Yellow Pages Ltd
TSX:Y
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Yellow Pages Ltd
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Good morning, ladies and gentlemen. Welcome to the first quarter 2018 earnings release call.Today's conference call may contain 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 for the first quarter of 2018. This call is being recorded, and the webcast and all the disclosure documents are available on the company's website and on SEDAR.I would now like to turn the call over to Mr. David Eckert, President and CEO. Please go ahead, sir.
Good morning, everyone. This is David. Thank you very much for joining us today. I'd like to make -- at the top here make a few comments and then turn the call quickly over to Ken Taylor, our Chief Financial Officer, to discuss the numbers a little bit more, but then most important, make sure we have plenty of time to answer all of your questions.So to start, we are extremely happy to report today improved results for our company. I believe, if I'm not mistaken, this is only the third time in the last 6 years that the company on a quarter has been able to report improved EBITDA less CapEx, and I think it's fair to say that this quarter's results are sharply improved, and that's extremely gratifying to us. When we spoke 90 days ago, we did a little bit of a kind of look at history, and I would again call your attention to our supplemental disclosure in a graph that we have in there and -- where we simply show 2 very simple lines measured -- looked at over the last 6 years and measured quarterly and in each point looking back trailing 12 months. And the first is the revenue line and, of course, that's not pretty, but I think I said 90 days ago and I still say, that's not surprising to me. Make no mistake, we need to fix that, and we absolutely intend to. But that's not what surprised me as I got involved about 6 or 8 months ago here as CEO. What surprised me was the reaction to that, and that's the other line which is simply our spending. And just reminding you, this spending line is simply the sum of operating spending and capital expenditures. In my mind, if you spend money, you spend money, and it's -- doesn't help very much, say, if you can simply persuade the accounts to let you capitalize, it is still money. So we sum up the spending in the gray line on the graph, and what surprised me most was that the reaction to the revenue over the last 6 years having been pretty much cut in half was that we continued to spend at about the same level.What I'm happy to report today is that the efforts that we started on our first day last fall have begun to bear visible and reportable fruit and that our -- we've begun to report that we're aligning our spending with the realities of our revenue and with the way successful businesses in our industry need to be operated. So it's very gratifying that this is beginning to show up on a consolidated basis. With all the hard work of everyone on our team and the sacrifices that people in our company have been making to try to get ourselves put on the right path that we're able to report good -- what I think are strong results given where we are.Looking forward, however, what we aim to do here is to turn this business around and to create a great company with very favorable results. And while I think we have a good start, I think we've made a good performance this quarter. We have a long way to go -- we still have a long way to go in controlling our spending and getting it aligned with the realities of current and future revenue in the business, and we have a long way to go to get our revenue stabilized and growing profitably. But make no mistake, those are the things, exactly the things we completely intend to do, and I feel we are on track to doing that, just could take a little bit of time. So I thank you all for your interest and your support. I can report that our team here is energized, as I said, is gratified by the results of our first quarter. And let me pass the baton here to Ken, our Chief Financial Officer, just to give some technical perspectives on the numbers.
Thanks, David. I'll now take you through our financial results for the first quarter ended March 31, 2018. Note that these financial results reflect the company's Q1 adoption of IFRS 15, revenue from contracts with customers, IFRS 16 leases and IFRS 9 financial instruments. Comparative figures in these financial results have been restated to reflect these new standards and, therefore, are reported on a consistent basis with first quarter 2018 results.The impacts of these restatements on comparative figures related to EBITDA minus CapEx are summarized in the supplemental information available on our website at corporate.yp.ca/investors and are more fully described in Note 2 to the company's interim financial statements available on our website and on SEDAR.Total revenue for the first quarter of 2018 of $159 million represented a $21 million, or 11.6%, decline as compared to Q1 2017 due primarily to declines in both print and digital revenues in the YP segment. Total print revenues of $37 million represented 23% of revenues and declined by approximately 19% as compared to Q1 2017. YP segment print revenues were $33 million and declined by 18% in Q1 2018 as compared to Q1 2017.Total digital revenues of $122.3 million declined by $12.2 million, or 9%, in Q1 2018 as compared to Q1 2017 due primarily to an $11 million, or 10.6%, decline in YP segment digital revenues. The Real Estate segment was the sole segment showing digital revenue growth, with an increase of 5% as compared to Q1 2017.Average revenue per customer in the YP segment declined by 6.7% in Q1 2018 to $2,477 as compared to Q1 2017. Customer count in the YP segment decreased to 221,100 customers from the 12-month -- for the 12-month period ended March 31, 2018, as compared to 239,500 customers for the same period last year. The decline in customer count is attributable to both a lower level of customer acquisition, driven in part by our focus on profitable growth, and by higher churn, driven mostly by the surge in customer acquisition in recent periods of customers purchasing low-end solutions.Q1 2018 adjusted EBITDA improved to $47.9 million, or 30% of revenues, as compared to $41.5 million, or 23% of revenues, in Q1 2017. The improvements in adjusted EBITDA are mainly the result of improved gross profit and decreases in other operating costs associated with reductions in our cost structure, including reductions in our workforce and associated employee expenses, reductions in the company's office-based footprint and other spending decreases across the company.Gross profit for Q1 2018 declined by only $3.8 million, or 4%, despite the 11.6% decline in revenues as compared to Q1 2017 due to a 4.5% improvement in the company's gross profit margin. The improvement in gross profit margin in Q1 2018 to 56.9% from 52.4% in the same quarter last year is attributable to the company's cost-reduction measures and greater focus on the profitability of the products and services we sell.The company's other operating costs were reduced by $10.2 million, or 19.3%, to $42.8 million in Q1 2018 versus $53 million in the same quarter a year ago, mainly as a result of the cost-reduction measures I've referred to earlier.The YP segment accounted for over 98% of the company's adjusted EBITDA and 99% of its EBITDA less CapEx in Q1 2018. Adjusted EBITDA less CapEx was $42.5 million in Q1 2018, improving by close to 60% as compared to $26.7 million in Q1 2017. This improvement is due to the increase in adjusted EBITDA and also to a $9.5 million reduction in capital expenditures on software development, office and computer equipment, and leasehold improvements associated with office relocations.The company recorded restructuring and other charges of $11.2 million in Q1 2018 as compared to $7.3 million in Q1 2017. The Q1 2018 charges included -- include $19.5 million associated with the workforce reductions, $2.1 million associated with office closures, both partially offset by a $10.5 million impact of the favorable litigation settlement on a contractual obligation with a vendor.The company recorded a net loss of $909,000 despite generating pretax earnings of $1.7 million in Q1 2018 due, mainly, to increases in valuation allowances and nonrecognition of certain tax attributes and deductible temporary differences associated with continued losses in certain subsidiaries.The company's pretax earnings in Q1 2018 represented a $7.5 million improvement over the same quarter last year due, mainly, to the improvement in adjusted EBITDA. The company generated net cash flow of $24.4 million in Q1 2018 to close the quarter with $70.8 million in cash. The company has 2 major payments associated with its senior secured notes that occur in May of each year. The company made its first semi-annual interest payment on May 1 in the amount of $16.9 million and will make a mandatory redemption payment of $30.5 million, including accrued and unpaid interest of approximately $249,000 on May 31, 2018.This concludes our formal remarks. Thank you for taking the time to join us this morning. And we will now take your questions.
[Operator Instructions] Our first question is from Bentley Cross with TD Securities.
First, I just wanted to ask maybe for, Ken, to what extent have the headcount reduction been reflected in the OpEx base? I mean, the pace of cost reduction was incredible in the quarter. Just wondering if it's all in there or we can still expect continued improvements in coming quarters.
Well, cost reduction remains a continued focus of the company as it's an important part of the equation going forward. The headcount reductions that we announced in the middle of January has -- the actions associated with those have largely been taken and, in fact, our headcount is down by more than we announced back in the middle of January. So cost reduction, not just headcount, is a recurring theme and one that we will remain focused on.
Okay. And then maybe for David. I mean, I think we've talked about this before, David, but, obviously, you can't cost-cut your way into profitable growth long term. Just wondering how you think about that pivot and when you start focusing on the revenue line more rather than just focusing on the cost line, which seems to be your emphasis right now.
Yes. A guy I admire a lot once said you can't cut your way to glory, and he's 100% right. And you're right with your point, and thank you for the question. We have given the simple facts of the change in revenue over the last 6 years and that the spending remained flat and that the difference between those 2 lines, which is EBITDA minus CapEx had gotten to a pretty small level compared to the cash needs of the company, like cash needed to do things like make interest payments and payments on our defined benefit plan and other things. Of course, the initial priority was and is and has been to make the necessary very large reductions in aligning the spending with the realities of the revenue. And we're not finished with that. As Ken said, a cost reduction is a really -- and spending reduction is a really high priority. But we aim to make the company stable and successful and a great company, a great place to work, with great stable careers, very good returns to investors. And the only path to do that, as you allude to, is to fix the revenue problem. And we -- from our first day, we've started laying the groundwork for that. In our industry, of course, it's a lot easier said than done. But we've been focusing on it in parallel, but without much noise. And I can tell you that in -- even in recent weeks, that focus has ramped up a lot. And so we are intensely looking at every element that affects how this company generates revenue. And I -- we have shared among ourselves internally, and I'm happy to say to you and to the world that we are going after that at least as aggressively and seriously and energetically as I think the numbers are now showing that we have been going after spending reduction. So it is a 2-pronged war -- kind of 2-front war here, and we are extremely serious about both fronts. The cost containment, spending reduction always is -- if you know how to do it, it's always a little simpler, could be done a little more quickly. Always getting revenue things that have been around for a very long time straightened out takes a little more creativity, a little more time because there's a little more complexity there. But that's why we started it, at the same time we just didn't talk about it. Does that help?
That's certainly helpful. And maybe you could just expand on that, I mean, having already gone through this once in your previous post, kind of maybe some lessons learned there relative to what you're seeing here.
Well, look, the lessons learned are -- I'm trying to figure out the right words to convey this. Simply hoping that things happen doesn't make them happen. And having a strategy to solve the profit problems, if simply trying to grow it all at any expense doesn't get anybody anywhere. So it has its nuts and bolts. It's understanding what do our customers need, how can we make them happy, what sells, and especially understanding who we are and what we are. And all of these legacy Yellow Pages businesses around the globe are, first and foremost, channels to sell great products to SMEs. And a lot of times, the ground is littered with the corpses of management teams and directors and investors and companies that have thought that instead what we should do is pour tons and tons and tons of money into being the best product companies in the world. And yes, we need to have good products. We do have good products. We want to make them even better. And it's fine for us to have products that we own and operate, and that's all fine. But first and foremost, we have to understand that we are the channel. We are -- need to be the world's best sales force. We need to support in every possible way the channel and the sales force, both feet on the street and telesales and every other way that we interact with our customers. So it's a bit of a mindset. It's a controlled mindset. And it doesn't require massive amounts of capital expenditures, not in this quarter that we're reporting, nor do I think it ever requires massive amounts of capital expenditure. It requires doing a really good job of maintaining ourselves as the channel, delighting our customers, designing and supporting our sales force.
And just on a little bit different of a tangent[indiscernible]. I noticed that you guys shut down some U.S. operations in the Agency business. And am I correct in assuming that's related to JUICE?
Yes.
And when was that shut down just so we can kind of project or better predict revenues in Q2?
Yes. That was in January, I believe, Ken?
Yes, it was. And I think important to recognize. I mean, that decision as all of our decisions are around improving the profitability of the business. We continue to do business with some U.S. customers in JUICE. But in order to accomplish that, we really didn't need the footprints. So some of those existing customers will continue. But that is when it had -- would have started to have impact certainly from our revenue perspective.
Okay. And last one for me. Just now that you guys have been in the seat for a little longer, any chance that you could provide any sort of guidance metrics even just on the CapEx level where you maybe have better visibility?
Yes. It's -- I would say, the reason that we paused the guidance and that it is still paused isn't because so much that we're new in our seats and, therefore, need to figure out what we're doing and what's going on. As it is, our entire company is under reconstruction. We are looking at every -- the only way to do this is to look at everything and make massive changes everywhere. Small changes aren't going to get us there. And I think this quarter's results show some of the benefit of that approach. But if we're making massive changes, frankly, I don't want us wasting our time calculating precisely, well, this is going to be this much on this week and that much on that week and this and that. For a little while here, we're focusing solely on making all the improvements that are needed to get dramatically better results, and I think we're on path. And I apologize that we can't do a better job than we are. On the other hand, I never mind having our results speak for us. Ken, do you want to help any there? Look, we'll help you where we can.
We'll certainly -- we're committed to keeping all stakeholders up-to-date as we progress on some of these significant initiatives. But I mean, it's an exciting environment. It's one that -- I mean, we just have -- we have so many things that we're looking at on a daily basis that -- to be -- to forecast timing really -- I mean, it just wouldn't -- I don't think it'd be helpful for you guys as well. So just know that every day we wake up trying to improve our results.
But you asked about CapEx. I think I alluded to CapEx a couple of minutes ago. I believe that the successful -- the success in this industry, and I would refer you to look for companies that have had good results for their employees and for their shareholders. I'm not going to mention any names, but I might be able to think of at least one. Don't spend a lot of money on capital because it's not needed. There are a lot of excuses that you can hear management teams give you, and they use words like investment, makes it sound like spending investors' money. And if you can label it as capital expenditure, it's virtuous; it's, you call it, investment. But there isn't all that much that's truly required in order to become a really successful and highly valuable company. So I'm trying to help you there without putting a specific number on the table.
Clear as mud.
Thank you. Clear as mud.
[Operator Instructions] There are no further questions registered at this time. This concludes today's conference. Please disconnect your lines at this time. And we thank you for your participation.