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The Dun & Bradstreet Corporation (NYSE:DNB)

Q2 2009 Earnings Call

July 31, 2009 10:00 am ET

Executives

Kathy Guinnessey – Leader, Treasury & Investor Relations

Steven W. Alesio – Chairman of the Board & Chief Executive Officer

Sara Mathew – President, Chief Operating Officer & Director

Anastasios G. Konidaris – Chief Financial Officer & Senior Vice President

Analysts

Michael Meltz – JP Morgan

Carter Malloy – Stephens, Inc.

Daniel Leben – Robert W. Baird & Co., Inc.

Operator

Welcome to D&B’s 2009 second quarter teleconference. This conference is being recorded at the request of D&B, if you have any objections you may disconnect at this time. All participants will be in a listen only mode until the question and answer session of the call. (Operator Instructions) I would now like to turn the call over to Ms. Kathy Guinnessey, Leader, Treasury and Investor Relations.

Kathy Guinnessey

In a moment we will hear commentary on our second quarter performance as well as our outlook going forward from Steve Alesio, our Chairman and Chief Executive Officer; Sara Mathew, our President and Chief Operating Officer; and Tasios Konidaris, our Chief Financial Officer. To help our analysts and investors understand how we view the business, our remarks this morning will include forward-looking statements. Our Form 10K and 10Q filings as well as the earnings release we issued yesterday highlight a number of important risk factors that could cause our actual results to differ from these forward-looking statements.

These documents are available on the investor relations section of our website and we encourage you to review this material. We undertake no obligation to update any forward-looking statements. During our call today we will be discussing a number of non-GAAP financial numbers as that is how we manage the business. For example, when we discuss revenue growth, we will be referring to the non-GAAP measure core revenue growth before the affects of foreign exchange unless otherwise noted.

When we discuss operating income, operating margin and EPS these will all be on a non-GAAP basis before non-core gains and charges. Reconciliation between these and other non-GAAP financial measures and the most directly comparable GAAP measure can be found in the schedules to our earnings release. They can also be found in the supplemental reconciliation schedule that we post on the investor relations section of our website. Later today you will also find a transcript of this call on our investor relations site.

With that, I’ll now turn the call over to Steve Alesio.

Steven W. Alesio

First of all as you saw from our earnings release, we delivered solid financial results in the second quarter in spite of a continuing difficult economic conditions. In our collective discussion today we will share with you a picture of what we see as a company heading in to the back half of 2009 and how we are leading as we head in to next year. While we will take more than a few words to do so, what you should take away are three things, first of all, the top line in our North America segment of our business is pressured by the economy more than we anticipated but we expect and we are working on that recovering.

The second thing you should take away is our focus on profitability is still very much a part of who we are and we expect our margins to hold up well even in this environment and to continue to do so moving forward. The third thing you should take away is that we are a company whose strong competitive position and the financial strength is very sound as we start preparing for next year. I thought I’d put my opening remarks in to a 2009 framework that I spoke of on our last two calls.

That is, when we entered the year we anticipated three things: first, that the weak economic environment would put pressure on our top line; second, we said we’d continue to focus on profitability; and third, we said we would invest for long term growth with a lens on heading in to 2010, a stronger company than we are today. Using that framework, let me touch first on the top line for the second quarter. The real highlight for us is that our international business really continues to perform very well with revenue up 20% and in line with our expectations. This business has shown terrific consistency with six consecutive quarters of strong double digit growth.

In the second quarter we experienced strong organic growth in established markets like Europe and Japan as well as inorganic growth from acquisitions in India and China. Further, during the quarter we took additional actions which will drive future growth and Sara will comment on that later. In our North American business, revenue was down 3% for the quarter, lower than we expected. Within that, risk management was down 1%, about what we expected and sales and marketing solutions were down 7% which was lower than we expected.

In North America, we are seeing three customer behaviors impacting our results. First, customers’ overall level of business activity is lower and whether that is less new credit evaluations or just doing fewer direct marketing campaigns. Second, our customer’s budgets are tight and we are choosing to be flexible with pricing when needed in order to retain customers for the longer term. Finally, the small business segment of the economy is acutely pressured and that’s a part of our business as well. We expect these items to continue to pressure our top line in North America the remainder of this year and Sara will touch on the specifics in a few moments.

The second part of our framework for 2009 is that in spite of top line pressure, we said we’d continue to focus on profitability. Earlier this year we undertook an aggressive reengineering program which has played a critical role in delivering operating income growth and EPS growth of 5% in the second quarter and 200 basis points of margin expansion in that same quarter. All of these earnings measures for the second quarter were in line with our own expectations. Equally important, year-to-date we generated $192 million of free cash flow.

The third part of our framework for 2009 is we said that we would invest for long term growth with a lens on heading in to 2010 a stronger company and we are doing that despite the continuing top line pressure. We’re focused on three areas to create growth in the future. First, we are continuing to invest in our international business. We will increase our presence in key geographic areas that leverage the value of our cross border data. In the most recent quarter we made two acquisitions you will hear about in a moment and we divested one operation since we did not see the top line or margin growth possible.

The second focus for growth is that we are increasing our investment in product innovation. The economy is forcing us to revisit the pace and the sharpness of our value propositions. Later this year we’ll introduce new solutions in risk management and sales and marketing solutions that Sara will talk about in a moment but we intend to continue to strength our product innovation capabilities to fuel growth going forward. Finally, we will continue to leverage our reengineering model as we head in to 2010 to prudently increase our efficiency, to have sufficient funds for investment and to ensure margin growth.

With this framework for 2009 as background, when we look at our financial picture for the remainder of the year, we expect first of all our international business to continue to grow its top line in the range of the high teens to low 20s based on its current momentum. In North America, we expect the customer trends we see to persist and therefore now expect the top line in North America to be down approximately 3% to 5% for the full year versus our original expectation of flat to down slightly for the full year.

From an earnings perspective, we are continuing to flex our cost base further but we are also maintaining the needed investments that I mentioned to grow our international business and to fuel product innovation in North America. The resulting earnings impact will have our margins be slightly up on a full year basis as well EPS. As a result of all of this, we are adjusting our guidance for the rest of the year, specifically for 2009 on a full year basis we expect revenue of approximately flat. We had said up 1% to down 1%. Operating income of up 1% to down 3%, EPS in the range of 1% to 5% and free cash flow of $285 million to $315 million full year.

Two last items of context that I would share with you, first of all we are a financially healthy company with a long history of being committed to driving total shareholder return. That is still very much the case. In this moment in time we are positioning ourselves for growth as the economy recovers. As a part of that, we’re very focused on retaining our customer relationships during the course of this environment. We’re in a unique position to keep making investments as a strong company. We have a valuable set of assets that can fuel growth in the future and we have a leadership position and a globally recognized brand in a large and growing market.

My second contextual statement is that while we want our business performance to be better than it is at the moment, we must remember that the environment is quite extraordinary. That does not mean that we lower the bar for ourselves but I do believe that D&B is outperforming its industry peers and in many cases, many parts of corporate America so we need to keep our performance in a relative context as we prepare for growth.

With all this as backdrop, Sara will now discuss our revenue results and provide a sense of what we expect in the second half and the basis for improvements over time and Tasios will then discuss the rest of our financial picture describing how we are focused on profitability and how we’ll maintain our financial strength. After that, I’ll come back with some closing comments before opening up items for questions.

Sara Mathew

I’ll begin with a review of our international business which was up 20% in the second quarter. Now, as a reminder, just two years ago we were struggling to maintain consistent top line growth in this market. Today, we are in a very different place, our international business is a strong contributor to D&B’s top line growth but more importantly this acceleration which was drive through a combination of organic and inorganic investment comes with higher margins and is creating value for shareholders and customers.

Let me explain, there are three key factors that drove this shift in international performance: first, our decision to service the need of cross border customers; second, our choiceful selection of markets and the way we compete within each of them; and third, our bench strength and the talent in each market. A foundational element of our international strategy is to target cross border customers with data quality as the basis for differentiation versus the competition. These choices have created focus for our investments and is a key driver of international growth.

As background, the international market is unique in this respect since most customers do not just rely on the domestic market to drive growth, they look outside. Trade liberalization has eliminated many tariffs across Europe and Asia and D&B is uniquely positioned to facilitate cross border commerce. Our global DUNS numbering system, linkage, matching and scoring solutions help customers make insightful cross border decisions, a critical need in these uncertain times.

To drive better cross border decisions, we’ve had a single minded focus to improve data quality across international. We invest organically via acquisitions and through partners to drive data quality improvements in each market. In addition, we continued to shape our alliance strategy to close gaps in our core DUNSRight proposition. As an example, we just announced the divestiture of our domestic Italian business to CRIF, the leading player in the consumer space in Italy. This has allowed us to close a critical data gap in Italy and we expect to achieve 100% data coverage in this market in about 12 months. Importantly, we retained the high margin cross border business, thereby creating a faster growing higher margin international business in the process.

A second example is our decision to purchase ICC, a business credit and marketing company in the UK and Ireland. When closed next month, this acquisition will significantly improve data quality in Ireland while also increasing access to an important customer segment, financial institutions, an area where we have been historically weak. This is yet another example of our investment approach in international that adds value to both customers and shareholders.

The second driver of the international turnaround is favorable exposure to higher growth markets. About two years ago we made a decision to focus our investments in high growth markets such as Asia. Once again, we executed this strategy through a combination of organic investments, joint ventures and partnerships. This ensures efficiency of investment dollars, lower execution risk and access to local talent and expertise. Our strategy is clearly paying off, as an example, in Japan our joint venture with TSR gives us greater access to the Japanese customer base with a cross border value proposition that is superior to local competition.

We also continue to expand our presence in China. In the second quarter we took a majority interest in Roadway, a direct marketing business that increases our footprint in the S&MS space. As context, the need for reliable B-to-B data in China is a critical need for most global customers. The acquisition of Roadway creates scale in the market research business in China an important entry point to customers who wish to do business there.

Finally, we continue to benefit from strong leadership in our international markets. Our JV partners bring local expertise and our D&B leaders ensure the right strategic focus so we sustain this growth trajectory in to the future. As a proof point, 2009 was a year of heavy investment and strong top line growth in international. Margins will expand largely a reflection of the way we have executed our international strategy.

Let me now turn to North America where revenue declined 3% in the quarter. These results were below expectations and it is now clear to us that our North American business is more economically sensitive than we originally thought. As a result, we expect revenue to weaken slightly in the second half and this is reflected in our revised guidance expectations for 2009. At a high level, Q2 has been a quarter of learning for us. The weak economy is driving inconsistent customer behavior and as Steve mentioned, we expect these conditions to stay with us a while.

Let me begin with the review of our second quarter performance and then cover the actions we are taking to improve the customer demand in the second half. Our risk management solutions declined 1%, about what we expected. Since our RMS business is mostly based on upfront customer commitment, we are seeing a slowdown in demand for our products and services which is largely a function of the weak economy. This will ultimately be reflected in our revenue in the second half of 2009 and our guidance for the year reflects this trend.

Several bright spots within the risk business, in the second quarter the D&BI penetration grew to 54% up from 38% a year ago. Retention rates among existing D&BI customers remains strong and price increases for renewals of D&BI remain in the high single digit level, all in line with expectations. A primary issue is with the transactional portion of the risk business which remains very weak. As context, the use of these legacy products closely correlates to our customers’ level of new business activity. With new credit applications down double digits in 2009, transactional usage of our legacy products is also down double digits.

The issues are most acute in the small business area where bankruptcies have almost doubled and with financial institutions where there have been a contraction in new commercial credit. Additionally, the weak economy has increased our customers’ focus of monitoring the risk within their existing accounts and we have now the opportunity to take advantage of this trend. As such, we have initiated for key questions: first, we have just launched the enterprise version of D&BI account manager and completed our first installation with a large transportation company.

This tool designed for large customers can track over 1.5 million active accounts in a portfolio, a key on [inaudible]. This module will be available to all customers in the second half of the year. Second, we’re proactively revising our scoring models and scoring engine to keep up with the fast changing environment so we improve the predictiveness of our scores by yearend. Third, since midsize customers have expressed a need for more efficient collections, we’ve added a collections module to D&BI in the second quarter.

Finally, we’re ramping up a supplier portal which is gaining traction in the marketplace. We expect this product to continue to gain momentum in the months ahead as we introduce a more scalable platform in the fall and ramp up the distribution arm that will sell this solution to our customers. We believe these actions will help stabilize our risk business however, we realize we should have been quicker to market with these initiatives. We now expect to see the risk business decline in the mid single digit range in the second half as we were have less benefit from deferred revenue I mentioned earlier.

Turning to our sales and marketing business, both the S&MS and Internet businesses continued to be impacted by the weak economy. S&MS was down 7% in the second quarter lower than we expected. Our traditional products declined 14% in line with expectations. The traditional business which is focused on prospecting is very closely tied to the level of direct marketing activity at our customers. In this environment, customers continue to defer or cancel marketing spend and this is lowering demand for our products. We expect this trend to stay with us over the rest of the year.

Our value added products or VAPs were down 2% in the quarter which is below expectation. When we spoke at the end of the first quarter, we had three initiatives to drive growth in the second half of the year: first, feature upgrades on our optimizer product for large customers; second, bundled offerings to bring more immediate value to the table; and third, improved sales execution, that is pipeline build and close. All three initiatives have been implemented in the market and our pipeline continues to grow signaling customer demand for our products and services.

That said, we’ve observed fairly erratic customer behavior in the second quarter. With severe budget constrains our customers are cutting back on the extent of their marketing activities so we did not get the growth we expected. To be clear, customers want our products and services and our retention rates are holding up very well. However, the breadth and scope of activity is limited and new customer acquisition has been challenging due to longer sales cycles.

Stepping back, we expect this business to improve when the economy strengthens. As such, we’ve made a strategic decision to retain our customers and ride out the economy with them. This will ensure we are in a good position to drive growth when they resume their marketing activity. In light of these circumstances, we are focused on new product innovation to drive higher levels of customer satisfaction. We’ve released Optimizer 2.0 which adds value for customers by offering global standardization and visual reports which offer better insight in to marketing campaigns.

This summer, we launched D&B Professional Contacts powered by Jigsaw, enhancing our offering in the digital marketing space. With this solution, our customers will have access to nine million contacts and email addresses and we’re piloting a new solution D&B Market Edge leveraging Acxiom’s capability to provide and end-to-end hosted marketing solution for midsized customers. Looking ahead we expect the S&MS trends in the second half to be slightly stronger than the first half. We have a strong value proposition and a healthy pipeline so we’re well positioned for growth when the economy improves.

Let me turn to our smaller segment, the internet which like S&MS continues to be impacted by the slowdown in marketing activity. Q2 results were better than we expected due primarily to a onetime deal that will not repeat. As we said in the first quarter, underlying subscription rates at Hoovers are down versus the prior year and these trends will be reflected in the segment in the second half of the year.

To sum up our North America, the economy is having a greater impact than we originally expected. It’s also clear we need to close a few gaps in the risk value proposition and as a result we expect full year North American performance in the range of -3% to -5% and this is reflected in our overall guidance for the year. Let me close with a few personal observations on our business. Our customers have severe budget constraints and this is putting pressure on our top line. Clearly, we did not anticipate the full extent of the economic downturn and its impact on our North America business.

That said, I remain optimistic about the future of D&B and the opportunities for growth as the economy slowly recovers. Our pipeline in North America is strong suggesting there is demand for our products and services. We know what we must do to strengthen our value proposition and we’re taking the actions to deliver our commitments in the second half. More specifically, we’re working to fine tune our North America go to market structure to focus beyond customer renewals to more aggressive new customer acquisitions and we expect implementation to be complete by the end of the year.

Last month we brought in a seasoned leader George Stoeckert from ADP who has extensive experience in transforming businesses in to aggressive [inaudible] scale. We’re fortunate to have George at D&B and we’re already benefiting from his thinking and expertise in this area. For the medium term, we’re planning to increase the pace and customer centric nature of our product innovation. We’ve engaged experts in the field help us to more fully leverage our core capabilities to drive future growth. On the international front, we have many things going in our direction.

Finally, we are a resilient group of leaders who are committed to weather the storm and emerge leaner and stronger in 2010. That concludes my prepared remarks, let me call the turn over to Tasios for the financial review.

Anastasios G. Konidaris

I plan to cover three areas today: first, our earnings and margin performance; second, our cash generation and uses of free cash flow; and third, our financial strength as we head in to the back half of this year. Let me start with our earnings and margins, in the second quarter we delivered solid operating income and earnings per share growth of 5% as our aggressive 2009 reengineering program drove very strong margin expansion of 200 basis points. In North America, operating income was flat and our margin improved by 120 basis points.

These results reflect the power of our financial flexible model as well as our reengineering efforts were able to offset the revenue decline as well as fund investments in D&BI, Optimizer, data quality and analytics. In international, our operating income was up 7% and margins were up 160 basis points. This reflects strong revenue growth and reengineering actions offsetting $3 million of negative foreign exchange impact as well as investments in Asia and Europe to fuel the strong top line growth.

Looking ahead, our revised operating income guidance reflects three items: first, our lower revenue projection in North America; second, much higher level of investments in the second half of the year than the first half, as Sara mentioned earlier we’re making numerous incremental organic and inorganic investments which we believe are very important to our long term growth; and finally, these are partially offset by the continued benefit of our financial flexibility program.

As we have said in the past, financial flexibility is a competitive advantage for us and allows us to consistently drive margin growth. In January, we shared with you our intent to undertake one of our largest reengineering plans we have ever done and create $90 to $105 million of flexibility. While our plan is on track, it was insufficient to cover both our investment needs as well as the economic pressure in our top line. We will continue to flex our expense pace to balance prudent expense management with investment for future growth.

However, due to the actions we have taken we still plan to deliver about 50 basis points of margin expansion this year and we have reduced our annual operating expenses by approximately 5%. This margin performance is consistent with what we have delivered on average over the past several years. In addition, our operating expense reduction is noteworthy and will serve us well when our top line trajectory improves given the very low marginal cost of higher revenue.

Looking ahead, we have already begun developing our 2010 reengineering plans and you can expect us to begin taking actions later on this year. In regard to our earnings per share, we delivered 5% growth in line with our expectations and we’re proud of our ability to generate bottom line growth in this environment. Our earnings per share growth was driven by our operating income growth and the accretive impact of our share repurchase program offset by higher net interest expense and taxes.

As we look forward, we expect to continue to grow earnings per share faster than operating income. This mostly reflects our ongoing share repurchase program and an annual tax rate between 35% and 36%. Let me now move to cash, we continue to generate a lot of cash at D&B due to our business model and capital efficiency. As a result, in the first half of the year we generated free cash flow of $192 million. This performance reflects lower collections and higher interest payments related to the timing of our $400 million bond offering last year partially offset by lower operating expense disbursements. Our revised free cash flow guidance for the year reflects lower collections due to our revised top line and a higher level of investments in the second half of the year, partially offset by reengineering savings.

Let me now move on to our uses of cash. As you know, we have three priorities in deploying our cash. First, we continue to invest to drive organic growth. So far this year we have made investments in data quality and new product innovations like D&BI enterprise version, Optimizer 2.0 and market edge, as Sara mentioned. We believe these investments will drive organic growth when the economy recovers. Second, we continued to look for acquisitions or divestments to improve our long term competitive position and growth prospects.

In the second quarter we invested $28 million in China for the acquisition of Roadway and signed an agreement to acquire ICC in the UK for $16 million. From a revenue perspective, these transactions will have a small favorable impact this year and add about seven points of growth to international next year. From an earnings per share perspective, these transactions will have approximately $0.05 of dilution this year but will be accretive next year.

In addition, as you saw from our 8K in May, we sold our Italian domestic operations to CRIF. From a top line perspective, our 2009 annual international revenue will be reduced by approximately $48 million. However, we kept the cross border business which was the most profitable and we will incur operating income neutrality this year and secure future bottom line growth. We are very pleased with these transactions as they position our international business for continued top line and bottom line growth and higher profitability.

Third, we remain committed to return excess cash to shareholders through a combination of cash dividends and share repurchases. In the second quarter we returned a total of $55 million to shareholders. We paid $18 million in dividends and we also bought back shares valued at $37 million, $28 million of which was under our discretionary program and the balance was used to mitigate dilution from equity awards. Looking ahead, we continue to target a total of $100 to $150 million in discretionary share buybacks in 2009 and as such expect a higher level of repurchases in the second half of the year.

Finally, we are proud of our financial strength in this very difficult economic environment. We finished the quarter with a cash balance of $226 million, up from $180 million in Q1 and we have $483 million of available capacity on the revolving credit facility. We continue to have a conservative balance sheet with a gross debt to EBITDA ratio of 1.5 times in line with our expectations. Like many companies, we have no required contributions to our US defined benefit planned in 2009 and no immediate debt maturities.

Finally, we ended the quarter with a substantial deferred revenue balance of $518 million. Our balance sheet and financial discipline have enabled us to deliver solid operating results in a very tough economy and they are very valuable assets for us. As we look to the future, we will need to significantly step up our pace of innovation. I’m confident in our ability to do so and maintain our high standards of profitability thanks to our track record of financial flexibility which is the key to our ability to invest in our business.

I will now turn the call over to Steve for some closing remarks.

Steven W. Alesio

What you should be taking away from us today are the following, first of all, we had solid financial performance in the first half of the year across really all major elements of our business. Second, from a top line perspective our international business continues to perform very well however our North American business is being impacted more than we anticipated when the year began. We do believe we are addressing the necessary drivers of top line growth to generate improvement as time passes and as the economy recovers.

The third take away is we are continuing to do well at managing for operating margins even in this environment. The fourth take away is we are focused on getting stronger and investing for our future. The fifth take away is we continue to be a very healthy company in terms of our core financial strengths. While admittedly we would like our results for this year to be better, we do believe our business is performing very well on a relative basis when we read the results of our peers and just general corporate America.

Importantly, when we look longer term, we still very much like our competitive position. We are gaining share in our international sector given our success of that business segment. In North America, we believe we are maintaining share as our competitors have similar economic issues to focus on and we are making a decision to hold on to our customers. So, our position as the world’s leading commercial information player is still very much intact as we head in to 2010 and beyond.

Before I wrap up I do want to say a few things to and about our team member. The first is about our senior team, the top 100 people who Sara and I met with a few weeks ago. This team is doing a strong job of leading in this environment and they continue to inspire us by their spirit and their willingness to persevere and find ways to be winning. Finally, I want to recognize the over 5,000 team members we have across the world. We appreciate that even in these times that create a heightened since of personal anxiety, we see this team bringing its’ passion and energy to the workplace each and every day.

With that, I’ll now open up the phone lines so that we can take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Meltz – JP Morgan.

Michael Meltz – JP Morgan

I think I have three questions, I appreciate everything you said there during the prepared script, presumably the macro environment is better today than three months ago and certainly six months ago. Can you just walk through a little bit more as to when you sense things were weakening? I don’t know if it is different in risk management versus sales and marketing, I just want to understand why the guidance cut is coming now? Then, I have two follow ups.

Steven W. Alesio

Why don’t you give us the two follow ups and then we’ll try and piece them together if they connect.

Michael Meltz – JP Morgan

One would be just to Sara’s point, what do you actually expect sales and marketing to decline in 2009?

Steven W. Alesio

Let me touch on the first one is what I took away Michael what’s kind of the macroeconomic context, how do we see that relating to the second half of 2009? So, I’m going to touch on that and Sara will touch on the specifics of sales and marketing but do I have the first question correct?

Michael Meltz – JP Morgan

Yes.

Steven W. Alesio

I think what we’ve said, I’m going to put international aside because that business is doing very well as we described so I think your question is really relative to North America. In the context of North America I think what we’ve said is the expectations that we see relative to customer behaviors is just worse than we believe almost three to four months ago now and that has all to do with them slowing down relative to transactional behavior and less activity on the sales and marketing side.

That specific customer behavior, as much as we can see it going in to the back half of the year, still looks like it is with us. We do expect when the economy turns around, and again, we have to measure that by when our customer behavior turns around that we will benefit from that with transactions and RMS improving, sales and marketing improving but that will be a function of us seeing our customers’ behavior change. At this moment, we don’t see that yet as we look in to the back half.

The flip side of that is we’re trying to stay in control of what we can and what you’ve heard from us is we’re focused on improving our value proposition, we’re focused on the efficiency of how do we go to market. Those are the things that we’re trying to stay in control of so that when our customer behavior changes, we will benefit from that. That’s my response to your first question. Is that sufficient?

Michael Meltz – JP Morgan

Let me ask it this way Steve, we’re hearing from a lot of companies that are saying things are better from what they were expecting a couple of months ago and you’re saying things are worse. So, was it you just had a higher bar of expectation for a pickup?

Steven W. Alesio

I would say it this way Michael, in the first part of the year we had an expectation for things improving in the back half of the year in the context of what we see with our customers. We don’t see that improvement. I think specifically what Sara said, using the US, is that we see the sales and marketing as slightly better in the back half of the year and we see the risk management as a little bit worse. So, it’s really that’s it. At this time we wouldn’t be in a space of being optimistic in the second half of the year based on everything that we’re seeing. If things recover faster, things will happen but right now we think it’s prudent to comment on what we can see with our customers.

Michael Meltz – JP Morgan

I guess that would feed in to the question then, you’ve given three year targets, it was a different world when you gave them then, you mentioned that you still view D&B, you don’t think you’re competitive position has changed, do you think your growth profile is any different looking forward?

Steven W. Alesio

We don’t think our competitive position changes. I think we’re better off internationally and I think we’re maintaining our competitive position in the North American market. I think relative to the growth targets that we had issued several years ago we said consistently that would have to be in normal economic times and that I can’t predict. We’re very focused however in the medium term of when our customer behavior kind of gets back to improvement, us being in a position to capture that. That’s what I would say on that.

Sara Mathew

I think Steve touched on it but I think the sales and marketing business in the first half was down about 8%. You can expect that to be marginally up, relative to that it won’t be up in positive territory but it should be a point or two better so you will see a slight improvement. That’s primarily because the first half was impacted by timing issues and in the second half we shouldn’t see that.

Also, I think you heard me talk about some of the things we’re doing from a value proposition standpoint. We have clearly got things that customers want Michael. The pipeline is certainly there. What we’re seeing is behavior Steve touched on that is very difficult to predict. We have people who signed contracts and then come back and tell us, “You know what, don’t send that over because we’re under severe budget constraints.” The sales cycle has lengthened.

To go back to your original question was did we set ourselves with a much higher bar? Maybe, we did but, that’s just who we are. That’s just the way we tend to approach the business and what we’re telling you is the bar that we set for ourselves, it is not becoming clear to us that for 2009 we will not be able to hit that bar and that’s why we have adjusted guidance appropriately.

Michael Meltz – JP Morgan

My final question Steve, you mentioned the commitment to total shareholder return, so in the context of your EBIT expectations aren’t going to be where you would like them to be, why aren’t you lifting your repurchase activity? I appreciate you want to keep leverage or Tasios at that leverage but given the stock’s performance today you could easily double or triple what you’re saying you’re going to do on repurchase and it wouldn’t change your leverage materially. Can you talk about if you’re not going to buy back stock aggressively close to $70, when are you?

Steven W. Alesio

Let me just say two things, one I think Tasios said this, I think in the range of $100 to $150 which is our share repurchase range for the year I think we’ve used about $45 million of that roughly so we have a lot more if you will room in the second half. That’s the first thing I would say and that’s quite consistent with Tasios. Second, as you know from your history with us, we’ve always been opportunistic. At times we thought it was going to be this and then it’s been higher and you know that from your history with us as do the rest of our investors.

So, you should assume that we’re always mindful of all of the factors that you mentioned including how we’re performing relative to the market, relative to our own expectations, keeping track of capital ratios as you mentioned. So, you should assume that the way we’ve behaved in the past and all the criteria that you mentioned are in our heads as we move forward. We watch that every week, every month, every quarter.

Michael Meltz – JP Morgan

Given the way that you buy stock, when do blackout periods come to a completion?

Steven W. Alesio

They usually come to a completion on a day like today so the blackout for us is over today as an example.

Michael Meltz – JP Morgan

Meaning that you could be in the market today or no Monday?

Steven W. Alesio

We could technically be in the market today.

Operator

Your next question comes from Carter Malloy – Stephens, Inc.

Carter Malloy – Stephens, Inc.

Can you talk more just about your acquisition strategy going forward? Are you going to continue to look internationally are you looking for maybe complimenting technologies here in the US? Then as a follow up Tasios can you give us the actual dollar amount expected from acquisitions in ’09 and ’10 and maybe it would be better if we had it on an international basis as I think that’s where most of it is?

Steven W. Alesio

Let me have Sara address the acquisition thinking and strategy relative to international and North America. I could have Tasios give you the numbers of what we’ve done to date but we really can’t project something forward. Let me have Sara answer that first.

Sara Mathew

In terms of acquisition, we’re in the market always Carter. In international, we’re trying to do two things, first we have to improve data quality so the examples that I talked about were all around improving data quality and at the same time figuring out a way to do that while creating shareholder value. We find that if we either acquire an entity where we already have a large owned presence we find that that works very well or in the higher growth markets where our presence is still so small and you can take China, China was a $5 million business three years ago and it will be over $20 million by the end of this year as an example of how we are rapidly expanding our footprint.

The one thing that is very clear to us is our brand in all of these emerging markets are top notched. In terms of how we think of acquisitions, we are continuously looking. We’re looking in international and we are looking in the US. If we cannot find an acquisition that delivers the customer and shareholder criteria which is real value to customers and real value to shareholders, we walk away. All I can tell you is we’re in there, we’re looking and you can expect us to continue to look in both international and the US.

Steven W. Alesio

As far as your question on numbers, all we can answer if it’s helpful is what we have done to date.

Anastasios G. Konidaris

So far this quarter we did about $55 million between ICC and Roadway and then earlier in Q1 we spent about $20 million in QED. So far we’re at $85 million so assume we’ll do in terms of targets about $100 million this year.

Carter Malloy – Stephens, Inc.

A $100 million acquisition spend?

Anastasios G. Konidaris

Yes. So far $85, let’s be precise.

Steven W. Alesio

So far $85 million for the first two quarters.

Carter Malloy – Stephens, Inc.

I’m trying to figure out the actual contribution to your P&L from the acquisitions you did in fourth quarter last year and then the ones you’ve done so far this year. Then also maybe Tasios you said on the call that you expected it to add 7% to international next year.

Anastasios G. Konidaris

Let me try to be helpful and if we need to follow up with you Carter I’d be more than glad to do so. When you look at it in terms of the acquisitions we did in the fourth quarter of last year and pretty much kind of Q1 this year, on the international side we expect from a revenue perspective that to add about 10 to 11 points of inorganic revenue growth. So, that’s probably going to be about $30 to $35 million on the top line. Bottom line, it’s probably going to be fairly neutral to a slight dilution, that’s how you want to think about that. In the US we did very little, if any, so you have QED primarily that’s probably going to add less than $20 million and it’s going to be slightly dilutive this year and accretive next year.

Carter Malloy – Stephens, Inc.

Then also you guys talked about a sharp reduction in the transaction volumes, I was wondering if you’ve seen the same related drop in usage in D&BI customers? And, if so, what their – I know Steve you alluded to some of them coming back and having pricing conversations with you and I’m just wondering if I’m a D&BI customer that signed up last year and I’m paying more and essentially using it less, what does your conversation sound like with those customers?

Sara Mathew

D&BI our usage is not an issue at all. D&BI usage is up, up very healthy as is all of the other aspects of D&BI. But, let me talk about the transactional usage, just remember transactional usage is when you don’t have a subscription contract but you can use more on an as needed basis. We started to see this occur in the first quarter but you should remember we had a sales force that we had brought in to D&B and we were pretty confident that we could start to turn the trajectory around.

The second quarter was marginally better but clearly it’s apparent to us that these trends will eventually play out in revenue in the back half because remember this is upfront commitment customers have made to us so we do have visibility in to what is likely to happen over the course of the year. In terms of connecting that to the external environment, it seems to correlate very closely with the level of new credit applications and new credit activity which is down double digits as I said in my prepared remarks and that is about what has happened to our transactional business.

To counter that, what we are trying to do is go back and look at what customers need. What they need in this environment is better portfolio analysis and I’ll be just candid, we were slow to market and slow to get in front of this trend and we are only now doing it. We have a scalable version of D&BI and once again, the benefits we won’t fully receive until 12 months from now so that’s the nature of the business.

Steven W. Alesio

Carter, the only thing that I would add to that because I think it’s a strategic question is one of the reasons we kept pushing subscription in D&BI is because when we get there we find ourselves embedded. So, even in this environment, as Sara said, people are using that far more than they ever were even in this environment versus the transactional where they are making those decisions more ad hoc, they’re not using them. So again, it’s strategically why we’re interested in that product line continuing to grow.

Carter Malloy – Stephens, Inc.

So not on a penetration basis but on a customer-by-customer basis the amount of usage is actually up?

Steven W. Alesio

Yes, that’s why we keep pushing for penetration.

Carter Malloy – Stephens, Inc.

Then lastly just real quick can you guys talk about your new contract with Acxiom and some of the efficiencies you expect to gain there?

Steven W. Alesio

I assume you’re referring to the contract from a datacenter perspective?

Carter Malloy – Stephens, Inc.

Yes.

Steven W. Alesio

This is really part of our financial flexibility and as you know we had outsourced this to [inaudible] several years ago I think it would be 2002 or 2003, I don’t have that year exactly right but back in the early 2000s. As it was coming up for renewal we were once again trying to look for two things: customer value; and shareholder value. We find that our partnership with Acxiom continues to move along extremely well. We believe we have complimentary aspects and that we can do a lot more from a data standpoint.

Acxiom also has technology that allows them to process large amounts of data which quite frankly, we didn’t have that capability in house. So, moving this business to Acxiom we believe, and you won’t see the benefits until 2010 and beyond, will have benefits both from a cost standpoint as well as from a customer value standpoint. Now, I can’t give away too much on the customer value end but you should expect to see more from us next year around customer initiatives.

What you did see this year that I briefly talked about was something I talked about called market edge which is a good example of how we are working with Acxiom leveraging their platforms and our distribution arm to bring in this case marketing solutions to the middle market which is underserved in this space.

Operator

Your next question comes from Daniel Leben – Robert W. Baird & Co., Inc.

Daniel Leben – Robert W. Baird & Co., Inc.

A couple of times you guys have made the comment about looking to hold on to customers, I just want to get a sense of what’s going on out there in the market in terms of pricing pressures specifically on the transactional said? And, are there some unique things you guys can do to try and get some more services in to some of these clients in order to retain them even though the pricing is actually going down on the individual products?

Steven W. Alesio

Let me just touch on that and if Sara wants to add something to it she will. First of all, because of our presence across the market it is important to us that we do retain as many customers as possible so strategically that’s how we think about it because we are such a leader in our space. What we said and what we are doing is we continue to try to work with customers relative to the scope of what they’re trying to get done and trying to in many cases to bundle as much as we can in to that in order to actually do the best we can for ourselves, for our shareholders as well as for them and because we have low marginal cost the bundling is relatively a cost effective process for us.

That said, we have to be mindful of what customer’s budgets are and their budget pressures and so that’s how we think about it and that’s probably as much to do with the project side of our business than anything else. So, that we’re very focused on strategically. That would be the first half of the answer to your question. From a transactional side, let me just have Sara touch on that?

Sara Mathew

What do you mean on the transactional side?

Steven W. Alesio

Do you mean on the risk side of that Dan?

Daniel Leben – Robert W. Baird & Co., Inc.

Yes.

Sara Mathew

On the risk side there are two pieces to it. D&BI is probably the best example of product that is fairly standard that we could give you specific pricing outcomes and as I said in my prepared remarks, that was up in the high single digits and in line with our expectations. On the transactional side, as I also said, it’s an upfront commitment and as we’re seeing declines in usage, we’ve reflected in our guidance that that will ultimately translate in to lower revenue. But, there’s one other point I want to make to add to Steve’s commentary. We don’t sell widgets so it’s very hard to talk about pricing per unit.

Customer activity has shrunk and so what we do is we sit down with them and we desculpt the activity that we are planning with them and we give them fewer deliverables. This allows them to do what we would describe as the minimal level of market activity so that they can continue and do what’s minimally required but, we’re also in some cases giving them less. But, we do believe when their marketing activity resumes, when the economy recovers we would just be in a better position since we were with them through what would be a period of economic pain.

Daniel Leben – Robert W. Baird & Co., Inc.

Just to shift a little bit, Tasios you gave us a little more insight in to the additional cost savings that you’ve embedded in the guidance versus the original 2009 plan?

Sara Mathew

This is additional cost?

Daniel Leben – Robert W. Baird & Co., Inc.

The revised cost saving target for 2009 relative to the original plan.

Anastasios G. Konidaris

Let me tell you how we think about it Dan. When you look at our revised guidance you kind of take the middle point of the revenue range and then you would see the new guidance implies $60 million less in revenue. Then, what you look at from an operating income perspective, operating income declined about $35 million so we actually increased our operating expense savings or financial flexibility in the remaining six months by $25 million. It was $25 million plus covering additional investments.

Daniel Leben – Robert W. Baird & Co., Inc.

I guess the other question I had was on the tax rate, what are the drivers for the tax rate coming down?

Anastasios G. Konidaris

There are a couple of things, first you have kind of mix of income between international and North America with international accounting for a greater portion of our net income and in general international has a lower tax rate than the US. The second thing is over the years is kind of thoughtful tax planning that we as well as other companies are doing.

Daniel Leben – Robert W. Baird & Co., Inc.

Then just the last thing, something we’ve seen from some other companies out there is that they’re seeing that Europe is slowing at a rate behind the US. Are you concerned that when we look out potentially in 2010 that that could be a drag on the international business?

Sara Mathew

I’m going to just very quickly paraphrase what I said in my prepared remarks. The European business is performing well and by that if you want to think of Europe it’s in the mid single digit range, we feel very good about it given the economic conditions. All other markets are up to prior year and if we go back to where the growth is coming from there are two primary sources. The first is cross border data, the need for cross border data is acute and it is actually pervasive through all of Europe.

Our focus on customers who want cross border data which has really been the focus of our international strategy has moved that along so we’re well positioned in the market. The second thing is that we did have a products portfolio manager that is available through Europe and that business is up significantly. What that product does is it allows customers to actually take a look at the risk within their current customer base and their current accounts.

That’s where the growth is coming from. We do see looking ahead that Europe will continue to maintain solid growth. We don’t expect high growth, the high growth really comes from our markets in Asia. If you look at the domestic-to-domestic business in Europe, and that’s built in to all these numbers, it is down so we are experiencing it but because of our positioning and our products we’re actually doing better than the norm.

Operator

Your next question comes from Carter Malloy – Stephens, Inc.

Carter Malloy – Stephens, Inc.

I just had a housekeeping question, what are your foreign exchange assumptions for the year? I know that rates have quite a swing favorably for you guys?

Anastasios G. Konidaris

I’m going to say they’re not favorable they’re at least not as bad as last year. Let’s kind of talk about Q2 first, so Q2 top line was about $13 million negative fx and as you heard from me operating income was a -$3 million. When you kind of look at Q3 I would expect Q3 drag on the top line to be about $14 to $15 million and on the bottom line about $3 million to $4 million. Then in Q4 I would expect, because that’s when the dollar began weakening last year, I would expect the foreign exchange to be significantly less, somewhere between zero and the -$15 million that I mentioned about Q3. All in rest of year top line probably down $20 to $25 and a negative operating income internationally by $2 million.

Carter Malloy – Stephens, Inc.

So you take the $20 to $25 and add in last quarter and that gets you close to your [inaudible]?

Anastasios G. Konidaris

Exactly. As you remember now, our guidance is on a per fx basis number one and number two, foreign exchange headwind on the bottom line has already been factored in, in our operating income guidance.

Operator

I am showing no further questions at this time.

Steven W. Alesio

I would thank all of you for joining us. Goodbye for now.

Operator

This does conclude today’s conference. Have a great day.

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Source: The Dun & Bradstreet Corporation Q2 2009 Earnings Call Transcript
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