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Executives

James M. Gruskin - VP of Finance and IR

David C. Swanson - Chairman and CEO

Steven M. Blondy - EVP and CFO

Peter J. McDonald - President and COO

Analysts

Michael Meltz - Bear, Stearns & Co. Inc.

Jaime Neuman - Wachovia

Peter Salkowski - Goldman, Sachs & Co.

Paul Ginocchio - Deutsche Bank Securities Inc.

Ian Whittaker - UBS Securities Inc.

R.H. Donnelley Corp. (RHD) Q4 FY07 Earnings Call February 28, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to R.H. Donnelley's Fourth Quarter and Full Year 2007 Results Investor Teleconference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. Please note that today's teleconference is being recorded as well as webcast live over the company's website, at www.rhd.com.

I would now like to turn the call over to Mr. Jim Gruskin. Mr. Gruskin, you may begin.

James M. Gruskin - Vice President of Finance and Investor Relations

Thank you and good morning everyone. I am Jim Gruskin, Vice President of Finance at R.H. Donnelley. Hosting the call today are Dave Swanson, Chairman and Chief Executive Officer of R.H. Donnelley, and Steve Blondy, Executive Vice President and Chief Financial Officer. Peter McDonald, President and Chief Operating Officer is also on the call.

Certain statements made today, may be forward-looking within the meaning of the Private Securities Litigation Reform Act. We call your attention to our press release for the quarter and year ended December 31, 2007 and the company's Form 8-K furnished to the SEC this morning, both of which discuss fourth quarter and full year results. We also encourage you to review the company's other periodic filings with the SEC, which may set forth important factors that could cause actual results to differ materially from those contained in, or suggested by, any forward-looking statements.

Copies of R.H. Donnelley's SEC filings maybe obtained by contacting R.H. Donnelley, searching its website at rhd.com or visiting the SEC website at SEC.gov. This transmission is the property of R.H. Donnelley Corporation and any retransmission or broadcast without the expressed consent of the company is strictly prohibited.

During today's call, we will focus on 2007 GAAP results, though we will be discussing some figures that exclude the impact of purchase accounting and related expenses. Also, today's references to EBITDA are before FAS 123 expense, and both EBITDA and free cash flow exclude the impact of certain compensation expense associated with the Business.com acquisition. Some of the aforementioned items are non-GAAP financial measures.

Additional information about non-GAAP financial measures as well a reconciliation between these items and the most comparable GAAP measures can be found in the press release and related 8-K, furnished to the SEC this morning. The press release is available on our website and can be accessed by going to rhd.com and clicking on, Press Releases. Please review the risk factors described in the Safe Harbor language as well.

Now, I would like to turn the call over to Dave.

David C. Swanson - Chairman and Chief Executive Officer

Thank you, Jim. Good morning everyone and thanks for joining us today. There are three headlines that I want to touch on today: First is the strong fourth quarter and solid full year 2007 results. Second is the outlook for 2008. And third is that we've decided not to initiate a dividend.

As you read this morning, we generated strong fourth quarter results completing a solid 2007, during which we delivered full year financial results in line with or above our guidance. Ad sales grew nearly 0.5%, including Business.com, with Q4 ad sales growing 0.7%.

EBITDA of 1.44 billion, slightly exceeded expectations and free cash of 617 million, beat guidance by 17 million. We were particularly pleased with the strong contribution from our Internet products in Q4, due to the expansion of the number of markets that we offer DexKnows.com and Dex Search Marketing.

Now, Steve will discuss our 2007 accomplishments in more detail, but I want to focus on two important milestone events in our strategic transformation. First, 2007 will be remembered as the year that we pulled together our portfolio of leading directional media brands acquired over the last five years under our new unified market brand Dex. But we were once a collection of disparate brands with no apparent connection, Embarq Yellow Pages, bestredyp.com, AT&T Yellow Pages, chicagoyp.com, Qwest Dex Yellow Pages, DexOnline.com and LocalLaunch were all pulled together under the Dex umbrella and are now recognized in our markets as Dex Yellow Pages, Dex White Pages, DexKnows.com or Internet Yellow Pages site and Dex Search Marketing. Our solution for helping local businesses obtained cost-effective leads from the rest of the Internet.

Having a strong unified identify to both consumers and advertisers is a crucial part of our efforts to extract the full value from our acquisitions. Dex market brand will transcend individual products and will immediately signal that any local commercial search solution bearing its name, harnesses the power of our rich accurate data and benefits from our significant consumer usage. Future examples of this brand extension might include 1-800-CallDex, a voice portal search platform that we are trialing and DexNet, a paper click ad network that will extend the reach of our current Internet offerings.

The second important milestone was the quantum leap that we made in diversifying our business to the Internet. We made huge strides in terms of our internal skill sets and competencies, with the acquisition of Business.com and the Business.com team. Along with the acquisition of LocalLaunch late in 2006, we've now built a team and a competency that will allow us to build and offer the kind of advanced Internet products and services that will keep us the market leader in local commercial search in our markets for many years to come.

We also began the process of training our 1900 plus marketing consultants to expertly represent our Triple Play offering. This offering helps our advertisers get found by active buying consumers whether they are searching and in the print Yellow Pages, Internet Yellow Pages, Yahoo!, Google or the rest of the Internet.

And finally, with our acquisition of Business.com, in the Business.com ad network, we now have the largest business-to-business online search engine and pay-per-click ad network in the U.S and an extremely fast-growing Internet business to complement our other offerings. With Business.com, came an extremely advanced engineering team that are leveraging their know-how on new and exciting offerings, including a more advanced version of our DexKnows.com's consumer site, which we hope to roll out late this year

All of this has allowed us to make significant progress, diversifying our product offerings and revenue base from print to Internet and we now have over 200,000 small and medium size local businesses buying Dex-branded Internet products.

So, while we are generally satisfied with our 2007 progress and results, particularly considering the economic environment that we experienced in Florida and Nevada this year, it appears we are facing a much stronger headwind in 2008 than we originally anticipated.

Florida and Nevada markets have actually gotten worse, rather than better, as the housing-related issues have spread to a broader range of businesses in those markets. We are now also seeing similar issues in Arizona. To a lesser extent, we have seen a general slowdown in the small business economy across the entire footprint.

Now while our composite markets continue to exceed national averages for growth in population, retail sales and employment and our business remains highly diversified across geographies and underlying industries, we still rely on the health of local business within our footprint. With consumer sentiment at their lowest level in several years, small and medium size business are feeling the effects of the slowdown, and are being extremely cautious about discretionary investments in advertising. This is impacting us in the following ways:

First, we are seeing an increasing number of advertisers unable to stay quite up on their bill, and are removed from our publications as a result. This is modestly impacting our advertiser renewal rates as well as bad debt.

Second is that advertisers are reluctant to increase their ad spend because of lower cash flow or fear of what's lying ahead for them. This is by far the biggest issue that we are seeing in the marketplace right now.

And third, we are also seeing new business sales down slightly, as we see a decrease in business formations and a decrease in the average value sale we are getting from new business. I think it's also important to note that we are seeing the same kinds of behavior across the product line; print, IYP and search. As a result, we are lowering our outlook for 2008 ad sales to decline mid-single digits. Likewise, we are lowering guidance for EBITDA and free cash flow, as you saw in our release.

Now while we expect tougher cyclical challenges in 2008, four factors give me confidence that we remain poised to grow once the economy returns to health. First is our products continue to provide a measurable and superior return on investment relative to other forms of local advertising and in a soft economy, directional media including directory advertising, had consistently outperformed other forms of advertising for small businesses.

We are also very encouraged by the results of the 2007 Usage Research that was recently released by KNSRI, showing print and IYP reference growth in 2007, with print remaining relatively flat. It confirms what we've been seeing with the thousands of media test lines that we operate, and that is the costs to advertisers are actually flat to up in most cases. Add to that, our new online products and you see that our value proposition remains very, very solid.

Second, is that our sales reps remain the trusted marketing advisors to the SME segment, would attract record for generating the highest volume of ready-to-buy leads at reasonable prices. And we see this becoming an even more important service in the future as fragmentation continues.

Third, our products continue to offer consumers the most relevant, comprehensive and accurate content about Russell's [ph] products and services in their markets, which will continue to drive strong usage of our products into the future.

And fourth, our markets are the envy of the industry. In terms of employment growth, population growth and retail sales, RHD's markets have grown faster than the national average over the last ten years and are forecast to outperform the national average over the next five years. Now, this has translated to above-average ad sales performance in the past and we believe that that will continue into the future.

And my third headline this morning is that our Board of Directors has decided not to initiate a dividend. We believe that given the near-term economic outlook and our current level of debt, it's more prudent to direct excess cash flow to debt repayment, until we see a more positive selling environment.

Finally, before I turn it over to Steve, we announced this morning that Jake Winebaum, founder of Business.com will be stepping down from his day-to-day role as President of RHD Interactive to spend more time with his family. And Jake has spent the last several months working tirelessly, integrating Business.com with RHD, setting up the new organizational structure and working with the entire RHD Interactive team to develop the roadmap for our digital future. Jake will continue to serve as a strategic advisor to me and the company, on our Internet matters and will also sit on the RHD Interactive Advisory Board.

Brian Barnum, Chief Operating Officer and Financial Officer of Business.com and RHD Interactive will be assuming the day-to-day responsibilities, as we evaluate all of our candidates.

With that, I'll turn the call over to Steve.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Thanks Dave and Good morning everyone. First, let's review RHD's 2007 business performance in greater detail. Then we'll take a deeper dive on our 07 financial results and revised 08 outlook.

In 2007, we achieved our stated objective of growing ad sales, while continuing to invest in key strategic areas to sustain our business long term. Total ad sales including Business.com were $2.74 billion, up 0.4% from last year. Total ad sales excluding Business.com were $2.67 billion, down 0.6% from prior year, improving from the 1.7% decline in 06, but still short of our growth objectives.

We also continue to invest generously in strategic programs to support our value proposition to advertisers and consumers, including digital initiatives, companion directories, systems modernization and extensive sales training.

In our Qwest markets, 07 ad sales were essentially flat after declining 2% in 06. Small and midsized markets performed well, while the larger metros continue to challenge us. Based on our early success in Illinois, we are confident that our major metro advertisers will embrace Triple Play as we deploy in Qwest markets, which should allow us to grow there, once the economy recovers.

Advertiser claims also continued to improve in our Qwest markets, contributing to synergies. And remember, Qwest markets have historically led the industry and growth. We intend to keep it that way.

In our Embarq markets, ad sales declined around 1.5 points in 07 after four consecutive years of solid growth there. Much has been reported about the Florida and the Nevada economies, and our presence there impacted 07 results as expected. However, make no mistake, the underlying strength of our Embarq markets make them some of the best places to do business in the country, despite modest incremental volatility. People continue to visit and move to Florida and Vegas.

Now one detail worth noting is that notwithstanding recurring revenue over 90%, we still closely monitor why advertisers reduce or cancel their programs with us, when that occasionally happens. Our 07 data indicate that most churn came from credit block outs, while relatively few advertisers left for other media. We interpret this as predominantly a cyclical challenge. In addition, our Embarq team managed through systems conversion in 07 that significantly impacted their productivity.

As the first of our operations to go live on the new Amdocs publishing platform, they had the responsibility to fine-tune the hundreds of small issues associated with an initiative of this magnitude. As a result of the Embarq team's efforts, our Illinois operation had a seamless experience when they converted later in the year.

In our Illinois AT&T markets, we modestly grew 07 ad sales after several years of decline, driven largely by the success of our Tripe Play offering and performance of our Plus directories in these metro markets. Our digital penetration rate exceeded 60% of advertisers in Illinois, up from 49% in 06, while average spend among retained digital customers increased 90%. We are encouraged by advertiser adoption of Triple Play in Illinois and we see this as a strong indication of what we can accomplish in our other metro markets.

We also modestly grew 07 national ad sales in each of our three telco market brands. Our national sales continued to be almost exclusively comprised of print products as we have not yet refined our systems to readily accommodate national customers buying Internet. While this remains critical work in process, it also highlights the national advertisers are most sophisticated and ROI-focused customers, slow [ph] consider our print products are stable in their advertising budgets reflecting the robust value that print continues to deliver.

In 2007, we also made significant progress on our key operational initiatives, in addition to ad sales growth. We advanced our systems integration and modernization, we consolidated our IYP sites around the new Dex brand, we enhanced our online search capabilities via the BDC acquisition. We signed attractive new vendor contracts with R.R. Donnelly and Amdocs and we maintained our disciplined cash flow generation. We are very proud of these accomplishments and our industry-leading financial results in 2007.

We made substantial progress on a number of financial initiatives last year. We delivered $1.44 billion of EBITDA and $617 million of free cash flow, achieving expectations and demonstrating disciplined cost management. We successfully refinanced $2.7 billion of debt, thereby extending maturities, reducing interest rates and simplifying our capital structure. And we captured $24 million of additional synergies from the Dex acquisition as promised. These highlights evidenced our commitment to delivering sustainable financial results.

Turning to the specifics; in 2007 we generated net revenue of $2.68 billion and $681 million in the full year and the fourth quarter respectively. 07 net revenue was down $8 million, due to the impact of lower 06 ad sales recognized as revenue in 07 partially offset by new Business.com revenue and lower Qwest claims and allowances. Our fourth quarter net revenue increased $14 million, also attributable to Business.com and improved Qwest claims.

Operating costs were $1.24 billion and $329 million for the full year and fourth quarter, excluding FAS 123 as well as purchased accounting and related items. We invested over $70 million in growth initiatives during 2007, including digital operations, branding, consolidating IT systems, companion directories, sales force automation and sales training.

Operating costs were up $40 million as synergies and other cost efficiencies helped to fund these investments. These same investments drove $15 million increase in Q4 expenses. EBITDA of $1.44 billion and $352 million for the full year and fourth quarter respectively, reflect responsible cost management in the face of the slowing economy, while still investing aggressively to nourish our business.

During the year, we paid $721 million of cash interest. Total interest expense of $831 million includes $3 million of net beneficial impact from the refinancing and purchased accounting, $68 million of capitalized interest and $40 million of deferred financing cost amortization.

In Q4, we paid $134 million of cash interest. Total interest expense in the quarter of $229 million includes a $20 million net negative impact from the refinancing and purchased accounting, 18 million of capitalized of interest and $23 million of deferred financing cost amortization. During the quarter, our weighted average cost to debt was 7.7%, down 50 basis points compared to Q3, due primarily to the refinancing.

Turning to taxes; we paid $10 million of cash taxes during 07, related to our 2004 IRS audit settlement. We reduced our FIN 48 liability by $167 million as a result. Now, we continue to expect annual cash taxes to remain at modest levels through at least 2012, as we continue to benefit from annual tax deductible amortization of $650 million for the next ten years from our acquisitions, in addition to $634 million of NOLs at year end.

2007 free cash flow of $617 million represents 43% of EBITDA after 77 million of CapEx, but excluding $2 million of cash payments for BDC restricted stock. Q4 free cash flow was $208 million, after $16 million of CapEx. On a per-share basis, free cash flow was $8.57 and $2.93 for the full year and fourth quarter respectively.

Switching to capital structure; in the fourth quarter, we successfully completed $2.7 billion of refinancing. Resources were $1.5 billion of new 7-8% notes [ph] and a new $1.2 billion credit facility at Dex East, at LIBOR plus 175 and 200 basis points.

We used proceeds to redeem $1.4 billion of high rate bonds and retire $1 billion of bank debt with restrictive covenants. As a result, we extended our average of debt maturities by five years. We simplified our capital structure and we lowered annual interest payments by over $20 million. In addition, during Q4, we repurchased 2.5 million shares of our common stock for $96 million accretive to free cash flow per share, but consuming cash that would otherwise have reduced debt. We ended the year with 6.9 times leverage and $10 billion of net debt.

Turning to the details of revised guidance; our lower ad sales outlook of down mid single-digits translates to lower revenue, EBITDA and free cash flow. We now expect 08 revenue between 2.6 and $2.7 billion, EBITDA between 1.35 and $1.4 billion, free cash flow between 525 and $575 million, year-end net debt between 9.5 and $9.6 billion and weighted average shares of $70 million.

In conclusion, now we are disappointed that the weaker economy precludes us from confirming original 08 guidance. We remain well positioned to capitalize on our significant investments in brand, products and training. We also expect to prove more resilient than most other traditional media, due to our measurable ROI and our position as trusted marketing advisor to local advertisers.

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

Question And Answer

Operator

Thank you sir. At this time, we would like to begin the question-and-the answer session of the conference. [Operator Instructions]. The first question for today comes from Mr. Michael Meltz with Bear Stearns. Sir, you may ask your question.

Michael Meltz - Bear, Stearns & Co. Inc.

Great. I think I have three questions. Can you talk a little about, you gave guidance in early December, here we are later end of February and the downward adjustment is pretty substantial. Can you just talk about... the economy was pretty weak in December and the outlook was such, what has changed really in your thinking? Dave I know you gave details, but perhaps what's changed in your forecasting as well? May be you can give us a little bit more detail there.

Secondly, implicit in that, how bad are you expecting Q1 to be given Vegas and other markets there that perhaps might have... we all knew, would probably be weak to start the year?

And lastly, with Jake leaving is there an adjustment perhaps for the Business.com purchase price? I was under the assumption, he had a longer-term employment contract and I just want to get more detail on his departure?

David C. Swanson - Chairman and Chief Executive Officer

Okay. Michael, I will try, just if I forget part of the... end of those, just remind me. Let me try to just go walk you through those. Let me just start with the, why the guidance changed so dramatically in a short period of time? I think the best way I can describe this is, the buying attitude got worse very fast in our... from our perspective, that is from SMEs. When I look back to Q4, we were still getting very good increases from advertisers in Q4 and that has been the biggest change that we've seen, is the willingness of advertisers to increase their programs. We also have a lot more visibility today into Q2 and we had very, very little back then and I think as you recall, we were expecting Q2 to start to show some improvement here and we are not seeing it. And so the guidance really reflects what we are seeing in the first half of 08 today, which is slightly lower renewal rates, slightly lower new business rates and significantly lower increases from our existing advertisers.

As it pertains to your Q1 question, I think the guidance that we gave reflects what we are seeing in Q1 and Q2, the first half of the year. That's kind of the best I can give on that for right now.

Michael Meltz - Bear, Stearns & Co. Inc.

So Dave, you expect that type of performance throughout the year. You are not expecting to tick up later in the year?

David C. Swanson - Chairman and Chief Executive Officer

We are just afraid to forecast tick up later in the year Michael, because you know how our business works and we start to run out of 08 ad sales, it starts dropping off as we can... during the quarter into July... into June, July. So, we don't really have the benefit of a full calendar year for economic improvement. So, well we really don't have a lot of visibility into Q3 and Q4 right now. We think... we don't have any reason right now to believe that those should be better than what we are seeing in the first half of the year.

As it pertains to Jake, there were certain things obviously in Jake's employment agreement that he walks away from. There was... we had a lot of ups into Jake, but one other thing that I'll remind you, Jake remains a very large shareholder in R.H. Donnelley. One part of the agreement was that Jake had to buy a significant amount of RHD shares which have a three-year lockup and that's obviously still in place. Anything else, all of the other retention hooks that we had, Jake has foregone.

But just a couple of more comments on that, I've been discussing this whole thing with Jake for the last several weeks and the bottom line is, this guy has had a very, very intense life, the last seven years and with the building of Business.com, he has got children that are approaching college age that he just hasn't spent much time with in the last seven years. And we both agreed if his heart isn't a 100% into this job day-to-day that he should step down, that is he is not going to be able to, it wouldn't be good for either one of us. So, listen we think are we disappointed? Yes. Happy, Jake is still remaining as strategic contributor. I think that that's important for us and but the third thing I will say, is we are very, very deep in RHD Interactive and Business.com. This was not a one-man show. So, I am not overly exercised about this.

Michael Meltz - Bear, Stearns & Co. Inc.

Has Business.com hit your expectations for the quarter and the year? I think you've been guiding the $57 million.

David C. Swanson - Chairman and Chief Executive Officer

Yes.

Michael Meltz - Bear, Stearns & Co. Inc.

Okay and last question from me; on the reallocation of the dividend, is the expectation that you do some type of tender or how are you expecting to actually repurchase debt?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Well we didn't say that we are going to repurchase debt. We said we are going to apply all of our cash flow to reducing debt. So we have some flexibility in how we go about doing that. But that is still under consideration.

Michael Meltz - Bear, Stearns & Co. Inc.

Okay, thank you.

Operator

The next question comes from Jaime Neuman of Wachovia. You may ask your question.

Jaime Neuman - Wachovia

Yes, hi. I have lot of questions. I just want to ask about, as you are seeing revenue declines and ad sales declines, what kind of triggers do you have to cut costs and check with the revenue declines?

David C. Swanson - Chairman and Chief Executive Officer

Let me just...

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Go ahead. You start off.

David C. Swanson - Chairman and Chief Executive Officer

I'll kind of start and Steve or Peter have any comments, because that's... Jamie that's obviously something that we are looking very intensely at right now, as we've seen this environment turn. There are... certainly it's like there is some variability in our direct sales costs and we are evaluating all of those things right now to see, given in this environment what those will yield. But we also have a lot of opportunities to look at our print and pay-per costs as a result of these three big acquisitions that we've made. We don't have as good standardization across the product line as we hope to get. And by doing more of that and standardizing our product line, we've savings to get ad in those areas.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Let me try to kind of dimensionalize it for you though. So, the change in the ad sales outlook is going to end up impacting 08 revenue by about 100 million bucks and we've lowered our EBITDA guidance between 90 and 40 million bucks, right between 13, 15 and 1400, where it was previously 1440. So, what we need to do is, we need to manage our expenses into that range to be able to impact guidance. So, I can tell you that we've already found a significant amount of it. So, I think we are feeling pretty confident but, it's not... that's not the end of the story, because the negative add sales performance for 08 is going to continue to have an impact into 09, as we amortize the revenue into 09 and so we've got our work cut out for us to manage expenses.

Jaime Neuman - Wachovia

Okay. On the last conference call I think you gave an idea of what the degree of the declines were in Florida and Vegas. Can you quantify what the difference is that you are seeing in your other markets versus those markets?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

For... in 07 Jamie?

Jaime Neuman - Wachovia

In the fourth quarter in 07?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Except that in the fourth quarter, we really didn't have any significant revenue or sales in... at Florida or Nevada. Those are really kind of Q1 and Q3.

Jaime Neuman - Wachovia

Okay. Then may be if you talk about for the full year?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Well I can help you, I guess you can kind of reverse engineer the math a little bit. Because if you look at Florida and Nevada were, it looks like they were down around full year 2.5%, something like that. And again, another way to think about that is those two states have contributed, if you go back to 06, 05 and well beyond that. They contributed about 5%, a little 5% plus growth over all of those years. This year performed at a minus 2.4 and they make up probably 12, 14% something out of the whole pie. So you can... I don't have the math in front me, but you could kind of pull it back into it.

Jaime Neuman - Wachovia

Okay. And then going forward, are you assuming that that gets materially worse or where it is when how far are we as far as earnings are concerned and where it balance bottoms. Do you think that we're there, close to the bottom or you think there is going to be continued deterioration in those markets as well?

Unidentified Company Representative

Well, again as I said in my script, what we are seeing right now in first part of 08 is it's worst in the first part of 08 than it was even in the second part of 07 in those marketplaces. And we have seen deterioration in Arizona as well, which a lot of others were kind of talking about in 07 that we weren't seeing it quite so much, but we've began to see Arizona look a little more like Florida, Nevada in the first part of 08. In terms of call on the bottom, there are a lot of people out there trying to do that. I wish I knew.

Jaime Neuman - Wachovia

Okay, alright. Thank you very much.

Operator

Your next question comes from Peter Salkowski with Goldman Sachs. You may ask your question.

Peter Salkowski - Goldman, Sachs & Co.

Good morning everybody. First question, you talked a little bit about sort of volume declines I guess in the sense that you are losing some advertisers who aren't able to continue to pay for their advertising in your books and new business registration being down. So, I was wondering if you could talk a little bit about rates, I don't know what you were thinking back in December in terms of your rate increases but if you could give us a sense of what you are thinking going into 08 and then what you are seeing in terms of realization of whatever rate increase you might try to implement?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Yes, let me try to answer that. Obviously there isn't really much happening different. Prices isn't a factor and to give you a little bit of an idea of our approach, we've been increasingly moving to a more segmented price-to-value approach and how we go to market by category, geography. And what's happening is, we've some categories that have no price increase at all and we may in fact giving them even additional product, in addition to no price to kind of level out value. We've other categories that we are able to push through 5% rate increases, because the value delivered is so strong. So, it's kind of a mixed cocktail, given our approach right now. I think that this all... it all nets out to around probably 2%, may be a touch under 2%, but that doesn't seem to be an issue for us.

Peter Salkowski - Goldman, Sachs & Co.

Okay, and then on the ad sales guidance for 2008, just to make sure I am clear, the 08 guidance for down mid single-digits includes Business.com into 07 and 08, and I assume the 57 million number that got mentioned earlier is the 07 expectations, you have a figure that you'll be willing to provide for 2008 on Business.com?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Yes, Peter. It does include Business.com in 08, but we are not planning to break out Business.com separately in 08.

Peter Salkowski - Goldman, Sachs & Co.

Okay, and then lastly and this is just more of a general question with regards to what you are seeing in your markets and sort of how things have progressed. I know and you guys have been in the business for a long time. So, I'm trying to get a sense of what you... how this downturn compares to may be what you would have saw in a short recessionary period back in 2001, 2002 and to even going back into the 90s, early 90s in terms of that, if you think back that far. Is any of this plays that in that way that... because we have seen quite a sharp and significant downturn in a very brief period of time here and I am just wondering, how this might compare to prior downturns that you might have seen?

David C. Swanson - Chairman and Chief Executive Officer

Yes Peter that's a great question. I wonder I have been trying to spend a lot of time thinking about. You know these down business cycles are just far enough apart that, you get a tremendous amount of amnesia about. So, we have been trying to do a little research into the past. What... this one will clearly is little more severe than we have seen in the past and I think one of the reasons that we have been able to identify is that we are getting hit a little bit harder, is that unlike previous risk recessions, this housing crisis is what really kind of let us in to this downturn. And when we look at the housing and the housing-related businesses, they are much more intensive Yellow Page advertising categories, than I think that were being affected in the downturns of the past.

So we also were seeing... we've got let into this thing with the biggest declines coming in these, what were high growth states of Florida, Nevada, Arizona and those were kind of buffering the impact for us in the past for other parts of country who may be experiencing more of the feelings to the economic downturn, and these were kind of sheltering us a little bit. And this time, they are actually the worst defenders.

I think the last thing is and this is to a much smaller degree, because I think it goes to this renewal rate issue which really is only off around a 100 basis points or 1% for us. But listen, there's just and clearly there is more adverting options out there for an advertiser today. If I look back at the previous downturns while we had other independent competitors, Yellow Page competitors in the market, there was clearly a lot less fewer markets that had an independent competitor. And so for an advertiser, if he is in a situation where his business has really gotten hit hard and he is late on his bill and he owes us $40,000 and he just has have it a hard time getting that within 60 days to get back in the book, it's easy for and to just say, I give up and so I am going to go, put some thing small in the competitors book as they'll let me in.

Peter Salkowski - Goldman, Sachs & Co.

Okay, great. Thank you very much guys.

Operator

The next question comes from Mr. Paul Ginocchio with Deutsche Bank. Sir you may ask your question.

Paul Ginocchio - Deutsche Bank Securities Inc.

Thanks. Just two questions; first, can you talk about some of the retention or hopes you have to the rest of the Business.com team? And then second Steve, I guess its about almost $900 million of debt amortizing next year in 09, can you just talk about some of the things you doing there? If you pay back 500 million this year and 500 million next year, does that... will that take care of that 900 million of amortization for next year? Thanks.

David C. Swanson - Chairman and Chief Executive Officer

Paul, on the retention issue at Business.com, again its a part of the purchase price. We have a very, very large amount of money that's in place to incent both the accomplishment of goals and the retention of the Business.com team. I think not everybody in fact nobody have got the kind of money that Jake did in this deal. So, I think that its... Jake is in a very nice position where the most of the other people would not have the same luxury of not having to work.

Paul Ginocchio - Deutsche Bank Securities Inc.

Okay, is there anybody else, anybody else in Business.com, who left at this point?

David C. Swanson - Chairman and Chief Executive Officer

No.

Paul Ginocchio - Deutsche Bank Securities Inc.

Okay.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

As far as the debt amortization goes really, there's two focal points for us over the next... really over the next two years and that is we are in a need to refinance the RHD Inc. credit facility and we are going to need refinance the Dex West credit facility. And the Dex West credit facility starts stepped up amortizations in June of 09. So one of the reasons we decided to forego the dividend at this point is to protect our credit rating and make sure that we are in a position to be able to refinance those once the market opportunity presents itself.

Paul Ginocchio - Deutsche Bank Securities Inc.

Okay. Thank you.

Operator

The next question comes from Ian Whittaker with UBS. You may ask your question.

Ian Whittaker - UBS Securities Inc.

Thank you very much. I just want to pick up on something that was said earlier. You said some of the advertiser company bills may actually [ph] go to independents. Are you seeing not switch out of your business some of the independents because of the toughening economic conditions, and is that perhaps a significant part of why you are lowering your guidance today or do you think those independents are hurt as much as you are within the respective markets?

David C. Swanson - Chairman and Chief Executive Officer

Yes, I'll start and I'll let Peter may be add some color on that but, again let me dimensionalize this, that part of the decline is relatively small, it's kind of 20% of the contribution. So we don't see a lot of switching going on but it's when we look at what's different today then in the past, it is some thing that we realize as an opportunity.

Peter J. McDonald - President and Chief Operating Officer

Ian its Peter. I would say that in the marketplace and some of our toughest markets in last couple of months, we reviewed over a hundred reps and managers and the first and second issues are truly related to the economy, cash flow and the small medium sized business. And actually, the return on our investment and independents or others are less of an issue today than they have ever been.

David C. Swanson - Chairman and Chief Executive Officer

Ian, one last point on that again, as we have looked at this is that our experience has been, when an advertiser has to cut... has to reduce his add spend in face to this, it is generally the independent book that gets it first. And the incumbent book that ends up going second.

Ian Whittaker - UBS Securities Inc.

I mean, have you noticed them in terms of competition, have you noticed them actually particularly with Yellow Book which seems to being quite aggressive, have you noticed them sort of being particularly aggressive over the past couple of months or not really?

Peter J. McDonald - President and Chief Operating Officer

Yellow Book Ian has been in our markets for years now and they are there but they are clearly not the issue today. They are less of an issue than they were in the past few years.

Ian Whittaker - UBS Securities Inc.

Okay.

David C. Swanson - Chairman and Chief Executive Officer

No change in.

Ian Whittaker - UBS Securities Inc.

No change. Perfect. Thank you very much.

Operator

At this time, I would like to turn the call back over to your host, Mr. Dave Swanson.

David C. Swanson - Chairman and Chief Executive Officer

Well, I'll thank you very much for your interest in R.H. Donnelly. We appreciate your time today and should you have any further questions, please don't hesitate to call our Investor Relations Group. That concludes our call. Have a great day.

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Source: R.H. Donnelley Corp. Q4 2007 Earnings Call Transcript
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