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PRIMEDIA, Inc. (PRM)

Q2 2007 Earnings Call

August 2, 2007 10:00 am ET

Executives

Dean Nelson - Chairman

Bob Metz - CEO

Kim Payne - CFO

Carl Salas - SVP and Treasurer

Eric Leeds - SVP and IR

Analysts

Michael Meltz - Bear Stearns

Paul Ginocchio - Deutsche Bank

Brian Gonick - Corsair Capital

Todd Morgan - CIBC World Markets

Presentation

Operator

Welcome to PRIMEDIA second quarter 2007 earnings conference call. (Operator Instructions) I would now like to introduce your host for today's conference call, Mr. Dean Nelson, Chairman, President and Chief Executive Officer of PRIMEDIA.

Dean Nelson

Good morning and welcome to PRIMEDIA's second quarter conference call. Please to be joined by Bob Metz, CEO of Consumer Source; Kim Payne, CFO of PRIMEDIA, Carl Salas, our Treasurer; Eric Leeds our IR and other members of senior management.

As always, we refer you to the Safe Harbor disclaimer spelled out in our earnings release. A reminder that any non-GAAP terms mentioned in this call are reconciled to GAAP in the company's earnings release and SEC filings.

In this morning's call, we will summarize second quarter 2007 results and review our operating strategies relative to those results. Bob will then offer performance highlights from the Consumer Source business and Kim will review the financials. Finally, we will open the call to your questions.

We've accomplished a great deal since our last earnings call. Yesterday, we completed the sale of our Enthusiast Media business to Source Interlink for approximately $1.2 billion in cash, which is a price that is both attractive for our shareholders and that one reflects the value created through the execution of our strategic initiatives. The business continued to perform well right through closing and we congratulate Source for buying a terrific business.

Secondly we have announced some key management changes as a result of the closing of Enthusiast Media sale. Specifically, the appointment of Bob Metz as CEO and Keith Bellknap as General Counsel of PRIMEDIA effective September 1, and Kim Payne as CFO effective immediately. I will remain as Chairman. We particularly want to thank Kevin Neary for all of his contributions as CFO and Jason Thaler, for his terrific work as General Counsel. Both did an outstanding job at a time of significant change in company.

Third we have taken many steps towards recapitalizing the company and through this process we have created a lower leverage, higher margin company which will generate strong cash flow that should enable us to pay an ongoing dividend to our shareholders. We announced yesterday we have secured financing commitments for a $350 million senior secured credit facility including $100 million revolving loan facility and a $250 million term loan. The new credit facility along with the proceeds from the PEM sale will be used to pay our existing term loan, redeem our notes and pay accrued interest on those notes, pay a financing fee and provide for one-time dividend of approximately $96 million to our shareholders.

We are going through the final post-transaction legal process required to ask the board to approve the one-time dividend. The board will likely consider the special dividend at a board meeting later this month. In addition going forward, the board intends to institute an ongoing dividend. After all of that, we estimate that we will have about $10 million of cash on hand and full availability of our revolver of $100 million. Our debt net of cash will be approximately $240 million. This new capital structure is designed to maximize shareholder value. The low leverage and the potential for ongoing dividends permit us to attract investors who previously were not able to invest in the company. This new leverage level also creates the benefits associated with leverage on shareholder returns, while also allowing us to monetize our net operating losses by offsetting taxable income.

We should be clear that we are not building a war chest for major acquisitions. Those of you who have been following us for the past five years know that we have been extremely selective and judicious in our acquisitions and pursued only those that had strong strategic and financial synergies with our core businesses. This acquisition strategy created significant shareholder value over the past five years and it is a strategy that we intend to use going forward.

Consumer Source has made selective acquisitions over the past few years, particularly to purchase publications that fill geographic holes in our apartment, new homes and Auto Guide businesses. We also have made selective Internet acquisitions such as RentClick. We anticipate making similar acquisitions going forward; however, these acquisitions are not expected to require significant capital.

Finally, as of today our stock at a one for six reversed split adjusted basis. We did this so we could bring more institutions into the fold that previously could not buy a stock trading below $10.

We are also in the process of downsizing our corporate infrastructure and relocating our corporate headquarters to Atlanta where Consumer Source is located. You saw in our release that our corporate expenses were down significantly year over year. We expect most of the remaining cost reduction to occur over the fourth quarter given that we still have a great deal of corporate activity in the third quarter associated with the sale of Enthusiast Media. We will continue to have a very small New York corporate presence in the first quarter of 2008. All corporate employees have individually been informed of their status and timing and we have begun the process of backfilling the key positions in Atlanta.

Before I hand it over to Bob Metz to discuss the second quarter's performance, I want to make a few overall comments on our Consumer Source business. First, it is simply a great business. It is highly profitable, generates a lot of cash, and most importantly, it offers a terrific unparalleled value with advertisers. This makes it a sustainable business with good growth potential that is aligned with the overall trend in the media world today. We are convinced from our market work that the winners in our segments will be those who have both a strong print and Internet presence and we fully intend to continue to strengthen our leading positions in both forms of media.

Secondly, we have an extremely talented, experienced management team. This business has long been a hidden jewel in the PRIMEDIA portfolio, and the management team has been both the architect and builders of that value. Our areas of focus here are simple. First, we want to continue to improve our execution in the apartments market so that we are in a position to disproportionately benefit when the market turns. Bob will talk about some of the positive trends here.

Secondly, we want to continue to pursue growth through line extensions and geographic expansion in our core market. We have been particularly successful in this strategy in our New Home Guides business.

Third, we need to get full traction and make significant progress in our Auto Guide business or frankly exit the business. We are seeing some positive trends here, particularly in Florida and California.

Finally and perhaps most importantly, we have to accelerate our Internet activities even more. We need to fully leverage our leading positions in apartments, small property rental markets and new homes. We have previously successfully executed comparable Internet strategies in our turnaround of About.com and our online activities in PEM's automotive business, so we can do it here.

Now for guidance. First, we are reiterating the expectation that in 2007 we will deliver mid single-digit percentage segment EBITDA growth excluding corporate overhead, and low single-digit revenue growth reflecting year-over-year revenue growth in our New Home Guides and our Rentals.com business, partially offset by a full-year decline in Apartment Guide. Our Apartment Guide forecast assumes a continuation of current market trends. We also expect operating losses in Auto Guide to diminish through the year due to improvements in management and operation.

With that I pass the call over to Bob.

Bob Metz

Thank you, Dean. Good morning. I would like to start with our Apartment Guide and ApartmentGuide.com business. As expected, ad revenue for Apartment Guide and ApartmentGuide.com declined just 0.5% this quarter. However this quarter represented the first time in two years that the business has had sequential quarterly revenue growth, a sign, we believe, that the apartment market is beginning to stabilize. The sequential growth is also the result of the team's hard work strengthening client relationships and developing unique offerings for our advertising base, including the ability to better track results.

On June 28, 2007, after an extensive beta testing, we created a strategic alliance between our MaxLeases and Call Source to launch a web-based lead management solution for multi-family property managers. The solution enables property managers to capture, track and report leads from all sources from telephone to email to walk-ins, ensuring that all sales opportunities are accounted for and property managers can use this information to best optimize their marketing mix. It is our view that MaxLeases will provide further confirmation that compared to other advertising vehicles, Apartment Guide Printernet products generate the higher volume of leases at a reasonable cost. We are very excited about the rollout of this product.

In tandem with the MaxLeases solution, we announced the national launch of TexttoRent which sends apartment hunters real-time rental availability information from listing on the ApartmentGuide.com and Rentals.com direct to their PDAs and cell phones. Consumers can actually request listing information by entering a property ID number that is made visible at the property location. This is an industry first service that enables consumers to make educated choices more effectively and quickly, and on their terms. In competitive Real Estate markets, information sharing via TexttoRent will offer consumers a big advantage.

These recent initiatives illustrate our commitment to products and services that address a new generation of renters and to driving qualified leads through a blended media package. As for variables affecting the broader apartment market, we are seeing a slowdown of condominium conversions and of some of the negative market forces that have caused abnormally high occupancy rates and revenue pressures on Apartment Guide. While construction of new apartment communities is increasing nationwide, the level of activity remains lower than two years ago and occupancy rates are still high in many markets.

Keep in mind that Apartment Guide's addressable market is primarily advertisers of apartment communities with more than 50 units and whose listings comprise an estimated 15% of the total rental market. This quarter, Rentals.com, our online single unit Real Estate rental business addressing the approximately 85% of listings not served by the Apartment Guide, grew revenue 52% in the second quarter. The growth rate reflects revenue of all the Rentals.com web sites which we successfully integrated into a single cohesive operating unit, rolled out a significant revamp and continue to bolster sales resources to support growth. Based on second quarter revenue, the Rentals.com business is expected to generate $10.7 million of revenue on an annualized basis.

To summarize, we continue to lead the very lucrative single unit Real Estate rental market. We hold an estimated 62% of all paid single unit Real Estate listings on the Internet. But with an estimated 2% market penetration as of year-end 2006 there is clearly huge growth opportunity out ahead of us.

In the second quarter, New Home Guide delivered organic revenue growth of 12%. We achieved aggregate growth despite softness in the overall housing industry, offsetting stalls in new construction and some Midwest and Northeast markets with advertising gains and others. We think our continued growth in many markets reflect a recognition by builders in these communities that the New Home Guide is one of the most effective and efficient marketing investments available to them today.

In March 2007, we launched a new guide in Colorado Springs, Colorado and two neighborhood maps in Charlotte, North Carolina. With the August issue, we launched a New Home Guide in Richmond, Virginia and a Realtor data book in Charlotte, the two largest revenue openings in the 32-year history of our company. These openings all leveraged existing infrastructure in the same or neighboring markets, making these launches particularly cost effective. We will continue to pursue this product line extension strategy going forward.

Now onto Auto Guide. This business saw a 32% advertising decline in the second quarter, in part due to exiting the San Diego market in the third quarter of 2006. However, we are seeing early signs of a turnaround in this business as it did deliver month-over-month revenue growth starting in June 2007. We are seeing particularly positive trends in Florida and California where we have added strong, experienced publishers who are focused on implementing our proven operating model.

Also worth noting is a completed conversion of all markets to a new guide format, as well as a completion of our upgrade of key management and publisher positions by the end of the month. With these changes in place, we are certain we have made the right moves to take advantage of the business's growth potential.

That being said, we are going to continue to monitor this business carefully, closing any local guides that we don't think can be improved quickly, and ultimately, exiting the business if it isn't an attractive market for our shareholders.

Finally, on to the distribution component of our business. Our guides continue to benefit from our industry-leading distribution capabilities. We continually optimize our distribution network to best meet the needs of our guides. This can cause DistribuTech revenues and expenses to fluctuate. This quarter, revenue grew primarily as a result of expanding store locations through new and existing retail programs, including a major expansion with a large drugstore chain and extending contract terms with a large grocery chain. Revenue gains in the second quarter were partially offset by a higher than usual customer attrition primarily driven by a loss of number of customers who publish resale home guides due to the current housing downturn. In total, these losses represent 4% of DistribuTech revenue.

Just to remind you, we don't republish any resale home guides and we believe the fundamentals of the New Home Guide where we have a leading position are very different, and in fact much better than the fundamentals of the resell home guide market. To some extent, this is borne out but the New Home Guide business performance that grew in revenue and profitability this quarter while many resell home guides struggle.

Also, it is not unusual to see a short-term decline in profitability in DistribuTech when we add new locations or in particular when we pick up new changes as we did this quarter. This is because we have to incur the entire cost of supporting the location immediately while we grow the revenue from distributing third-party free publications to fill the pockets not filled by our own guides over time.

So as you have heard, the overall business is quite strong, and we look forward to delivering even stronger results as the apartment and housing environment normalize further and as we make upgrades to Auto Guide talent that will only reinvigorate the business.

I will now turn the call over to PRIMEDIA's Chief Financial Officer, Kim Payne.

Kim Payne

Thanks, Bob. As Dean mentioned, we entered into an agreement for a $350 million senior secured credit facility, which includes $100 million revolving loan facility and a $250 million term loan. After transaction-related events, we will have debt net of cash of $240 million. As of June 30, 2007 on a pro forma basis, and accounting for the company's new credit facility, our multiple of net debt to EBITDA is expected to be three to four times.

During the quarter, free cash flow, which accounts for discontinued operations, was negative $32.5 million compared to negative $4.1 million in the same period last year. The primary drivers of the year-over-year decrease in free cash flow were increased cash taxes, paid primarily related to divestitures and timing of receivables collections. These were partially offset by our lower debt service.

For the quarter, interest expense was approximately $29 million, compared to $32.2 million in 2006. The decrease in interest expense this year was due to lower averaged debt levels, partially offset by higher interest rates.

Finally, we estimate $15 million in capital expenditures in 2007, compared to $13 million in 2006 for Consumer Source. We also estimate use of $1 million of working capital in 2007.

At this point, operator, we would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Meltz - Bear Stearns.

Michael Meltz - Bear Stearns

Great, thank you. I have a bunch of questions so maybe I will get started and then jump back on and let others go. Last quarter, you actually gave us the numbers for PEM. Can you please tell us what the revenue in EBITDA was in the quarter? I saw you gave us the corporate adjustment but I would like to know those operating metrics?

Also on the corporate line, your press release doesn't read all that clearly to me. You are saying you are going to drop down to a run rate of $11.7 million, I think. Can you just talk about, are you saying in '08 you will be at $11.7 million? What are you actually expecting the next few quarters to be? Then I have a couple of follow-ups.

Dean Nelson

Michael, first of all, with regards to PEM, we don't really talk about businesses we don't own anymore, but I can tell you it continued to perform in the second quarter at a level that was very consistent with the first quarter of performance. The decline you might have seen in our discontinued ops year-over-year was, of course, driven by the fact there were other businesses in there. Actually it went up a little bit, but that's got most of our business in it, and it did very well in the second quarter. If you look at the first quarter results it would have been comparable in terms of growth rates both in terms of revenue and EBITDA so we feel quite good about the turnaround there and the price we got for our shareholders.

With regard to our corporate costs, what we are saying is we expect ultimately to be at a run rate of $11.8 million. For the costs as they are incurred on behalf of the corporation in corporate. As you noticed in the release, there is around $2 million today of that cost built into the segment EBITDA for Consumer Source because we do allocate those costs out. We would expect to see a major decline in the corporate costs over the fourth quarter.

The third quarter will still be a little bit bumpy for a couple of reasons. One is obviously we had to close the transaction this quarter. We had to continue to bring oversight to the PEM business through July. Secondly, a lot of the costs to your corporate is finance and the third quarter close will be complicated with the transactions and partial ownership of PEM. But we will see a decline in the run rate of the comp in the third quarter, a much larger decline over the fourth quarter in run rate of comp.

By the end of the year, we expect to have the team pretty well built up in Atlanta. We are going to keep a very small residual set of resources here in New York after the end of the year, about five people just to make sure we can get through that fourth quarter close. We are also going to be paying rent on our headquarters here through February. But by the end of the first quarter, we expect to be at the $11.8 million dollar run rate.

Michael Meltz - Bear Stearns

Can you just clarify? Your corporate expense was $7 million in the quarter. What are you actually expecting in Q3 and what do you expect in Q4?

Dean Nelson

Q3 will be pretty bumpy, Michael and hard for us to say precisely because we are going to have a variety of transaction costs that perhaps can't get built into the transaction itself in there. But what we do know is what we are really keeping on top of is the compensation line at corporate because that is the line that obviously we are trying to manage carefully and move the resources down to Atlanta. We are expecting about one-third of attrition to happen in the third quarter and a good half or more of the attrition from where we are today in the fourth quarter. Realize that we are already well below last year's rates.

Michael Meltz - Bear Stearns

Dean, I don't want to belabor the point. Are you saying Q3 will be above 7 and Q4 will below 7?

Dean Nelson

I think Q3 could be above 7 not because of the run rate but because of some one-time costs which we will pull out and highlight. Q4 should definitely be below 7.

Michael Meltz - Bear Stearns

Onto the debt. You are saying $240 million of net debt so I guess you are saying $250 million of debt. Can you just explain how you get from the balance of June 30 to all this cash you received from the deal and what the holes are? There is a pretty big variance between what I had thought the balance would be and where you are saying it is. Can you just walk us through that please?

Dean Nelson

I will let Carl do that, but I think it is pretty clear.

Carl Salas

If you have additional questions on this, I would love to talk to you offline, but just highlighting the big pieces. If you look at the money we received yesterday and all these transactions did occur yesterday, we received $1.178 billion. We also received $250 million. Those are your sources. On the balance sheet, we had cash of approximately $125 million. Those amounts will be applied very shortly to pay out bank debt of roughly let's call it $500 million. We paid out most of the bonds, which were tendered. That's approximately $880 million, including tender premiums. We had accrued interest of at least $17 million. We have a proposed dividend as you can see of approximately $96 million. Cash will be earmarked for that. Then we have taxes which we have stated of approximately $42 million, state and federal. When you add the transaction fees which we have disclosed in the past of approximately $25 million, severance costs, and other costs of financing, you will see how we get to the $10 million cash balance.

Dean Nelson

Michael, the things people didn't realize and maybe we weren't clear in the process, one was a tender premium obviously out there for the bonds, which chewed up a fair amount; it was over obviously the book value of the bonds, the market value. Secondly, we do have right now I would say maybe a conservative $42 million on taxes on this transaction. There are basically state taxes that we always have to pay which we paid also on outdoor but there is also an component of this where we can't totally use our NOLs to offset it. That number has not been finalized but those two things are the numbers that people normally miss in the process from going from point A to point B.

Michael Meltz - Bear Stearns

But I think there is also going be too gap. You are saying severance fees and then there's some type of origination fees. How big is that component?

Dean Nelson

If you look in the release, we said we got $1.178 billion. We expect to get $1.103 billion. The three numbers there are $422 million for taxes, $22.7 million for all of the banking and professional fees and $10.1 million, which is more severance than bonus, but also sale bonuses. It gets you to the $1.103 billion that we talk about in terms of net proceeds from the sale.

Michael Meltz - Bear Stearns

Maybe I should follow up. I just don't think I am understanding how your net debt gets to $240 million. It may be helpful to put out a schedule showing that.

Dean Nelson

Look through again Page 5 on the release and let us know what is not clear on that because it kind of breaks it into the two buckets. What we got out of the transaction and obviously what we did in terms of paying off the bonds and the refinancing of the business.

Michael Meltz - Bear Stearns

Didn't you say you had some type of new origination fees and some fees there? How big is that number?

Dean Nelson

The origination fees to do the new financing were about $5 million.

Michael Meltz - Bear Stearns

I will follow up. On the NOL balance you are saying roughly $500 million. Can you talk a little bit about what you have left in terms of the expiration dates? Hopefully you can use all of it, but are these some of the longer life NOLs that you have left?

Carl Salas

They are. Obviously we have done our best to use the shorter-life NOLs in the transaction. We don't have any significant issues with the expiration dates of NOLs.

Michael Meltz - Bear Stearns

Since I am having trouble with the debt number can you tell us what is your interest expense assumption going forward?

Dean Nelson

I don't know if we announced the cost of capital or what the interest rate is?

Carl Salas

The interest on the $250 million term loan is approximately what we are paying now, LIBOR plus 2.25.

Dean Nelson

So the best estimate would be the 250 times that rate.

Carl Salas

You are going to get roughly $20 million when you look at commitment fees and other minor items.

Michael Meltz - Bear Stearns

That would be from August 1st to the end of the year?

Carl Salas

That's correct. And remember $20 million is an annual number so for those five months close to $8.5 million.

Michael Meltz - Bear Stearns

Is there anything else in that that is going to be weighing down that line? Any other fees that we should be aware of?

Carl Salas

No.

Operator

Your next question comes from Paul Ginocchio - Deutsche Bank.

Paul Ginocchio - Deutsche Bank

On the auto guides you used to give us annualized revenues. Will you give us that again? Any way to size the losses in that so if we know, if you were to sell it what it would look like?

Kim Payne

I don't have it handy, but I can certainly get it.

Dean Nelson

We will get that for you, Paul. You know the number is down primarily first and foremost because of the closing of the San Diego Guide last year. Frankly, when we put new management in there, James Moon, he found a number of ads that were placed in the book that were not close to rate card. Basically what he had to do was spend the first quarter and fourth quarter cleaning up the books, getting people back to rate card, getting back to the rate commitments, getting the new books formatted and the right people put into place. That has by and large been done and we are starting to see benefits of that later in the second quarter and into the third quarter.

What we are going to do, as always, is look at that it both as a portfolio and individual guide to make an assessment that if there is a particular guide or two in the market that we don't think we will be able to get across the line we are not going to wait until the end of the year for a big decision point to make that decision. Bob and James and I are constantly looking at the business and making that assessment. Obviously we are facing a decision I would say overall toward the end of the year.

Paul Ginocchio - Deutsche Bank

Can you give us what a rough range of the loss there is?

Dean Nelson

I am looking at our IR and General Counsel. We have not done that, Paul, but it is meaningful. This is millions of dollars.

Paul Ginocchio - Deutsche Bank

Not tens?

Dean Nelson

Not tens.

Paul Ginocchio - Deutsche Bank

On DistribuTech, the remaining exposure to resell home guides so I know if there is any risk there? Any way to give us exposure to revenues by advertising category?

Bob Metz

I can answer that. Our revenue for DistribuTech is still growing. It was just some of these guides that went out of business. I think the ones that were going to go out of business for the most part have. There may be a few more that might, but I don't consider the exposure going forward is particularly large on that.

Paul Ginocchio - Deutsche Bank

Same store on the New Home Guides? I guess is there a way to look at the same-store growth? I know you added a couple of guides in the last year or so. Seems odd it is growing in a difficult market which is a great thing, but on a same-store basis is it growing?

Bob Metz

It was same-store growth except for the opening in Colorado Springs and those two maps. So we did achieve a same-store revenue growth year-over-year for the quarter.

Dean Nelson

Those aren't very big at this point.

Bob Metz

They are not particularly large. Even subtracting those, we still had year-over-year revenue growth.

Paul Ginocchio - Deutsche Bank

Great. Back to the NOLs. My model, it takes you almost out to 2019 to utilize all the NOLs. Are the expirations that far out?

Dean Nelson

Well, we haven't run the numbers ourselves, but they are that far out. I think, Paul, you are not as confident as we are around the growth of EBITDA in this business. I guess we don't think it will take nearly that long.

Operator

Your next question comes from Brian Gonick - Corsair Capital.

Brian Gonick - Corsair Capital

Can you tell us what you think maintenance Cap Ex levels are?

Kim Payne

Are you saying in percentage of the total level that we are spending right now?

Brian Gonick - Corsair Capital

If you are spending, you said $15 million.

Kim Payne

It is probably 60% of total, maintenance.

Brian Gonick - Corsair Capital

Just to clarify the Rentals.com revenues that you are referring to, does that include ApartmentGuide.com?

Dean Nelson

No, it does not.

Brian Gonick - Corsair Capital

The sale of the healthcare business, presumably whatever cash proceeds you get from that will be in addition to the cash you are showing of $10 million?

Dean Nelson

Yes, although that is not a big business. So I don't know that the impact relative at least to the overall value of our company will be meaningful.

Brian Gonick - Corsair Capital

Right, so just a few million bucks?

Dean Nelson

Wouldn't want to speculate at this point, but it is a small business, a very small business.

Brian Gonick - Corsair Capital

Last quarter when you gave guidance, you talked about the possibility of sequential quarterly Apartment Guide revenue growth as 2008 approaches. This quarter, you actually did have sequential revenue growth. Can you just discuss that and did things get better than what you thought last quarter?

Bob Metz

What we had said before was that we believe there was an opportunity at the end of the year to achieve some sequential monthly revenue gains. We did achieve that faster than we anticipated. We started achieving that early in the year. From that perspective we were able to do that earlier in the year and ahead of time, yes.

Brian Gonick - Corsair Capital

So your biggest business is doing better than you thought relative to last quarter. So by sticking to your guidance and not changing it, are you just being conservative?

Dean Nelson

You know, I don't think that is the case necessarily. I think it is doing better than we thought, but we had expectations that it was going to get better than it had been historically in terms of the trend rate. Our guidance we think is still on target.

Brian Gonick - Corsair Capital

Things are doing better than you thought is what it appears.

Dean Nelson

I think that is true. When you look through the release and look through the data, what you will see is apartments are doing better than we thought, and I think we were caught with a negative surprise on DistribuTech, primarily because of the resale home book. If you ask Bob or me or Kim, would you rather be strong in apartments and weak in DistribuTech or vice versa, we clearly would take the hand we have now. But the improvement in the Apartment Guide was offset by the weakness of the revenue side of DistribuTech.

Operator

We will go next to Todd Morgan - CIBC World Markets.

Todd Morgan - CIBC World Markets

I have one clarification and a couple of questions. If I look at the sources and uses you lay out in the press release and take $111 million of cash at the end of June and net all those together on the source of financing need of $255 million, I think Carl, you said there was cash July 30 of $125 million?

Carl Salas

That's correct.

Todd Morgan - CIBC World Markets

So if I take the 255 plus the 15 difference in the cash balance, that's the 240. Is that the right way to think about this in terms of the net debt that you anticipate right now?

Carl Salas

That's correct.

Todd Morgan - CIBC World Markets

Nothing missing from that calculation?

Carl Salas

No, again, just to reiterate, in the big bucket you have $72 million of fees, $495 million of bank debt, $875 million to tender the bonds and pay accrued interest; $96 million for the dividend and $5 million in DLPs for the new loan. Just simply adding Source and usage you get a delta of $10 million. 1554 minus1544 is what I get of balances.

Todd Morgan - CIBC World Markets

Right. That makes sense because all the numbers are there. The second thing, you talked about sequential improvement in the Apartment Guide, which is obviously a good thing. Is that the way we should think about the business? Or should we be thinking of it more year over year as we look forward, in terms of how much seasonality is really in that number?

Bob Metz

Historically we look at it year-over-year, but because we had some downward trends, we are looking for the beginning of trends going the other way and there is not a lot of seasonality. So when we start to achieve sequential monthly revenue gains, we believe that opens up the opportunity to achieve the quarterly gains year over year. So our first step was to get the sequential monthly revenue gains.

Carl Salas

The vast majority, virtually all of that revenue is on annual contract. So really, when you see at quarter to quarter change, it means that we picked up more new annual contracts than we lost. So from our standpoint, we always look at the business month-to-month trends and quarter-to-quarter trends; not year-over-year trends.

Todd Morgan - CIBC World Markets

On DistribuTech can you give us a dense of the demand for available pockets that you have right now? As well, the utilization level of those pockets. How availability is there?

Bob Metz

For the most part, our grocery chains are sold out. Some of the programs in convenience stores and drugstores and video stores may not sell out quite as much. We may have a 15% or 20% amount of pockets that are not sold out but we take that into consideration when we put a bid in on the deals.

We believe there are still a lot of free publications out there to sell and we are still achieving gains in some of these markets. It is not like the whole market is going down; particularly in the resale home business there was just some softness.

Todd Morgan - CIBC World Markets

You are paying those stores for the rack, not per pocket, right?

Bob Metz

We pay the store a fee to place our rack in the front of the store, and then there's a certain amount of pockets on that rack, 16, 20, 24 that we then sell to other publishers to put their books in those pockets.

Todd Morgan - CIBC World Markets

So as you move rate or occupancy in those pockets that is all accruing to your benefit?

Bob Metz

Yes.

Todd Morgan - CIBC World Markets

I think you guys mentioned a fixed exit analysis on the Auto Guides business. Can you give us a sense of the timing you are thinking about at this point? How much lease do you really want to provide here?

Dean Nelson

We are in the process right now, Bob, and Kim and James Moon and I of looking at the individual markets and making a decision, making sure that the ones we have still have positive potential. We are going to do that between now and the middle of September. I think we are looking at more of a portfolio decision on the business overall at the end of the year. We will let the rest of the year run out at that point and see where we stand.

We are really going to see at that point significant improvement and a real base to continue to push the business forward or frankly we have got, you know, guides that are profitable. We will get out of the markets that aren’t profitable and sell the guides that are profitable and there are certainly other growth opportunities in the company.

Todd Morgan - CIBC World Markets

That sounds like a pretty quick kind of evaluation process.

Dean Nelson

Absolutely. We need to be able to communicate to the market and to the world and to all of you on the call progress by the end of year. We are seeing signs of progress, but a meaningful progress by the end of the year or we need to think differently about that business.

Operator

We will go next to a follow-up from Michael Meltz - Bear Stearns.

Michael Meltz - Bear Stearns

Actually an easy one for you. Bob, I know you have been isolated the RentClicks revenue and you are saying you are at $11 million annually, but obviously your online mix is more than 3% to 4% of revenues. Can you give us a ballpark as to what you think your online revenues currently contribute to ad revenue?

Bob Metz

We don't actually break that out separate, because we sell a package of online and print together we call PrinterNet. With ApartmentGuide.com and NewHomeGuide.com and AutoGuide.com, except for upsells from our standard position, we don't break that out.

Michael Meltz - Bear Stearns

Understanding it is an allocation gain then, would you say it is over 10%?

Dean Nelson

Bob the way to think of it is what fraction of the leads do you think today are coming from online versus print?

Bob Metz

A rough guess might be 40%.

Dean Nelson

Online.

Bob Metz

Yes.

Dean Nelson

Although we do think, Michael, people pick up the book in the store and then they go online with the book in their hands, if you know what I mean. So if you were to really allocate it, would you put, I would guess, a third of the revenue in online and two-thirds in print.

Operator

We have another follow up from Paul Ginocchio - Deutsche Bank.

Paul Ginocchio - Deutsche Bank

Sequentially your costs in the quarter were up $3.3 million from the first quarter. I am wondering which, is it the first quarter run rate that looks more like the right cost growth for the Consumer Source business or is it the second quarter and how that trends? Thanks.

Kim Payne

The cost structure did increase in the second quarter, and some of that is going to be run rate, where we have filled in salespeople in our Rentals.com business, as well as making sure we have most of our publisher positions filled across all divisions across the country. So we are seeing the impact of that.

The increased cost in distribution that we outlined in the release related to adding stores. So those numbers are going to increase that run rate as you are seeing in the second quarter. However, there were a few expenses that are quarterly expenses due to trade shows and some ad campaigns that we do expect to decline, but those would be minimal dollars compared to the overall.

So I think if you are looking at where you want to run the business, the second quarter expenses are more accurate as far as a forward-looking run rate.

Dean Nelson

I think it is somewhere in the middle, as Kim said. I think the two big increases in the second quarter were first adding new salespeople to RentClicks which we think is a good thing to grow that business going forward; and the second one was the additional rack in DistribuTech that we break out here in our release.

Kim Payne

The other thing I would just add to that is the ongoing evaluation as we are seeing expenses increase. We are making sure that where we are adding cost, that it's to drive revenue and we will make decisions if we need to reduce expenses elsewhere just to ensure that profit grows the way we want it to.

Dean Nelson

That seems to be all of our questions. So we appreciate everybody dialing in and participation in our call. We look forward to talking to you again after the third quarter. Thank you.

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Source: PRIMEDIA Q2 2007 Earnings Call Transcript
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