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Executives

Peter McDonald – CEO

D Jones – CFO

Analysts

Chad Quinn – Bennett Management

Colin Murphy – Valerie

Lance Vitanza – CRT Capital Group

SuperMedia Inc. (NASDAQ:SPMD) Q2 2012 Earnings Call July 27, 2012 10:00 AM ET

Operator

Good morning and welcome to SuperMedia Second Quarter 2012 Earnings Conference Call. With me today are Peter McDonald, Chief Executive Officer; and D Jones, Chief Financial Officer.

Some statements made by the company today during this call are forward-looking statements. These statements include the company’s beliefs and expectations as to future events and trends affecting the company’s business and are subject to risks and uncertainties.

The company advises you not to place undue reliance on these forward-looking statements and to consider them in line of the risk factors set forth in the reports filed by SuperMedia with the Securities and Exchange Commission. The company has no obligation to update any forward-looking statements.

A replay of the teleconference will be available at 800-585-8367. International callers can access the replay by calling 404-537-3406. The replay passcode is 11277433. The replay will be available through August 10, 2012.

In addition, a webcast will be available on SuperMedia’s website in the Investor Relations section at www.supermedia.com. At the end of the company’s prepared remarks, there will be a question-and-answer session.

And now, I would like to turn the call over to Peter McDonald. Peter?

Peter McDonald

Thank you, Maria, and good morning, everyone. In the next few minutes, I will review some of the highlights for the quarter focusing on ad sales, expenses and our progress of our new sales approach.

Following my comments, D will review the financials and then we will be happy to take your questions.

As I think about this quarter, it is disappointing to see us reflecting a 19.7% decline in adjusted ad sales numbers. In that regard, I would like to remind everyone that these results reflect the value of print directories that were primarily sold in the fourth quarter of last year and the first quarter of 2012 and then published in Q2.

In addition, our digital results reflected in the calculation are on an amortized basis such that what we sell and fulfill in the current period are only partially reflected. While our reporting methodology is the same as always, the response to our new approach and trends, we are seeing the marketplace have not yet been scaled and are not yet reflected in our results.

Today it is clear that while many customers see the value of print advertising, most are also interested in marketing their business online or with social media. Let me give you an example. An existing customer may have $1,000 a month budget and decided to keep $750 in print. And take the remaining $250 and use it toward digital marketing solutions.

On a print basis, we would recognize a 25% loss from the prior year, while it will take a full 12 months for the effect of the $250 digital order to be fully reflected in ad sales. At this time, we aren’t changing our sales reporting process as it is more closely tied to the sales that will translate to revenue.

While we aren’t growing yet, we are seeing real progress with our new approach in the marketplace; that our reporting methodology doesn’t capture right away. We have trained all of our premise consultants that handle the bulk of our customers and are seeing improvements across all regions.

Our new approach is being well received by our media consultants as well as our customers. It is no longer just a project; it is taking off in all regions because it does make sense.

We are now training the new approach with telephone sales and have started our training for consultants that handle our top 5% customers. This customized team selling approach for the top 5% of our customers is key to our transformation. While training has received high grades from the top media consultants; they are now in the field calling on customers. We expect to be able to report more as we go forward.

I’ve been in the field this quarter to see first-hand on the front lines, how we deliver our approach and how it is received by our existing and new customers. Most small, medium sized businesses don’t know how to manage their business on Google, Bing or Yahoo! They have no idea of how to deal with social media or manage their message on mobile. But they do agree that their customer search for businesses in all these places and they need to be there.

Most customers are happy with us and are very open to ideas. Riding in the field with Christina in Boston, Dan in Philadelphia and Ernesto in DC, I saw talented media consultants that could deliver our approach easily and effectively. Armed with iPads and our internal app, they demonstrated that they could win customers and help grow the business. I left each of these field visits feeling good about our ability to drive business in the right direction.

I also spent time sitting with one of our top telephone media consultants, Julie in Boston; and again, was impressed with her technique over the phone. Customers want solutions and that is what we are providing. We believe we are moving in the right direction and expect to see improvements as I watched the progress in the marketplace.

Next, we continue to challenge everything we do and find efficiency as we manage the expense side of the business. This clearly shows up in our EBITDA of $144 million for the quarter and related margin of 41.3%.

With regards to expenses, in the period, we saw a reduction of $64 million, which represents a decline of 23.8% versus last year. We are consistently seeing improvements across the board. We are seeing improvements in bad debt, customer claims are down, traffic acquisition costs are being managed more efficiently and many other areas are moving in the right direction.

In addition, during the quarter, we took actions to reduce some of our post employment benefits, which will reduce this liability by $262 million and provide ongoing expense in cash savings.

The team has reduced our debt by more than $1.2 billion since we restructured in 2010, and I am also pleased to announce that we’ve ratified contracts with our bargain for employees in New York, New Jersey, Pennsylvania, Maryland and Virginia. These contracts reflect the commitment on both sides to move the business forward and win in the marketplace.

In Q2, we are also seeing results for the thousands of customers to whom we have sold our digital solutions. The team is very focused on each customer’s results whether it’s in impressions, clicks, calls, actions or likes.

Our performance reports allow us to learn effective practices from customers that are getting outstanding results and target the ones that need help. We realize that long-term relationships will only be built on results.

During the first half, we went to the field and did reviews to help, execute, transform and drive growth. This past week, our sales leadership brought in all of our sales managers for a three-day summit. The purpose was to focus the team on growth and share with them the keys to future success. I will say that it’s the best training that I have seen in my career.

Our digital leadership also brought the team up to speed on the latest developments and wowed the group with their presentations and cool stuff like our real mobile app. We expect to realize the benefits of this conference as we move forward.

In conclusion, it was a productive quarter on many fronts as we focus on execution and transformation. We realize the importance of relationships and results and are committed to do what’s right for our customers, employees and investors.

Thank you, for your time, and now to D.

D Jones

Thank you, Peter, and good morning, everyone.

Before we begin, I would like to mention that some of the results I’ll be speaking to this morning are non-GAAP numbers. We have provided a reconciliation of GAAP to non-GAAP results in the appendix of this presentation.

With respect to the second quarter 2012 financial results, second quarter 2012 reported operating revenue was $349 million, a 17.1% decline for the quarter compared to the same period last year. Year-to-date reported operating revenue was $712 million, a 17.1% decline compared to the same period last year.

Ad sales for second quarter declined 19.3% compared to a 16.3% decline for the same period last year. As we’ve reported before, 2011 was impacted by financially distressed single certified marketing representative in our third-party national sales channel.

The CMR impact was $2 million for the three months ended June 30, 2011. The total 2011 CMR impact was $11 million, with $9 million in Q1 of 2011. Adjusting for this impact, second quarter 2012 ad sales would have declined 19.7% compared to 15.9% in 2011.

As Peter described, it will take time for our transformation activities to be realized in our ad sales results. As such, as we look forward, we do not anticipate a material change in these results in the next quarter under our current methodology.

As Peter mentioned, second quarter 2012 adjusted EBITDA was $144 million, a 5.3% decline compared to the same period last year. Adjusted EBITDA margin was 41.3%, 520 basis points improvement compared to the same period last year’s margin of 36.1%. Year-to-date adjusted EBITDA was $292 million, a 4.6% decline relative to the same period last year. Adjusted EBITDA margin was 41%, a 540 basis point improvement relative to Q2 2011 year-to-date of 35.6%.

Looking at year-to-date adjusted expenses, year-over-year total expenses excluding severance cost and depreciation and amortization declined 24.1%. Selling expense declined by 21.9%, cost of sales declined 21.3% and G&A expenses declined 33.9%. As reported in past earnings calls, our expense reductions have been consistent across all functional areas of the business.

Year-over-year, the expense declines are due to lower head count, lower print and distribution quantities, bad debt and numerous other initiatives. The bad debt expense provision rate for the quarter was 2% and is 1.8% year-to-date.

Year-to-date free cash flow was $170 million, consisting of cash from operations of $176 million, less CapEx of $6 million. We continue to take advantage of opportunities to de-lever the balance sheet and in the second quarter we repurchased debt at below par allowing us to de-lever by $56 million, utilizing $33 million of cash.

Also in the second quarter a mandatory cash sweep payment was made of $114 million consisting of $69 million relative to Q1 cash flows and $45 million relative to Q2. On a year-to-date basis, we have reduced the total debt principal by $234 million. Of that $118 million was at par and $116 million was repurchased at below par which brings our debt balance to $1.511 billion from $1.745 million balance as of 12/31/11. After the second quarter cash sweep payment of $45 million we have approximately $22 million remaining in discretionary cash.

In the second quarter, the company amended the post-employment benefit healthcare and life insurance plans which resulted in a pre-tax reduction of certain post-employment benefit obligations by $262 million. As a result, an after tax deferred gain of $164 million to accumulated other comprehensive income was recorded. Additional details would be available in the second quarter 10-Q.

This concludes the Q2 financial results report. We’re now ready to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions) Our first question comes from the line of Chad Quinn of Bennett Management.

Chad Quinn – Bennett Management

Good morning. I was wondering if we could just go back to what you were saying about the ad sales number being down 19% in the quarter but not really reflecting recent trends. Should we expect to see a dramatic improvement in that going forward given your new initiatives?

D Jones

Well, as I mentioned, I think in the third quarter we are not anticipating a material change due to the methodology and the fact that the digital portion of that calculation is on an amortized basis and there is more of a lag effect. But as we look forward we would love to see improvement in those ad sales over time.

Chad Quinn – Bennett Management

Okay. Is there any reason it accelerated in the quarter downward?

D Jones

No, not particularly other than the fact that when you see movement or shift in the mix of products because of that methodology it can give a little bit of distortion as to the result because of the timing that Peter described and how the digital flows into that calculation relative to the print.

Chad Quinn – Bennett Management

Okay. And can you just give us what cash taxes and cash interests were in the quarter?

D Jones

Yeah. Cash taxes were around $32 million. And what was the other question, I am sorry?

Chad Quinn – Bennett Management

The cash interest.

D Jones

Cash interest was $44 million.

Chad Quinn – Bennett Management

Okay. And you mentioned having the $22 million of discretionary cash. Should we expect that you will be back in the market with a tender for the bank debt in the near future?

D Jones

Yeah. I mean, we’ll evaluate that opportunity as we look through the next month or so. We’ll continue to evaluate that. We believe in efficient deleveraging and efficient utilization of cash and that’s certainly an element and an opportunity that we’ll consider strongly.

Chad Quinn – Bennett Management

Okay. Thank you.

Operator

Your next question comes from the line of Colin Murphy of Valerie.

Colin Murphy – Valerie

Yes. Good morning, guys. Can you break out your – what percent of total sales are digital today?

D Jones

As we said in the past, we don’t segregate our results between print and digital.

Colin Murphy – Valerie

And do you see that changing over the near term?

D Jones

Yeah. I mean, we’ll continue to evaluate the metrics and how and what we report as we move forward and that’s certainly an element that’s on our radar screen to consider and evaluate.

Colin Murphy – Valerie

Okay. And it looks like in Q1 you guys did about $2 million in CapEx and then in Q2 it’s probably closer to the $4 million. How should we think about CapEx for the remainder of the year?

D Jones

Yeah, and we’ve talked about this a little bit in the past. Total CapEx on an annual basis for us this year we’d probably expect to see somewhere in the mid teens type number. It normally accelerates a little bit as you move through the period that’s a traditional activity for this business. And so – but like I said, I’m expecting it to be probably in the mid teens for the full year.

Colin Murphy – Valerie

Okay. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Lance Vitanza of CRT Capital Group.

Lance Vitanza – CRT Capital Group

Hi, thanks for taking the questions. Just a couple of quick ones. The first is on – I think it was $22 million that you said of “surplus cash” and I apologize I missed this earlier. But is that then the – that’s the sort of the 32.5% or whatever it is that is not required to be swept to the banks under the excess cash flow sweep, is that what that represents?

D Jones

Yeah, that’s correct. We had a $45 million cash sweep done leaving $22 million of discretionary cash, the 32.5% and under that calculation that’s what we have available as discretionary.

Lance Vitanza – CRT Capital Group

Okay. And then the – just mid-teens you’re talking on the CapEx side, clarify the last question. The mid-teens you’re talking are like $15-ish million is that...

D Jones

Yes.

Lance Vitanza – CRT Capital Group

Okay. And then, lastly, what’s the sensitivity on not breaking out print versus digital revenues? Dex One does a really fine job I think highlighting the growth that they are seeing with digital bundles and with digital bookings and so forth. I would think that this would be an attractive element to your story as well and something that you would want to highlight. But what’s the sensitivity there, if you could help me understand I’ll appreciate it?

Peter McDonald

Yeah. You know in the past we’ve talked about the mere fact of the nature of our business and how we approach the marketplace and the solutions that we provide, our packaged and total solution, and that’s how we look to manage our business and run our business.

As I mentioned, we’re going to consider those elements as to what and how we report and the policies around that as we look forward. So, as the business moves and evolves and changes, we are certainly going to consider what elements of reporting that we want to make as we look into the future.

Lance Vitanza – CRT Capital Group

Thanks very much.

Operator

(Operator Instructions) At this time, I’m showing no further questions. I’ll turn the floor back over to management for any closing remarks.

Peter McDonald

We appreciate everybody’s interest and time this morning. As we move forward, we’ll continue to make progress in the marketplace and drive this business in the right direction. Thank you for your attention.

Operator

Thank you. This concludes today’s teleconference. As a reminder, an archived version of this call will be available on the website at supermedia.com, under the Investor Relations section. You may now disconnect your lines at this time and have a great day.

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