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Edited Transcript of Y.TO earnings conference call or presentation 13-Feb-20 1:30pm GMT

Q4 2019 Yellow Pages Ltd (Canada) Earnings Call

MONTREAL Feb 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Yellow Pages Ltd (Canada) earnings conference call or presentation Thursday, February 13, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Alan Eckert

Yellow Pages Limited - President, CEO & Director

* Franco Sciannamblo

Yellow Pages Limited - Senior VP & CFO

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Conference Call Participants

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* Paul Michael Tepsich

High Rock Capital - Portfolio Manager

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Yellow Pages Fourth Quarter 2019 Earnings Release Call.

Today's conference call contains forward-looking information about Yellow Pages' outlook, objectives and strategy. These statements are based on assumptions and are subject to important risks and uncertainties. Yellow Pages' actual results could differ materially from expectations discussed. The details of Yellow Pages' caution regarding forward-looking information, including key assumptions and risks, can be found in Yellow Pages' management discussion and analysis of the fourth quarter of 2019.

This call is being recorded and webcast, and all of the disclosure documents are available on the company's website and on SEDAR. I would now like to turn the meeting over to Mr. David Eckert, President and Chief Executive Officer. Please go ahead, sir.

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David Alan Eckert, Yellow Pages Limited - President, CEO & Director [2]

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Thank you. Good morning, everyone, and thank you for joining us on our fourth quarter call. We appreciate your interest in our company. As usual, I'd like to start with some overview comments. And then Franco Sciannamblo, our Chief Financial Officer, will describe our fourth quarter and full year results in a little more detail. And then after that, we will endeavor to answer all of your questions.

In summary, we're pretty happy with our continued progress in the fourth quarter and the full year 2019. We finished the year with EBITDA at 40% of our revenue, which is at world-class levels in the legacy Yellow Pages business. EBITDA minus CapEx was 38% of revenue.

We're also very happy with the cash generation, not unrelated, of the business. During the last 8 quarters, we have been able to reduce our net debt by more than $300 million. A piece of that, we've been able to pay off as we predicted we would last time we spoke with you guys. We paid in full our senior notes in the month of December 2019 originally 350 million -- $315 million, excuse me, which was paid 3 years ahead of maturity, and our net debt at the end of December down to only $54 million.

We're also pleased with the continued progress of bending the revenue curve each and every quarter during 2019. We saw an improvement over the previous quarter of the rate of change compared to prior year in our revenue. So we're making concrete steps based on real progress, and we're pretty happy about that.

I'm pretty optimistic about the continuation of that progress. That is because even though we are generating a good deal of cash, we believe we're making all of the sensible investments in the business to continue to make progress bending the revenue curve and building an ever more stable situation and company for all of our constituents. One example of that is we're in the process of expanding our sales force, our telesales force. We see opportunities there. And so we're in no way hesitating to make any and all investments that we think are sensible in the business.

We're also announcing today that we intend to fully pay off all of our remaining interest-bearing debt, which is our exchangeable debentures, on or about May 31, 2021, which is the first time we can do so without a premium. We would do that at par. And after that, we would have no debt, no interest-bearing debt remaining in the company.

We also are announcing that we intend to initiate a regular quarterly dividend on our stock effective the second quarter of this year, the second quarter of 2020, in the amount of $0.11 per share per quarter.

And just in summary, we're feeling good about what we see our progress having been. We're feeling good about what we see as the opportunities continuing going forward. And we really like where we are.

So let me shift -- hand the microphone to Franco Sciannamblo, our CFO, for some more details on the quarter. And then we'll answer your questions. Thank you.

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Franco Sciannamblo, Yellow Pages Limited - Senior VP & CFO [3]

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Thanks, David. Good morning, everyone. Let me take you through our financial results for the fourth quarter ended December 31, 2019 now. As you will recall, we report our operations now in 2 segments. The first segment is the YP segment, which provides small and medium-sized businesses across Canada digital and traditional marketing solutions. The second segment is the Other segment, which includes the operations of businesses we have disposed of or liquidated this year and over 2018. Since last quarter, we no longer have any operations in the Other segment. So the current Q4 results are made up entirely of the YP segment and is where my comments will be more focused.

And so in revenues, YP segment revenues decreased by $17.3 million or 15.6% year-over-year and amounted to $93.5 million. This represents a 1% improvement versus the 16.6% year-over-year decline we recorded in Q3 and, as David mentioned, marks the fourth consecutive quarter that the year-over-year rate of revenue change has improved. The revenue decrease for the quarter is mainly due to the decline of our higher-margin YP digital media and print products and to a lesser extent, our lower-margin digital services products. This has created pressures and continues to create pressures on our margins.

In terms of YP digital revenues, it decreased 15.2% year-over-year and amounted to $70.2 million. The revenues were adversely impacted by a decline in the number of digital customers partially offset by a sixth consecutive quarter of higher spend per customer. The lower digital customer count is mostly attributable to a lower level of acquisition driven in part by our focus on profitability.

YP print revenues decreased by 16.8% year-over-year to $23.3 million from a decline in the number of print customers and lower spend per customer.

On adjusted EBITDA, the consolidated adjusted EBITDA for the quarter decreased by $6.4 million or 15.5% and amounted to $34.8 million. The adjusted EBITDA margin for the quarter increased to 37.2% from 33.0% for the same period last year. This decrease in the consolidated adjusted EBITDA was a result of the revenue pressures in the YP segment as well as the divestitures in the Other segment.

Adjusted EBITDA for the YP segment for the quarter decreased by $4.1 million or 10.5% as a result of lower overall revenues, pressures from the change in product mix and investments in both customer care and new customer acquisition. The adjusted EBITDA margin for the YP segment for the quarter increased to 37.2% from 35.1% for the same period last year. The increase in adjusted EBITDA margin is due to the revenue pressures and investments in both customer care and new customer acquisition being more than offset by our cost reductions.

On adjusted EBITDA less CapEx, it decreased by $4.3 million or 11.7% to $32.8 million, mainly due to lower adjusted EBITDA partially offset by decreased spending on software development. Adjusted EBITDA less CapEx margin increased to 35.1% as compared to 29.8% for the same period last year as a result of the cost reductions in the YP segment as well as the divestiture of unprofitable or nonsynergistic businesses and revenues in the Other segment.

Our total workforce is now comprised of YP segment employees only and amounts to 768 active employees as at December 31, 2019. This represents a decrease versus the same time last year of 24% overall and up 20% for the YP segment alone. The company recorded restructuring and other charges of $5.7 million for the quarter, consisting mainly of charges relating to workforce reductions.

On net earnings, we recorded net earnings of $53.6 million during the quarter as compared to $40 million during the same period last year. The improvement in net earnings is mainly due to decreased depreciation and amortization expense from lower software development expenditures, lower financial charges from a reduced level of indebtedness and higher recovery of income taxes partially offset by the lower adjusted EBITDA and an increase in restructuring and other charges.

On December 2, 2019, as previously announced and as alluded to by David, the company made a mandatory redemption payment of $50.3 million toward the principal amount on its senior secured notes. With this payment, the company has now repaid the notes in full, 3 years ahead of maturity.

As for the exchangeable debentures and also as David announced earlier, we intend to accumulate cash in order to fully repay them at par on or shortly after May 31, 2021. This indenture does permit the company to make restricted payments, including payment of dividends and common stock buyback in an aggregate amount not to exceed $20 million. To this date, the company has made no such restricted payments. On this note and also as David announced earlier, the company intends to initiate a regular quarterly dividend of $0.11 per common share per quarter beginning in the second quarter of 2020.

On net debt excluding lease obligations, the company's amount is now reduced by approximately $130 million to $54 million compared to $182 million as at December 31, 2018. And our cash position as at December 31, 2019, stood at $44.4 million.

This concludes our formal remarks. Thank you for taking the time to join us this morning. We will now take your questions

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from Paul Tepsich with High Rock.

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Paul Michael Tepsich, High Rock Capital - Portfolio Manager [2]

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Congratulations, great quarter. Quick question on your dividend, that's a great sign. Is there -- well, 2-part question. Would you increase your dividend if you are able to bend the revenue curve and continue on this path? And second part is would you look at share buybacks?

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David Alan Eckert, Yellow Pages Limited - President, CEO & Director [3]

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Thanks for the questions. First, we think we are bending the revenue curve. We just want to obviously continue to bend it, which is what we absolutely intend to do. We have a lot of things underway, moving in that direction. And I think our comments about dividends and so forth reflect our strong commitment in that direction. What we've said, we have a limit on what we can do in dividends and share buybacks, as Franco mentioned, in the indenture, in the exchangeable debentures. So there is a significant limitation for the next approximately 5 quarters of cumulatively $20 million for what it really is the limit until we pay off the debentures.

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Paul Michael Tepsich, High Rock Capital - Portfolio Manager [4]

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Yes, I'm aware of that.

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David Alan Eckert, Yellow Pages Limited - President, CEO & Director [5]

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Thereafter... excuse me?

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Paul Michael Tepsich, High Rock Capital - Portfolio Manager [6]

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Yes. Sorry, I'm aware of that. I meant after. Going forward.

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David Alan Eckert, Yellow Pages Limited - President, CEO & Director [7]

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Yes. Thereafter, look, I think everything is on the table. And we'll look around and see what the situation is. And we have no desire to take cash that is generated by the business and fritter it away on investments that wouldn't otherwise stand up to scrutiny. We will make every investment that makes sense to make. But just because we would have cash in the bank, we don't want it to get in the guise of investing in the business sent -- frittered away. I think our actions so far in the last couple of years have demonstrated that commitment. And so we'd be very open-minded about providing cash to the relevant constituencies, shall we say. But obviously it will all depend on what things look like at the time.

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Operator [8]

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Thank you. There are no questions registered at this time. I would now like to turn the meeting over to Mr. Eckert.

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David Alan Eckert, Yellow Pages Limited - President, CEO & Director [9]

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Okay. Well, we're really happy where we are. We appreciate the interest that all you have, and we look forward to talking with you in another 90 days. Thank you very much.

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Operator [10]

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Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.