Yellow Pages Limited

Julien Billot - President and CEO Ginette Maillé - Chief Financial Officer

Aravinda Galappatthige - Canaccord Genuity

Thank you, Lisa, and good afternoon, everyone. And welcome to Yellow Media Limited’s 2014 third quarter conference call.

Joining me today is Ginette Maillé, Chief Financial Officer of Yellow Media. The implementation and mobilization of our return to growth plan is going as planned, with the third quarter bringing for some significant milestones for Yellow Media.

We will dive deeper into the achievement later in the call. But I am proud to announce that the core KPI effective of our digital transformation are all moving in the right direction.

First, digital revenues are now in excess of print, having reaching 52% during the third quarter. Second, we have continue momentum in customer acquisition and already achieved our 2014 acquisition target of 20,000 new customers, with customer acquisition over the last 12 months having reach 20,200 as of September 30, 2014.

Third, total digital visits for the third quarter showed strong growth and reach over 110 million visits, a 10% from 100 million visits at the same time last year. And fourth, debt repayment remains well above our minimum mandatory requirements.

We anticipate paying a total of $140 million on our Senior Secured Notes in 2014. Our ultimate goal is to return this company to revenue and EBITDA growth.

Successful execution of the return to growth plan will help us achieve this in 2018, as initiatives underlying the plan are design to strength our relationship with local businesses and consumers, and help us gain a leadership position within Canada’s local digital advertising market. Initiatives underlying the return to growth plan are divided into four key four pillars all of which are key long-term revenue and EBITDA drivers.

The improved brand whereby the company will launch targeted advertising campaigns to improve brand perception and awareness, media to ensure online and mobile properties, attract to growing number of Canadian shoppers daily, customers to provide valuable products and improved sales [indiscernible] supper executions of clients marketing campaigns and employees to ensure the right resources and expertise are in place to execute our plan in the timely and efficient manner. Supporting these four pillars are also investment in operational efficiencies, who went to maximize profitability of our operations, by realizing efficiency gains across all print and digital function.

Let’s just provide you with an update on the brand pillar. Branding investment will support customer acquisition and the overall growth of our customer base by raising awareness around our digital solutions.

The company is presently extending radio campaign in Vancouver, which already successfully took place in Montreal, Toronto and Calgary earlier this year to promote our website and facebook offerings. Highly regarded digital seminar surveys also continue to be held across the country educating SMEs on key elements of digital marketing, as well as YP’s role as a trusted partner and provider of digital solutions.

Improving one perception we will also help growing product usage of our digital properties, an element key in delivering return on investment to existing customers. To-date, national and local flights of advertising campaigns have been launched Canada-wide, gear at growing adoption of our digital YP properties.

These campaigns are focused principally on raising awareness around YP mobile application as usage behavior continues to shift from desktop to mobile. Subsequent to the TV campaign overall Canada-wide from April through June 2014.

The company completed an extensive out of form advertising campaign in Toronto, Montreal, Calgary and Vancouver from June to August 2014. Then the Local Market Attracts.

This campaign was comprised of outdoor billboards, even promotion, digital pre-rolls and advertisement in highly traffic urban centers. We are quite pleased with the results of our Local Market Attacks as we saw strong brand recollection, material uplift in key broad perception metrics, as well as growth in downloads of the YP mobile application.

Investments, we are now voting out a second wave of digital advertising in these same markets to raise targeted awareness and usage around the Gas Price and Deals features available on the YP mobile application. Lastly, another key campaign taking place this quarter is Shop the Neighborhood.

This event took place last year in the DTA and following its success, we have decided to expand it across Canada on November 29, 2014. The mission of Shop the Neighborhood is to position the YP brand in the digital local search marketplace while reinforcing our promise to businesses and consumers nationwide of positively contributing to local neighborhood economies.

To date, strong partnerships and rich force with major business association as well as municipal and provincial governance. We also have 2500 local merchants signed up to-date to take part in this event across Canada and hope that all of you participate and support local shopping within your respective neighborhoods.

For further information on the event, please visit shoptheneighborhood.ca. Growing traffic across our digital properties is another core investment underlying the return to growth plan.

It enables us to drive valuable leads and return on investment to our customers, improves perception of our properties within the digital market place and ultimately promotes customer renewal and acquisition. For the third quarter of 2014, total digital visits, which measured the traffic across our YP, RedFlagDeals and YP Shopwise online and mobile properties, grew 10% to 110 million, up from 100 million visits for the same period last year.

Our media strategy is well defined and focused on enhancing content and creating more differentiated user experiences on existing and new verticalized properties. Our properties now contain rich, relevant and complete content for users to fulfill their shopping needs.

Further rollout of Online Merchant Management, we had fixed data [IOLs] [ph] and eliminated closed all stale, duplicate business listings. Our database of information is also larger with over 215,000 new merchant profiles created to date and ready for publication over the coming month.

We’re also investing in creation and publication of differentiated editorial contents. During the third quarter of 2014, the collection of article focused on assisting users in making educated and informed shopping decision known as Smart Tips, was published across YP’s digital properties.

The Best of the Neighbourhood caption was also introduced, allowing for the discovery of top-ranked local businesses in and around users’ neighbourhoods. Lastly, we continue to grow and mobilize team to support the launch of three new vertical services, eat and play as well as the ongoing enhancement of YP.ca and YP Shopwise.

We are currently in the process of our assessing various tuck-in acquisition to accelerate the development of this digital properties and anticipate launching this new verticals over the next 12 months. As a first achievement in development of new search verticals, the company launched redesigned version of its Shopwise mobile application in October 2014 regarded as YP Shopwise on iOS and Android, the new mobile application contains a redesigned homepage, easier-to-navigate functionalities and flyers from approximately 50 retailers available for download.

We are also proud to announce that YP Shopwise got some very good loads on the App Store featured as Best New App during its first week of release. Canada 411 mobile app were also released in October 2014 and featured as Best New App by Apple, now providing users with a new cutting-edge design and simplified interface to quickly find people businesses in and around the area.

Now onto our go-to-market strategy. As of September 30, 2014, the customer count reached 267 customers.

This compares to 283,000 customers at the end of the same period last year. The company’s revenue performance remained highly correlated with this customer count.

Ultimately growth in revenues cannot be achieved with relative growth in customer count. In response, Yellow Media has been actively investing in acquiring new customers.

Investment started as early as mid 2013 together with the creation of new sales channels and entry level product offers. This investment continued throughout 2014 as the company further expanded its acquisition sales channels, evolve its digital bundles, and introduce sales incentive programs to encourage sales reps to grow customer acquisition.

On the technology front, a new Customer Relationship Management platform is also being rolled out, designed to improve the way with prospect, the sign and manage leads among our sales channels. These initiatives are proven valuable in reversing the historical trend of declining customer acquisition.

For the 12 months period ending September 30, 2014, YP acquired 20,200 new customers, up from 14,800 last year and 18,400 for the 12 months period ended June 30, 2014. In fact, we are proud to announce that we have already achieved our 2014 acquisition target of 20,000 new customers and continue to work hard to maintain momentum and grow these figures to 30,000 for 2015.

Very importantly customer retention also remained stable year-over-year, reaching 85% for the 12 months period ended September 30, 2014. Customer renewal is mainly supported by YP 360 Solution customers defined as customers purchasing three or more product categories.

Renewal among YP 360 Solution customer reached 90% for the 12 months period ended September 30, 2014, up from 82% among non-YP 360 Solution customers. YP 360 Solution penetration also grew to 35% as of September 30, 2014, as compared to 24% for the same time last year.

Despite improved retention among multi-product customers, the demands of our digital customers continue to rapidly evolve. Consequently tools, system, and platforms are presently being implemented within the company sales and customer service functions, all aimed at delivering digital customers and improved sales experience, timely and quality fulfillment of digital solution, as well as quicker resolution of customer inquiries.

Lastly, successful implementation of Return to Growth Plan can only be achieved with the right expertise and culture. The company is presently ramping up hiring in the domain of digital marketing, media and ISIT, while creating dynamic workspace environment that foster digital innovation.

In addition, I am very happy to announce that we have added the new member to our Board of Directors. Appointed on October 15, 2014, Susan Kudzman brings forth extensive expertise in human resources and risk management.

Ms. Kudzman is currently Senior Vice President, Human Resources at Laurentian Bank.

Prior to that, she was a partner at Mercer Canada and held executive positions at Caisse de dépôt et placement du Québec and BCE Emergis. I will now pass the floor over to Ginette, who will review third quarter results.

Thank you, Julien. Consolidated revenues declined 8% year-over-year to reach $218 million during the third quarter of 2014.

This compares to $237 million for the same period last year. Revenues remain adversely impacted by the overall loss of customers as well as the reduction of print advertising spends among large customers.

Print revenues are declining or showing signs of stabilization. Print revenues decreased 23% year-over-year to reach $105 million for the third quarter of 2014.

In addition, the company remains active and protecting revenues sourced from the print platform. Over the course of 2014, the company launched the Print Product Simplification initiative, which increases print advertisement sizes at little to no incremental cost to the customer.

This redesigned offer protects customer renewal while ultimately preserving content and usage of the print directory. Print Product Simplification also simplifies the selling process for sales reps by reducing the number of print offers available to current and prospective customers.

Digital revenues continue to perform in line with expectations, driven by the migration of traditional print customers to digital solutions, as well as by new customer acquisition. Penetration of the company’s digital solutions among YP’s customer base reached 63% as of September 30, 2014, up some 61% the year prior.

Fueled by customer acquisitions, digital-only customers also grew to 32,700, compared to 21,300 in 2013. Digital-only customers represented 13% of YP’s customer base as at September 30, 2014, up from 8% as at the same time last year.

On a consolidated basis, digital revenues reached $114 million during the third quarter of 2014, up 12% from the same period last year. For the first time in the company’s history, digital revenues exceeded print to represent 52% of consolidated revenues during the quarter.

YP’s core digital revenues which exclude the contribution of Mediative, Wall2Wall and 411, also increased by 9% year-over-year for the three months period ended September 30, 2014. EBITDA declined to $75 million during the third quarter of 2014, as compared to $102 million for the same period in 2013.

EBITDA pressure is primarily explained by lower revenues and a lower EBITDA margin. The EBITDA margin for the three months period ended September 30, 2014 reached 35%, as compared to 43% in Q3 of 2013.

Lower print revenues and investments related to the company’s return to growth plan were the main contributors to the decrease in EBITDA margin. However, in light of these investments, the company continues to improve business efficiencies across its print and digital operations.

On the print side, we anticipate to consolidate and decommission our legacy print publishing systems, Canada Wide by the end of 2015. In addition, we have recently taken a decision to move a portion of our existing print distribution model in-house.

On the digital side, the company is investing through realize efficiencies in digital product fulfillment through the implementation of a new workflow management platform. The company has also replaced legacy ageing ISIT datacenters, network and systems.

Overall, we anticipate these projects to generate material cost savings by late 2015, roughly in the neighborhood of $20 million to $25 million annually. For the third quarter ended September 30, 2014, the company recorded net earnings of $27 million.

This compares to net earnings of $42 million in the year prior, with the decrease mainly attributed to lower EBITDA. Free cash flow remained strong during the third quarter of 2014, reaching $38 million as compared to $64 million in Q3 of 2013.

This decline results mainly from lower EBITDA and higher income taxes paid in 2014, as the company was not required to pay income tax installments in 2013, partially offset by favorable timing in the payment of certain accounts payable. The company continues to have the financial flexibility necessary to invest in its digital transformation.

In 2014, CapEx investments are still expected to total between $85 million and $90 million, focusing on the following elements of digital transformation. First, media, where we will develop rich content, new search verticals and more personalized user experiences.

Second, on the sales front, where we will rollout a new CRM system to promote effective customer acquisitions. We will also introduce a new customer facing sales tool, allowing for a richer, more comprehensive dialog between our customers and our sales reps.

Third, the customer experience. Here, we will build the infrastructure required to support new product introduction.

We will also rollout a new digital fulfillment workflow management system to promote the high volume and cost effective processing of customer orders. New sales search functionality will also be added to our 360 Business Centre, allowing customers to manage their digital marketing campaigns independently.

In conjunction, the company continues to materially deleverage its balance sheet. Net debt as at September 30, 2014, decreased to $478 million as compared to $533 million as at December 31, 2013.

Most notably, the company anticipates making a $66 million principle mandatory redemption payment on the senior secured notes on December 1, 2014. Following this payment, 2014 mandatory redemption payments will total $140 million, which will surpass the minimum requirement of $125 million for 2014 and 2015 combined.

Lastly, I would like to reiterate that the return to growth plan remains as fully funded plan. Yellow Media will therefore be able to realize its digital transformation, while materially reducing the amount of debt outstanding from here until 2018.

I will now allow Julien to provide his concluding remarks.

Thank you, Ginette. In conclusion, we’ll remain on track with the implementation of our return to growth plan as evidenced by continued growth in digital revenues, customer acquisition, total digital visits and debt repayment.

Our focus remains to gain a leadership position within Canada’s local digital advertising markets. This will allow us to return to a growth in customer account in 2017, and ultimately grow revenues and EBITDA in 2018.

We look forward to sharing continued progress of our transformation as it unfolds and we’ll keep you up to date on the core KPIs that outline the progress of the return to growth plan. Well, thank you again for taking the time to join us this afternoon.

I would now like to pass the call over to Lisa to collect your questions.

Good afternoon. Thanks for taking my questions.

Julien, some pretty good operating metrics here, particularly on the digital side. In that backdrop, I wanted to ask you, sort of maybe comment on your level of comfort of maintaining the online revenue growth in this range.

Call it sort of the high single-digit range. And perhaps maybe taking a step further as sort of the newer verticals that you’re working on and developing starts to kick in, is that even a potential for that growth number to take up as time goes by?

Well, thank you, Aravinda for the question. I mean, the growth is heavily dependent on digital.

It’s heavily dependent on our ability to acquire different type of customers and new digital-only customers. And that’s why we are so focused on growing our customer base again because we know that growing our customer base will be linked to our growth in digital revenue specifically.

So our strategy on verticalization has a direct impact on our ability to grow our customer base because historically, we are very strong in some verticals. Let’s call it the service industry, the farmers, the physicians, the lawyers, who have very good penetration there.

But we have very low penetration on different segments of SMEs like restaurants, like all the entertainment industry or like the household industry or like the retail industry. So verticalization is definitely there to help us grab market share there.

We’ll add new customers and of course, new digital revenues and so helping us to achieve our goal, which is to maintain a high single-digit growth in digital revenues between now and 2018. So verticalization is definitely a huge part of our ability to maintain that growth and our customer growth for the coming years.

Great. Thanks, Julien.

And then just going to the sort of the growth that you had in the audience, maybe just focusing on the mobile component of that, obviously you’ve had some pretty large advertising campaigns. Any kind of metrics that you can provide, or any general percentages that you can provide around sort of mobile downloads, the user obsessions that kind of got a boost from that?

And also sort of on the brand perception side, I know you touched on that. Is there any sort of metrics that you can share with us on that front?

Well, definitely, as you can assume most of the growth in traffic is linked to mobile traffic and mobile is really shooting the growth as we’re in the industry. What’s very interesting for us is we see really an improvement on two fronts.

One is basically the improvement of brand perception, which happened with the different brand. I cannot really share inside there, but I can tell you the metrics we are following on the quarterly basis are really showing improvement between Q3 and Q2 2014.

And this improvement on the brand perception had direct impact on brand on downloads of the application. We saw significant increase of download of the application during the 14 weeks, where the different campaigns run, the T.V.

campaign first, then the local market second. We saw real increase in downloads in application, almost more than two times in average what we had before the campaign and after the campaign.

So definitely, we saw link between the brand image, the number of downloads and basically also the content we provide with the application, because part of this growth is linked to the traffic going to the application, part of this growth is also linked to the traffic coming from Google and SEO. And this traffic is directly linked to the amount of contents and new content we provide on mobile and all the efforts that we’ve of bringing new campaign, new reach campaign, new neighborhood storage, new smart tips is also helping us to gain traction on mobile.

So it’s a combination about better youth expressions, brand perception, link to advertising and new campaigns and/or content initiatives.

Great. Thanks, Julien.

Just two questions for Ginette and I will ask them together. First of all on the tax, the tax guidance, you cut the tax also quite significantly, you had a $100 million for '14 is down to '16 now, and obviously the '15 has come down from 20 to 10.

I was wondering if you can give us a little bit of color on that. And secondly, with respect to the investment spend that’s going to the OpEx line I should add, is there any sense you can give us as to the cadence of that spend?

I mean, are we close to sort of a peak level at this point, where we can expect it to flatten out, any kind of color on that? I’ll pass the line after that.

Thanks.

Okay. Very good.

So on the taxes front, basically what we had including in that amount were also some potential sales tax assessments. So basically sales tax settlements have been in our favor so far, and this is why you see that amount reducing significantly actually by $40 million.

In addition to this, we continue working on tax optimization. And on that level, it has helped us reduce the amount in 2014 and also reducing it in 2015.

So 2014 is a combination of sales tax settlement in our favor and tax optimization and 2015 is tax optimization. Obviously, when you look at the rate in 2015, this will not be the ongoing rate.

So the tax rate assumption should be 26% following 2015. In terms of investments, what I would say is that the level of investments.

And I said that there was a certain level of reset in the back half. So Q3 wasn’t an indication, I expect Q4 to be even heavier in terms of investments, 2015 will be a very heavy year, so the type of guidance that we’ve given is that it would be between 30% and 35%.

So I think in the back half of 2014 onward, you need to be taken into consideration that Q4 2014 and 2015 should be a heavy year of investments in order to reposition this organization for future growth.

Great. Thanks.

I’ll pass the line.

Thank you.

Yeah. Thanks very much.

Good afternoon. And maybe just going back to the revenue side, you guys don’t breakout revenues between desktop and mobile?

But I was wondering if there is any color you can give us there in terms of which, obviously, desktop, also mobile driving the bulk of the growth, I would think? And then, if you can comment on what sort of desktop revenue growth is?

And I asked in the context of, obviously, pretty strong quarter for digital growth, but we didn’t see a deceleration of maybe 200 basis points in that rate of growth quarter-over-quarter?

Yeah. So maybe, if I may comment on the digital growth, what we’ve said is that progressively, we would be moving from low double-digit to high single-digit.

So, I guess, we see that transition and this is what we expect to see from now on, if we compare 2014 and 2018. So that should be the level to be expected in the core business obviously.

Now when you referred to segregation between desktop and mobile, this is actually not really an information that we are sharing with the public, so this one would be a little difficult.

Okay. No.

That’s fair. So, I guess, maybe another question Ginette or for Julien.

With respect to your digital-only customers, those obviously account for the bulk of the new customer acquisitions? Is there any color you can give us on the ARPA that’s coming from these new customers?

Well, basically, obviously the ARPA is lower than, we don’t give the figure. But the ARPA is lower than the existing customers.

But what very important for these customers, we really see a lot of up-sell opportunities, because we know these customers are entering into organization with -- with entry level products, we create specific bundle for them. But we know that when they tested our products, they are quite loyal to the company and really able to up-sell, because we can provide that, they understand, we can provide them more value with different products.

So, definitely, we are just not looking at the level of acquisition but we are looking -- really looking at the up-sell opportunities and definitely that’s a huge opportunity for us to up-sell these customers.

Okay. That’s fair.

That’s great, Julien. And then, just another question for you strategically, I know you are looking at something you called before YP leads or sort of moving the company in the direction of sort of a more of a collective based offer.

Is there any update that may be you can provide on that development and whether it’s a sort of a 2015 or 2016 story?

Meaning both of them. It will begin in 2015 and will follow in 2016, ‘17.

It’s a long-term project, but we are today building some of the assets we need and specifically Mediative to be able to deliver a first step of this promise in 2015 and then obviously we will follow in the coming years. So it’s a very important project for us.

We know that part of future growth and also ability to acquire different type of customers will come from placement to list generation business. And so we are preparing ourselves for that and definitely will be -- will launch the first initiative in 2015 on this one.

Okay perfect. And then last one for me maybe back to Ginette.

With respect to the balance sheet and debt repayment, just following the $66 million payment in December. When we think about next year, should we just think about you paying down based on the cash flow sweep, is that kind of the assumption?

That’s right. So the minimum requirement is now behind us.

So the calculation will really be based on cash sweep. And obviously this amount is little higher than expected as you can imagine the improvement in working capital and the tax assessment that are now partially behind us has made a big difference in that cash sweep calculation, when compared to, what we had announced previously.

So in 2015, you could probably expect an amount that would be a little lower than what we stated in 2014. But it will all be based on cash flow.

No problem to repay the debt out of the cash sweep mechanism.

Okay. And then.

I guess sorry just one other one, with respect to CapEx, Ginette, I guess you maintained your guidance for the year, which would imply a pretty big ramp in Q4. Is that fair?

Yes it is fair. And this is why, when I was answering to Aravinda and talking about the fact that Q4 would even be heavier than what we’ve seen in Q3.

This is part of it.

Okay. Thanks very much.

Thank you.

Okay. Thank you again for your attendance.

And so we look forward to speaking again in February, as we recap 2014 and provide you with more in-depth discussion of objectives and initiatives underlying 2015. Thank you.