Yellow Pages Limited

Julien Billot – President and CEO Ginette Maillé – CFO

Aravinda Galappatthige – Canaccord Genuity Andrew Calder – RBC Capital Markets Jeremy Lucas – Scotia Capital

Thank you, Maris, hello everybody. And welcome to Yellow Media Ltd’s 2014 second quarter conference call.

Joining me today is Ginette Maillé, Chief Financial Officer of Yellow Media. We are pleased to take this opportunity to discuss with you the recent progress made on the company’s return to growth plan.

The return to growth plan is the core strategy underlying Yellow Media second phase of digital transformation, one focused on accelerating customer acquisition in order to return our company to revenue and EBITDA growth. Significantly, successful accretion of the return to growth plan will strengthen our relationship with local businesses and consumers nationwide, providing us with the opportunity to gain a leadership position within Canada’s local digital advertising market.

Four different pillars have been identified as areas of focus behind our return to growth plan. They include brand, way by the company will launch targeted advertising campaigns to increase brand perception and awareness.

Media to ensure our online and mobile properties are growing number of Canadian chopper daily. Customers to provide valuable products and improve sales experience and supervise acquisition of claims marketing campaigns and employees to ensure the right resources and expertise find places to execute our plan in the timely and efficient manner.

Let’s provide you with an update of the brand’s pillar. The company anticipates spending approximately $25 million in branding initiatives throughout 2014.

These campaigns will be targeted at local consumers and SMEs alike to promote usage of our digital media platforms and increase adoption of our solutions. To address usage, the company recently repositioned its flagship online and mobile search properties from Yellow Pages.ca YPLCA.

Adopted in April 2014, this natural brand evolution signaled the company’s digital capabilities, all we’re maintaining the notion of Yellow Pages the name well recognized by Canadians as a trusted source of local business information. Two flights of advertising campaigns were then launched Canada-wide in order to promote the adoption of our rebranded YP mobile application, national and local.

On national front, the company deployed the TV and digital campaign that run from April to June 2014 highlighting the new functionalities available on the YP mobile property. Locally, the company engaged in mostly media campaign across Canada’s most populated urban market Toronto, Vancouver, Montreal and Calgary, which took the form of hallway and city billboards, as well as urban buses and [indiscernible] shelters to name a few.

We are very pleased with the success of this campaign so far. Since the launch of the TV campaign in April 2014, average weekly mobile visits and downloads of the YP mobile app have increased by 20% and 65% respectively, while also experiencing growth versus the same periods last year.

Campaigns have also been executed to improve the awareness of the Yellow Pages brand among local businesses, there by supporting lead generation for customer acquisition. Most notably during the second quarter of 2014, the company launched radio and digital advertising campaigns in Montreal and Calgary.

These campaigns were focused on introducing SMEs to the booster pack bundle solution, while also generating traffic to our B2B, 360 Business Center website. Let’s now address what’s been accomplished to improve our digital properties.

For the second quarter of 2014, total digital visits, which measure the traffic across our YP, RedFlagDeals and ShopWise online and mobile properties, grew to 102 million from 100 million visits for the same period last year. Growing traffic to our properties is key, we promote customer acquisition by improving the perception of our media provide them with advertising return on investment, while also projecting profitability by reducing our dependency on both traffic when generating leads for customers.

In April 2014, our YP online and mobile properties were fully redesigned and supported by search engine to provide users with more relevant search results and faster search response times, content was also enhanced. The company completed the online merchant management project eliminate it style, obsolete and duplicate information from its existing database of major distinct.

Over 74,000 new merchant profiles were also created and existing profiles were supplemented with geocode capabilities deals, website links and reviews. In recognition of this projects particularly in the mobile phone, the YP application received volumes acknowledgement on the app store including Editors Choice and best new app in May 2014, best of May 2014 and top Canadian made app in June 2014.

In addition to revamping, its existing search properties Yellow Media also aims to deliver mobile users the more verticalized search experience. During the second quarter of 2014, the ShopWise mobile application was enhanced to include personalization pictures that allow users to select preferred categories of deals to appear on the homepage.

The version of the RedFlagDeals upcoming mobile application was also released on the ongoing platform. The objective is now to launch the new mobile application, particularly in underpenetrated [indiscernible] such as shopping, restaurants, real estate and leisure.

Over the coming quarters YPG will recruit additional resources in IT and digital marketing as well as complete value stuck in acquisition in order to accelerate the development of these new verticals. Now on our go-to-market strategy.

As of June 30, 2014 the customer can’t decrease to 265,000 this compare to 291,000 at the end of the same period last year. Significantly the company cannot reacquire revenue growth without accelerating customer acquisition and growing its customer base.

In response the company developed privately acquisition strategy 2013, redesigning its acquisition channel and introducing new digital bundles to increase customer leads and conversion. To-date this initiative has proved fruitful, for the 12 month period ending June 30, 2014 YPG required 18,400 new customers up from 15,300 last year and 16,500 for the 12 month period ended the previous quarter.

In conjunction, the company has also been able to grow its digital-only customer count, with digital-only customers having reached 29,400 as of June 30, 2014 as compared to 19,700 in the same period of last year. With the objective we’re returning to a growth in customer comp by 2017.

We continue to invest in full of their accelerating in this rate of customer acquisition. Over the past two quarters, additional cost centers rates very high to service incoming late while a customer relationship management platform was developed for optimized lease assignment and conversion rates.

The recent acquisition of 411 Local Search Corp for the support of this acquisition strategy, but in March 2010 the company purchased 30% of 411 as part of this initial acquisition, the other shareholders of 411 are going to put option allowing them to sell the remaining 70% interest to Yellow Media at the later date. On June 1, 2014, these shareholders exercised their foot option causing Yellow Media to acquire the remaining 70% interest of 411 for a net purchase price of $22.7 million.

With the sales force of 60 core center representatives, servicing approximately 15,000 digital customers across Canada, 411 holds a proven track record in lead generation, lead conversion and customer acquisition. The acquisition of 411, therefore compliments Yellow Media’s return to growth plan allowing the company to leverage the expertise of 411 sales team to best support its customer acquisition efforts.

Promoting the retention of existing and prospective digital customers remains another key element in protecting our customer base. Although the customer renewal rates remain stable at 85% almost recent customer service surveys we really need to improve the quality of service offered to our digital customers.

In reference, during the second quarter of 2014 the company invested in improving its customer facing tools. YPG launched a new B2B site, the 360° Business Center equipped with a simplified architecture about the lows existing and prospective customer to easily disclose the YPG’s digital solution.

Over the coming quarter, the 360 Business Center will be adapted to provide customers with accessible self-portal, allowing them to create and manage their profile, view and pay their bills and monitor the performance of their marketing campaigns, Yellow Pages analytics. In conjunction the new version of Yellow Pages analytics was also developed, now featuring and easier to navigate interface and enhance performance monitoring of customers marketing activity.

The success of the return to growth plan is dependent on having the right expertise in place to execute upon our strategy. During the second quarter of 2014, the new Vice President and Chief Human Resource Officer was appointed to review all employee-related investment and ensure that adequately support the exit, attrition and deliver of the return to growth plan.

To promote copyright mobilization across the organization. The executive management team also hosted events nationally, informing all employees of the objectives and projects, underlying the return to growth plan as well there is respective responsibilities.

Lastly, total for the development enhancement of Yellow Media’s online and mobile properties, sales and customer phasing tools as well as the digital products and service, the company will remain active in elevating digital expertise and culture throughout the organization. I will now pass the floor over to Ginette, who will review second quarter results.

Thank you, Julien. Consolidated revenues declined 9% year-over-year to $221 million during the second quarter of 2014, as compared to $243 million for the same period last year.

This continues to be fueled by churn among for low end customers not being offset by the acquisition of new customers, as well as a reduction of print advertising spend along with our larger customers. Print revenue declined continue to be consistent with prior quarters decreasing 22% year-over-year to reach $112 million for the second quarter of 2014.

Digital revenues also performed in line with expectations, digital revenues across our core business which exclude the contribution of media Mediative wall-to-wall and 411 increased a 11% year-over-year during the second quarter. On a consolidated basis, digital revenues reached $108 million during the second quarter of this year, up 10% from the same period last year.

Consolidated digital revenues represented over 49% of total revenues as of June 30, 2014 increasing from 40% during the same period in 2013. Growth in digital revenue continues to be driven by the active migration of traditional media customers towards digital products and services mainly through the adoption of the Yellow Pages 360 solution across our sales channel.

As of June 30, 2104 the penetration of the Yellow Pages 360 solution offering among the YPG customer base grew to 33% as compared to 21% last year. Consequently penetration of our digital solutions also saw improvements with 63% of YPG customer base purchasing digital products as of June 30, 2014 as compared to 61% the year prior.

Mobile priority placement is presently your fastest growing digital offering with customer penetration having increased from 10% last year to 21% as of June 30. EBITDA declined to $81 million during the second quarter of this year as compared to $107 million for the same period in 2013.

EBITDA per share is primarily explained by lower revenues and a lower EBITDA margin. The EBITDA margin for this three month period ended June 30, 2014 reached 37% as compared to 44% in Q2 of 2013.

Lower print revenues, investments related to the companies returned to growth plan as well as increase employee-related expenses were the main contributors to the decrease in EBITDA margin. Improving business efficiencies remains key in further protecting our profitability.

Numerous initiatives are being undertaken on the print side in order to support future cash flows. The company is currently consolidating and replacing its legacy print publishing systems across Canada, while reviewing its existing print distribution model to promote manufacturing and distribution cost savings nationally.

The Yellow Media will also realize cost savings by enhancing core platforms and infrastructure company-wide. During the second quarter of 2014, the company consolidated eight of its IT datacenters and replace its legacy to left any system and exchange servers.

On aggregate, the projects delivered in the second quarter are currently underway are expected to generate approximately $15 million of annualized cost savings by late 2015. Net earnings for the second quarter this year, declined to $28 million compared to net earnings of $50 million for the same period last year.

The decrease was mainly explained by lower EBITDA and a restructuring charge related to the announcement of workforce reduction associated to the consolidation of our legacy platform. Although in decline free cash flow remained strong during the second quarter of 2014 reaching $42 million as compared to $68 million during Q2 2013.

This decline is due to lower EBITDA, a more stable working capital and higher income tax that’s paid in 2014, as the company was not required to pay income tax installments in 2013. Consequently net debt as of June 30, 2014 decreased to $516 million as compared to $533 million as of December 31, 2013.

On June 2, the company completed a $74 million mandatory redemption payment on the senior notes over the next 12 month the company anticipates paying an additional $45 million on these instruments. Overall the return the growth plan continues to represent a fully funded plan allowing the company to invest in its operation while meeting all of its financial obligation.

In addition to returning the company to revenue and EBITDA growth, successful execution of the plan will allow Yellow Media to optimize and significantly deliver its balance sheet over the next four years. I will now allow Julien to provide his concluding remarks.

Thank you, Ginette. In conclusion, successful execution of the return to growth plan with trends and relationship we look out businesses and consumers and help us gain a leadership position within Canada’s local digital advertising market.

We rely that this process will take time. However, we’ll continue sharing with you our progress.

Most notably they are core KPI that management will track and continue to discuss publicly in order to our claimed progress of the return to growth plan. These include one customer acquisition, which measures the total customers acquired over the last 12 months, accelerating the annual run rate of customer acquisition is key in achieving revenue growth.

For the 12 month trial of ending June 30, 2014 YPG acquired 18,400 new customers up from 15,300 last year. Our objective for 2014 and 2015 is to further accelerate these rates and acquire 20,000 and 30,000 new customers respectively.

Total digital visits number two, which measures the total visits executed on our YP, RedFlagDeals and ShopWise desktop and mobile properties and is representative of the leads and return on investment, we can deliver to our customers. This metric grew to 102 million up from 100 million visits for the same period last year.

Third, will 360 penetration which measures the percentage of YPG customers, purchasing three products or more is a metric link to customer loyalty. As of June 30, 2014 the Yellow Pages 360 Solution customers will represent a 33% of the YPG customer base had a 91% renewal rate compared to 83% of non-Yellow Pages 360 Solution customers.

And lastly four, debt repayment, as the company remains focused on delivering value to shareholders by strengthening its capital structure. Over the next 12 month, the company anticipates repaying an additional $45 million principle value of senior secured notes with your teammate objective of Montreal deleveraging the balance sheet by 2018.

I want to thank you again for taking the time to join us this afternoon. I would now like to pass the call over to Maris [ph] to collect your questions.

Thanks, good afternoon. Few from me, let me just start with Julien.

Julien, I know that you’ve emphasized that customer acquisition is very much to the core of your strategy. I was wondering if you can just get into some of the changes we’re implementing at the sales force level.

Is it simply sort of changing the structure and the incentive programs there or you’re actually thinking about hiring more people because, if you are going after a larger block of SMEs rather than sort of the 270,000 to 300,000 that you have right now, it might require some more headcount, is that a consideration as well?

Well hi Aravinda, basically we have to look at the acquisition strategy as a kind of multiple stages look at, if I may say. In 2014 we did really the first stage which was really talking about acquisition to our sales force and – the sales force dedicated for acquisition.

That was with the first step and that will be the lowest to grow to 20,000 new customers. After that we consider, we have other levels to exploit to really grow to 30,000 I would see mature to go to 40,000 to 60,000 new customers per year.

Basically the levels we’re working on are improving our leads management, we have lot to do when receiving new companies created in Canada to talk with them and call them and being able to have them as customers. Of course any brand; brand perception improvement; any media perception improvement will help a lot our sales force to better acquire new customers.

And ultimately we’ll have new type of offers more performance based offers to really be more efficient to attract new customers. So we have to consider this acquisition strategy as the multiple layer strategy which will be developed over time, for that for 2014 is massively sales effort to grow from 15,000 to 20,000.

In 2015 it will be a mix between extra sales effort and better leads management and then over time brand improvement, media improvement and new offers will help to develop our acquisition strategy.

Great, thanks Julien. And mostly seeing some nice uptick in the numbers, as you kind of roll that your media – media plan I’m referring to advertising and branding plan, you’re seeing some uptick in the app downloads and the app sessions I suspect.

I just wanted to get a sense of where you are right now with respect to your search is in, what proportion of your online search is, mobile now, I know that’s couple of your European comp that kind of given numbers around the 30% to 35% range. I’m just curious where Yellow stands right now?

Today for the previous weeks, I would say we are very close to 50-50 between desktop search and mobile search and it’s really linked to mobile growing very fast link to all recent campaigns. Well we had very good news on the mobile front lot of downloads very acquisition by the ecosystem, lot of traffic coming from mobile browsing and from mobile app.

And we also saw very good results coming from comScore regarding our mobile penetration and the number of unique visitors they duplicated that we’ll arrive from mobile very differently than the one we had from desktop. So definitely today we are at 50-50 and we anticipate that number to be massive more, more mobile in the coming month.

Great, thanks a lot. And then just on the content, switching gears to content, I mean I know that’s another focus for you to kind of improve sort of the level of reviews, that use generated content that’s there on the on your media platform.

What’s the strategy there, is it sort of more sort of arrangements around sort of similar to what you have for example with TripAdvisor, its more partnerships that I think gets you there or is that sort of a different approach?

Well I mean our strategy on content is multiple layer strategy or so. First of all of course to improve our – the ability to raise customers directly for our users typically should go to our mobile app today is we do a search from our mobile app then your next search we will incentivize you to rate and put a note for the SME you were searching for.

So that’s very efficient to generate rating. The second is we absolutely see us as a syndicator writings all across the web, so we’ll have ongoing discussion with some partners to syndicate their raisings into properties.

But of course our efforts in syndicating comfort is not only ratings, we’re also investing a lot to develop on content based on geocode capabilities based on ability to collect website, Facebook pages for advertisers, our capability of [indiscernible] opening hours and we’ll do that for some 100,000 customers for the end of the year. It’s not completed yet, but it’s not news we can, we share for Q2.

But for the next quarters, we can share that we’ll have lot of, lot of new businesses and lot of businesses we would enhance company into Yellow Pages properties and we’re talking about some 100,000 of businesses with improved content in our media properties.

Great, thanks. Just switching over to the financial side, maybe for Ginette.

Ginette you talked about the initiatives that some of the initiatives that you’ve implemented in Q2 leading to $15 million and savings by the end of 2015. Are you specifically referring to initiatives in Q2 only or are you including some things that you do in the future as well or should we expect additional layers of sort of efficiencies as you kind of particularly given your CapEx projection?

Yes, so when we did refer to the consolidation of the legacy platform. So this is an ongoing project, but it’s a long project.

So we believe that we will be done by mid-year in 2015, so these will be recurring expenditures and investments in order to generate the benefit. What is excluded from that $50 million that we referred to is the review of the print distribution model.

So the whole print manufacturing and distribution model of the legacy business is under review and this, the benefits related to these initiatives are not included in the $15 million, I would refer to.

Okay. And just to be clear Ginette, isn’t the distribution completed sort of outsourced at this point?

It is outsourced, but obviously we are the one driving the strategy.

Okay.

So it’s the strategy that is currently under review.

Okay, great. And just last one, actually last two from me.

I’ll ask them back-to-back, with respect to the additional investments going through the OpEx line, is there sort of a cadence or seasonality to that as we kind of look to project quarter-by-quarter and the annual numbers. Is there any sort of up and down fluctuation we should think about, number one.

And then number two I know in the past you talked about sort of online growth being able to – your ability to kind of maintain that in the call it the high-single digit although a double-digit range, is that still your expectation? I leave it there.

Okay, so if we look at the level of OpEx investment, basically what were we can be sharing with the market is the fact that we expect certain level of re-shift of the EBITDA margin in Q3, Q4. So it will be heavier in terms of even operating investments.

And we believe that will be in a position to maintain that level of EBITDA margin throughout the years. I don’t believe that we will have any cyclicality by quarters we shouldn’t, obviously if there is a blitz in communication, you might find one quarter little heavier than others.

But besides branding, you should expect a stable amount of investment throughout the year in terms of operational expenditures. And oh yes, you had the online question, I’m sorry.

So the online question we’re still targeting the same level of performance it will be a high single digit in terms of digital revenue growth.

And basically that’s why we consider the acquisition of customers is so critical, because most of the acquisition of customers, new customers is made on digital only customers and so that will help us to maintain a high-single digit growth in digital, successful in our customer acquisition strategy.

Great, thanks guys. I’ll pass the mic.

Thank you, Aravinda.

Thank you very much, first question I had was on the 411 business, could you please share us some of the financials revenue with our CapEx LTM basis?

Yes, well if you look this business as it is currently the level of revenue is in the neighborhood of $20 million annually, their margins is approximately 20%; on the CapEx side there is no significant amount of capital expenditures.

Thanks very much. And how is that business been trending recently in terms of revenue and EBITDA?

Actually revenue and EBITDA has been growing over the years.

That’s any sort of rate, you’re willing to share?

Well, well, I don’t, but I don’t really want to give any number, because we will be considering, we will be reassessing what exactly we will do with the business, how it will be included in the strategy. So, we might just manage it on ourselves sustaining basis we might want to leverage this company for own acquisition efforts.

So until we really have a clear view of the future of 411 and how we want to handle it, it would be difficult for us to give any trends for that business.

Okay, I understood. Second thing, I want to ask you is on the capital expenses seems to be trending somewhat light against the full year guidance, so I just wanted to confirm that you’re still looking to spend what you are guiding to and which case should imply a much heavier second half?

Yes, well your right it’s been light when you compare to the back-half if you get to the guidance. But we are planning to spend much more in the back-half.

We will really be investing in the return to growth plan. I suspect that it will ramp up Q3 versus Q4 and, we are reassessing currently the level of expenditures of each of the initiatives and that plan.

But at the time we’re still guiding to an $85 million to $90 million for 2014.

Okay. And we’ll just lastly, I believe you mentioned as you land at the beginning $25 million in branded restaurants in 2014.

And I just wanted to understand, is this all incremental was that an incremental 25 or if not you have the comparison in 2013 for us?

Well, I would, it’s not total incremental, but the level of advertising we did in 2012 and 2013 was very low we spent $2 million in 2012, $6 million in 2013. So it’s massive incrementally we’re on $20 million compared to 2013.

Okay.

And we planned, we planned to maintain the same level of investment up to 2018.

Okay, okay. That very helpful that’s it from me.

Thank you very much.

Thank you.

Thank you, Andrew.

Yes, hi, just quick one regarding the mandatory redemption on the senior secured notes. I believe you mentioned you’re looking to pay-down or forecasting to pay-down $45 million over the next 12 months, did I hear that correctly?

That’s right.

Is that the – is that your forecast for the minimum mandatory redemption payments that will be due over the next two payments?

No the minimum actually what is left from the minimum is $50 million, this is really based on the cash flow generation that we’re currently. So the $45 million is really based on the cash flow generation.

So the additional $50 million is really the remaining minimum mandatory repayment for the next 18 months.

I see, okay. And then given that and your current free cash flow profile and cash on the balance sheet, how do you think about your capital structure and carrying the senior secured notes on the balance sheet, are there are you contemplating additional pay-downs or potentially refinancing activities?

Well, for the time being if we look at additional pay-down this is not really something that we’re contemplating and what I mean by not repaying further, if we’re not planning to repay and pay that 5% premium. So it will really be based on our calculation of free cash flow.

As far as the excess cash is concerned obviously, what we’re saying is that we will start investing for the return to grow plan as a higher level than what we’ve done in the past, so the back-half will be heavier in terms of cash outflow. If we talk about refinancing, we did say in the past that we have an interest in refinancing, but the condition that has to be met is that it has to be economically beneficial to the organization and obviously one element that has to be in place as the media objective is the conversion of the exchangeable debentures into equity.

So the stock price has to be at the right level in order for us to execute on that front.

So is it fair to say then with – with the stock price below the strike on the unsecured debentures that you’re not looking to refinance the senior secured notes and would wait until, the stock price is above the strike before you would look to do sort of more of a comprehensive transaction?

Well this is our view at this point in time.

Okay, great that’s very helpful. Thanks very much.

Thank you.

Thanks very much, just one more from me. I just wanted to get your thoughts on the print decline rate it’s going to help up there in the 22%, 23% range.

I know you’ve kind of talked about investing there a little bit, trying to contain that, just wanted to get your thoughts on maybe moderating that decline, I mean how much visibility do you have there?

Well, I will just maybe talk about Q4 of 2013, I just want to remind you that in Q4 of 2013 we delivered a decline of 21.6% we mentioned at the time that this was an anomaly. We had some non-recurring print deals in Q4 of last year which amounted to approximately $4 million.

So this is just to set the expectation in terms of decline in Q4 this year when you compare to Q4 of last year. As far as an improvement on the print side, what you’ve said is that we are fighting for it, there are initiatives currently underway, early signs are positive, but it is way too early to conclude on that front.

So I would tell you that, our view at this point is just at the bottom is in the range of between minus 23% and minus 25%.

Great, thank you Ginette.

Okay. I want to just to thank you again for your attendance.