Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Tyler D. Gronbach - Senior Vice President of Communications

Alfred T. Mockett - Chief Executive Officer, President and Director

Gregory W. Freiberg - Chief Financial Officer and Executive Vice President

Analysts

Lance W. Vitanza - CRT Capital Group LLC, Research Division

David Roeske

Colin Wilson Murphy

Christopher Mathewson - Ares Management LLC

Dex One (DEXO) Q2 2012 Earnings Call July 25, 2012 8:30 AM ET

Operator

Good morning and welcome to Dex One Corporation's Second Quarter 2012 Results Conference Call. [Operator Instructions] Please note that today's call is being recorded as well as webcast live over the company's website at www.dexone.com. I would now like to turn the call over to Mr. Tyler Gronbach. And sir, you may begin.

Tyler D. Gronbach

Thank you, Karen. Good morning, everyone, and thank you for joining us today. We will begin this morning with comments from Dex One Chief Executive Officer, Alfred Mockett; and Chief Financial Officer, Greg Freiberg. Following their comments, we will then have time for some of your questions.

I would like to remind everyone, certain statements made today may be forward-looking as defined by the Private Securities Litigation Reform Act. We call your attention to our press release for the quarter ended June 30, 2012, and the company's Form 8-K furnished to the SEC this morning. These documents discuss second quarter 2012 results, as well as full year financial guidance and ad sales guidance for the third quarter. The 8-K includes the results package, which provides additional information pertaining to our discussion this morning.

We encourage you to review these materials and the company's other periodic filings with the SEC, which set forth important risks and other factors that could cause actual results to differ materially from those contained in or suggested by any forward-looking statements. Electronic versions of Dex One's SEC filings can be obtained by contacting us, visiting dexone.com or visiting the SEC's website at sec.gov. Copies of the news release and results information package can also be found under the Investor Relations tab at dexone.com.

During the call today, we will refer to certain adjusted figures that are non-GAAP financial measures, such as expenses, EBITDA, free cash flow and net debt. Some of these exclude items such as impairment charges, stock-based compensation and long-term incentive program expenses, fair value discount and gain on debt repurchases. Additional information about non-GAAP financial measures, as well as a reconciliation between these items and the comparable GAAP measures can be found in the press release and related 8-K furnished to the SEC.

One final reminder, this call is the property of Dex One Corporation and any retransmission or broadcast without the expressed consent of the company is strictly prohibited.

I would now like to turn the call over to Alfred.

Alfred T. Mockett

Thank you, Tyler, and good morning, everyone.

The transformation of Dex One is well underway and generating solid results. Despite a lingering economic malaise and challenging conditions for the print publishing industry, we continued to make progress. Most notably, we delivered a 53% increase in digital bookings compared to the second quarter last year. Bundle accounts for more than 50% of all bookings in the first half of 2012. In the quarter, they represented 58% of total bookings. EBITDA was $141 million for the quarter. For the first half of the year, we have posted EBITDA of $291 million.

We successfully retired $470 million of debt in the first half of the year and we expect to retire an additional $50 million by year end. We remain on track to achieve our guidance.

The cultural shift we have driven within our most critical asset, our sales force, clearly has traction. The investments we've made in digital, in training, tools, technology, products and services are producing the results we all anticipated.

During the quarter, we completed the roll out of our Bundle Builder iPad app to all sales professionals across the company. We deployed iPads to our sales force almost 2 years ago and people asked, "Why?" The answer is compelling on 2 fronts: Firstly, it makes Dex One products and services easier to buy and easier to sell, improving the adoption rate for Bundles by utilizing our value presentation and iPad app. Secondly and importantly, selling Bundles on the iPad has lifted the productivity of our sales force across the board, veterans and new hires alike.

Our Digital portfolio is opening up new groups of target customers. This is important because it takes us beyond our traditional customer base, opening new markets and segments, bringing in new customers. For example, last month, we gained a new client in the business sector we would have never encountered in the past, DNA testing. This customer purchased an array of digital services including SEM and digital display ads to better promote their business.

Our sales forces is our most important asset, and with their successful transformation to a digitally savvy team, we are building on this asset. This transformation is critical as print ad sales continue to decline as we managed the secular shift from print to digital. The effectiveness of Bundles cannot be overestimated. I said a number of times, Bundles make it easier for us to sell and easier for the customer to buy. In addition with Bundles, we see the rate of decline in print moderating within the Bundle from customer who spend more.

Turning to sales performance. Overall bookings declined 13% for the quarter, but as I noted, bookings for digital increased 53%. Ad sales for the quarter were 1 point better than expected of minus 12% compared to the previously provided guidance. The company's revenue decline slowed to 11% for Q2.

Now looking ahead to the third quarter, we do expect weaker print performance in some of our larger major metro markets, resulting in an overall ad sales of minus 13% to minus 14%. We remain on track to achieve our guidance for net revenue, EBITDA and free cash flow, and Greg will provide detail in a moment.

Before I turn it over to Greg, let me highlight our progress to date in the areas of people, partners and packaging. Looking at the people side of the business, we have made great progress shifting to a digitally savvy customer-centric organization that is well-positioned to capture more of the small or medium business marketing investments as it shifts from print to digital. Our people have the tools, technology and training to effectively compete in a rapidly expanding local search market.

Shifting to partners, we continue to work with digital experts from Google and Yahoo! to PaperG and Boostability to continuously improve our offerings and the results they generate for our customers. This rich network of digital experts plays an important role in our third and final area of packaging.

During the quarter, we continued to work on enhancements to our local, social and mobile offerings. These enhancements will improve our customer search performance.

With that, I will turn it over to Greg and then I will be back for questions.

Gregory W. Freiberg

Good morning, and thank you, Alfred. I want to start by building on a few important things that Alfred said and to give you details on our narrowed full year guidance.

We are now projecting a range for adjusted EBITDA of $525 million to $575 million, with attendant net revenue of $1.25 billion to $1.3 billion. Free cash flow guidance for the year will be in the range of $310 million to $360 million. As Alfred said, our digital growth is helping us across the board, which brings up the next item I want to spend a moment speaking about, Bundles.

As you saw on our release, Bundles were 58% of total bookings in the quarter and 50% in the first half of 2012. We introduced Bundles more than year ago. They combined traditional print with an array of digital products, we are seeing a lot of positives in Bundles and we expect to maintain that trend through year end.

When combined with Dex guaranteed actions, our internal analysis shows with that level of Bundle penetration, we experience more than a 12% increase in overall bookings. Further, we estimate that for each 10% of additional Bundle penetration, we will receive an additional 2.5% increase in bookings. Additionally, with 50% of total bookings in Bundles, we appear to be enjoying a 3-point improvement in print sales.

To close out the discussion on Bundles, you can see we get very good uplift across the board when we sell Bundles. Clearly, we are making investments as we capitalize on the digital opportunity. However, anticipated savings and print efficiencies are taking somewhat longer than we thought due to regulatory issues.

Given these most recent developments, we expect to achieve $90 million in cost savings for the year, slightly less than originally estimated. I am pleased we continue to perform against adjusted EBITDA as reflected by our narrowing of the guidance.

Total expenses were $193 million, a reduction of $27 million or 12% from a year ago, with production and distribution, selling and support and G&A all declining. As we discussed last year, we retired $425 million of debt by our April call. We expect to retire approximately $525 million of debt this year, which would reduce our net debt to approximately $1.9 billion at year end.

Let me go over a few more numbers with you.

Bad debt was 3% of net revenue, towards the low end of our normal range. We achieved $141 million of EBITDA, note that this is inclusive of $3 million of severance expense. After deducting cash interest of $46 million, CapEx of $7 million and $9 million for use of working capital, we generated $79 million of free cash flow. Working capital use was comprised of a $2 million pension contribution, $1 million of cash tax payments and $1 million of restructuring payments, along with the normal seasonal timing factors that land in Q2.

At the end of the second quarter, net debt was $2 billion, leverage was 3.4x and the weighted average cost of debt was approximately 7.6%.

To wrap things up, we generated solid financial results in the second quarter and we are focused on strengthening the balance sheet and managing our cost base while supporting robust digital growth.

Thank you. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Lance Vitanza, CRT Capital Group.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

I guess, 3 things. The first, it took some time but it looks pretty clear now that the investments you've made over the past 1.5 years are showing up in better revenue performance relative to your peers, certainly. Do you think that that's -- I mean, how much more do you have to go there? Can you -- do you think you can get top line declines ultimately into the single digits?

Alfred T. Mockett

Okay. Well, first of all, I appreciate the compliment. Yes, it's very gratifying to see our investments paying off in the digital side of the house. We've still only penetrated our customer base, our print customer base, the extent of that 15% with the digital portfolio so we still got a long way to go. We're obviously delighted with the high growth rate in digital we posted in the second quarter and we anticipate running through the rest of the year well north of our targets of 30% growth on digital.

Gregory W. Freiberg

Lance, it's Greg, I'll just add a comment there. We did narrow the revenue guidance around the high-end of what was previously given, so we have some confidence that we're seeing there. And as a reminder, in the digital revenue rec, you're not waiting on a print book to publish, and so you do have that accelerated cycle of booking go to ad sale, go to revenue straightaway.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

And then Greg, could you repeat the reason for the less than expected cost savings? I missed the first half of that.

Gregory W. Freiberg

In the first quarter earnings call, I had mentioned that we targeted $125 million of expense reductions this year in 2012. And as a reminder, we have taken out $425 million of expense in the last 3 years so -- but anticipated savings in print optimization is taking somewhat longer than we thought. So I've clarified or revised that number for in-year expense reduction to $90 million, but I also reminded that we're still on track on EBITDA as evidenced by narrowing the guidance again around the high end there.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

Do you think you'll be able -- I mean, is this just the timing shift then? Will you ultimately be able to get to the full amount of the print optimization savings that you had expected but just over a longer period of time or no?

Gregory W. Freiberg

That is absolutely correct. Yes, I do.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

Okay. And then just lastly on the balance sheet. So if I'm reading it right, by the end of the year, if I think about just the bank debt for a minute, it looks like you'll be under $1.6 billion of net bank debt by the end of the year if you hit on your targeted debt reduction. So I'm thinking...

Gregory W. Freiberg

Sorry, Lance, It'd be about $1.9 billion at the end of year of net debt.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

Well just -- again, just to the bank debt?

Gregory W. Freiberg

Just to the bank debt, you're correct. Yes.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

Okay. So $1.6 billion on the bank debt line. If the top line is down just pick a number, down another 10% next year, I'm guessing that free cash flow is going to be somewhere in the $250 million range, I guess what I'm wondering is you're making a lot of progress, things are starting to go right for you but do you have the runway that you think you need to really be able to grow into this balance sheet or how do you plan on getting where you need to be by the time your bank debt maturities hit or covenants hit for that matter?

Gregory W. Freiberg

Right. So that's a great question and I think you've really hit on many of the points. I don't want to give specific guidance, obviously of next year but I have discussions and meet regularly with the banks and the admin agents and it's a multidimensional question because it's part of seeking out and amend and extend. They want to know how is your current business doing, what are the top line trends, what is your performance, doing what you say, say what you do and equally, the margin profile. So we feel comfortable with the strategy that we've laid out, the work that were done, all of those are leading into that discussion. But the banks don't necessarily telegraph when or what they're going to do in the future.

Alfred T. Mockett

Yes. And on that question of covenants, we anticipate staying within the covenants through debt maturity.

Operator

Next question comes from Tad Quinn [ph], Bennett Company.

Unknown Analyst

Nice job on the digital front. What is digital now as a percent of total revenue?

Alfred T. Mockett

On the bookings basis, digital is now running at 25% of total bookings. And that is the lead indicator, it just takes a little while to go through to ad sales then to revenue.

Unknown Analyst

Okay. And you mentioned retiring additional $50 million by year end. I was wondering if you could tie that into your current buyback capacity and what do you expect to do with buybacks in relation to that $50 million?

Gregory W. Freiberg

It's Greg, I'll take that. The $50 million through the end of the year is just the remaining scheduled amortization payments. So that's not anticipating if we did do additional buybacks between now and the end of the year. There is a small amount of capacity we could still do below market buybacks. Between now and the end of the year, there is about $5 million of cash at RHDI, $6 million at West and then there might be a little bit of a cash at Dex One Corp. but it's a little tighter there. But the $50 million just is the straight amort between now and the end of the year.

Operator

Next question comes from David Roeske, Soundpost Partners.

David Roeske

Just a little extra clarification. I was wondering what you meant by regulatory difficulties in achieving the cost savings that you expected on the print efficiencies?

Gregory W. Freiberg

So this really in the print optimization. It has to do with that size, the distribution, and these are areas we look at to take out the costs. And you have to work in tandem together with the regulatory to achieve that, so that's what we were referencing.

Alfred T. Mockett

It's particularly relevant on residential white pages where there are considerable savings going to on-demand distribution as opposed to sort of mass distribution and that just takes time to negotiate with the set regulators.

Operator

And next question comes from Colin Murphy from Bowery.

Colin Wilson Murphy

Given the fact that you run on your business on a book-by-book basis, I was wondering if you pulled any books this quarter that were not profitable?

Alfred T. Mockett

Okay. Just as a reminder, we still have more than 800 titles that we publish that go to 65 million households in -- 27 million households rather, about 65 million books or so. We continue to monitor the entire portfolio, looking at it on a P&L contribution and a cash flow contribution and over the last 12 months, we have discontinued about a dozen books out of the 800.

Colin Wilson Murphy

Okay. And can you give us some further insight into the $7 million CapEx spend in the quarter?

Gregory W. Freiberg

Yes. So our CapEx is -- relatively we're not a CapEx-heavy company but our investments in CapEx have to do with the platforms, the portals and product development related to the digital growth effort.

Alfred T. Mockett

Yes, it's mainly software.

Colin Wilson Murphy

And should we expect that number to roughly remain flat throughout the remainder of this year?

Gregory W. Freiberg

If you work backwards off of the guidance, I narrowed the free cash flow guidance around the middle of my previous range. And so I'm telling a bit there that, no, there would be a little more CapEx in the second half of the year than there was in the first half of the year and that's really driven by supporting that out-performance better than what we thought on the digital side, so a bit more CapEx on the second half of the year.

Operator

And our last question comes from Chris Matthewson, Ares Management.

Christopher Mathewson - Ares Management LLC

A couple of questions. You're only saying $50 million of additional debt repayment and I know that's just your scheduled amort. What are your plans with the remaining free cash flow that you're going to generate the rest of the year? Are you just planning to park that on your balance sheet for next year buybacks or what are you thinking about doing with that?

Gregory W. Freiberg

Yes. So that is the general plan, yes. And as a reminder, the amendment that we received back in the beginning of the year extends through the end of 2013. So there is a new replenishment of amounts that we could use to go back into the market and do buybacks using the borrower's portion of excess cash flow. And that amount is going to be calculated in March next year and it's going to be calculated based on the 2012 results.

Christopher Mathewson - Ares Management LLC

Okay. So the plan would then be, just to be clear, you're just going to kind of leave the cash there for next year?

Gregory W. Freiberg

I hate to give specific guidance, but boy -- that's sure a good return on investment as we demonstrated in the past and we also think that's part and parcel of the say what you do, do what you say and the relationship with the banks and ultimately -- an amend an extend for us.

Christopher Mathewson - Ares Management LLC

And then just some thoughts around potential consolidation within the industry. I mean, obviously there are a couple big guys in the space and what do you think the hurdles are, putting aside capital structures, that yourselves or one of your large competitors or what do you think are the biggest hurdles to making the combination happen?

Alfred T. Mockett

Okay. Well, as we said before, we continue to believe that consolidation in the sector is inevitable at some point. The timing of that or the catalyst, that would cause it to happen is yet uncertain. Meanwhile, we continue to manage the fundamentals of the business, driving value for the long-term, focusing on debt reduction and growing the digital business.

Okay. Well, thank you, everyone for joining us today. In closing, let me share 3 final thoughts. Firstly, our transformation to a digital company is well underway as underscored by the numbers. Secondly, sales of bundles lift our performance and drive the transformation to digital. And finally, we continue to take steps to strengthen our balance sheet.

Thanks once again for joining us and have a nice day.

Operator

Thank you. That does conclude today's conference call. Thank you participating. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Dex One Management Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts