Yellow Pages Ltd
TSX:Y
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Yellow Pages Ltd
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Good morning, ladies and gentlemen. Welcome to the Yellow Pages Second Quarter 2018 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 statements, information, including key assumptions and risks, can be found in Yellow Pages' management discussion and analysis for the second quarter of 2018. 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, Chief Executive Officer and President. Please go ahead, sir.
Good morning, ladies and gentleman. Welcome again to this quarter's Yellow Pages conference call. It's good to talk with you again. As is our custom, we'd like to make sure we have plenty of time to answer any questions that you all might have about our progress in improving our company. First, though, I'd like to make just a few comments. First is that as -- if you've seen our numbers for the second quarter, you will see that our EBITDA minus CapEx was up 49% compared to the same period a year ago. We're very gratified by that improvement. I'd also like to point out that this is the second quarter in a row that our EBITDA, minus CapEx, has been up over the previous year. And as I've looked at the last -- looked back over the last 6 or 7 years of history of our company, and I believe this is the only time in that history when we have had 2 quarters in a row where that measure has improved. And that's very important to us. As you know, we're very focused on sharp and strong improvements in our performance, and in improving the returns that we provide our investors, at the same time that we're laying groundwork for good profitable growth in the medium and long term. So we're pleased by that result in the second quarter. In gaining a better understanding of that and what's behind it, I'd like to call your attention to a supplemental disclosure that we've used the last couple of quarters. It is on our website. I believe it's the second quarter supplemental disclosure for the period. And it's just a simple graph, which shows over that period of time that I just alluded to, simply 2 measures, 2 lines. The top line is our consolidated revenues, and the bottom line is our consolidated spending. And revenues is simply what it sounds like. It's all the revenues in the company. And in each case, this is measured at each quarter. In each quarter that it's measured, it looks back 12 months, trailing 12 months or rolling 4 quarters, as you will. And the bottom line is simply the consolidated spending, which is simply operating expenses, plus capital expenditures. And we don't make all that great a distinction between the 2, although, of course, we account for them properly and distinguish them that way. But here we add up the 2. And as we pointed out in past conversations, what we inherited here was the completely dissatisfying, but unsurprising in a legacy Yellow Pages company, decline in revenue kind of steadily over a period of time, and -- but on the spending side, a pretty level spending. What we told you that we would do, and what I think this quarter's results again show that we are doing, is aligning our spending with the realities of the revenue, at the same time as laying the groundwork for profitable growth and stability in the medium and long term because we can see that the revenue trends more or less have continued, but you can see continuation of the sharp reductions in the level of spending. I'd like to emphasize a couple of things. One is that it's easy to cut spending in a company. You can slash and burn, but that's not what we have been seeking to do here, and I believe it's not what we've been doing here. What we've been doing is, yes, we've been making lots of spending controls and reductions, but we do it with a scalpel, not with a machete. And it takes much more work to do it with a scalpel because you have to understand all the details, so that, hopefully, there is as -- hopefully 0, and if not 0, close to 0, negative effect on either short-term revenue or long-term prospects. And I believe that we've made the large reductions that we made so far in just that way. So we're pleased with that. We're not pleased with the results yet of -- in our revenue. Those of you who follow the legacy Yellow Pages businesses around the globe know that fixing the revenue situation takes a bit longer. But as I have said in the past, we are just as serious about that, as we have been and continue to be about always aligning our spending with whatever the realities are of our revenue, so that we always can generate good net results with a strong eye on EBITDA minus CapEx, and a -- just by the way a resulting good reduction in our indebtedness, hopefully consistently. So we're pleased. We're in the middle of a major reconstruction project in this company, but I think where we are is where we said we would seek to be at this juncture. And we are continuing to make, I believe, make the changes and improvements necessary to create a strong, stable, great company for all concerned -- for our employees, for our investors, for our communities and for our suppliers and other counterparties. I'd like to shift in a second, I'd like to shift over to our Chief Financial Officer. And I'd like to welcome to these calls, Franco Sciannamblo, who is our Chief Financial Officer, and he is new with that title. But Franco has been here for 5 years. He has been our Chief Accounting Officer. He has been our Controller and Vice President. Franco has always been the one responsible for both the accurate accounting of our information, and also truly helping to, in a very big way, manage the details of the business and manage our spending reductions. We've come to rely on Franco a lot. And he's a great addition to our most senior executive management team, although he's extremely familiar to all of us here. And so I couldn't be more pleased having Franco be our CFO. And let me throw the ball over to him for a few comments and more detail about our results in the second quarter.
Thanks, David, and good morning, everybody. I will now take you through our financial results for the second quarter ended June 30, 2018. Total revenue for the second quarter of 2018 of $163.2 million represented a decline of $30.3 million or 15.7% as compared to the same period last year due, due primarily to declines in both print and digital revenues in the YP segment. Total digital revenues of $121.8 million declined by $15.9 million or 11.5% in the second quarter of 2018 as compared to the same period last year, primarily due to a $13.8 million or 13.3% decline in YP segment digital revenues, mostly in our higher margin YP digital segment. And this created pressure on our gross margin. Digital revenue was further impacted by the closure of certain U.S. operations in the Agency segment to improve profitability as well as the sale of Totem as of May 31, 2018, partially offset by 11.1% growth in the Real Estate segment. Total print revenue of $41.4 million represented 25% of revenues, and declined by 25.8% as compared to the same period last year. YP segment print revenues were $37.8 million and declined by 23.3% in the second quarter of 2018 as compared to the same period last year. Print revenue was further impacted by the sale of Western Media Group as of May 31, 2018. Customer accounts in the YP segment decreased to 209,100 customers for the 12 period -- 12-month period ended June 30, 2018 as compared to 236,500 customers for the same period last year. The decline in customer accounts 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. Despite this $30.3 million overall lower revenues and the pressures on margins from product mix, adjusted EBITDA for the second quarter of 2018 improved by $7.2 million to $57.2 million or 35% of revenues as compared to $49.9 million or 26% of revenues for the same period last year. Adjusted EBITDA and adjusted EBITDA margin grew due to increased focus on the profitability of our products and services and reductions in other operating costs. These reductions in our cost structure included reductions in our workforce and associated employee expenses, reduction in the company's office space footprint and other spending decreases across the company, which more than offset the revenue pressures. The company's workforce as of June 30, 2018 totaled 1,810 active headcount, which represents a 40% decrease versus the same date last year. Gross profit decreased to $96.6 million or 59.2% of revenues for the second quarter of 2018 compared to $104.5 million or 54% for the same period last year, mainly due to the decline in revenues in the YP segment, the company's most profitable segment. The increase in gross profit margin is due to the company's cost reduction measures and focus on profitability of products and services, offsetting the pressures from reduced revenues and change in product mix. The company's other operating costs were reduced by $15.1 million or 27.7% to $39.4 million in the second quarter of 2018 versus $54.5 million for the same period last year, mainly as a result of the cost reduction measures I referred to earlier. The YP segment accounted for over 94% of the company's adjusted EBITDA and 95% of its EBITDA less CapEx in the second quarter of 2018. Adjusted EBITDA less CapEx was $56.8 million in the second quarter of 2018, improving by close to 50%, as compared to $38.1 million for the same period last year. This improvement is due to the increase in adjusted EBITDA and to an $11.5 million reduction in capital expenditures on software development, office and computer equipment and leasehold improvements associated with office relocation. The company recorded a recovery of restructuring and other charges of $1.8 million in the second quarter of 2018 as compared to a charge of $2.8 million during the same period last year. The recovery for the second quarter of 2018 consisted of restructuring charges of $5.5 million associated with workforce reductions, which were more than offset by net recovery of $7.3 million relating to the impairment of right-of-use assets and future operating cost provision for leased contracts for office closures as a result of more favorable lease recovery than we had anticipated. The company recorded net earnings of $16.6 million during the second quarter of 2018 as compared to net earnings of $2.4 million during the same period last year, mainly due to adjusted -- to a higher adjusted EBITDA, decreased depreciation and amortization expense. And this was partially increased by increased income taxes associated with the improvement in pretax earnings. The company used net cash of $5.8 million in the second quarter of 2018 to close the period with $65 million in cash, which were mainly due to our payment of $30.2 million on the senior secured notes, partially offset by cash flows from operating activities of $25.6 million. As of June 30, 2018, Yellow Pages had $389.4 million of debt net of cash compared to $442.7 million as at December 31, 2017. The total net -- the total debt net of cash to latest 12-month adjusted EBITDA ratio as of June 30 was 2x compared to 2.4x as at December 31, 2017. Note that after June 30, 2018, the company divested its Real Estate segment through the $51 million sale of ComFree/DuProprio as of July 6, 2018 and the divestiture of Yellow Pages NextHome for a nominal amount as of July 23, 2018. As both parties were in full operation throughout the reported period, they're included in the results of the second quarter. Also, as required by the indenture governing the 10% secured -- senior secured notes, the net proceeds related to the sale will be included in the November redemption payment. This is included in the current portion of senior secured notes, as presented in the interim condensed consolidated statements of financial position. This concludes our formal remarks. I'll now turn it over to David.
We'd be happy to take any of your questions now and answer them.
[Operator Instructions] The first question is from Aravinda Galappatthige from Canaccord Genuity.
I -- obviously, outstanding cost reduction numbers, and obviously helping EBITDA and simple free cash flow settling out much larger than, I think, the analyst industry had expected. So that certainly deserves to be called out. But I wanted to understand, David, the digital strategy here. I mean, as I look at the customer count decline at the same time the digital revenues decline, would it be fair to characterize your strategy on the digital side as looking to sort of be profitable with a much smaller base? I mean, you're at about to 209,000. Are you looking at this customer base and thinking there's probably a niche segment within this space that would allow you to operate profitably and you're sort of churning out until you get to that niche segment? Is that sort of one way you're thinking about the digital strategy?
Well, we certainly do not have, as an objective, to be smaller. And we certainly do have, as an objective, to be profitable. And I would not at all characterize that we're seeking a niche. But guilty as charged, we're interested in business that is profitable. Seeking customer count or revenue growth simply and solely for the sake of being able to say that we have more customers or to be able to say that we have more dollars of revenue or, frankly, to be able to say that we're more digital. Digital by itself also, we don't seek to be digital solely just so we can run around and say we're digital. What we seek is to have a company that is stable and sustainably profitable and rewarding for its investors and rewarding for its employees and rewarding for its customers and its communities and its vendors. And seeking profitability and stability at where we are in the stage, where we are in the reconstruction of this company, yes, probably does involve stepping past some situations where maybe there's a customer, maybe there's some revenue, but certainly it may not be profitable, and it's not worth. I mean, I'd much more -- I'd much rather take your pointed questions about, gee, you have one less customer today than you did yesterday, than have that customer have -- be able to tout the customer number, but know that it's -- I'm less profitable today than I was yesterday. So we are seeking profitable growth, not simply growth for the sake of growth or numbers of customers or anything else. But no, it's not a niche strategy. In fact, we are in a great position to serve the vast majority of small, medium-sized enterprises throughout the entire country from top to bottom, left to right. So no, we're not kind of seeking a niche or protection. We are in the best position of anybody in the world to serve this marketplace of Canadian small, medium-sized enterprises.
So if I can just follow up on that. So is -- should I -- is the long-term plan then to get to a stage at one point where you're, once again, attacking that larger base of SMEs, call it, 1 million or 1.2 million or whatever that market size is, but with a different offering than what you have now? Because, I mean, it's -- obviously, the offerings that were available to these customers in the past, obviously can be sort of -- it may not necessarily all be profitable. So you're looking to kind of reshape your service offerings and maybe the pricing to kind of get to a place where you can grow the customer base as well, while sort of maintaining profitability?
Well, probably, if there's a one-word answer to your question, the answer would be yes, in the sense that, yes, we're absolutely intending and have never stopped attempting to aggressively attack the marketplace broadly. And there is -- there's no reason we can't do that. We have a pretty good offering now, but it's also true that these businesses, whether it's ours here or other similar players in other countries around the world, we are primarily a great distribution channel for products -- good products that small, medium-sized enterprises need and want. And in some cases, we might own those products ourselves, be backward-integrated into that and have the technology. In some cases, we may not. But we can take that capability and always keep fresh the product line, but attack it in a, I think, very well organized, very aggressive, very rational way to have -- continue to have great relationships with customers, and do it in a way that is considerably more profitable than what the company has delivered in the past. But it takes a little bit longer than cutting some costs, whether that's here or anywhere else. Partly, it's a matter of how we sell the great products that we have and making enhancements on that front. For anybody who's done that in the past, here or anywhere else, would know, also takes a little bit longer than simply curtailing some spending. But that's the key that unlocks the profitability lock.
And just lastly for me on the sales force and the sales team. I mean, you've given the headcount numbers in the MD&A as just over 1,800, obviously down a little over 1,000 year-over-year, I think about 1,100 year-over-year. What is the sales headcount at this point? And to what extent have you reduced the sales force?
Well, let Franco and me answer the question sequentially here. First, I will tell you that our sales force is the most important part of our company. And I'm not ashamed to say that because any legacy Yellow Pages company, what we are, more than anything else, is a great distribution channel to the small- and medium-sized enterprises in our country. And as we have gone about controlling our spending -- and controlling your spending isn't at all about just headcount. It's the last thing, not the first thing, I want to do in controlling spending is ask some of my valuable colleagues to leave the company. But even within that, probably -- not the first, but the last area that I -- where I want to cut is our sales force. Now we -- that doesn't mean that it's immune, but our sales force is the most valuable part of our company. So I much prefer to look at other areas that are more kind of support, administrative areas, shall we say. And that's indeed what we've done. Frank, if you'd like to share a number or 2, that'd probably be good.
Yes, sure. Of our 1,810 headcount at the end of June 30, 400 approximately is our sales [ max ] and related management. So sales force is about 400 at YP.
In the core -- is that in the core business?
That's right.
The next question is from Vince Valentini from TD Securities.
It's Vince filling in for Bentley. I have 2 questions. First, I think I understand what you're saying on profitability versus revenue and volume. But just in terms of near-term expectations, we saw a deceleration in your revenue erosion or acceleration, I should say, in the erosion rates in Q2 versus Q1. Is that -- should we expect it to continue in Q3 and Q4, albeit with better profitability? But should we continue to expect revenue growth rates to accelerate on the downside?
Look, we want to have every dollar of revenue we can get that is profitable. And we want revenue stability and revenue growth, and that is what we're bound and determined to get to. It -- I've been doing this kind of thing for a very long time in this industry, and especially outside of the industry. And I can tell you, in answer to your question, that it takes a little bit longer to achieve those goals, especially if you're going to do them right. And while I hate not being able to report revenue growth or stability or improvement in the trend, which is what you're asking about, and you're right to ask about it, I think it's what we need to do as a consequence of focusing on what's going to be strong and stable in the future and what's going to be profitable and how we get there. So we make no forecast -- we're not providing guidance at the moment. And so we make no forecast about that. But let me just say I understand your question. And if it takes a little longer of some growth numbers that aren't what we would ideally hope for, in service of getting where we need to get to, and in service of having very strong profitability along the way, that's what we might need to do.
No, that's fair enough. And the second question is on asset sales. So there's been a number of deals you've done since coming aboard. Do you think you're down to the core asset base now? Or could there more pruning of certain assets over the next few months?
Well, I've been very clear -- we've been very clear I think, that the company has had a collection of businesses that are outside of what we call YP core, and that our future -- I've said no degree, no amount of success in any of those -- the truth is that no amount of success in any of those businesses can offset any level and any lack of success in YP core. In other words, we need to fix and make stable and strong and valuable our YP core business. And I think we are doing it, and I think we can do it, and I think we will get there. And I prefer that we not be substantially distracted from doing that. So we've been asking -- and I've been very public about this. We've been asking the right -- what I think are the right questions about each one of those subsidiary or separate or other businesses, whether they're legally a subsidiary or otherwise. And the questions are, first, does this business truly offer any synergy to our core business? And people can wave their arms and talk about synergy. And if a business has the word digital in it, maybe it's great. But that's not -- that doesn't bring any value to anybody -- not to our company, not to our employees, not to our investors, not to anybody. I'm talking about real synergy, not just elusive or apparent synergy. So the first question is, is there synergy? And if the answer to that question is no, about one of these businesses, then the question is, is it worth more in the hands of someone else than it is in our hands? Is it delivering anything to us? And so we have been systematically applying those questions to each and every one of our non-YP core businesses. And as you note, we have announced a number of transactions where we concluded that it was more valuable for us to enter into the transaction than to continue to hold the business. The questions that I just went through a second ago are still valid questions about each and every one of the businesses. We don't have anything more to say today about any of the specific answers on any of the other businesses. But the questions remain the same. And our commitment to having -- to eventually getting to a strong, stable, valuable rewarding YP core business is unabated. And that's where our attention lies.
The next question is from Adam Shine from National Bank Financial.
David, can we just talk about this year basically as a year of cost-cutting scalpel use or, arguably, otherwise, and then maybe look ahead to 2019 as a year where, after the heavy lifting on the cost cutting, you sort of reengage in regards to a strategy whereby perhaps there's more investment into the business to perhaps drive the degree of stability -- not stability, but perhaps some curbing of the revenue erosion?
Thanks for asking -- I appreciate all the questions, but I particularly appreciate this one, too. And that is because, on the one hand, yes, absolutely, unmistakably, we have been in our -- during this year, engaged in, on a grand scale, aligning our spending with the realities of our revenue, as we've talked about and I alluded to before. Absolutely. What's not, though, the case is that, that is the only place that we are turning our -- that we are applying our attention and our energies and our resources. It is the most obvious when someone looks at our reported financial results, obviously. But from our day 1 here and accelerating kind of every week that's gone forward, we have also been applying resources, attention and money and time and people and creativity to addressing the challenges, which are crucial to address, on the revenue side. And any results of that -- that's a longer-term process. And so any results of that, you've not seen any favorable results of that. And -- but it's not because, up until now or through the rest of this year, we're not working on it. It's because it's a much longer process than even carefully creatively and with a scalpel aligning spending with the realities of the revenue. But I would argue that the mistake that some players in our global industry have made over time is to try to do that stuff in reverse, to try to simply and only grow their way out of the problem without aligning their spending to the realities of their revenue. We are in the process of doing both simultaneously, which I believe is the only sensible approach. But -- so no, it's not like this is a throwaway year, where we're spending all our time cutting costs, and we're going to let the revenue just do whatever it's going to do and then maybe in 2019, we'll start thinking about the revenue. That is 180 degrees different from what our internal approach has been and is. But I fully acknowledge that as you look at the reported financial results, you haven't seen 1 penny of -- at least on a net basis, you haven't seen 1 penny of favorable results on the revenue line from that yet. And it's a process that takes some time.
Absolutely. And another question, just relating to some of the steps you're having on the cost side, is obviously the deleveraging that is indeed happening. David, is there a particular range of leverage that you think is ultimately appropriate, based on everything that you've been saying on these calls, and obviously what you see now in the business going forward?
Well, with a smile on my face, I'd like to say I love round numbers like 0. That is not a projection or a forecast or a commitment or anything, I want to make very clear. But it's a sentiment -- but it's a valid sentiment, which is, in this situation, while still investing in the business and working and fixing the revenue and all that, I think it is fully appropriate for our company to continue to make significant reductions, cash reductions in our indebtedness because I think that is key to creating the long-term value here, which I -- we're bound and determined to create, for all -- for the benefit of the investors and the employees and everybody else. And so it's not like we have a target or a range. But I think every dollar, and especially if it can be tens of millions of dollars or multiples of tens of millions of dollars every quarter or 6 months, when we make our reductions in our debt, to have those numbers be very big numbers, I think is one of the most important parts of creating long-term value here, just like it would be for any individual or any household or any smaller business to have a much lower, as low as possible in many ways, debt burden that, frankly, that makes the ultimate challenge of having a strong and stable business much more achievable. That's just simple arithmetic. So we're very happy. And it's not just an accident that we are paying down our debt. I think that's key to creating long-term value for everybody concerned here.
The next question is from Adam Mitchell from Polar Asset Management.
Can you just give us a sense of the cash flow impact from the 2 dispositions that occurred during Q3? I think we can kind of back out the revenue and EBITDA from those dispositions, but just curious the net free cash flow impact from those.
The -- well, you see them both in the segmented reporting that we have in our notes. You see EBITDA minus CapEx that's generated by the Real Estate segment, which is basically where the big sale was, which is DuProprio. So they generated a couple million dollars of EBITDA minus CapEx. And that's what you'll see if you look at the first 6 months. And if you can get a look at what...
You said a couple of million dollars. Over what time period?
Over the first 6 months.
So ComFree/DuProprio. And what's your -- Adam, you're wanting to know not the cash effects of the -- you're not asking about the proceeds of the sale?
No, what they're contributing.
You're asking about the operating contribution from those businesses, right?
Exactly, yes. Yes. So if we look forward 6 months on a run rate basis, what's the decline or increase in cash flow from the disposition?
Yes. EBITDA minus CapEx for the first 6 months for ComFree/DuProprio was $3 million something, right?
Yes, but it's part of the whole segment.
The whole segment?
With YP NextHome, right? Which...
If you include YP network...
Yes. So it's $2.7 million is the exact number?
$2.7 million?
Yes. That's the...
The sum of the 2 for 6 months.
And the other part that you need to keep in mind is, in the case of DuProprio, the first half is their -- it's a very seasonal business and the first half is their strong half, they tend to be breakeven-ish in the back half. So that's the nature of that business. So there wasn't much that's left on the table for the back half. But on an actual basis, $2.7 million was the actual number. And obviously, the focus is in the current portion of long-term debt that we're going to be paying down in the next mandatory redemption payment.
Yes. The proceeds go to pay off debt.
[Operator Instructions] So there are no further questions registered at this time. I'll return the meeting back over to you, Mr. Eckert.
Okay. We thank all of you for your interest. We thank you for your great questions. We're happy to provide answers. We like that you're paying attention, and we will bid you good morning because we have a lot of work we need to get back to doing. So thank you very much. And if nothing else, we'll talk to you here in another 90 days.
Thank you. The conference has now ended, and please disconnect your lines at this line. We thank you for your participation.