Harte-Hanks, Inc. Q2 2008 Earnings Call Transcript

Jul.24.08 | About: Harte Hanks (HHS)

Harte Hanks Inc. (NYSE:HHS)

Q2 FY08 Earnings Call

July 24, 2008, 11:00 AM ET

Executives

Dean Blythe - President and CEO

Doug Shepard - EVP and CFO

Jessica Huff - VP, Finance & Chief Accounting Officer

Bryan Pechersky - Sr. VP, General Counsel and Secretar

Analysts

Mark Bacurin - Robert W. Baird & Co

Alexia Quadrani - JPMorgan

Troy Mastin - William Blair & Co

Dan Salmon - BMO Capital Markets

Edward Atorino - Benchmark

Operator

Welcome and thank you for joining the Harte-Hanks second quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. [Operator Instructions] Today's conference is being recorded. If you have any objections you may disconnect at this time. Now I will turn the meeting over to Mr. Dean Blythe, President and CEO of Harte-Hanks. Sir, you may begin.

Dean Blythe - President and Chief Executive Officer

Good morning, everyone. On the call with me today with us, is our Doug Shepard, our Executive Vice President and Chief Financial Officer, Jessica Huff, our Vice President, Finance & Controller, and Bryan Pechersky, our Senior Vice President, General Counsel and Secretary. Before I begin my remarks, Bryan will make a few statements. Bryan?

Bryan Pechersky - Senior Vice President, General Counsel and Secretary

Thanks, Dean. Our call will include forward-looking statements about our strategies, initiatives and business plans, financial outlook and capital resources, competitive factors, business and industry expectations and other statements that are not historical facts. Actual results may differ materially from those projected or implied in these statements because of various risks and uncertainties including those described in our most recent Form 10-K and other documents filed with the Securities and Exchange Commission and in the cautionary statement in today's earnings release.

Our call may also include non-GAAP financial measures. Please refer today's earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the investor relations section of our website at www.harte-hanks.com.

I will now turn the call back over to Dean.

Dean Blythe - President and Chief Executive Officer

Thanks, Bryan. We have one focus today, a return to earnings growth. And we did not achieve this in the second quarter. We did, however, see some signs in this quarter showing progress towards achieving our earnings growth goal. First, direct marketing business continued a steady top line growth in the quarter, consistent with what we have seen over the last nine quart quarters in spite of what has been a deteriorating macro economic environment over this period. And with this revenue growth, we delivered positive leverage of the bottom line and improved margins.

Second, while the year over year Shoppers comparisons continue to be dismal, the quarterly sequential progression in Shoppers, that is our performance in the second quarter of 2008 versus our performance in the first quarter of 2008, does show some positive. Revenue in the second quarter was higher than in the first quarter, a typical seasonal flow of revenue for this business. And on the $3 million of incremental revenue from Q1 to Q2, we delivered 4 million of incremental operating income showing the impact of our continued emphasis on cost reduction.

These are difficult times and difficult results for this business, but this was good hard work and good performance from our Shoppers team. We remain optimistic about the long term performance and strength of each of these businesses. The positive signs we saw in the second quarter, reconfirm this optimism and our belief in the fundamental value of our businesses. That being said, however, there is no doubt that the current external environment has not given us any help and will not give us any help in achieving our earnings goal, at least through the remainder of this calendar year.

The local advertising markets in California and Florida are the worst we have seen in our Shoppers business and do not appear to be showing any signs of improvement. As I noted earlier, we have delivered very steady revenue growth from our direct marketing business for over two years, in spite of a weakening environment. But are increasingly seeing more of our customers across all verticals becoming cautious with their spending plan.

The external forces potentially impacting our revenue performance are driving and we will continue to drive our behavior in managing our businesses. We will continue to aggressively pursue actions, keep our costs aligned with our revenue level and improve our efficiency and effectiveness in delivering our products and services to our customers.

Before I turn it over the Doug to give details on our results this quarter, let me briefly address how our people are responding to the -- to today's market challenges. Following the economic news on a daily basis and seeing up close the challenges faced by for our --our customers, make all of us think and act differently about how we approach our business and our jobs. The positives in this quarter were the result of this different thinking and action. I want to thank all of our people for their continued efforts to strengthen and improve our company as we move forward.

Doug will -- Shepard will now give you some more details on our results, Doug?

Doug Shepard - Executive Vice President and Chief Financial Officer

Thank you, Dean and good morning. Here is a company-wide overview of the second quarter. Revenue decreased 5.3% for the quarter, with an increase in revenues for Direct Marketing and a decrease in Shoppers. Direct Marketing revenue increased 4.4% for the quarter, compared to 4.1% in the second quarter of 2007. Direct Marketing revenue has increased 17 of the last 18 quarters and exceeded 4% growth in six of the last seven quarters. Shoppers revenue decreased 20% for the quarter.

Moving to operating income, it decreased 16.4% for the quarter. The quarter direct marketing had an operating income growth of 6.6% while Shoppers declined 42.4%. Direct Marketing operating margin was 14.2% and Shoppers operating margin was 12.7% for the second quarter. The second quarter our free cash flow was 22.9 million, versus 26.2 million in the second quarter of 2007. We spent 5.3 million in capital expenditures compared to 7 million in the second quarter of 2007.

Turning to our two businesses. The second quarter of 2008, direct marketing revenue increased 4.4% and operating income increased 6.6%. Representing or resulting in an operating income margin of 14.2% for the second quarter of 2008, which is an increased compared to an operating margin of 13.9% for the second quarter of 2007. direct marketing delivered positive leverage for the quarter with incremental operating income representing 20.7% of the incremental revenue growth. In the second quarter our high tech/telecom vertical represented 27% of direct marketing revenue, retails 24%, select markets were 22%, financial was 17% and healthcare pharma was 10%.

Our top 25 direct marketing customers represented approximately 42% of direct marketing revenue in the second quarter. Our largest customer in the quarter represented almost 7.5% of our total direct marketing revenue.

Turning to Shoppers, our second quarter revenue decreased by 20%. Operating income margin for the quarter declined to 12.7% as compared to 17.6% for the second quarter of 2007. Decrease in operating income margin was primarily driven by a 460 basis point increase in postage. This postal costs were directly tie to circulation, the increase as a result of declining revenues with relatively flat circulation compared for the second quarter of 2007. In response to continuing economic problems in California and Florida, early in the third quarter we recently reduced circulation by approximately 250,000 households per week. This reduction was primarily in California and was concentrated in unprofitable areas, raw material charges should be expected for this action.

Our total Shoppers circulation is now approximately 12.8 million. Our second quarter effective tax rate was 39.9% compared for 40.1% in the second quarter of 2007. We anticipate our effective tax rate for the remaining quarters of the year will be comparable to the 2007 quarter in effective tax rate.

On the balance sheet of June 30th, we were showing a debt balance of 309.4 billion a cash balance of 23 million for a net balance of 286.4 million. Net accounts receivables were 183.4 million versus 199.2 million at December 31 2007. Day sales outstanding at the end of June, was 61 days, the slight increase over the 59 days outstanding at the end of March.

During the first six months of 2008, we spent 76.6 million on stock repurchases compared to 76.2 million in the first six months of 2007. We have approximately 10.5 million shares remaining from repurchase authorizations as of June 30th. In the second quarter we did not repurchase any shares. As a result of the tremendous turmoil and deterioration that we saw in the overall economy and credit markets in the second quarter, we took a more cautious approach to our free cash flow and available debt capacity in the quarter. We will continue to closely monitor external market and economic conditions as we consider uses of capital and free cash flow.

In summary, as Dean mentioned, we remain confident in the long term fundamentals of our business. Our direct marketing business continues to provide solid revenue growth and deliver good bottom line growth results. Our Shoppers business delivered higher revenues and operating income in the second quarter than in the first quarter which is consistent with a historical seasonality in this business. We continue to be strong generators of cash with 22.9 million in free cash flow during the quarter. Our quarterly earnings have exceeded the consensus and company has a strong balance sheet with 96 million available under our revolver as of June 30th.

With that operator, we'll turn the call over for questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. Mark Bacurin of Robert W. Baird, you may ask your question.

Mark Bacurin - Robert W. Baird & Co

Hi, good morning guys. Couple of things in the press release you noted, and I think you even said in the prepared remarks. You sound a little more cautious in terms of the expectations for direct marketing in the back half of the year. Is there anything specific, or any specific vertical you can point to that kind of give you the caution or is that just more watch macro economic environment?

Dean Blythe - President and Chief Executive Officer

Mark, this is Dean. There is nothing specific other than stay as close as possible as we can to our customers. And we hear it from our customers. They're nervous. So when they get nervous, we get nervous.

Mark Bacurin - Robert W. Baird & Co

And is it -- do you get the sense that maybe people are ringing back for Q3 with the expectation, maybe saving a little bit of dry powder for Q4 going into the holiday period? Or it just?

Dean Blythe - President and Chief Executive Officer

That is probably on the retail side. That is probably correct. I'm not sure if it applies to the other verticals.

Mark Bacurin - Robert W. Baird & Co

Okay. On the -- driving in to the direct market a little bit. Healthcare, pharma, seemingly a fairly non-cyclical industry but you are experiencing some softness there. can you give us some color on what's going on?

Dean Blythe - President and Chief Executive Officer

I think there are probably three things impacting that market. It is two different -- it is pharmaceuticals and it is healthcare providers. On the healthcare provider side, which is this majority of the weakness, we help healthcare organizations drive membership. Healthcare organizations today for a couple of reasons are pulling back.

One is, some of the programs they have today, they lose money for every new member they recruit. So they have decided not to spend money to recruit new members. People also are very interested in what is going to happen in November, and how that may or may not impact healthcare plans going forward. So there has been a significant cutback in healthcare membership drive spending.

In pharmaceutical, there have been a lot of drugs in the news, in terms of studies coming out showing that these drugs aren't -- don't do what they said they were going to do. We -- while we are not directly impacted by any of those recent statements, in other words we don't do work for those particular drugs, we do work for the companies that have investments or own those drug brands. And several of those companies have slashed marketing spending across their entire organization. And we have been impacted by that.

Mark Bacurin - Robert W. Baird & Co

Great, that is very helpful. On the decision, this quarter, to use free cash flow more for debt reduction than stock buyback, was there -- are you looking at any specific covenants that as you go up through the next few quarter, it would give you some concern, you want a little leg room there or --?

Dean Blythe - President and Chief Executive Officer

Mark, this is not a covenant issue at all. We are a million miles away from any covenant issues.

Mark Bacurin - Robert W. Baird & Co

They are -- just chose, could you elaborate a little bit? I mean, these things, like your balance sheet is not very heavily levered relative to most companies rates are coming down, so just curious for the decision to pay down debts than in buying back stocks. And what your thoughts are going forward on that?

Dean Blythe - President and Chief Executive Officer

I don't think I can say a lot more than what Doug said. These are historic times. If you pick up the paper, the amount of uncertainty in the market -- in the external market, and in particular in some of the markets that we operate in on the local side, we haven't seen things like this in decades. And in those economic times, we made a decision this quarter, and it's not forever, to preserve capital in the face of extreme economic uncertainty.

Mark Bacurin - Robert W. Baird & Co

Okay. And then just finally the share cut sounds like it was low profitability. Does that actually help margins in the back half of the year and what is the revenue that was associated with that 500,000 or so households.

Dean Blythe - President and Chief Executive Officer

It wasn't 500,000, I think it was 250 or 275 -- 250.

Mark Bacurin - Robert W. Baird & Co

Sorry, I misheard that.

Dean Blythe - President and Chief Executive Officer

I think that -- the revenue mark is going to be, on an annual basis, probably under 2 million. But I am -- no, I am -- I am going -- let me confirm that number. Because I think when we did 600,000, it was about 5 million in revenue. So the 250,000 would be somewhere in the 2 to $3 million range.

Yes, while -- yes, will it help margins? All else being equal, the answer is yes. We were losing money on that circulation so we wouldn't lose money. So therefore, yes. It would improve margins. But Doug mentioned in his comments, we lost 490 basis points -- no, 490 basis points in Shoppers overall.

Now the impact of declining revenues with flat postage expense, because the postages expense is fixed based on the number of packages and your circulation. 460 of the 490 basis point loss was the result of the fixed postage expense. So as long as revenue is declining at the rate it is declining, we continue to face that margin, that significant margin impact. And so we are doing things obviously to combat that. And cutting circulation a little bit will help.

Mark Bacurin - Robert W. Baird & Co

Just to make sure, I understand you, Dean, that 460 of the 490, that is just basically negative operating leveraged on that fixed cost base?

Dean Blythe - President and Chief Executive Officer

Exactly.

Mark Bacurin - Robert W. Baird & Co

Yes, okay. Thank you very much.

Operator

Alexia Quadrani of JPMorgan, you may ask your question.

Alexia Quadrani - JPMorgan

Hi. Just a follow up on your comments about the clients in the Direct Marketing business becoming more cautious. Would you say that there was a notable change, maybe in recent weeks, which suggest more muted growth in the second half? Then I have a couple of follow ups.

Dean Blythe - President and Chief Executive Officer

Alexia, I would say, we have said, at the beginning of the year and after the end of the first quarter that we -- that we had seen some of our customers in some verticals. We are primarily talking about retail and financial. I just think that since -- I wouldn't say it is recent within the last couple of weeks, but I would say, certainly, within the last 90 days we've just seen more of that and outside of those two verticals.

Alexia Quadrani - JPMorgan

And then on the select vertical, if you can give us little more color and what you are seeing there, you have such a good performance just the fact that auto is in that category. Can you give us some more details on that?

Dean Blythe - President and Chief Executive Officer

Our auto is actually up this quarter. Our automotive was up this quarter, we do work with the foreign manufacturers. We don't -- we have very little, if ant work with Detroit and some of our guys are doing pretty well. Auto was up, our government's nonprofit sector was up in that and those were a couple of the drivers.

Alexia Quadrani - JPMorgan

And the -- the government nonprofit, a big chunk of that or was it pretty evenly divided in much little verticals?

Dean Blythe - President and Chief Executive Officer

It is not exactly evenly divided, but it's one of the -- kind of the three biggest pieces in that are automotive, government nonprofit and what we call actually consumer durable goods.

Alexia Quadrani - JPMorgan

Would you say in the government chunk is election related or not necessarily.

Dean Blythe - President and Chief Executive Officer

Not at all. We don't have any political work in direct marketing.

Alexia Quadrani - JPMorgan

Okay. Okay and then just on the -- again back to the good numbers in direct marketing, I don't know if you can read this far into what you're seeing from your clients, but do you think it's a shift in spending maybe from us, maybe to more sort of direct account media or do you think just this is the part of the business that hasn't really been cut yet because it is more accountable? Are you getting money from our places necessarily?

Dean Blythe - President and Chief Executive Officer

No -- I'm sorry, Alexia, you lost my -- I think, are you suggesting -- are you asking is our relatively positive top line performance based on a shift from mass media into direct?

Alexia Quadrani - JPMorgan

Yes, you said it much better than I do, yes.

Dean Blythe - President and Chief Executive Officer

We can't tie any dollars, but it certainly seems like some of our media within some of our customers may be getting cut more than what we're doing. I don't know if it's a shift of dollars, but the reductions -- maybe the reductions are less in this form of media than others.

Alexia Quadrani - JPMorgan

And then not lastly, just not to beat a dead horse, but I'm a little surprised about your comments about the share buyback in the quarter, I understand it is historic times, but the stocks also sort of historic loads on a valuation perspective. Is there a stock price that you guys internally maybe look to and saying at this point you just have to make a move and buyback stock, or is it really just we're so nervous about the economy that we don't think kind of use a free cash flow in that way right now it is prudent.

Dean Blythe - President and Chief Executive Officer

I don't -- no, there is no magic stock price that makes us turn this on or turn this off. It was more of the totality of the circumstances. We bought an enormous amount of stock in the first quarter.

Alexia Quadrani - JPMorgan

Okay.

Dean Blythe - President and Chief Executive Officer

And if you look at it -- if you're going to look at it, is that mean if we're not buying every single day, we changed our mind, no. It is kind of like over a period of time and we have bought more in the first six months of this year than we bought in the first six months of last year. We just didn't do it on a steady straight line basis.

Alexia Quadrani - JPMorgan

So it's not necessarily, we should read into that you're not going to be doing it in the third quarter.

Dean Blythe - President and Chief Executive Officer

I would think that is correct, but I don't think you should read the opposite either. I think, we continue to evaluate this on an ongoing basis.

Alexia Quadrani - JPMorgan

Okay, thank you.

Operator

Troy Mastin, of William Blair & Co. You may ask your question.

Troy Mastin - William Blair & Co

All right, thank you, good morning. You mentioned the sequentially growth in Shoppers from Q1 to Q2, I wonder if you could help us in understanding how you view the sequential progression in that business, I think Q2 and Q3, I think it was positive in '03 and '04, but negative in '05, '06 or '07 just been trying to get some context around how we should expect to see the things going at business going forward.

Dean Blythe - President and Chief Executive Officer

Troy, I think the reason to focus on that is the sign -- this business forever -- revenue in Q2 has been higher than revenue in Q1 in any year because of seasonality with Q1 being a very low revenue month -- low revenue period. Q2 -- between Q2 and Q3 has not followed that trend, in other words, sometimes it's higher and sometimes it's lower.

So there is no established seasonal trend. I think we highlighted the seasonal trend between Q1 and Q2 to say yeah, it's pretty flat on year-over-year basis, but at least it's a returned to some degree of normalcy in the revenue flow. Now, we don't have that same historic benchmark between Q2 and Q3.

Troy Mastin - William Blair & Co

Okay, so we can't read much into Q3, relative to Q2, similar to Q2 and Q1?

Dean Blythe - President and Chief Executive Officer

I would say that's correct.

Troy Mastin - William Blair & Co

Okay and what about the progression of the Shoppers business within the quarter? Some of the newspaper companies seem to see, less negative results in the earlier parts of the quarter and more negative results in the latter parts of the quarter. Did you see a trend like that?

Dean Blythe - President and Chief Executive Officer

Yes.

Troy Mastin - William Blair & Co

And has that -- weakness in June or softness in June carried into July from what you seen so far?

Dean Blythe - President and Chief Executive Officer

Troy over the last, since the fourth quarter of 2006, we have seen 52 trends. And we've learned that two weeks or three weeks does not a trend make in either direction. So the revenue is more volatile than it was and that's why we're -- we're very cautious about the future, because you can't -- we're not seeing trends yet.

Troy Mastin - William Blair & Co

Okay. So if there was an apparent trend in some areas, when they look as a comparable to you, say April stronger than May, stronger than June. You're not necessarily seeing a trend that you can tease out of your results, you are saying.

Dean Blythe - President and Chief Executive Officer

I'm saying that if you look backward, and you can make some factual comments about which month did better, I'm not sure that portends what the future is going to hold.

Troy Mastin - William Blair & Co

Okay. And then what can you tell us about paper prices and Shoppers? Are you seeing upward pressure that -- you mentioned postage in terms of the impact on your margins, what kind of an impact did paper have year-over-year? And what's the outlook for paper, going forward?

Dean Blythe - President and Chief Executive Officer

Okay. There are two impacts, both of postage and with paper. And one is the rate impact and one is a volume impact. With postage, we had very little volume benefit. In other words there was no volume declines because postage is fixed on the number of packages you send out or virtually fixed.

Our newsprint consumption is actually declining because our advertising is declining and we print as many pages as we have advertising. So on a rate basis, we're actually slightly down year-to-date in newspaper rate, with projections and expectations that they will increase in the second half of the year.

Troy Mastin - William Blair & Co

Can you give us some order of magnitude as to how much of an -- a margin of impact that might be in the back half of the year?

Dean Blythe - President and Chief Executive Officer

Margin impact. I think the rates are -- in the neighborhood of -- we're projecting a potentially 10% increase in the second half on a year-over-year basis. Something close to that, and with paper somewhere between 10 to 15% of our revenue base. So that would be 100 basis points or something. On a year-over-year basis.

Troy Mastin - William Blair & Co

Got it. So you'll make some of that with a circulation cut but you might give it right back in the form of paper?

Dean Blythe - President and Chief Executive Officer

And we'll make it up -- there are lots of ins and outs.

Troy Mastin - William Blair & Co

Okay, and then, as you look across your cost cutting that you have been pretty effective at or cost control, is it getting much more challenging for you to find other areas to eliminate cost, low-hanging fruit, is it largely gone? Or are you getting continually more creative to where you think you can keep driving or blunting the impact of the revenue downturn through more effective cost management?

Doug Shepard - Executive Vice President and Chief Financial Officer

Yes, there are always things that you can address, cutting expenses, etcetera. But you are correct that we've taken a lot of the low-hanging fruit in Shoppers, etcetera. And it does get harder, obviously as you progress into the future to take as big as cuts as we have in the past.

Dean Blythe - President and Chief Executive Officer

But Troy, the other thing is it depends on revenue levels. We have -- to produce revenue we have expense. So if the revenue isn't there, then we can get at that expense fairly readily.

Troy Mastin - William Blair & Co

Okay. And then finally one more question on the direct marketing side. Are there any types of services that are standing out as areas of strength, not verticals but services? If it's a particular one that is driving a good portion of that 4.4% growth?

Dean Blythe - President and Chief Executive Officer

Yeah -- in any given quarter we do a lot of different things for a lot of different customers. And probably over this nine quarter period of time, we have had 10 different things driving the growth. So I don't think there are any trends, particular. It varies from quarter to quarter. But I don't think there is a long term trend that we're seeing.

Troy Mastin - William Blair & Co

Okay, good, I'll let someone else ask. Thanks.

Operator

Dan Salmon of BMO Capital Markets. You may ask your question.

Dan Salmon - BMO Capital Markets

Hi, guys. Thank you. Could you break out the contribution of to the Mason Zimbler to the Direct Marketing unit growth? And then further on, just any significant difference between how that business is performing versus the rest of your business? Thanks.

Dean Blythe - President and Chief Executive Officer

Okay, the Mason Zimbler, I believe on the revenue basis is about 1% of the growth.

Dan Salmon - BMO Capital Markets

Okay. And is that business -- do you see any significance -- you said it sounds like pretty broadly customers across all verticals and throughout the business starting to pull back a little bit, any significant difference with the clients that are focused there versus clients elsewhere?

Dean Blythe - President and Chief Executive Officer

I'm sorry, focus where, Dan?

Dan Salmon - BMO Capital Markets

Well, the clients that are -- focused -- that you acquired mainly through Mason and the work you're doing with them there. Do you see any particular difference with their trends versus the rest of your client base?

Dean Blythe - President and Chief Executive Officer

Dan, Mason Zimbler is 1% of our total revenue.

Dan Salmon - BMO Capital Markets

Okay.

Dean Blythe - President and Chief Executive Officer

1% of our total revenue, so I don't -- they have you got 10 customers and we have got 10,000. So I don't think we can really draw any trends from -- those comparisons.

Dan Salmon - BMO Capital Markets

Okay. Thanks. I'll let someone else pass on.

Operator

[Operator Instructions] Edward Atorino of Benchmark, you may ask your question.

Edward Atorino - Benchmark

Hi. Looking at the debt level and your strategy there, should we assume that this expenses is going to stay where it is, unless off course you ramp up your share repurchase program again. Second, and I hate to beat this thing to death, but if you -- there has been rather nasty trends in the Shoppers business. Go back to last few quarters, the rate of decline has sort of accelerated from 7% to 20% and now it's stabilized.

And in terms of the rate of decline in revenues, you have sort of gone from 9 to 22, which is sort of starting to stabilize, I'm not sure if there was any message there but I guess the answer is you don't know. It looks like you might be stabilizing somewhere in the mid-80s level, but of course that's also guess work.

Second question on the cost side, you've look like your cost are starting to stabilize in the $80 million plus or minus range there, are we near a base in that category? And then lastly, on the corporate line, you did good job in squeezing corporate down. Would that be a run rate to look at the second quarter roughly $3 million give or take a little, would that be a run rate going forward?

Dean Blythe - President and Chief Executive Officer

Okay, let me -- I think there are three questions, corporate rates.

Edward Atorino - Benchmark

Which was corporate and then the trend quote unquote on the Shoppers side?

Dean Blythe - President and Chief Executive Officer

Yeah, the corporate run rate, the answer is yes.

Edward Atorino - Benchmark

Okay.

Dean Blythe - President and Chief Executive Officer

A good run rate. The Shoppers -- I guess the question was really we kind of -- are we seeing stability and in the mid-to high to $90 million revenue range on the revenue side and $80 million on the cost side?

Edward Atorino - Benchmark

Yes, I think that sort of sums it up, yes.

Dean Blythe - President and Chief Executive Officer

I would -- I will have to go back to, I think it was with Troy, what I was talking about is. I would love to be able to tell you that.

Edward Atorino - Benchmark

Yes, I understand.

Dean Blythe - President and Chief Executive Officer

And we're certainly hoping that that is what we're driving at. But we just don't have enough empirical data and enough visibility to say that's what's happening.

Edward Atorino - Benchmark

I understand.

Dean Blythe - President and Chief Executive Officer

The first question is our interest expense going to stay where it is. About half of our outstanding debt is floating. So certainly with rate movement -- one way or the other, which -- I don't know if there is much more downward room, but there is certainly upward.

Edward Atorino - Benchmark

Yes, I understand.

Dean Blythe - President and Chief Executive Officer

That rates is going to increased and then as I mentioned with Alexia, I believe earlier, what we do with our free cash flow.

Edward Atorino - Benchmark

I understand, yeah, you don't need to believe in that. I understand that totally, that's no problem. Thanks a lot.

Dean Blythe - President and Chief Executive Officer

Thank you.

Operator

I would like to now turn the call back to Mr. Blythe for closing comments.

Dean Blythe - President and Chief Executive Officer

I want to thank everyone for joining us today. And we look forward to speaking with in the next quarter. Bye.

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