28 million from last year and $32 million versus Q2 as a result of the foregoing. Q3 EBITDA margin was 51.5%.

Turning to cash flow, we paid $206 million of cash interest in Q3, including $2 million accelerated into the quarter related to bonds repurchased. GAAP interest expense of $198 million included $18 million of bond discount accretion, $6 million of deferred financing fees, and $4 million of purchase accounting benefit. At September 30, our average interest rate was 8.3%. Q3 free cash flow of $108 million also reflects $17 million of CapEx and $3 million of net working capital uses.

We reduced net debt by $155 million in the quarter, bringing year-to-date debt reduction to $462 million. During Q3, we repaid $35 million of bank debt at par, and we repurchased $187 million principal value of RHD Corp notes in the open market at an average price of 49% of face. Of this amount, approximately $22 million closed in October, so is not reflected in our Q3 financials.

Our next debt maturities are not until 2010, and at the opco level, which benefits both from lower leverage and structural seniority. Required debt payments through the end of 2009 are only $135 million. In the meantime, our strong cash flow and our full $365 million revolver capacity provide ample liquidity.

Despite the weak economy, we still expect full-year 2008 guidance within our previously announced range, albeit at the low end. We expect ad sales to decline approximately 8%, EBITDA of $1350 million and free cash flow of around $475 million. However, we now expect improved year-end net debt at below $9.5 billion, reflecting the added value we recaptured via the bond repurchases. Expectations for net revenue and share count are unchanged at $2.6 billion and 70 million, respectively.

To wrap up, we remain focused on three key financial priorities -- disciplined cost management, investing in critical growth initiatives, and reducing debt. That should allow us to weather the economic storm and be well positioned to grow once the market recovers.

That concludes our prepared remarks. Operator, we are now ready for questions.

(Operator Instructions) Matt Chesler, Deutsche Bank.

Good morning. I just want to start out with the top line. Could you just let us know -- implicit in your guidance for the full-year ad sales growth, what is the pro forma 4Q '07 ad sales number that you are going to be using in the base that would reflect any scheduled changes or any other adjustments that take place during normal operations?

Well, we don't provide that number on a quarterly basis, Matt, but you can back into a number and it's worse than Q3.

Okay. Okay, thank you. Just at this point as we're getting closer to the end of the year, I guess we're not quite at December when you're probably going to provide more specific guidance as to your 2009 cost-saving initiatives, but can you give us a sense where we can start thinking about what the range of likely possible outcomes would be for how much cost you're trying to really get after, and whether that's going to be a cost that you intentionally take out as to other costs that come out through the variabilized component of your business?

Sure. So one way to think about that that I think is pretty reliable is to look at this year's ad sales and assume that that's what happens to revenue next year in terms of the percent change. And so we have got to take action in order to protect EBITDA. I can't tell you that next year's EBITDA will be the same as this year's, but that's the way we are going about attacking the problem.

As far as the breakup -- or the breakdown between the variable component, that will be a part of it, but it will be the minority. And the actions will have to take will have to get off -- will have to come from what appear to be fixed costs in this year and in the past.

Okay. Would it be reasonable to assume that the type of restructuring activity that you going to pursue is going to be on a larger scale than what we've seen this year and what we will see for the full year?

Yes.

And based on your $40 million plan and the restructuring benefit, you've talked about how the ongoing savings from the plan would be, I think you said, substantially larger than what you take in restructuring charges. Can you be a little bit more specific on what you mean by substantially?

Really would prefer to hold off on that until next year. I think you kind of get the picture, though. If we are trying to sustain leverage, if not bring it down, that will give you some kind of a clue as to what we're looking at in terms of what kind of cost savings are necessary.

Finally, it sounds like you're moving full speed ahead with a comprehensive, independent multiplatform strategy. Does the difficulties of the current environment make you think a little bit more differently about partnering with other local search providers, whether it's sort of print only or online, to distribute your process?

Yes, it's a great question. As you know, we are -- we have been very open advocates of finding ways to do more partnerships in all manner or form with others in the space. While there is some cost synergies to doing such things, they are not massive cost synergies. And while we will always keep the dialogues going and we will continue to do as many things as we can, we think that we've got a strategy that works for us, regardless of how big or broad those things might be or how narrow they might be.

Thank you, Steve. And Dave, thank you.

Michael Meltz, JPMorgan.

Thank you. I just have two questions. Just following up on Matt's question on the ad sales for Q4, so your implied guidance is down about 10% for the fourth quarter. Am I reading that right?

I think that's the order of magnitude that you get when you back into it. Right.

Okay. Can you give us any guidance on the free cash flow components? Where do you sit now in terms of your expectation for interest expense, working capital use, and cash flow for the full year -- I'm sorry -- and CapEx for the full year?

And you can actually see that in the schedules to the press release, Mike. Cash interest paid 750. I think previously it was 745. CapEx and working capital actually remained the same, although there's a flip, about $10 million, between them. Last time, we showed $65 million in CapEx. That has gone up to $75 million. And working capital changes were $60 million, and that's gone down to $50 million. And that is largely the way that we need to account for some tenant improvement dollars associated with our new office space in Denver.

Okay. Then on the mechanics of the bank debt, can you talk a little bit about how that will work, ideally?

Well, the mechanics are through a Dutch tender. And I think that there will be -- we sort of anticipated that it would be in a series of increments.

Okay, over what duration?

I think we got this waiver for a period of up to 270 days.

From yesterday?

Sometime this week. I'm not sure of the actual --

Okay. All right, thank you.

Peter Salkowski, Goldman Sachs.

Good morning, guys. Dave, you talked about the headcount reduction year-to-date. I believe it was 13%. I was wondering if you could give a little bit of sense of where that falls in terms of sales versus non-sales staff, and then how much of that actually occurred in the third quarter.

Well, the third quarter was roughly 200 heads lower at the end of Q3 than at the end of Q2.

Thank you.

Pete, I don't have the exact breakout of sales versus nonsales, but it's clearly both. And the process is we are literally going office by office on the sales side and looking at what our current staffing levels are, evaluating, based on very strict productivity standards that we have established with the help of the consultants that we're working with, normalizing that and then ensuring that A, we have enough people to cover the market and make our value proposition sales call to everybody that we want to, but not have any more people than we need to do that. So that's the approach we're taking on the sales side.

Got you. Then two follow-up questions. One, if you could give a sense on Vegas. I know it started to turn pretty bad last year and we would've cycled in the third quarter here against last year's book. I am just wondering if that market -- if you are seeing a bottoming in that market at this point. I know that's a big book for you.

And then also a question on your suppliers. Are you seeing any pressure from your printer and distributor -- I believe it's R.R. Donnelly, although I could be wrong. It could be Quebecor. And give a sense of if you are seeing anything there from them, because they know you're under pressure from your advertisers, from your customers.

Yes, Peter, you know on Vegas, I don't want to go into too much detail about any specific market. I will tell you that -- it's kind of more -- I told you last time -- it's more of the same. It has not gotten worse, but we have not seen any signs, at least in our leading indicators, that it's better.

I did hear anecdotally some good news about the Nevada and California housing market, that maybe we are coming to the end of the $0.30 on the $1 buys out there, and that they mark the bottom. But it hasn't reflected in our numbers yet.

Yes, I'm not surprised. It's been horrible. The housing market is going to be awhile.

It looks that way. In terms of suppliers, Peter, we are hearing nothing from anybody. I mean, as you know, we still have a lot of cash flow here and continue to pay our bills and expect to for a long, long time.

Great. Thank you very much.

Aaron Watts, Deutsche Bank.

Good morning, everyone. Just more of a few housekeeping questions. A follow-up on the amendment you got with your banks. When are you expecting to sort of kick off the Dutch auction process? I know you're not going to do it all in one clump, but do you anticipate doing that sooner rather than later?

We are really not prepared to telegraph that, Aaron.

Okay, fair enough. I know you'll probably have this when you file your Q, but can you talk about which bonds you went after specifically in the quarter and maybe your thought process behind that?

Yes, we bought RHD corp bonds in all five series, I think. So we bought -- the majority of them were the 13 maturities. We did buy some 16s and 17s just because the price was so attractive. But the large majority was in the 13 maturities.

Got you. Obviously trying to reduce that maturity hurdle that year.

Well, all other things being equal, right? I mean, at the beginning of the quarter when we started doing this, the prices were relatively the same for 13s and 16s and 17s. And then as we got further into the quarter, the 16s and 17s got considerably cheaper. So we took advantage of that as well.

And were those purchases all done with cash generated by the business or did you sort of tap into any of your revolvers to make that accretive purchase?

No draws on the revolvers.

Okay. All right, I appreciate it. Thanks, guys.

Robert Kricheff, Credit Suisse.

A couple of quick questions here. Is it safe to assume that for the bank tender process that there will be no draws on the revolver that you will be using, that the game plan is to use cash flow that's generated from the businesses?

I really don't want to limit our alternatives in terms -- in that regard, Robert.

Okay. And then could you give us -- two other questions -- number one, could you give us a sense in ad sales if there is any differences in the declines by the various debt-issuing entities, meaning Dex East, Dex West, RHD, Inc. -- are you seeing any differences there? If so, can you tell us what they are?

And lastly, is there any way you can just give us a sense of what the decrease has been year-over-year and like the number of listings or the number of actual customers that you have signed up?

Robert, a couple of those might need you to remind me. In terms of numbers of customers, like the decreases very much are paralleling the revenue numbers. So no real differences there. They are tracking the same -- the ad sales number. And what was the question before?

On the ad sale declines that you are seeing, are you seeing differences between the various -- in the degree of decline from the various bond-issuing entities? Mainly, are you seeing greater declines in RHD, Inc. than Dex West or vice versa or anything like that?

No, no. The only way that I would -- across business lines or those entities, I would say no. It's the major markets -- the major metro markets are performing worse than the smaller markets.

Okay, great. Thanks.

Ken Silver, RBS.

Thanks for taking the calls. Given the weak environment out there, have you seen, are you starting to see closures of some of your smaller print competitions in certain markets?

You know, there has been some of that that has gone on over the course of last year. You know, right now, we are pretty focused on our own business. We are not hearing a lot from our customers about competitors at all.

The discussions that we are having with advertisers are about the stress that they are feeling in the marketplace, rather than how are they going to -- how they can move advertising to some other lower-cost provider.

But my sense is it's pretty darn hard out there for everybody, and those that got less staying power, it just looks like it's going to be a difficult environment to be able to hang on in long-term.

Do you have any indication that there could be a significant shakeout among a lot of the smaller competitors?

You know, I am not going to go there. I don't know.

Okay, thank you.

Todd Morgan, Oppenheimer & Company.

Good morning. Thank you. Can you talk a little bit more about the sales environment? And I guess sort of two things, if you could comment on them. When you're talking with customers about renewing, I'm assuming that they are kind of lamenting their own situation. What sort of strategy do you have to try and keep them as advertisers, keep their spending levels up?

I guess secondly, I know local is the vast majority of advertising. But can you talk about any differences in national versus local trends? Thanks.

Todd, not much difference between national and local these days; they are both performing pretty similarly. In terms of things we are doing to try to help these small businesses through these times is we are trying to offer -- for those that will at least spend the same or increase their spending, we are creating a lot of incentives for them, where they are able to buy more advertising at a discount. We are including color in many places.

We're leveraging some of these new platforms that we are rolling out. As an example, 1-800-CALL-DEX out there, we are not charging incremental for that. It's just another part of the Dex advantage that people get from doing business with us. And in other things with our digital products as well.

So we are trying to help them through a very difficult time as best we can. And it's one of the reasons why we aren't seeing as much lift on the increase line as we normally do.

Okay. And yet it looks like you are doing that essentially with a pretty flat cost structure at this point.

Yes, it's a great question, because what we've been talking about and what we've been doing as we have had to increase our investments in the interactive side as a result of changes in technology, we have been trying to find ways to use technology to decrease costs in other parts of our business.

And a great example of that is if -- these will be rough numbers, but as we increase -- in 2008, increase the spending on the digital side of our business by some $30 million, we have been able to decrease costs in the legacy side of our business by at least $30 million. So it's not just all incremental.

Good. That's helpful. Thanks.

Andrew Finkelstein, Barclays Capital.

Good morning. Just wanted to follow-up on the expense issue. It looks like while you are holding it, it's pretty close to home, it's up from the second quarter. And then if I roll through the guidance for the fourth quarter, it looks like it's going to be up a little bit more. Obviously, with what's happening on the top line, I thought that -- kind of expected to see that number go negative.

So I was just wondering if you could talk about fourth-quarter expenses and sort of where we are, at least in the rollout of the current set of expense reductions.

Andrew, it's good to hear from you. So remember in the second quarter, we indicated that there were some timing issues related to expenses that hit in Q2 -- I'm sorry, that did not hit in Q2, but we would be seeing in the back half of the year. And some of that you see in the Q3 expenses. So there is some timing issues there.

I think the other thing that -- your question about the implied expenses for Q4, I think that maybe what you are seeing there is some level of conservatism on our part with respect to where EBITDA may come in, just because we don't know in particular what is going on with bad debt expense. And so if bad debt expense remains around the same as it is now in Q3, then we might do slightly better than the bottom end of the range. But if it deteriorates, we are sort of making some sort of provision for that in our guidance.

Thanks. And could you talk a little bit more about maybe bad debt, on what you saw sort of through the quarter over the three months and how much you think that is moving?

I'm sorry, you're saying what -- between what, the timing issue?

No, just in bad debt. It sounds like (multiple speakers) --

Right. So the bad debt number in Q3 was $38 million. It was $34 million in Q2. And our DSOs went from 35 to 39 days. So we are assuming that we continue to lose a day per month of DSOs in our fourth quarter.

Okay, great. Thanks.

This concludes today's conference. Thank you for your participation. You may disconnect at this time.

Thank you all for your interest.