Yellow Pages Limited

Thank you. Good morning, everyone and welcome to our third quarter call.

As usual, I'd like to spend a few minutes at the top here, highlighting where we are and the progress we've made in the last quarter. And then our Chief Financial Officer, Franco Sciannamblo will provide some more detail on the quarter.

And then after that Franco and I joined by Sherilyn King, our Senior Vice President of Sales, Marketing and Customer Service will answer your questions. We are feeling pretty good today -- very good today.

We have a cash balance of approximately $137 million, which you will note is already $30 million more than the face amount of our remaining debt, our exchangeable debentures, which we confirm still we are intending to pay off on or shortly after May 31, 2021. So that will leave us debt free excluding leases.

We also feel very good about the degree to which we have been faring well in the era of COVID. While, of course, nobody can predict the effects of COVID and we knock on wood a little bit for all of society, I guess, I would point out that we continue to have only a couple or a handful of percentage points ill effect of COVID on our rate of change in revenue or growth and on our EBITDA and EBITDA less CapEx percentage.

And also, at least as I analyze the COVID data while our country Canada is seeing a second wave like most of the rest of the part of the world just like before the data seems to suggest that in Canada all of this is not nearly as extensive on a per capita basis as it is in many, many parts of the rest of the world specifically United States and Europe. So we feel guardedly optimistic about that and really good about the degree to which we've been hit so far by those effects.

We also feel like we're making very good progress in setting the stage for resuming bending our revenue curve. We are very much on track on the things that we talked about last quarter.

We're on track to doubling the size of our telesales force by the end of the year, which is designed to produce a very -- a significant increase in our ability to generate new business and land new accounts. And we're making good progress on our new product initiatives as well.

The -- we feel good about our earnings performance this quarter. Our EBITDA percentage this quarter is 34%.

While that is 4.5 percentage points less than last quarter after adjusting for two onetime items in the two quarters we feel good about that. The two onetime item adjustments: one is, in both quarters the degree to which we've gotten some government wage subsidy; and the other is, there -- is some accounting effect of some executive stock-based compensation regarding the ending and renewal of our -- of the employment agreement for our CEO.

But if you set aside those two onetime items, the difference in EBITDA percent is 4.5 percentage points. And as we anticipated about half of that, we believe is due to the effects of COVID and about half of that is due to conscious and purposeful investments we're making in -- as we shift to focusing on the growth aspects of our revenue.

In fact I will appoint that for what I'm sure is the very -- the first time in the tenure of this administration in this company, which now is over three years for the very first time our headcount is actually up, up slightly but up compared to last quarter as we have been building out our sales force and doing other things. We are also guardedly pleased about our bookings.

We don't usually release data on bookings, but we did mention it last quarter. And the picture is the same as it was last quarter.

We are exactly where we expected bookings to be, which is that the -- our calculation of the effect of COVID on our bookings and of course bookings are the leading indicator of reported revenue, but the effect there is just a small number of percentage points. We would anticipate that as all that works its way through our system and becomes revenue that our best thinking right now, our best information right now is that will continue to be the case that we're talking about a small number of percentage points effect on our growth rate and on our earnings.

So a big perspective our net debt is now significantly favorable or negative or favorable. Our profitability and cash generation continue to be strong.

And we're making what we think are the right targeted necessary investments for the future and we believe that we can continue to return to bending our revenue curve in the favorable direction and simultaneously generate healthy profitability and cash flow. We do not believe that we have to choose between those two and we're embarked clearly on that path.

So we're feeling good today. Franco would you describe some more detail about the quarter?

Sure. Thanks, David, and good morning, everyone.

As you will recall, we report our operations in two segments, the first of which is the YP segment, which provides digital and traditional marketing solutions to the small and medium-sized businesses across Canada. The second segment is the Other segment, which includes the operations of businesses we have disposed of or liquidated over the last two years.

Since the third quarter of 2019, we haven't had any operations in the Other segment. So our results are now entirely made up of the YP segment and this is where my comments will be focused.

I'll now take you through our financial results for the third quarter ended September 30, 2020. On revenues, our revenues for the YP segment decreased year-over-year by $17.9 million or 18.2% and amounted to $80.3 million.

The decrease for the quarter is due to the decline of our higher-margin digital and print products and to a lesser extent our lower margin digital service and resale products. This change in product mix created pressure on our margins.

Our revenues were also negatively impacted by the COVID-19 pandemic, which mostly affected customer spend rather than customer renewal rates. YP digital revenues decreased 17.5% to $61.3 million due to a decrease in the number of customers.

This was partially offset by ninth consecutive quarter of higher spend per customer despite pressure on spend in the quarter due to the pandemic. YP print revenues decreased by 20.4% to $19 million from both a decline in the number of customers and lower spend per customer.

On EBITDA the pressure from our lower overall revenue and change in product mix as well as certain one-time items partially offset by efficiencies and cost reductions negatively impacted adjusted EBITDA and adjusted EBITDA margin for the quarter. The one-time items as David alluded to included a $4 million expense related to the vesting of our CEO's long-term incentive plan upon completion of his first contract in the third quarter of 2020, resulting from the increase in the company's share price, partially offset by a $1.2 million emergency wage subsidy received during the three-month period ended September 30, 2020.

The efficiencies and cost reductions were from continued optimizations in sales and operations and reductions in other operating costs from reductions in our workforce and associated employee expenses, reductions in the company's office space footprint and other spending reductions throughout our company. As a result, adjusted EBITDA decreased year-over-year by $10 million or 27.7% to $27.3 million, while EBITDA margin decreased from 38.5% to 34.0%.

Continued modest effects on revenue of the COVID-19 pandemic coupled with increased headcount in our sales force will create some pressure on margin in the upcoming quarters as David alluded to earlier. On adjusted EBITDA less CapEx, it decreased by $9.5 million or 26.7% to $26 million, while adjusted EBITDA less CapEx margin decreased from 36.1% to 32.4%.

The decrease is due to lower EBITDA partially offset by lower year-over-year CapEx spend, due to decreased spending on software development. As for our workforce, when you look at it year-over-year, as at September 30, our total workforce had decreased 21% year-over-year to 698 employees.

This is one of the key drivers for our reduced spend. Restructuring and other charges this quarter, was $4.5 million, consisting mainly of $0.4 million charge related to workforce reductions and $4.1 million related to office closures.

On net earnings for the quarter, it decreased to $9 million from $13.8 million for the same period last year. The decrease in profitability of $4.8 million is mainly due to lower adjusted EBITDA and an increase in restructuring and other charges, partially offset by reduced financial charges and reduced depreciation and amortization expenses.

As David talked about earlier, our cash continues to build. As of today, our cash on hand is approximately $137 million.

This balance significantly exceeds the $107 million principal amount of our exchangeable debentures, which are our only remaining debt excluding lease obligations. And as previously announced, we do intend to fully repay off those exchangeable debentures at par on or around May 31, 2021.

Given our strong cash position, the Board of Directors approved a dividend of $0.11 per common share to be paid on December 15, 2020 to shareholders of record as at November 27, 2020. And also, just recall that we entered into a Normal Course Issuer Bid, which commenced on August 10, 2020 to purchase up to 5 million of common shares in the open market for cancellation on or before August 9, 2021.

As at September 30, 2020, the company had purchased under this NCI program 99,280 common shares for cash of $1.1 million. This concludes our formal remarks.

Thank you for taking time to join us. I'll pass it over back to you David.

Thank you, Franco. We'd be happy to take any questions that any of you might have.

Good morning, David and Franco. Thanks for taking my questions.

A couple from me. I wanted to start with the online revenues still maintain a solid $60 million to $65 million a quarter in revenues there.

I was curious as to the sort of composition of that -- or I guess an update on the composition of that in terms of the -- what you would strictly call sort of the reseller portion of it, as well as the owned and operated. And if there is a hybrid piece to it as well, how are those pieces trending within that?

So, perhaps we can sort of identify what sort of looks more sustainable? What's sort of bottoming out and maybe looking -- showing some signs of stability?

I'll start there.

Franco?

Yes. So print which you could probably see pretty much from our financials that we break out, it's above our -- of our overall revenues.

I'll do it that way. Print is about 24%, 25%.

And then the balance, the 75% of the balance is split evenly between our very high-margin IYP business, as you know and then the services and resale business is the other half. So it's pretty much split at this point roughly half-half.

Is – Franco is there anything that you can give us in terms of trend? Is the higher-margin business declining at a steeper rate, or any kind of color on that would be helpful.

Yes. And we do specify that in our MD&A as well, it has been the trend that the higher-margin IYP has been declining at a higher rate than our services and resale.

Okay. Thank you.

And with respect to the balance sheet maybe David you – obviously, you're not that far away from the – paying off the debentures as well, free cash flow continues to be strong. Is there any update in terms of strategic direction, M&A options what you can do with sort of the sales team?

You still have nearly 140,000 customers potentially have relationships with more customers than that. Any sort of plans or updates around leveraging that base?

Well, first, I agree with everything you said in your question. And we – it leaves us with a lot of options.

And as I've indicated before, we are now in the phase where we kind of look back over the last three years or so, what we inherited was a very dire situation. And now we feel the job is far from done but we have an awful lot of safety and security right now and a lot of options.

So everything is on the table. We have very high standards though.

So M&A is something that unless there's something that would make an enormous amount of sense, we're not looking to just to throw money around, absolutely a high priority is using all of our internal capabilities. As I've said, growing our Telesales force because the long-term solution here is to generate a lot more new accounts.

And then as they come in treat them very well, delight them every day. And over the course of time, new accounts very often can become even more well-established accounts with whom we do more business.

And in the medium term and the long term, that is the path to having a buoyant and strong company, which is what we've always been on the path to doing. So very high priority and a lot of focus on what we can do internally.

And we're very willing to in a targeted way, as I have indicated, spend money on that. We don't think that we have to sacrifice massive amounts of EBITDA and EBITDA minus CapEx to do that but we are already very willing in very targeted ways to spending expense money and a little bit of CapEx money to supporting what I hope will eventually be true growth with a plus sign before it rather than a minus sign before it.

So everything is on the table. We feel real good.

We particularly feel good in this era of COVID, that not only does the data that we see suggest that we're being hit not very much but also, if there were any kind of pause or hiccup or deferral or delay in the markets or anything, we're in a great spot. We don't see that coming but we're well equipped in case it would.

So everything is on the table. We don't believe in making decisions before we need to make them.

And we know what we're doing now. We're focused very much on trying to organically grow the business.

That's – honestly, we've not had this anywhere close to this degree of focus on that anytime in the last three years. Sure we've tried to expand the business of course.

But strategically, we've been busy putting our house in order and putting our balance sheet in order. And now we want to put our revenues in order.

So I hope that answers your question Aravinda.

Yes it does. Thank you.

Good luck and best of luck.

Thank you very much.

Thanks much, It's Drew here. Maybe one for David, one for Franco.

David on the kind of focusing in on bending the curve and kind of looking at kind of the COVID realities out there where obviously your business is proving kind of relatively resilient where it was before, is the bending the curve more kind of finding new advertisers and small businesses out there? Is it reducing kind of churn and increasing retention maybe it's a kind of both of those attacking those at the same time?

And then second for you Franco, just housekeeping items on modeling with respect to CapEx, cash taxes and pensions. Just provide an update there maybe if you can into 2021.

That would be helpful. Thank you.

Thanks for your questions. First, in the question you asked me, you mentioned COVID.

Let me just say one of the things that makes me sleep very well at night on the COVID front is we keep an eagle eye on our collections. Because if there's going to be a problem in this kind of business, with COVID the problem is going to be that some of our customers will find themselves not in a position to be able to pay us, or at least to be able to pay us what's due when it's due.

And so we keep a very eagle eye on cash collections. And as you can tell from the cash balance on a macro level – on a micro level the cash collections are steady as a rock.

And so that would become – and I can say that that's true-up through the most recent data that I have seen. So we're cautiously optimistic as a result of that.

More broadly your question about whether the bending the revenue curve is from new accounts or whether it's from growing existing accounts, obviously, the answer is both. We have a very serious focus on both.

And SK, would you have any commentary you'd like to add to what we're doing on each of those just briefly?

Sure. So, Jerry, I think your question was the focus is actually on new accounts reducing the churn and increasing the existing share of wallet, or the spend from our existing client base.

And so if you recall back in the early – in August when we had the other investor call we mentioned that we are looking at new products to enhance the current share of wallet with our current base of customers and also looking at acquiring which is why we're doubling our Telesales team as well as we do have a focus on reducing the churn.

That's great. Thank you.

And then Franco, I think he had a question for you.

Yeah, I think you were asking in terms of some modeling numbers to have in mind. On pension figure, the amounts that's not in – already in EBITDA.

So when you look at our cash flows, there is that line that says post-retirement benefits in excess of what's in the P&L. So that line will be about $4 million to $5 million in 2021 and figure about $4 million throughout this year a little under that.

Cash taxes that we haven't paid and continue to believe we won't be paying in 2021 as well. So nothing for cash taxes and CapEx, I would say use the run rates that we're at right now.

That's in the ballpark of what we expect.

Okay. That's great Franco.

Thank you all.

Well, thank you all very much for joining us today. We're going to get back to work here and we look forward to talking with you again in about 90 days.

Thanks so much.