Yellow Pages Limited

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

Aravinda Galappatthige - Cannacord Genuity Vahan Ajamian - Beacon Securities Bentley Cross - TD Securities Drew McReynolds - RBC

Hello good morning everyone, and thanks for joining to discuss Yellow Pages Limited fourth quarter 2016 results. With me today is Ginette Maillé, Chief Financial Officer of Yellow Pages.

While we're going to keep this pretty concise today, I want to make sure we've lot of time for questions. Let me start by summarizing the progress this company has made since 2014, when we launched our return to growth plan.

We have delivered a number of successes so far, but have yielded amiable milestone in the evolution of the business. First we've created and established a credible digital offering with nearly 70% or 555.8 million in annual revenues coming from our digital business.

Since 2014, we've maintained mid to high single digit growth in our digital revenue. Second we have improved our operational capabilities and stabilized our customer base at 241,500 which is over 20% of the addressable market of our small businesses in Canada.

In 2016, we delivered in our customer acquisition objective for the third consecutive year and acquired 41,100 customers, exceeding our target of 38,000 and landing 33% higher than the 30,800 that we acquired in 2015. Notably we're approaching we're acquiring impressive growth in customer accounts, with a net customer account decline of 3500 year-over-year compared to the approximately 30,000 net customers we're losing per year before we launched our return to growth plan.

Our customer renewal rate was 82% for the twelve months period ended December 31, 2016 as compared to renewal rate of 85% during the same period last year. This rate is been under pressure due to accelerated levels of digital customer acquisition.

The new cohorts churn at higher rates than older cohorts. However in complex this is still very strong and renewal loyalty rates industry wide and exceeds standards loyalty rates in the digital space.

To sustain this rate, we begin building teams specializing in on boarding and retention last year, and we're also looking at building retention capabilities across other customer channels. Third, to attract customers and increased visits, we've invested in growth opportunities, such as Bookenda, dine.you.

Choosing these two entities, lead to the creation of YP Dine ans cohesive digital offering for the restaurant vertical. We're quite confident we'll be able to grow our real estate vertical offer and we acquired JUICE and repositioned Mediative to expand our digital marketing solutions to global brands.

Additionally we've built a strong partnership network of digital global search brands that syndicate our content and listings, in fact traffic to our media properties increased significantly in Q4 2016 growing 26% year over year. This increase is a positive result of our workout platform as well as our partnership network which ultimately drives traffic and eyeballs back to YP platforms.

As a result we finished the year with 464.7 million visits annually across our digital properties. Also a key accomplishment is the significant deleveraging of our balance sheet.

This has allowed us the financial flexibility to invest in strengthening our business operation, technologies and product offering. Thanks to our strong free cash flow generation we successfully repaid 490.3 million on our senior secured notes since their inception in 2012.

In 2016 alone we repaid over 97 million of debt of notes bringing the outstanding balance to 309.7 million despite having also used cash on hand to acquire JUICE. Net debt amounted to $384.9 million as of December 31st, 2016 down from $430.6 million as of December 31st, 2015 and approximately $800 million we had at the inception of our return to growth plan.

So as you can see we've made quite a bit of progress and we're delivering on the objectives of the return to growth plan we laid out in 2014. Our revenues are performing in line with the products that we had anticipated in our return to growth plan supported by diversification of our business over the last two years has allowed us to preserve our growth potential.

However there is a bit of the plan which has proved more elusive and it is the toughest piece to deliver translating our successes into EBITDA growth. I will take a few minutes to expand on this.

As I described earlier over the last three years we significantly expanded our customer offering which has resulted in a greater ability to compete and to acquire customers. We can all agree this is critical to any business especially in the digital space.

Our revenues are performing as anticipated in our return to growth plan. However the result including mix is applying pressure on profitability.

In order to grow digital quickly broadening our digital offering has been key. Our customers are increasingly attached to the solution in our portfolio that we manage on behalf of multinational players like Google and Facebook.

They're placing the expanse in those areas which also happen to be lower margin product for us. This customer decisions are largely driven by brand or commission and not by knowledge of the actual -- not necessarily because these solutions will generate better results or value.

Customers are simply going with the most immediately recognizable solution in our portfolio due to lack of understanding of digital solutions differences. Largely as a result of an acceleration of this particular dynamics in Q4 which were limited in impact over the course of 2016 we took a non-cash $600 million impairment to intangible assets that include stream off and non compete agreements.

I would underscore that this is a non-cash item and does not affect our debt covenants. It is not a reflection of changing our growth ability nor in our ability to generate revenues.

We see the echo effect of changes in a diversified product mix. That being said we've identified where the issues are stemming from and we're going to be addressing these areas with a laser like focus in the context of the strategic process currently underway to determine the next phase of evolution for the business.

We are going to look more closely at how we structure our sales conversations and approach. How we will completely counsel our customers on the purchases, how we can truly act more as advisors and equip our customer facing teams with the right systems, data and tools to help them understand which solutions that customers truly need and which one will allow them to extract the most value for their dollars as opposed to just the product pricing conversation.

This is a part of work we are currently looking in our strategic process; of course we’re already starting to action some key operational areas in order to help address this issue. We’ve already started rolling out new tools and training to our sales team to have value based as opposed to budget based conversation with customers.

Some of the elements were also evaluating our product offering, pricing and contracting sales structure effectiveness and additional upsell channels. As mentioned, we’ll be sharing the full outcome of this exercise with all of you in May.

What I can share with you now is that we should do still expect to be returning to customer account growth in 2017 and top-line revenue growth is still within reach for 2018. As we work to address the margin and mix issue, we foresee additional pressure on adjusted EBITDA in 2017 and we still expect stabilization in adjusted EBITDA in the short to mid-term post 2017, however not at the levels previously expected.

We also continue to expect strong free cash flow and as a result we’ll be able to continue to pay out our debt. If we choose to do so, we will be able to pay down $75 million of debt in 2017.

However, part of the exercise underway related to the evolution of the business involves determining how we should use our cash to best grow the business and ultimately generate shareholder value. In conclusion, I want to underscore that Yellow Pages is a profitable healthy business with strong growth potential.

Thanks to several years of hard work in our return to growth plan, we have a sustainable balance sheet, and able cash generation and a growing digital business that is among the more significant in Canada. We need to optimize certain areas of the business to better deliver bottom-line growth but the foundation of the business is solid and we’ve barely begun to scratch the surface in terms of market potential this company can capture.

On that note, I would now be happy to take any questions you might have.

Good morning and thanks for taking my question. Julien let me just start with the product mix issue you talked about, it was you had discussed in the past that obviously it’s a lower margin piece, the search engine marketing which is really what you’re referring to was going to grow faster and as a result pull the margins down.

So, what you seem to be saying is so that was in line with sort of that was your expectation that component would start to grow a little bit faster, but what you seem to be saying is that, you suddenly saw an acceleration in that, in that component, in that take up of that product in the last, call it three to six months is that sort of the taking?

Hello Aravinda, that’s absolutely correct what you're saying. So we always anticipated that on an operated, the mix between on our operated products on one side, and let's say reselling products, SEM or the new Facebook offers we launched, would going to change over time.

Obviously with SEM and Facebook offers growing faster than the rest of the portfolio with lower margins. What we so, better some more Q4 phenomenon if I may say, we saw a big acceleration of the trend in product mix with on an operated slightly declining and the rest accelerating growth.

So that’s why from the total revenue prospective, we're pretty much online with our return to growth plan, because the two effects are compensating each other but on the other side, from a margin prospective it's quite different. So when we saw that for accounting purposes, we decided that was a triggering event.

Because we think that’s more structural, that’s not something just happening in Q4, we see that continuing overtime. So we decided to do this impairment testing and consider that before changing the way our margin could be generated over time.

So the impairment charge and also additional pressure will see in adjusted EBITDA for 2017 linked to this mixed issue. But I really want to reemphasize the fact that from revenue prospective, after we feel confident that we can go to grow revenue in 2018 and stabilize revenue in 2017, that’s really a mix effect.

Not a change in our revenue trajectory as a whole.

Just to add to that, could you give me a [exit] the break down to the digital revenue, the website, what call is the mid margin component and the SEM margin you talk about, how exactly does that component break down could you just remind us?

You would know, we never disclose the share between the different revenues. In term of margin what we always said, we have three components in our digital offer, one is on and operating product with very high margin, could say the 80% close, very close to trends that’s the first component.

The second component is really, also mid margin products, because we need more people to build them, so typically building website for customers. That will be so somewhat transactional platform, that will be SEO campaigns and the third one with the lowest margin will be all the reselling activity, SEM products, when we sell Google, Facebook products, you can also include JUICE products in this one.

Because that’s relatively the same type of offers and so we saw obviously is change of share, market share between these different products. I would underscore the fact that, it's also the what exactly what we see in the US, if you look at the US market in 2016, what we saw in the US market in 2016, is Facebook and Google capturing all the growth of the digital space, actually most of the growth of digital space.

All the other properties went down in 2016, so this change is mix effect; it's something we saw in Q4 2016. But we also saw in the US in 2016, that’s we consider it’s a social effect and not something for, not one of effect for Q4.

Okay and just on the EBITDA discussion, I think you talked about stabilizing EBITDA post 2017 or in the near term after 2017. Is there any sort of indication you can give us what 2017 looks like, in terms of margin, I mean, are we talking sort of a mid, or sort of call it a double digit EBITDA decline in 2017 is that really inside the relevant possibility here?

So what we plan to disclose in May we'll present our strategic outlook and obviously we'll give then guidance for 2017. What we want to say at that stage is we'll see additional pressure on our adjusted EBITDA 2017; we'll not disclose more precise guidance today.

I'll give much more information and a complete plan and complete targets for 2017 and the coming years in May 2017.

And with respect to the -- you've commented about the repayment of debt given sort of the May 2017 timeline, is there -- any updated thoughts around how you approach the redemption of the notes?

Well it's still an open discussion so what we wanted to indicate externally is if we follow all the cash [flow] calculation and we manage according to cash flow calculation we could pay $75 million of debt in 2017, that's giving a sense of our cash flow generation also for 2017. Obviously in May we'll disclose what will be our policy on that but obviously there's a cash repayment on the cash flow calculation end of May, so obviously we'll have some discussions before with some of the players and then obviously we'll indicate what we do in May if we decide to pay under the cash flow, but even if we didn't pay, the cash flow calculation we'd still pay the 1st of June, the amount we want at par.

So, 2017 is a very different year for -- regarding that; 31st of May is not as important a date it used to be, because the 1st of June basically we can repay the debt we want at the base we want at par, so we'll disclose what we want to do in May, June later in the year. But the global indication we want to give us we could repay $75 million of debt using our cash flow calculation if we wanted to.

And then last question from me on the M&A side, can you just give us an update on where you stand on JUICE, I know given the challenges that you had in the prior -- that you indicated in the prior quarter; and also I suspect on the M&A side you're sort of reserving your comments for May as to which direction you want to take and what your thoughts are on that?

Well for the M&A side, yes, meaning that's part of our strategic review and we should disclose more information in May. Regarding JUICE actually, JUICE I indicated that in some call we had, JUICE it was like -- JUICE would have the same Q4 then Q3, because as I said the management team of JUICE changed in Q3, we completely revamped the Canadian team, as the new Chief Revenue Officer at JUICE, [indiscernible] came from Twitter early November, so obviously it was too late to have a real impact in Q4.

We're very happy the way the JUICE organization is now moving, Brad has completely rebuilt the team with very senior guys for the Canada team, US is performing well, so we're still pretty optimistic on JUICE, we think JUICE could deliver very high double-digit growth in 2017. Relatively at the same pace as in 2016, that's what in our plan.

So, we knew that Q3, Q4 for JUICE would be difficult because of management changes. Still on the total year 2016 JUICE has delivered 50% growth, five-zero, so that still a tremendous amount, and we anticipate JUICE to continue deliver on that path for 2017.

So, in the case of JUICE, I will requalify Q3 and Q4 as the one-off, linked to some management issues and management rebuilding and we're optimistic on 2017 regarding JUICE.

A couple of questions, first off just for clarity sake, is any of the impairment charge to $600 million related to JUICE at all?

No, absolutely not. Impairment is just the way we do impairment is we look at cash generation in units.

So we look at that separately, so it’s only to Yellow Pages, so actually JUICE would have much positive goodwill in sense so it will limit the impairment but it’s not the case. So impairment is just linked to Yellow Pages and its only linked to product mix, so nothing to do with any of our operations which are created, who have today more value that the one which we have in our booking.

Okay. And I think you talked about expecting stabilization and EBITDA post 2017.

I mean can you help sort of quantify that, could it be flat in 2018?

What we see basically is pressure in 2017 and then yes stabilization, that could be almost same in 2017-2018, obviously it’s still far too say, less than two years from now. But what we see is release stabilization of the EBITDA post 2017 because basically the real thing is as I said, we have this mix issue we want to address, obviously we’re not going to look at this mix issue without doing anything.

Actions will take time, so we think this mix issue will have a record effect in 2017 but hopefully as we deploy all the asset we have in mind and we’ll present more lengthy in May, we can achieve stability, stabilization over the post 2017, so namely in 2018- 2019.

Okay. Thank you very much.

Good morning. I just wanted to first start things off by saying good bye Ginette, thank you very much.

I expect this as your last call.

Thank you.

I hope you enjoy your retirement. And then just to maybe stay on the positive track, although your retirement is not positive Ginette but the traffic was very positive in Q4.

Wondering if you might give any sort of indication as to why that happened or how you’re able to generate that strong growth there.

Yes, absolutely. So I’ll take out two different things from this traffic, first of all of this traffic you know we worked a lot since 2014 to improve our digital property and we saw good traction even if its limited numbers in direct traffic on YP on - deals on the different apps we’ve launched YP Dine, YP Grocery and others.

So direct traffic is really growing again linked to the all the actions we have taken overtime. The big piece of it is the partnership we’ve had with Apple, last year we were struck by Google changing layout, this year we had a positive impact of Apple changing layout, thanks to iOS 10.

So basically Apple changing layout on Apple Maps in iOS 10 has given much more visibility to Yellow Pages brand and our booking engines. So that’s exactly the opposite effect that’s the one we had in Google.

So the major reason why we’ve had this lift on Q4 is partnership, nevertheless we also saw very good traction on our direct traffic on our on and operated properties and the combination has driven to that type of growth.

Okay, that’s helpful color. And maybe also on the - color I know you don’t want to reveal your hand too much in advance of May but maybe just the levels of that expectations.

Can you give any sort of guide on your margin outlook for 2017?

No, I am sorry to say that. That’s what we want to disclose in May because May at the end of the day want to present is where we are in our margin, so what’s the plan to go to stabilization of EBIT post 2017?

Meaning 2017 will have an impact on the mix effect and we prefer to tell that now and the impairment is linked to that but what we see also is we can welcome that, we can have mitigation plan, we can really improve the way we sell, the way we operate as an operation. The way we present our offers and fight on the mix effect and stabilize our EBIT level post 2017.

So that’s the global plan we want to present not 2017 by itself, because that will not demonstrate our ability to stabilize EBIT. So that’s why we prefer to be a global vision of what we have in 2017 and came to deliver post 2017 in the same day.

So if it should be the day of the general assembly of shareholders the 10th of May 2017.

Ju when you talked about just your three bucket of digital from a margin prospective, I just want to focusing on the owned and operated piece, I know you don’t want to quantify size of growth, although you did provide a little bit of margin guidance. Can you just at a high level comment on, how that piece is growing and what are the key properties within that piece that really contributing to that growth or growth profile.

And the secondly just on the print outlook, we're seeing a little slippage in the year-over-year decline rate, but obviously still in that kind of low to mid 20% just could you provide an update on your expectations for that growth rate in 2017. Thanks.

So regarding the on and operated so in term of revenue or in term of revenue generation obviously on and operating was by low single digit the last year. What we saw is now is slightly declining.

So that’s the changing trend we saw, so the mix effects as I said is the change of the structure our revenue. So on an operating slight declining and SEM and Facebook reselling growing faster than we anticipated.

It's not stable growing SEM into declining [ON] and growing faster SEM. That’s why the mix effect is active writing and that’s the impact we take in the impairment and that’s what happening.

Obviously we think of the on and operated today, we think those are the reason why its slightly declining now, the pressure of Facebook and Google is one [said that]. But the other is also that we have to revamp our offer that’s what we will present in May, it's how we see the future of Yellow Pages customer proposition, the future of Yellow Pages offer, not only on the reselling place but also on the on and operating of these.

We think we have a huge potential in this one, but we're not capturing today the potential because some parts of our offers need to be transformed. And it will be adjusted and it will be repriced and that what we present in May.

So more color on ONO trajectory, not only from a financial point of view but also from a offer point of view to come in May. Regarding trends, you know it's very early to tell, I would see trends in 2017 at the same level slightly better than it was 2016.

We also working a lot on trends, regarding the structural deal offer also more to come in May. I would say the very early tendencies so 2017 would indicate print in December end then 2016, or slightly better.

So it's very early to tell, so we will see overtime but the early indication would say that.

Okay, so I just want to thank you all of us to joining us today. So you can anticipate, we're looking forward to speaking with you again in May at our Annual General Meeting of shareholders and obviously during this meeting we'll share report on our Q1 results and share much more information of our new strategic path forward.

So, speak to all of you then, and I wish you a very-very good day. Thank you.