Peter J. McDonald - Chief Executive Officer, President and Director
Samuel D. Jones - Chief Financial Officer and Executive Vice President
George Joachim Sebastian Schultze - Schultze Asset Management, LLC
SuperMedia Inc. (SPMD) Investor Conference May 7, 2013 10:00 AM ET
Good morning, and welcome to Dex Media Investor Conference Call. With me today are Peter McDonald, Chief Executive Officer; and Dee Jones, Chief Financial Officer.
Some statements made by the company today during this call are forward-looking statements. These statements include the company's beliefs and expectations as to future events and trends affecting the company's business and/or subject to risk and uncertainty. The company advise you not to place undue reliance on these forward-looking statements and to consider them in light of the risk factors set forth in reports filed by Dex Media and its predecessor company with the SEC. The company has no obligation to update any forward-looking statements. A replay of the teleconference will be available at (800) 585-8367. International callers can access the replay by dialing (404) 537-3406. The replay passcode is 46200966. The replay will be available through May 21, 2013. In addition, a webcast will be available on Dex Media webcast in the Investor Relations section at www.dexmedia.com. At the end of the company's prepared remarks, there will be a question-and-answer session.
And now, I'll like to turn the call over to Peter McDonald. Peter?
Peter J. McDonald
Thank you, Angie and good morning, everyone. Welcome to our first investor call for Dex Media.
One week ago, Dex One and SuperMedia exited their Prepackaged Chapter 11 bankruptcies. In the next day, the companies merged to create Dex Media. I believe the creation of Dex Media is good for shareholders, lenders, employees and clients and are excited about the opportunities before us.
Today, I'd like to describe Dex Media's position as we launch the new company and share my perspective on our priorities as we move forward. Dee will then review first quarter results that the 2 predecessor companies previously released. After which, we look forward to responding to your questions.
It took many people and significant effort to complete our transaction. We benefited from having experienced teams at both companies and at our financial and legal advisers. I extend thanks to everyone who played a significant role in reaching this milestone. In particular, I'd like to acknowledge the members of the Dex One and SuperMedia Boards of Directors and executive teams. Dex One Board Chairman, Al Schultz, and SuperMedia Chairman, Doug Wheat, became close partners to keep the transaction on a steady course. And Alfred Mockett and Greg Freiberg were great partners to me and Dee along the way.
Dex Media is a new company with a powerful and effective approach to deliver social, local and mobile marketing services to small- and medium-sized businesses throughout the country. The merger has strengthened our position as a trusted marketing solutions partner with a track record of helping local businesses grow. As a result of this merger, we will be able to provide more and better solutions with more measurable results to more businesses.
The combination also will accelerate the transformation that was underway at both companies. We will adopt best practices, technologies, operating processes and marketplace approaches that each company had developed.
In addition, by extending the debt maturities on our credit agreements, we will have additional time to pay down debt as the business transforms.
Significant cost synergies and benefits of enhanced tax attributes will also strengthen our cash flow and enable us to repay debt more rapidly than otherwise would have been possible. Perhaps as important as positive changes coming from this merger are the things that haven't changed. We will still go to market with highly-trained marketing consultants who have a deep and experienced relationships with local businesses. We will continue to serve as the outsource marketing department for small- and medium-sized businesses. And we will help simplify the marketing process in an increasingly complex environment.
Our relationships and our track record of generating results for our clients have been, and will remain, our competitive advantages.
Our statistical profile tells a story of the scale and scope of Dex Media. The company's generated pro forma combined revenue of $2.7 billion in 2012, including $460 million of digital revenue. We serve approximately 665,000 clients in 43 states with more than 2,700 marketing consultants. We are well-positioned to execute our strategy to be the trusted marketing partner to help local businesses grow through effective marketing solutions.
Before I expand on our strategy, let me share my thoughts on the top line. We are not, at all, satisfied with where we are, but we know what we have to do to stabilize and improve revenue and we have a plan to do so.
Sales in the first quarter at SuperMedia and Dex One were below expectations due to a variety of reasons or factors. We are well aware that our business does not turn on a dime, and that there's likely to be some carryover of trend into the current quarter.
I will provide some specifics about our game plan to address the top line on this call, and we will provide more updates in the coming months.
The December 6th lender presentation included publicly released forward-looking financials and other metrics as a plan of record for the standalone and combined entities. We are not updating that information at this time.
Looking forward, while results for individual revenue and expense lines may vary, we remain committed to achieving EBITDA and cash flow levels reflected in the plan.
I believe we have the right strategy to achieve Dex Media's purpose to help local businesses grow. The approach is to focus on the total client experience we provide. In addition to delivering results, we need to understand how clients feel about our solutions and our service.
What is the satisfaction level of our clients and how do satisfaction and behavior correlate? Do they trust our marketing consultants and client service personnel, as well as the solutions and results we provide? We know from experience that when we deliver results in form of leads or calls for clients, whether from digital or print sources, they are more likely to renew and increase their programs with us. We typically have a client retention rates in the 80% to 85% range. That tells us a large portion of our clients stay with us each year because our marketing solutions work.
Our retention rate among clients who purchase more than one solution from us is even higher. Retaining existing clients and attracting new clients are top -- are our top priorities. We began several initiatives over the past year to improve our performance in these areas and will help us move in the right direction. Improvements in renewing and increasing client spending have always been the biggest components of revenue growth in our business. While overall renewal rates are showing only slight improvement, each time a relationship is renewed, we take that opportunity to offer digital solutions to complement existing print solutions.
As I noted, when we achieve print and digital relationships, both renewal and a retention increase. While I like the direction, many of our clients have yet to understand and embrace the benefits of digital solutions for their businesses. Many small- and medium-sized businesses are focused on day-to-day survival rather than marketing. Many are still hurting, following the recent economic recession. Many are concerned about the uncertainties around healthcare costs. They remain cautious about their marketing budgets. We are trained our consultants to be more effective as educators, to remind local businesses that they need to apply marketing solutions to grow, and that we have a broad array of solutions to help them.
Consistent with our strategy, we are focused on building trusted relationships based on our marketing expertise and delivering measurable results that prove the value we bring. Currently, we can track and measure the results and we are getting for every digital client in the SuperMedia markets, and we will be doing this for clients across the Dex One footprint as well.
I am impressed with the results that we are delivering for our clients, as reflected in our renewals. Renewals, on a dollar basis refers to the amount spent by clients that renew their contracts with us up to the amount spent in the previous year.
Renewals on a dollar basis relative to the prior year have been in the 70% to 80% range. Increase refers to the amount that returning clients spend above what they had spent the previous year. Increase has recently been in the 5% to 10% range. We have focused primarily on our existing client base which is the most profitable.
Our objective is to expand our relationships with them to the digital solutions in order to drive higher renewals even higher. We feel good about the progress we have made, and we believe this is the right path to sustainable and profitable growth.
New refers to dollar spent by newly-signed businesses who are not clients in the prior year. New clients recently have been in the 3% to 5% range. We need to do better on new business. And we have spent -- we have several recent initiatives to increase new client acquisitions. One is called Get Started. We have specially trained marketing consultants who are responding immediately to inquiries that we generate through inbound marketing and lead generation campaigns. The consultants listen to the needs of each business owner and have a full selection of solutions to match each need. Further, the members of this team then ensure the solutions are set up properly and that the new clients receive and review the performance reporting for their programs.
Another client acquisition initiative is called Encore. It is a performance-based pay-for-call solution that brings in new customers and drives profitable revenue. The price per call varies by the geographic market and category of business. For example, a cost to generate a call for a heating contractor in Minneapolis will be more expensive than for a heating contractor in Eugene, Oregon. We've had success using this pay-for-call approach with national, as well as local businesses. Similarly, we offer pay-for-call solutions using mobile search. Last year, we began offering mobile search category sponsorships to national companies. We now have completed implementation of new technology that allows category sponsorships in local geographies. We started testing this local mobile search solution in April and expect to roll it out across our markets by year end. One more example of a new solution is text marketing, which we tested and refined last year and are now rolling out in stages. It is essentially, SMS messaging targeted to our business' customers. Something easy to understand, implement and manage. It is proven popular with nontraditional directory advertisers, with approximately 70% of the contracts from new clients. Results are immediate. A business sends out an offer and sees the responses displayed in the report. This level of a service establishes credibility and makes it easy for marketing consultants to follow up and have clients add on other solutions, such as search engine marketing, websites or even printed yellow pages. In fact, we are generating more revenue from the add-on products so far, than from the text marketing itself.
This is a great example of how establishing a relationship with a simple solution can lead to clients asking for help with additional local marketing needs. And we are in a position to meet all their needs across a full range of solutions and online media providers such as Google, Facebook, YP.com, CityGrid and many more.
We are a one-stop shop for marketing solutions. Our value story gets stronger daily. Our size, scale, technology and partnerships, along with the relationships and performance of our marketing consultants, give me hope for the future. I am hearing and seeing more confidence from our marketing consultants in the field.
Everyday, we are getting better at execution, and that will be key, going forward. Finally, a few comments on our integration process. Where we are and where we're heading. I mentioned on our 2012 year-end earnings call in March that Phase 3 involved naming new company's leadership team that would go on to define the rest of the organization. I can report that we have made great progress and are fully engaged in completing the Phase 3 process.
Our initial leadership team met on Day 1 of the new company last week to recommend organizational structures, share definitions of responsibilities, roles and key measurements and report on their plans to meet synergy targets. Everyone collaborated on best practices and discussed cross-functional issues to help us avoid surprises.
Dee provided an update on where we stood against our plan of record and synergy commitments, as well as underscoring the importance of meeting Dex Media's planned objectives from the beginning.
With top line sales falling a little short of where we needed it to get to in Q1, we clearly communicated the need to implement best practices, implement initiatives to drive top line improvement and capture additional efficiencies.
This is a veteran group that understands. Their final transition plans will be implemented in our next step, Phase 4.
I continue to be impressed with the interaction of our leadership team members. They are quickly establishing a culture that reflects their passion for the business and commitment to have an ownership mindset and make decisions that are the right thing for our clients and the company. They will keep us on track with our integration schedule while meeting our commitments to our clients, employees and investors. It is an exciting time for Dex Media. I appreciate your interest and your support.
And now, I'll turn it over to Dee.
Samuel D. Jones
Thank you, Peter and good morning, everyone. I'd like to start off by saying thank you, to all the teams that made this transaction possible and for their dedication and efforts in completing this merger.
While it will take more hard work as we integrate these companies, it is an exciting time. We look to establish ourselves in the best position for Dex Media's longevity and future success.
While Peter gave you an overview of the operational highlights, I would like to review the financial highlights of this transaction. The merger of Dex One and SuperMedia was well supported by strong majority of its lenders and shareholders. As provided in the December 6th lender presentation, this transaction will bring annual cost synergies of $150 million to $175 million by 2015. Second, extensions to the debt terms to all silos will provide us more time for our transformation. And third, the tax aspects and construct of the deal will allow the company to maintain and take advantage of its tax attributes and assets.
As Peter mentioned, we are one week post merger announcement. At this time, we have made it our top priority to address what needs to be done as quickly as possible so we can focus on our transformation, commitment and to the results of the enterprise. While we don't have pro forma financial results on a combined basis -- combined entity view to share with you today, teams are hard at work to meet the requirement that pro forma financial results be filed with the SEC within 71 days from the merger effective date. Those pro formas will be shared at that time.
While not as robust as historically presented or as much as will be shared going forward, today, I did want to review Q1 2013 results on a stand-alone basis for the major line items.
There will be required GAAP reconciliations provided in the appendix of this presentation. And as mentioned previously, the 10-Qs for the respective entities have been filed.
For Q1 2013, SuperMedia reported revenue was $293 million. Adjusted expenses were $181 million and adjusted EBITDA was $112 million. We were able to maintain cost controls across all functions, resulting in an EBITDA margin of 38.2%.
For Q1 2013, Dex One reported revenue was $288 million. Adjusted expenses were $169 million. And adjusted EBITDA was $119 million, with an EBITDA margin of 41.2%.
Looking now at adjusted net debt. Over the previous 12-month period, SuperMedia has made principal payments of $239 million, leaving a gross debt balance of $1.442 billion. After cash-on-hand of $152 million, the net debt balance was $1.29 billion. At emergence on May 1, 2013, SuperMedia made a cash sweep principal payment of $36 million, not reflected in these balances.
Over the last 12-month period, Dex One has made principal payments of $333 million, leaving a gross debt balance of $1.965 billion. And after cash-on-hand of $139 million, the net debt balance is $1.826 billion.
Looking now at ad sales. Q1 2013 advertising sales for SuperMedia declined 17%, when compared to the same period last year. This consisted of a print decline of 22.1%, offset with digital growth of 13%. Q1 2013 advertising sales for Dex One declined 16% when compared to the same period last year. Print declined 24%, offset by digital growth of 21%. Total bookings declined 14% when compared to the same period last year. Print declined 22%, offset by digital growth of 13%.
With respect to these metrics, there are some methodology and calculation differences between the 2 entities. while we have maintained the historical Dex One approach for this quarter and introduced a print and digital split for SuperMedia, we will be working over the next months to develop standard reporting methodology and metrics for the combined entity.
Just one quick note with respect to this quarter's results. While print numbers are pretty consistent as to timing and methodology with respect to print, the SuperMedia, in regard to print -- with respect to digital, the SuperMedia ad sales calculation is actually more like the Dex One bookings calculation than their ad sales calculation, primarily due to timing and recognition of the digital sales. As Peter mentioned, we are in no way satisfied with these top line results. As we bring the best practices and solutions of Dex One and SuperMedia together, we will be striving for improvement in all these trend lines. We will have more to share by the time we report second quarter results. With that, operator, we are ready for questions.
[Operator Instructions] Your first question comes from the line of Tim Daggett with Citigroup.
I'm just wondering when you're going to file the silo level financials for the stuff -- the Dex stuff?
Peter J. McDonald
Yes, we're working to get that completed. And that side, as you might imagine, there's quite a few activities going on, but we will be getting it out shortly.
And you'll just post that on the website, like you used to do?
Peter J. McDonald
For Q1, that's what we're going to do. We'll maintain that process, we're evaluating exactly how we're going to want to be doing that on a go-forward basis. But for Q1 results, we'll be consistent with that process.
Your next question comes from the line of George Schultze of Schultze Asset Management.
George Joachim Sebastian Schultze - Schultze Asset Management, LLC
I was curious if you, going forward, think there'll be any other potential consolidation opportunities in the industry? Additional M&A activity? Just curious if you had any comments about that.
Peter J. McDonald
You know, as we look at this space in the industry, this -- we've always been an advocate for consolidation across the space. I'd say it's a little bit premature to be looking down that path in the immediate sense. We're always going to look at opportunities. But right now, focused on getting this one integrated and completed and achieve the objectives associated with it. But always looking at opportunities.
Your next question comes from the line of Glenn Bradford with ARM Holdings.
I was curious if you had plans to buy back debt with your excess cash on hand?
Samuel D. Jones
We have -- both individual firms have been -- have had a history of being in the marketplace to make buybacks. If you'll note from the new credit agreements on both sides, we will have a mandatory portion of the respective cash sweeps that have to be utilized for open market repurchases, and then there will be open market repurchases available to us with regard to the discretionary cash in each silo. There is a balance of cash in the respective silos that may potentially be used for open market repurchases. And as we get a clearer vision of the cash flows required to affect the transaction, to get it to synergies and pay for the cost of getting after the synergies in the near-term, and we can get a good view of what cash might be available, I would expect that we'll be in the marketplace at some point. I don't have a defined timeframe for that as yet.
Your next question comes from the line of Colin Wilson Murphy with Bowery.
There was a slide that you had in your January 2013 presentation that talked about the 4-phase approach. And I guess in Phase 2, you specifically said that you wanted to agree upon a strategy, priorities and objectives to drive the transformation of the combined pro forma enterprise. I was wondering if you could spend a minute or 2, just giving us an overview of what you agreed upon, as it relates to a strategy. And said in another way, what will this business look like in 3 years?
Peter J. McDonald
Okay. On the 4 phases or the integration that you're talking about, it's really more focused on integration of the 2 businesses versus the strategy. So that's -- the second phase was actually where we kind of designed a new organization, really focused on how do we become efficient and effective and meet our synergy targets. Relative to the question -- where I think your question really is, where will the business be in 5 years. And we see ourselves as the trusted local marketing partner in our given markets. Actually acting as the outsourced marketing department for local businesses. And we'll be able to provide solutions for them. Because we're agnostic about how we drive leads. The key focus is, this company will be that marketing partner for small businesses, and we will generate the leads which has become more complicated, as the digital world stated more fragmented. And that's our space. And I think as history will say, that would things get more complicated -- I'll give you an example -- like payrolls, and HR and benefits, you've seen local businesses outsource that.
Now marketing has become more complicated than ever and more fragmented, and that's a space that I think that we have a real opportunity with.
Okay. And do you think that the print side of the business in 5 years will still be a significant focus for you?
Peter J. McDonald
The print business, I think will -- I think the research will show you that there's still quite a bit of usage of people that are 45 and older. And given the different types of markets that are out there, the urban markets are going digital quicker than the suburban and the rural markets. And there's still somewhere near like 7 billion references a year, to the print products remains a very strong kind of cash flow machine for us.
Your next question comes from the line of Brett Taylor with MGX Factset Management.
I'm probably one of the newest people following your company, could you break down the debt at this point in time between the various entities? Or will that be in detail in your 10-Q?
Samuel D. Jones
Well actually, yes. That will be in the information that is filed by specific silo, that was mentioned or asked about earlier. I don't have the specific numerics by silo in front of me. Well actually, if you look at the slide, one of the slides we have reflected, we have adjusted net debt and it shows the breakdown at the end of Q1 as to the net debt in the respective silo.
And the slide is under your Events and Presentations on the website?
Samuel D. Jones
That is correct. It will be presented there.
[Operator Instructions] Your next question comes from the line of [indiscernible], private investor.
I have a rather mundane question from an individual investor. My investment now is just about 50% underwater. Can you give me any kind of an estimate of what's happening as far as the growth of the price of the shares?
Samuel D. Jones
As a practice, we don't comment on the specific trading activity or the specific price of the equities or shares of the enterprise. As we talked about on the call, we're looking to drive value in the total enterprise going forward, and drive performance of the business to transform it and transform the business. That's just specific comments around the trading activity or the price of the specific security, we're not in a position to do that.
But you must have some idea of the potential growth of the company in a period of time: within the year, within 2 years. I mean, how much time do you expect to take to get to back to a reasonable value for the investor?
Samuel D. Jones
As we indicated previously on the call and made reference to our plan of record, that's out there publicly that was utilized before, that indicates we're not updating that at that time, but that does provide for a review of the longer-term performance of the enterprise. As to how the market reacts to that, there's a lot of extraneous factors, multiple factors that influence that. So it's not appropriate for us to speculate as to what that might be.
At this time, there are no further questions. Thank you for participating in today's conference call. You may now disconnect your lines at this time.
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