Executives

Robert MacLellan – Chairman of the Board, Interim President and Chief Executive Officer

Ginette Maillé – Chief Financial Officer

Doug Clarke – Senior Vice President, Sales

Analysts

Aravinda Galappatthige – Canaccord Genuity

Stan Manoukian – Independent Credit

Yellow Media Inc (OTC:YLWDF) Q3 2013 Earnings Call November 5, 2013 1:00 PM ET

Operator

Good afternoon, ladies and gentlemen, welcome to Yellow Media’s 2013 third quarter conference call. We remind you that forward-looking statements are being made pursuant to Safe Harbor provisions of applicable securities regulations. (Operator Instructions) I would now like to turn the meeting over to Mr. Rob MacLellan, acting President and Chief Executive Officer and Chairman of the Board of Directors of Yellow Media. Please go ahead, Mr. MacLellan.

Robert MacLellan – Chairman of the Board, Interim President and Chief Executive OfficerThank you, Valerie, and good afternoon, everyone. And welcome to the third quarter investor conference call for Yellow Media Limited. Joining with me today is Ginette Maillé, our Chief Financial Officer; and Doug Clarke, our Senior Vice President of Sales. We’re each going to say a few opening words, and then we’re going turn this over to questions and answers.

For my part, I’d just like you to know that we know that, one thing we know well in this business is that the manner by which local consumers search for business information has changed dramatically over time. Consumers want quick access to rich and accurate merchant information and they’ll use a countless numbers of media to find it.

Consequently, digital advertising has become increasingly fragmented and challenging for local advertisers. In order to attract local consumers, advertisers need to be as visible as possible within the digital marketplace. And this includes having a website, being visible on search engines and ensuring rich-contented, easily-accessible both online and via mobile applications.

Our mission is to help Canadian advertisers efficiently tackle this complexity. We want to champion the new neighborhood economy and provide solutions that allow local consumers to connect with merchants like never before.

In an effort to become the number one local destination for consumers and advertisers across Canada, the company has established a specific set of strategic priorities. Our key priorities for 2013 are directly related to our customer promise and aim to provide the right value, products, execution, customer experience and consumer audiences to our advertisers. As we approach yearend, the Board of Directors and management team have made significant progress in executing on these key priorities.

I’d like to ask Doug Clarke now, to provide an overview of these recent initiatives. Doug?

Douglas Clarke

Thanks very much, Rob. Our clients have expressed improved satisfaction with YPG due in part to improved customer service, enhanced product fulfillment and an evolved product and service offering. Our Yellow Pages 360 Solution is actually one of Canada’s most comprehensive product and service offerings.

This value proposition allows advertisers to connect with local consumers through visibility on YPG’s owned and operated properties and tools such as website development, search engine optimization and search engine marketing. As of September 30, 2013, the penetration of the 360 Solution amongst our advertiser base grew to 24%, and this compares to 14% at the same period of time last year.

On a product front, online placement remains the company’s largest penetrated digital offering, growing from 32% last year to 43% this quarter. Mobile placement and digital services are currently the fastest growing. This growth in advertiser penetration continues to result from the introduction of new mobile and premium digital products in 2012, alongside the sales execution of the 360 Solution across our different sales channels.

Indeed, our sales force is now equipped with improved tools and processes to better promote the company’s products and services. Advertisers now benefit from increased yearly touch points and follow-ups, alongside a more thorough business review process with their media account consultant.

Advertisers also benefit from increased access to performance tracking via Yellow Pages Analytics. This reporting tool allows our clients to track the ROI of their digital marketing spend on a real time basis, further promoting client renewal and revenue growth. With promoting advertiser ROI in mind, the company continues to invest in growing and retaining digital audiences.

For the third quarter of 2013, our online network of properties attracted an average of 8.4 million unique visitors, representing 30% of Canada’s online population. Cumulative mobile downloads also grew to 6.2 million times compared to 4.7 million at the same period of time last year.

To improve the mobile user experience, the company recently launched a real-time gas pricing and comparison feature in an updated version of its flagship Yellow Pages mobile application. This feature is available across all areas and service stations in Canada and provides a comparison of different stations real-time gas prices, service station information, directions and mapping as well as detailed pricing for various grades of gas.

Taking full ownership and control the platforms and data also remains critical in providing an optimal user experience. The company recently developed a new search engine in-house to improve search engine response time and relevance. Bringing the search engine in-house also allows for quicker, more efficient iterations, developments and innovations in the near future.

The online merchant management tool is also being deployed in-house and promotes the delivery of accurate, rich and reliable data to users and partners. The online merchant management tool eliminates duplicate listings and ensures that content on each Canadian business is made available via a unique and stable merchant identifier.

In this era of highly search fragmented, searching activity investing in partnerships, branding and promotion also remains critical in boosting advertiser return on investment. To increase advertiser visibility, YPG extended an existing collaboration with CBC.ca to provide CBC users with excess to YPG’s database of rich and curated local business information.

The company also launched an integrated multi-media advertising blitz in Toronto from June to August of 2013, in an effort to build awareness of the Yellow Pages brand and promote the download and use of the Yellow Pages mobile application. The campaign saw a success, as an improved public perception of the Yellow Pages brand, strengthened the company’s brand image and help to promote an increase in mobile downloads and visits.

In response to its success, the company recently extended this advertising campaign to target millennial audiences in Toronto, Montreal and Vancouver through multi-media advertising across university campuses. The company has also launched, the Shop The Neighborhood campaign in the Greater Toronto Area, as an extension of its corporate social responsibility commitment to promoting local businesses.

Supported by a number of partners, advertising and editorial coverage, this event positions YPG as a champion of local economies and small business survival. It encourages Canadians to shop locally on November 30, 2013, a weekend, when they historically shop in the U.S. for Black Friday or online for Cyber Monday deals.

And at this time, I’ll pass it over to Ginette. Ginette will review the third quarter results.

Ginette Maillé – Chief Financial OfficerThanks, Doug. Revenues in Q3 2013, declined 11% to reach $237 million, due principally to lower print revenue. In Q3 2013, digital revenues increased by 10% to reach $102 million, marking the first quarter with digital revenues surpassing $100 million.

Digital revenues frankly represent 43% of total revenues compared to 34% last year. The continued decline in total revenues is mainly due to a decrease in advertisers coupled with lower spending amongst our larger advertisers.

In terms of advertiser acquisition, we recently redesigned our acquisition channel. We had the development of dedicated inbound and outbound call centers. We also launched Business Builder Bundle and Booster Pack offers to help new advertisers gain a digital media presence at entry-level pricing.

To support retention efforts and increased loyalty across our larger advertisers, the company is currently completing the implementation of the PriorityPlus program across the country. PriorityPlus provides high spend advertisers with priority treatment and service, alongside customizable premium digital product to answer effective execution of their marketing strategy.

EBITDA for the third quarter declined from $138 million last year to $102 million. The decline in EBITDA is mainly attributable to print revenue pressure. The EBITDA margin in Q3 stood at 43%. The company continues to anticipate some erosion in EBITDA margin as a result of lower print revenues, a revenue shift towards lower-margin digital products and services and investments required to advance the company’s digital transformation.

Given anticipated margin pressure, the company has in place projects to improved the efficiency of the organization and promote future cost savings. These projects may include the consolidation of legacy systems and data centers and development of improved sales tools. It also includes the optimization of operational processes throughout the organization.

The company recorded net earnings of $42 million in Q3 2013 compared to $22 million last year. The increase is a result of lower restructuring and special charges, a lower depreciation and amortization expense, lower financial charges and a loss on settlement of debt recorded in Q3 of 2012, partially offset by lower EBITDA.

Free cash flow for the third quarter increased from $40 million last year to $64 million. The increase is mainly due to lower payments, relative to restructuring and special charges, lower interest and income taxes paid and favorable working capital, partially offset by lower EBITDA.

The company continues to generate ample free cash flow and sufficient financial flexibility to fund its operation, meet all financial obligations and advance its digital transformation. As of November 4, the company had $260 million of cash on hand. At quarter end, the company had approximately $601 million of net debt, representing a leverage ratio of 1.3x. This compares to $782 million at December 31, 2012, representing a leverage ratio of 1.4x.

On October 29, 2013, the company exercised its option to redeem $27 million aggregate principal amount of note. The company also completed an $8 million principal open market purchase on the notes on September 25. The company will make a mandatory redemption payment of $92.3 million on December 2, upon which $647 million of notes will remain outstanding. Post the December 2013 mandatory redemption payments, total debt pay down for 2013 will equate to $153 million above the $100 million minimum. In the near term, the company will continue exploring option to reduce the balance of senior secured notes outstanding.

Now here’s Rob with his wrap up.

Robert MacLellan – Chairman of the Board, Interim President and Chief Executive OfficerThank you, Ginette. The board and management team continue to deliver on the company’s mission and strategy, growing Yellow Media to become a leading digital partner of choice for small and medium-sized businesses nationwide. As continued investment and proper execution in our digital transformation remains critical, the company is currently working on establishing its key priorities for 2014.

In near-term, the company’s focus will remain on product evolution, advertiser acquisition, improving the user and advertiser experience and generating additional business efficiencies. We will embark on these projects and continue growing our digital businesses with the new leader on board.

Now, in case any of you missed this on October 21, 2013, Yellow Media announced the appointment of Julien Billot as President and CEO effective January 1, 2014. The appointment results from a global search executed by the search committee of the Board of Directors, whereby a senior leader with extensive experience in executing digital transformations and corporate change was soft.

Julian brings over 20 years of experience in executive level positions within the global media industry including Executive Vice President and Head of Media at Solocal Group formerly known as PagesJaunes. Under his past position, Mr. Billot led a various initiatives, which resulted in the development and launch of mass market digital products and services, growth of digital audiences, digital revenue growth and enhanced digital product profitability. We look forward to introducing Mr. Billot to you in the New Year and will continue to provide key updates on our business programs as they develop.

Valerie, would you please open the line now to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Aravinda Galappatthige with the Canaccord Genuity.

Aravinda Galappatthige – Canaccord GenuityJust a couple from me. With respect to the incremental investment in the digital side, you talked about it in the last couple of quarters, and obviously that’s impacting the margins as well. When you look at Q3, has that sort of land up to its full run rate or should we be sort of anticipating more, sort of additional spend to sort of be layered on top of that as we look ahead?

Ginette Maillé – Chief Financial OfficerActually when we look at the spend, we are not done with the spend. We will continue doing it in Q4 of 2013 as well as in 2014. We need to invest significantly to really position its corporation in order to reacquire growth, so we will continue spending at the same level.

Aravinda Galappatthige – Canaccord GenuitySo just to clarify, so I do anticipate that the spend continuing, I am just wondering whether the spend will step up from the current level or are you saying they will continue to ramp up or it will continue to sort of at stay at the level that you have in Q3?

Ginette Maillé – Chief Financial OfficerIt will continue at the same level.

Aravinda Galappatthige – Canaccord GenuityWith respect to the digital sales, I mean you’ve seen some nice momentum over the last couple of quarters. As you sort of look into Q4, how is that pacing. Are you seeing the same momentum with the digital services and mobile as well?

Ginette Maillé – Chief Financial OfficerWell, if you look at the YPG, the core business, we looked at Q1 and Q2, which was in the neighborhood of 20%. At the last call we did talked about the fact that it would go down slightly. We have experienced a 15% growth in Q3 and we expect the same level in Q4.

Aravinda Galappatthige – Canaccord GenuityJust one more for me. You talked a little bit about the sort of projects that are sort of designed to lower your costs, the efficiency of project. Any sense of timing and I’m not sure over the year you could have disclosed sort of order of magnitude, how much cost do you think you can target in terms of reduction for the next couple of years, when you think about these program.

Ginette Maillé – Chief Financial OfficerWell, as you know we’re not really giving any guidance. What I would tell you though is there a major focus in Q4 and we will continue investing and streamlining the cost structure through the year in 2013. So the benefits would really start to kick in 2015, so you will see a change in 2015.

Aravinda Galappatthige – Canaccord GenuityBefore I go just one last one, the insolvency deficit on the pension side, is that significantly different from the accounting liability that you have in the balance sheet?

Ginette Maillé – Chief Financial OfficerWe need to get back to you on this one.

Operator

Our next question is from [indiscernible] with RBC Capital Market.

Unidentified Analyst

Just a couple of questions, if I may. The first one is around the pension funding requirements, given that the interest rates have increased this year, do you have an updated outlook on the cash pension contributions for 2013 and perhaps for 2014 as well?

Ginette Maillé – Chief Financial OfficerSo actually the fact that the discount rates has been up had not impact on the funding itself. In order to change your funding requirements you need to go through an actuarial evaluation. So basically, it only had an accounting impact on the balance sheet. And as you’d probably noticed, we’ve recorded a gain in the neighborhood of $25 million to $30 million for the quarter, but the funding will not change.

Unidentified Analyst

And my second is around the digital advertiser penetration rate. Seeing as the proportion of revenue coming from digital has increased, but digital advertiser penetration rate has been largely flat, could you just give us some more color on the dynamics there?

Douglas Clarke

What we’re seeing in the last few months is actually an increase in the digital penetration at the lower-end of our customer segment. So we’ve launched several initiatives like the Booster Pack bundle and other bundles that incorporate digital into those product offerings and we’re starting to see some pretty good traction relative to the number of customers that we’re increasing, the digital penetration within our customer base.

Operator

Our next question is from Stan Manoukian with Independent Credit.

Stan Manoukian – Independent CreditI have specific question about your sales force, specifically you have been taking advantage of your sales force and what is the digital rates that your sales people are offering to the digital customers compared to local advertisers? And maybe you can elaborate later on the specifics of the joint venture with the CBC.ca.

Douglas Clarke

I will tackle the question relative to the sales force and then I might ask you to repeat the last question. We’ve spent a lot of time over the last several months and previously actually into ’12, upgrading the digital knowledge of our sales force. So they are Google certified. They have an in-depth knowledge of SEM, SEO website. We’re engaging with a large segment of our customers in quarterly dashboard reviews, which is the process of analyzing the success and weaknesses of advertising campaigns on behalf of our advertisers in the face-to-face market. Clearly, we’re in the process of piloting some social products and we are engaging in obviously a lot of conversations around mobile.

So the question you’re asking is really important question. The sales force is a significant differentiator for us. We feel like we have made significant progress relative to their digital competency and we’re leveraging that and you’re seeing that in terms of the penetration across Canada in terms of the number of digital products that we’re selling to them.

Stan Manoukian – Independent CreditWell, and to follow-up on this, how many sales people do you have? And maybe you can elaborate on the evolution for this number?

Douglas Clarke

Well, we have 1,100. We have approximately 450 that are in the face-to-face position. We have approximately 200 that are in our telephony centers, which are located in Vancouver, Calgary, Toronto and Montreal. We also have over a 100 in our acquisition channels. We have outbound as well as inbound as well as face-to-face acquisition sales folks.

We have a diamond sales channel and they engage specifically with customers that have more complicated and sophisticated advertising requirements. And then obviously, we have Mediative, which is our agency channel. And Mediative deals with national brands as well as large Yellow Pages advertisers that are requiring more complicated advertising solution.

So the Mediative channel has or the Mediative organization has progressed quite nicely in terms of the products they are offering and the services that they are providing. And the diamond channel, we’ve expanded over the last couple of years as well. And in the face-to-face channel, we are driving a lot of efficiencies through technology into that channel as well as our telephony channels. So we feel like we’re getting more efficient and we’re able to talk to more customers on that basis.

Stan Manoukian – Independent CreditAnd with the price premium that you’re charging compared to other smaller advertisers for digital sales?

Douglas Clarke

I’m not sure where you’re going with that. What I would say about our sales organization is we are positioning ourselves as very agnostic sales organization, we give advice on a multitude of different offers, whether it is the effectiveness of a website, whether it’s the effectiveness of an SEM program, an SEO program, a social program.

So it’s difficult for us to compare to other local channels quite honestly, because we’re offering a full suite of products, whereas our competitors are offering very niche type advise, and we don’t participate in that discussion. So it’s a difficult question, honestly, for me to answer for you.

Stan Manoukian – Independent CreditBut the number of digital customers has been increasing, which is great, but the average sales for digital customers has been declining at low rates compared to the increase of a number of customers though which is good. So is the price for additional product declining because of the competition or because of some other considerations?

Douglas Clarke

So I think what you’re identifying is the transition that we’re going through with our larger spending customers. So we’re migrating prints to digital, and we started that process about a-year-and-a-half ago. So a good chunk of those customers were exposed to more sophisticated digital products.

In Western Canada, about 12 months ago, we’re in the second year of the cycle in terms of those discussions on those more sophisticated products. And we just launched those products in the last several weeks, actually in Central Canada and Quebec. So on the revenue side you’re seeing the transition is still prints to digital and on the advertiser side you’re seeing pressure at the lower-end of our customer base that we’re addressing with our acquisition efforts.

Stan Manoukian – Independent CreditAnd last question was related to the specific of your joint venture with CBC.ca. What is the split radius or how does it work?

Douglas Clarke

I believe you’re referring to the CBC deal. So this is an existing relationship that we have had with CBC that we’ve extended. And frankly I would ask that I get more detail to you on that one, and I’ll do that through our Chief Marketing Officer.

Operator

Thank you. There are no further questions registered at this time. This conclude today’s conference. Please disconnect your lines at this time. And we thank you for your participation.

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