Yellow Pages Limited

Julien Billot - President and CEO Ginette Maillé - SVP and CFO

Aravinda Galappatthige - Canaccord Genuity Vahan Ajamian - Beacon Securities Drew McReynolds - RBC Capital Markets Bentley Cross - TD Securities

Thank you, Paul and good morning everyone, and welcome to Yellow Pages Limited third quarter 2016 conference call. Joining me today is Ginette Maillé, Chief Financial Officer of Yellow Pages.

We have a good amount of material to cover today and I'm looking forward to our Q&A session as well. However to begin, you have likely all noted the news we issued this morning along with our Q3 results.

We announced that two of our senior executive team members will be retiring next year, including Ginette who many of you know as well. I would like to add a bit of context to this.

Our corporate strategy [indiscernible] called return to growth both aim at developing mechanism to generate cash to pay down our debt, which would bit by bit [indiscernible] the financial freedom to make the investments we need necessary to build the future of the business. It's also aimed at stabilizing key pillars of our business, namely our customer base, our media properties, our brand perception and finding business efficiencies to contribute to a stronger financial structure.

We are executing our strategy well. We had to make some bold moves in order to innovate and to move even faster.

But all of these moves aren’t easy decisions but there are always catalysts of change that help us move closer to our ultimate goal of becoming the Canadian leader in local digital media and marketing solutions for businesses. Today we’re making some additional changes to our organization.

Ginette has had a distinguished career at Yellow Pages spanning over a decade. Under her leadership, we have cut costs, paid debt and stabilized the financial structure of Yellow Pages in accordance with what we outlined in our return to growth strategy.

Ginette will be staying on as chief financial officer until March 2017 and will actively assist with the transition process when a new CFO is named. The search process for this position is already underway.

We have Russell Reynolds [ph] to assist us with finding candidates that can play a strategic partner role to myself in terms of the next steps of the business. Doug Clarke, our Chief Operating Officer will also be retiring at the same time.

Dominique Vallée, formerly Vice President, Sales who has led sales division at Yellow Pages for the last decade will succeed him as senior vice president, sales and customer care. Dominique has led the change in our acquisition strategy and has delivered year over year on very ambitious customer acquisition objectives.

I'm very confident that he will continue to help the company grow in this regard. The experience and knowledge of our business and long experience with our customers will help us continue to grow our customer base and transform our customer service channels into experience and up-sell channels.

We are now at a pivotal point in our return to growth strategy where we now need to think about the next step for the business. The changes announced today ensure organization is best adapted to our current and future environment.

In this third quarter of 2016 we find ourselves at an inflection point in our plan and I would like to take a minute to reiterate our core business and strengths as well as a summary of what we've accomplished to date in our turnaround strategy. In three years, accomplished a lot, our ability to service the marketing needs of local merchants and national brands across the country is more comprehensive and accessible than ever.

Our digital media properties are becoming increasingly specialized across certain verticals that present growth opportunities. We’ve delivered a strong level of profitability and cash flow despite investing in transforming our business and we successfully reimbursed over half of our backlog.

Most importantly we restored this company’s ability to acquire customers, a feat that eluded Yellow Pages for over a decade. We have the largest national network of sales, customer service and digital fulfillment professionals.

Our sales force alone is among our greatest assets that I see this consistently overlooked. These teams span coast to coast with people available to speak, meet and assist small business owners across the country.

This is important as there are over 1 million small businesses in Canada and [indiscernible] still call personal interaction and assistance when it comes to monitoring for the volatile options in the digital marketing space. This is a space that is only becoming more complex.

This is why we have one Yellow Pages into one of Canada's largest full service digital marketing solution providers, to answer the basic needs of the resource-starved time-strapped small businesses. Moreover our coast to coast presence and interaction with small businesses provide us with feedback mechanism to develop and address products that are tailored to their real-time needs.

Example of this ability include the accessibility and utility of our full serve content syndication solution called NetSync and our one-page website products. Both of these provided affordable targeted solutions to common visibility and digital presence needs of small business customer audience.

Our recent advertising campaign the Lemonade Stand, during which Yellow Pages opened its all small business and marketed it using our all digital media tools and services, resulted in a material lift in our perception as a credible supplier of digital advertising and marketing solutions. It also increased the likelihood of advertisers to consider Yellow Pages as a supplier for their marketing needs.

Our customer count was 243,000 as at September 30, 2016 on a trailing twelve month basis. Our net customer count decline was 3000 year over year, compared to 14,000 net customers lost during the same period last year.

All the approximately 30,000 net customers we were losing per year before we launched our return to growth plan. On a sequential basis, our decline was 1000 customers between the second and third quarter of this year.

And we're very pleased with our progress in this area. Before we launched return to growth plan in 2013, we were also only acquiring 11,900 new customers in the twelve month period back in Q3 2014.

Today we more than tripled that, acquiring 40,200 customers in the last twelve months. The customer renewal rate was 83% for the 12 months period ended September 30, 2016 as compared to renewal rate of 85% during the same period last year.

This rate was adversely impacted by accelerated level of customer acquisition. Generally new customers churn at higher rate than older cohorts.

In an effort to protect customer renewal rates, Yellow Pages has deployed specialized onboarding and retention teams which has demonstrated positive impact in improving churn. We’re also actively improving the performance of our sales, customer service and digital fulfillment teams by providing these teams with enriched tools to this line and fulfill valuable digital marketing campaigns.

In accordance with the strategy we laid out three years ago with the return to growth, these various initiatives are translating into growth in digital revenues which now total 68.9% of all revenues, up from 60.7% last year at this time. Remember that before we launched return to growth, our digital revenues totaled 45% for 2013, less than half of our total revenues.

Our verticalized media helped drive digital revenues. They provide us with a diversified offering able to penetrate areas in digital where we see growth opportunities such as restaurants, retail and real estate.

They also further cement our position in verticals we have been traditionally strong in, such as home services and health and wellness segments. Total digital visits to our network of media properties, excluding ComFree/DuProprio totaled 109.4 million for the third quarter as compared to 124.1 million during the same period last year.

Total digital visit performance improved slightly during the third quarter of 2016 as compared to the second quarter which totaled 106.2 million. However it remained adversely impacted by ongoing changes made since late 2015 to the layout of Google's mobile web search result pages.

These changes put organic results of all mobile web publishers lower on Google search pages. Yellow Pages is leading, ranking among Google's organic listings on mobile web, however, remained relatively unchanged despite this layout change, a reflection of the strong relevancy and quality of the company’s data.

In response to these changes, data driven improvement and adjustment of user functionalities and experience remains a key focus for Yellow Pages in its platforms. We also continue to make ongoing improvements to functionality across our search results page to adapt to the real time needs of users.

We also introduced new layouts to the merchant pages driven by data on which information users were choosing to click and interact with on the pages. These improvements all have the objective of ultimately driving greater return on investments focused on those by converting visitors into customers.

We also leveraged the strength of our partnership network such as having Yellow Pages listing available on Apple Maps driving directly to our applications. Our vertical media approach continues to deliver new opportunities as well.

YP Dine for instance continues to offer restaurant owners the comprehensive solution of reservation, online ordering as well as an out of the box client relationship management system. We have segmented the sales team at YP Dine to more precisely target the high end and low end needs specific to the restaurant vertical.

Just as YP Dine was developed out of the acquisition of small start-up enterprises, we’ve added some new technologies and skill sets to our portfolio this quarter. Last month, we have also acquired an ownership stake in Coupgon, a digital grocery comforting platform based in Toronto.

This technology will make an interesting addition to our existing retail vertical. It allows for the mobile tracking, keeping and redeeming of coupons directly at the checkout counter in a retail location.

Our stake in Coupgon allows us to expand our mobile retail offering and also facilitates relationship with over 50 consumer package goods companies, including Saputo, Kellogg, Kraft, meaning first time access to their product discounts and deals. This is another example of how start-up investment can continue to help us find growth in new areas, expand our existing offering and deliver additional or completely new value proposition to our current and potential customers.

ComFree/DuProprio for instance provides Canadians with the expertise in media required to sell their homes themselves by breaking away from the traditional brokerage model. Although excluded from our total digital visit metric calculation, ComFree/DuProprio attracted 20 million visits during the third quarter of 2016 and consistently shows strong mobile and app traffic growth.

As we continue to develop our vertical media offering, ComFree/DuProprio presents some cross-selling opportunities to traditional Yellow Pages segments such as home subsidies. On the national advertising front, our national channels comprised of Mediative and Juice continue to position us strongly in this space.

Together this division service the digital marketing needs of some of North America's most respected brands and continue to contribute favorably to digital revenue growth. They are strong assets, despite a softer than expected performance of our national operations in the third quarter, which Ginette will provide additional details on in a minute.

In summary, we continue to build on the strength of our customer acquisition, our media network and our brand as we enter the final phase of our return to growth plan and begin evaluating the next steps for our business. I will now let Ginette How share with you the financial update for Q3 2016.

Thank you, Julien. We continued to see progress in our financial metrics.

Digital revenues grew 8.4% year over year to total $139 million for the quarter ended September 30, 2016, representing 69% of total revenues. This compares to $128 million or 61% of revenues during the same period last year.

On a pro forma basis, digital revenues during the third quarter of 2016 grew 3% year over year. This growth is supported by our local real estate and national channels.

In our local operations, this is driven by the acquisition and retention of customers as well as the maintenance of growth in digital spending of renewing customers. Digital only customers grew to 72,200 or 30% of the customer base as at September 30, 2016 and increased when compared to 49,100 digital only customers or 20% of the customer base as at the same period last year.

In 2013 prior to the return to growth plan we started with less than 10% of our customer base as digital only advertisers. In addition, 44% of our renewing local customer base see a year-over-year increase in annual spending over the twelve months period ended September 30, 2016.

Our real estate operations also continue to contribute favorably to pro forma digital revenue growth. ComFree/DuProprio continues to grow its footprint in Quebec where it accounts for 20% of all real estate transactions.

ComFree/DuProprio is also entering new markets in Ontario using targeted ad campaigns to grow awareness of its offerings. Pro forma digital revenue growth continues to also be favorably impacted by growth in our national channels, yet performance in this area was softer than anticipated.

Both Juice and Mediative has seasonality to their businesses that typically shows strong growth in the back half of the year. This did not happen as anticipated in Q3.

In this context, despite the fact that we anticipate a better performance in Q4 we are revising guidance and a pro forma digital revenue growth for the year ending December 31, 2016. It is now expected to range between 5% to 8% compared to the previously disclosed guidance of 9% to 11%.

Consolidated revenues during the third quarter of 2016 decreased 4.5% to reach $201 million. On a pro forma basis revenues decreased 7% year over year for the three month period ended September 30, 2016..

Print revenues decreased 24.4% year over year and amounted to $63 million during the third quarter of 2016. Print revenue performance was adversely impacted by a decline in the number of print customers and the migration of print marketing spending to digital.

Adjusted EBITDA totaled $57 million for the three month period ended September 30, 2016 as compared to $64 million during the same period last year. Adjusted EBITDA margin for the third quarter of 2016 was 28.3% as compared to 30.3% for the third quarter of 2015.

The decrease in adjusted EBITDA and adjusted EBITDA margin was principally due to lower print revenues, change in product mix, partly offset by the ongoing realization of cost saving initiatives. The adjusted EBITDA margin was also impacted by the acquisition of Juice which operates at a lower adjusted EBITDA margin relative to Yellow Pages prior to the acquisition.

With softer than anticipated revenues from Juice, we anticipate delivering an adjusted EBITDA margin of approximately 29% for the year ending December 31, 2016 compared to the previously disclosed guidance of 28%. We continue to have strong free cash flow.

Free cash flow for the three month period ended September 30, 2016 increased to $58 million as compared to $35 million during the same period last year. The increase in free cash flow was mainly resulting from the settlement of sales tax assessments as well as lower capital expenditures.

Net debt totaled $391 million as at September 30, 2016 as compared to $431 million as of the end of the prior year. The company made a $36 million principal mandatory redemption payment on its notes on May 31 and we anticipate making a payment of $61 million on November 30, bringing the total principal mandatory redemption payments in 2016 to $97 million.

We remain confident in our ability to continue de-leveraging our balance sheet as we approach May 31 2017. On this date we gain flexibility to repay any tenders made on the senior secured notes at par.

Now back over to Julien for concluding remarks.

Thank you, Ginette. Clearly we are now at a pivotal inflection point in our five year return to growth plan where we start looking ahead to the next steps for this business.

Our overall results today continue to show strong progress. We are demonstrating a strengthening financial profile with ongoing digital revenue growth and debt repayment.

We still have some challenges before us. However we have a solid and stabilizing business.

As we head into the final stretch of our return to growth plan, we are undertaking a process to determine how we continue to evolve our business and the strategy that goes along with that. We anticipate this exercise to be completed by early 2017.

Part of this process includes the review of our management outlook and we will provide updates on impacts, if any, where appropriate. We will not be in a position to comment further on this announcement until we are able to provide further updates.

We believe this is the right step for the company at this point in time in order to remain focused on creating shareholder value. So thank you for taking time to join us today.

I will now pass the call over to Paul for questions.

Good morning. Thanks for taking my questions.

Julien and Ginette, I wanted to start with the digital revenues. I mean I think you guys have been clear with the variance to your expectations you’ve had in Juice and Mediative.

But can you talk about how the core YP digital revenues as well as ComFree performed? Was that essentially tracking your expectations or was there a small miss there as well?

Hello Aravinda, thank you for the question. Well, actually no, they were absolutely on line with our expectation and that's primarily the reason why we're able to increase our guidance on margin.

And because the gap was really into Juice and Mediative for some reasons, one of them being investment made into Q2 instead of Q3 because of the Olympics and some of the big brands. But on the rest of the business it's exactly tracking on target and that's why for the end of the year we are able to revise our guidance up in terms of percentage of margin from 28% to 29% because the rest of the business is absolutely delivering on target as expected.

And then just getting into Juice and Mediative, it appears that in the past, even in the recent quarters, Mediative seems to be a little bit hard to predict. That seems to be where the variances occur.

I mean, is that simply sort of little bit more of a tougher visibility business? I mean, is that sort of the nature of that space?

No, absolutely. Meaning if you think about how Mediative and Juice are taking orders they can take orders up to the last week of the quarter.

So basically they're really building their revenues every month up to the end of the month or every quarter to the end of the quarter. So it's very hard to predict where they stand, when you begin a month or how they have booked 50%, 60% of the revenues for the month coming, so it's giving very high seasonality and very high unpredictability.

So that's why what we saw in Q3 was not expected by us. Q1 and Q2 was strong quarters for both Mediative and Juice but it seems that some brands, as I said, invested some of their advertising budget – their yearly advertising budget for the Olympics and so spent less money than expected on Q3.

We will see in Q4, we remain optimistic on Q4, we think Q4 will be higher than Q3 in term of digital world but that's why we maintain a range between 5% and 8%. Obviously Q4 will be very critical to be at the high end of the range or the low end of the range.

Thanks for that and then looking at the profitability side of things, even though the EBITDA number would have been, maybe a million or so or two lower than the Street. I mean considering the revenue where it is, actually probably did a lot better suggesting the cost containment is pretty solid.

Can you talk about what the outlook is in terms of – I mean you’ve done a fabulous work in trying to reduce the cost base and rationalize the cost base and it took about another $10 million in restructuring. Can you just talk to the running room that you have to continue to rationalize that cost base?

So maybe I will talk about some of the work that was done and it is a reflection of what you find in their restructuring provision. So when we look at -- and I will have a discussion around the restructuring to give you an idea.

So one third of what you see in that restructuring provision is related to -- what I would say, the abolition of sale support. So sale support was there obviously to help the sales organization but given that we've delivered sales tools and the sales organization is becoming much more efficient.

This is one area where we can have some cost efficiency, cost savings and this is something that you see in the numbers and that you will continue to see. The second one would probably be – on the technology front.

So we're changing the approach, the way this team is working is changing. So they are embracing the agile methodology and this is also allowing that team to be much more efficient.

So one third of what you see in restructuring is related to these individuals who can exit given that we're becoming much more efficient. So this is something that you will continue to see in future results.

The third one actually is very different, the third one is more the alignment of the sale structure with growing revenue. So we make sure that we have the right sizing in terms of sales organization to cover their revenue.

So we do continue to find some cost efficiencies and we will continue doing so.

Thanks and Ginette, while I have you there, the solvency -- the pension deficit funding, obviously it came down – if I am reading this correctly, it came down by about $5 million for ’16 and about $6 million for ’17 from your earlier projection, which is obviously a positive. But can you just help us understand what drove that?

Yes absolutely. So there was a change in legislation in Quebec, Bill 57 and basically this is allowing us to no longer include the indexing of the Quebec employees in the calculation of the deficit.

So the pension deficit to fund has gone down from $92 million to $60 million and as such the amount to disburse on an annual basis has gone down significantly. So when you look at the total year -- when we started the year we were expecting approximately $26 million a year in funding deficits but given the Ontario relief measures and the change in legislation in Quebec it has gone from $26 million to approximately $14 million annually.

And then on the print side, I mean we’re seeing that print decline rate tick up rather sequentially. I think if you go back to Q4 last year it was as low as 19.5, and it ticked up through the through 16 all the way to 24.4.

Talk to what's happening here.

Well basically that’s the same phenomenon in the past quarter. What’s happening on print is Yellow Pages print decline is exactly on target, they’re exactly as we forecasted.

What we've had consistently all over 2016 is an accelerated decline in one of our properties named YP NextHome which is providing free magazine in the real estate. We saw a sharp decline, not totally expected on this one and that’s adding at least 1% or 2% pressure on our print decline and that was exactly the same phenomenon all over 2016.

So there is no acceleration on the Yellow Pages front, it’s exactly as expected but on Yellow Pages NextHome that's the property which is creating the gap in our print decline.

Julien, my last question on the strategic side, obviously with the May 2017 timeframe, as that draws closer, is there some thought given to sort of maybe presenting a shareholder returns plan given that your balance sheet is looking better with each period as the free cash flow comes in and you kind of move into a kind of a different phase in your evolution. I mean is there some thought to the shareholder return side of things, either buybacks or dividends and so on?

Well that's exactly to answer this type of question alongside the question on debt and our future growth, which would take the time to do that structurally thinking and we will communicate further on these different hypothesis [ph]. But that question is typically part of the different scenario we're looking at.

I got a question regarding the outlook for Juice Mobile. I understand when you purchased the company your revenue was growing on average but 100% a year for the last three years and I was under the impression it would be somewhere around there for this year.

What do we project for I guess this year or more importantly how much can Juice grow in 2017

So for this year obviously it would be a bit lower than 100%, would still be very strong double digit growth, more than 50% but it will be less than 1005 for sure. I have said seasonality, some changes also in management in Q3, we had the tactical issues I would say in Canada because we changed the head of sales in Canada in Juice, plus Neil Sweeney has left the company.

So within Q4 2016 it’s more rationale to think about a window of around 50% growth for 2016. 2017, it’s too early.

We are in the process to build our budget, so we'll see for 2017. So it's a bit early to tell.

But for sure it will be a strong double digit growth for 2017 but a bit early to tell what will be the rental of this growth.

I understand there is usually a lag between investments made this year kind of help impact the revenue growth next year. Qualitatively how would you say those investments are being in 2016 and used to help support 2017 revenue growth?

You mean just in Juice or globally at the organization?

Well, I guess in Juice first and if you can comment on the rest of the company.

Well, basically Juice, part of the growth has to come from the U.S. So basically in 2016 we have visited heavily to grow our U.S.

operations, so namely recruit people because in this industry you need to have platform but you need to have people to sell. So in 2016 we are investing to grow Juice in the US in terms of structure and people with offices in New York, Chicago, LA and the big cities.

And so obviously we are expecting that to be put in 2017 because these people will be in and begin to arrive in Q3 and Q4 2016, so they will have time to be full blast in 2017. And so definitely the U.S.

market should contribute more heavily to growth for Juice in 2017. But overall meaning our investments are always made to grow the future business, so typically with the CapEx we have invested this year are very much based on improving our system, building our media and that's really to generate growth opportunity and accelerate in digital growth in 2017.

Thanks very much. Good morning.

Most of mine have been already answered here. But Julien, just a couple of kind of bigger picture.

When you look at your original return to growth plan, you’ve talked about customer growth next year and then obviously financial growth the year after. And then we look at the timing of the strategic review now, are you course correcting here relative to those kind of benchmarks or are those benchmarks still firmly in place but what you’re trying to do is maybe get there differently?

I'm just trying to understand the backdrop here of everything that's obviously going on at the moment?

You draw up a very fact Question. No, basically we're halfway on our plan.

We said the plan in the very beginning 2014, we are the end of 2016, the plan was aimed to the end of 2018. So this industry is very hard to predict five years ahead.

So at half point we decided to make a step back and say okay, what did we achieve and we achieved a lot of great things. And what do we want to achieve up to 2018 but also to prepare ourselves for post 2018, because we are not going to wait 2018 to think to post 2018.

So that's exactly the process we’re undertaking now. Fundamentally we are very very confident about the future of this business.

Just to give you some figures, we know that the local market in Canada is $10 billion in advertising, only 305 of it is digital. And we know in the coming three to four years at least 205 of this money, which is more than $2 billion will become digital in the local market.

So that's tremendous opportunity for our company. We want to find the right way to achieve that opportunity and we thought it was the right timing to take a step back, look at that and come back with a full plan for 2016, 2018 and post 2018.

Of course, the debt question at end of May 2017 is also part of the thinking because most of the question we have and we share is, are you willing to pay down all your debt, what’s the best capital structure, are you thinking about shareholder -- giving back value to shareholders? So that’s exactly the question we want to answer and we think the timing is right now before May 2017 to answer that questions.

Thanks for that and just one last on Juice. I guess over the years I think for most of the analysts on the call, we've seen digital acquisitions, that sometimes have worked, sometimes haven't worked.

And obviously it's an extremely competitive space that's constantly evolving. When you look at your Juice acquisition, I just want to make sure that from your standpoint what you acquired is what you thought you acquired and that there really isn't any structural issue here in terms of the market shifting or you’re not getting out of the platform what you originally thought?

Let me remember you, why we acquired Juice. We acquired Juice for two reasons.

What is a growing market and programmatic in mobile are at the core of the digital transformation of the advertising market. And of course, there is some softness in growth but we still have a very high double digit growth for 2016, we see that also for 2017.

So it's really that it brings very strong growth in a very competitive market. But the other side is we also bought Juice because we think that programmatic in mobile will be a core transformation also at the local space.

And every time we look at Juice and we see the platform and we see the assets and the knowledge, we can absolutely confirm these. So Juice was made also to find growth on one side but also to extract synergies and to understand how to drive programmatic and mobile programmatic in the local space and that’s absolutely doing the job.

Good morning. Ginette, I just wanted to wish you all the best in your forthcoming retirement.

In addition to that I do have some questions. The first being I want to triangulate between some of the earlier questions on Juice in the core business.

If you’re expecting 50% plus growth for Juice, is it fair to assume ComFree is in the very high single digits or maybe low double digits and then the core business in the low single digits?

I think it's fair, ComFree, it will very much depend on where do we stand on the western provinces. You know part of the issue we have with ComFree/DuProprio in 2016 was the sharp decline in Alberta, that was obviously not forecasted with both the company, we had very strong growth in Quebec, very strong growth in Ontario but a sharp decline in Alberta and the western provinces.

And so that has affected somehow the growth. So I would say the ComFree picture is a bit mixed, if you look at Quebec and Ontario what we have a double digit growth and Albert which is declining.

So overall we would be exactly where you say which is in the high single digits.

And then lastly I don't want to beat a dead horse on traffic. I know we've talked about this in prior calls.

But I think according to your plan you're hoping to see traffic stabilized, is that still the outlook for Q4, maybe even into early 2017?

I think that's a very fact question. Traffic is always a concern.

For sure we have seen some problems between Q2 and Q3 not exactly what we were totally expecting. We still see some improvement in Q4.

Obviously traffic during the Black Friday weekend will be important specifically for RedFlagDeals and YP Shopwise. So we'll see.

So it's a bit early to make a prediction for Q4, because it’s heavily dependent on that two weeks end of November. But we see interesting items coming from organic and direct traffic, we see that direct traffic is stabilizing, it is now growing again in some areas, specifically on mobile.

So I'm pretty optimistic for traffic in 2017. For sure the Google changes hurt it a lot.

It's two dimension, one is of course you lose short term traffic but also we did a lot of incentive -- we are incentivizing our people going to our web pages to download the app. So if you have less mobile web pages because of Google's change in layout, you have also a bit less download, that's hurting you in direct traffic longer term.

So that should be the retail effect we had all over 2016 but we think now we are beginning to come out of this effect and 2017 should show positive trends on traffic. End of Q&A

Okay, Paul, thank you. Thank you for joining us today.

Obviously we look forward to speaking with you in February when we report our Q4 results. Have a great day.