Yellow Pages Ltd
TSX:Y
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Yellow Pages Ltd
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Good morning, ladies and gentlemen. Welcome to the fourth quarter and full year 2017 earnings release call. Today's 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 assumption and risks can be found in Yellow Pages management discussion and analysis for the fourth quarter of 2017. This call is being recorded and the webcast of all the disclosure documents are available on the company's webcast and on SEDAR. The company also has the supplemental disclosure document, which will be discussed on the call today, available on the company website. I would now like to turn the meeting over to Mr. David Eckert, President and CEO. Please go ahead, sir.
Thank you. Good morning, everyone. This is David. Thank you very much for joining us this morning. We're real happy to have you here with us. When we spoke with you 90 days ago, which I think was just a couple or few weeks after I joined the company, I said that we'd like to have some concrete things to say, in that generally, we limit what we say to serve concrete things, talking about actions we've taken and so forth. And I'm real happy to report that we have now taken the first significant large step towards aligning our spending with the realities of our revenue and by doing that, towards recovering our financial performance, in particular, EBITDA minus CapEx.I would like to share with you, just for a couple minutes here, at the outset. Our thinking and what's guiding our priorities and our sequencing. And do that before we have ample time to take your questions. And before Ken Taylor, our Chief Financial Officer, goes into some more detail. As everybody on this call, I think, knows perhaps the most relevant measure of financial performance and I think value in a business in our industry is EBITDA minus capital expenditures. And for most players, probably all players in the global legacy Yellow Pages industry, that measure is or at least was declining significantly and plunging. There -- I think there are perhaps 1 or 2 or 3 players who have figured out how to do that. And I think that is a strong indicator of value creation -- on the path of value creation. And of course, there are 2 components of EBITDA minus CapEx: One is revenue and the other is spending. And when I say spending, I mean the sum of operating spending and capital expenditures. And obviously, the difference between those 2 is EBITDA minus CapEx. And I'd like to call your attention. We've supplied a graph in our supplemental disclosure that's available, I think, by clicking through on a link that's on our release having to do with this call. It's on our website. It's called supplemental disclosure. And it is simply -- it's not really any date of it nobody doesn't already have, it's based on public information. And it's simply grafted as those 2 lines. One, in this case it's in yellow. Yellow is the color we like. If in yellow is revenue and in gray is the spending. And for those of you who are able to see it, I'd like to just point out, the first blush is you say "Oh, gee, there's a revenue problem. Revenue is going down." And indeed, on this graph revenue is kind of over these years and here it's measured every quarter by the way. It's trailing 12 months, measured every quarter and it's on a consolidated basis, the whole company. The -- just the company. And yes, it's maybe gone from -- just kind of looking at the graph, maybe around 1,400 to maybe around 700, almost cut into half over these many years. I'm not shocked by that. Obviously, we need to get that turned around as soon as we can. And have stability in revenue, for sure. That's obvious. But I well understand the realities of print -- revenue of our print products and so on. And I think we were actually doing a bit better than industry standard on that. Not doing quite as well recently on digital revenue. We're in the process of getting all over those issues. But frankly, what was most striking to me when I looked at this, was the line on the page that to an untrained eye, might not look all that significant, because it's kind of flat. And that's spending. And I think it's pretty clear that if you got your revenue roughly cutting in half, you probably got to try to align your spending with the realities of that revenue. And so, as a top priority, in order to restore our performance on EBITDA minus CapEx, we have been focusing on our spending, again, defined as operating spending plus capital expenditures. And the significant reduction in force, which is regrettable, it's never fun or a happy thing to reduce the size of a workforce. But I believe that it was not only the biggest that the company has ever had in percentage terms, I think it was the biggest in absolute terms. And we issued some commentary about that.So that is a very significant first step. We are very much focusing on controlling and reducing in a comprehensive and large way, our spending. And at the same time, we are in the process of building the efficient platform for profitable growth on revenue, but that takes a little bit longer. So we're well concentrating on products and partnerships and pricing and all -- incentives and all kinds of things on the revenue side. I'm very happy to report that we have actually been taking the first large steps to get spending reduced. So we're -- the new management team that is in placed -- place is working fast and aggressively and we plan to continue to do so. And we're hopeful that we can deliver a good story to our supportive investors.With that, I'd like to turn it over to Ken Taylor, our Chief Financial Officer, who has some more detailed comments on the results. And then, we'll be happy to take your questions. Thank you.
Thanks, David. I'll now take you through our financial results for the fourth quarter and fiscal year ended December 31, 2017.My review of financial results will include references to certain operating segments, the segments aligned to how we manage and evaluate performance of our business. Our 4 operating segments are: YP, which covers digital and traditional marketing solutions, including our online and mobile priority placement on Yellow Pages digital media; Agency, which covers national advertising solutions via Mediative, JUICE and Totem divisions; Real Estate, which includes ComFree/DuProprio and Yellow Pages NextHome; and other, which includes 411.ca as well as our local lifestyle magazine specific to the Western Canadian market.Total revenue for the fourth quarter of 2017 was $184 million, up $2 million from Q3 2017 due to seasonal strength in the Agency segment. However, declines in both print and digital revenues in the YP segment resulted in a 9% decline in total revenues as compared to Q4 2016. Total print revenues declined by 22% and YP segment print revenues declined by 21% in Q4 2017 as compared to Q4 2016, which were in line with the annual declines with anticipate for print revenues.Total digital revenues declined by 4% in Q4 2017 as compared to Q4 2016 due to a $7 million or 7% decline in YP segment digital revenues, which more than offset year-over-year digital revenue growth in the Real Estate and Agency segments. YP segment digital revenue continues to be negatively impacted by declines in demand for YP Digital Media products, offset partially by increased demand for lower-priced third-party products and services.Total revenues for the year ended December 31, 2017, of $746 million declined by $72 million or 9% as compared to fiscal 2016. The decline in revenues is primarily due to a $57 million or 24% decline in YP segment print revenues, and a $14 million or 3% decline in YP segment digital revenues. Overall, fiscal 2017 digital revenues and print revenues declined by 2% and 23%, respectively, as compared to fiscal 2016.The total number of digital only customers in the YP segment climbed to 84,700 in the year ended December 31, 2017, representing 10% growth over the same period last year. Average revenue per customer in the YP segment declined by 7.5% in fiscal '17 to $2,488 as compared to fiscal 2016 due to a decline in the base of customers taking both print and digital solutions and many new customers opting for lower-price services.Fourth quarter 2017 adjusted EBITDA was $47 million or 26% of revenues, down from $57 million or 28% of revenues in Q4 2016. Fiscal 2017 adjusted EBITDA was $184 million or 25% of revenues as compared to $235 million or 29% of revenues in fiscal 2016. The decline in Q4 and fiscal 2017 adjusted EBITDA was due primarily to lower gross profit associated with declining YP segment revenues and a shift in mix toward lower margin third-party products and services, partially offset by reductions in other operating costs. Gross profit for Q4 2017 was $95 million or 52% of revenue versus $110 million or 54% of revenue in Q4 2016. The decline in gross margin was partially offset by a $4 million decline in other operating cost. Fiscal 2017 gross profit of $393 million or 53% of revenue declined by $67 million as compared to gross profit of $460 million or 56% of revenue in 2016. This decline in gross profit was partially mitigated by a $16 million or 7% decline in other operating costs.The YP segment accounted for over 98% of the company's adjusted EBITDA in Q4 2017 and over 99% of the company's adjusted EBITDA in fiscal 2017. The company recorded a net loss in the fourth quarter of 2017 of $586 million or $22.33 per diluted share as compared to a net loss of $432 million or $16.35 per diluted share in the same quarter last year. Net losses in the fourth quarter and fiscal years ended December 31, 2017 and 2016 are the result of noncash after-tax charges of $500 million and $439 million, respectively, related to the company's annual impairment analysis to assess the recoverability of its assets allocated to cash generating units; and an additional $75 million in 2017, associated with the write-down of deferred income taxes. In order to assess the recoverability of these assets, the company revised estimates of future profitability and cash flows to reflect recent historical trends, particularly related to a shortfall in revenues in Yellow Pages and other cash generating units compared to previous estimates and uncertainty with regards to future long-term trends.Net debt as of December 31, 2017, was $357 million as compared to $385 million at December 31, 2016. The company generated free cash flow of $6 million in the fourth quarter of 2017 as compared to $8 million in the fourth quarter of 2016, and generated $48 million of free cash flow in fiscal 2017 as compared to $95 million in fiscal 2016. The decline in fiscal 2017 free cash flow as compared to 2016 is primarily related to the decline in adjusted EBITDA minus CapEx, which was $125 million in fiscal 2017 as compared to $180 million in 2016.Customer count for 2017 came in at 229,000, representing a decline of 12,500 as compared to the same period last year. Total digital visits grew to 164 million in Q4 2017, up 10% relative to Q4 2016.As stated in today's earnings release, we are pausing on providing financial guidance, as we are now in a period of identifying and implementing significant changes, as David alluded to earlier. These changes will be targeted at improving our EBITDA minus CapEx and identifying and monetizing the value of non-core assets. We will provide updates on our progress as these changes are implemented.Lastly, it's important to note that the company's 2018 adoption of IFRS '15 on revenue from contracts with customers and IFRS '16 on leases are expected to have a material impact on elements of the company's opening balance sheet for 2018 reporting purposes. More[Audio Gap]Expected to have a material impact on the company's EBITDA minus CapEx in fiscal 2018. This concludes our formal remarks. Thank you for taking the time to join us this morning. We will now take your questions. Operator, over to you.
[Operator Instructions] The first question is from Bentley Cross from TD Securities.
I wanted to first ask about -- I know there's been an extreme emphasis since you've taken over, David, on the cost side. But on the same side, obviously, you can't do -- turn the business around if revenues continue to fall off a cliff. Just wondering what your thoughts are in terms of revenue trajectory as well as the cost.
You're absolutely correct that you can't cut your way to glory. And no doubt about that. And we have assembled a crack management team and we are very serious about getting some profitable growth in the company. The realities are, that to get there, in any -- anywhere in this global industry to -- has some lag time. And we are in the process of shorting through the right tactics and changes and improvements to make, soup to nuts, to make the revenue line look good. So no doubt about it that is a priority. However, it's also true that the strategy -- in this global industry, the strategy you're trying to grow your way out of the problem has always failed. And the -- there -- the playing field is littered with huge losses of value on the part of investors all around the world in companies, in this global industry that have focused on trying to use growth and -- either entirely or primarily to resolve the issue. So we have a balanced approach. And the very first thing we're trying to do is address where I think we could get the most largest and immediate benefit. And that's what we've been doing that's most obvious. And when we have more concrete to say about results from our changes in revenue and the things that lead to revenue, we'll certainly be talking about the specifics of those as well. But make no mistake and not to worry, we're not under the illusion, as I said, that we can cut our way to glory. That never is -- that never happens. We will not create long, sustainable lasting value here simply by having a lot less spending. But first things first, I feel like we are on track. We have a long way to go, but I believe we're on track.
That's good color. I appreciate that. And one of the things you mentioned there is focusing on profitable growth. Obviously, I think you said in your opening comments that 99% of adjusted EBITDA is coming from the YP segment, so implying the other segments aren't very profitable growth. Would you consider ditching those segments? Is that still on the table? I think last quarter, you maybe said everything is on the table. Just wondering if you made any progress on looking at some of the non-core pieces.
Yes. Let me answer that in 2 ways. First, any reference that I make to profitable growth, I'm really not aiming at non-YP core as not profitable growth and YP core -- that was not in my head -- that distinction was not in my head. But I mean, throughout the company, we're not interested in growth of revenue simply so we can tell you 90 days from now that we've got more revenue, if it's not profitable growth. And because what creates value is profitable growth, not just growth for the sake of being able to show you some revenue. And that's true, whether it's in one of our subsidiaries or in the core business, whether it's a digital product, whether it's a print product, whether it's a product that we own or whether it's through a partnership or whatever. It's got to be profitable growth. So that's kind of at the high level. The very specific thing you asked about, our view is exactly the same as what I've said before. And that is that everything is on the table and that I don't have answers or specifics to provide you, because we'll provide you specifics only when we have something actual and concrete to announce. But the questions -- we know the questions to ask about all of our businesses. And that is number 1, is this -- is a particular piece of our company synergistic with our core business? Is it or is it likely to be in the near future? And if the answer to that is yes, then good; if the answer to that is no, then we go to the second question, which is, is that business worth more to somebody else than it is here? And you know I think the follow-on questions and answers from that are pretty obvious. So we are absolutely still where we were philosophically, as I just said on that. And when and -- if and when we have anything specific and concrete to announce, we will do that.
I appreciate the candor. And just one last one for me before I pass the line.
I appreciate your good questions. Go ahead.
Just -- I understand that it's tough to provide guidance now, but maybe if you -- is there any possibility you could provide some guidance just on the nonoperating metrics, i.e. pension, funding, CapEx, things like that?
And by the way, just a comment -- a high-level comment on that. We don't intend to not provide guidance forever. This is a temporary brief pause, just like, if you have a road that's under construction, sometimes you don't let traffic go over it. This is -- we're in a period of a lot of change. And I want everybody in our team to be focused on making the most smart change that we can, and doing as fast as we can in the right ways and a careful way, rather than spending all our time trying to make predictions. So that's the philosophy. Ken, do you have something concrete you wanted to say?
Yes. Yes. Yes. Absolutely, Bentley. Look, the one thing that we can talk to on that is on the pension side, our funding obligations on that, we expect $7 million -- about $7 million for '18 and about $13 million for each of '18 and '19 as...
You mean '19 and '20, I think.
Oh, sorry. '18, '19 and '20. Sorry. So $7 million for '18, $13 million for '19, $13 million for '20.
[Operator Instructions] We have a question from Antonio.
Operator, I'm not hearing any question. Is there a technical issue?
So we have a question from [ Antonio Leon ] from Ben Oldman and Partners.
I have 2 questions, please. The first one being, do you expect any further write-downs of your intangible assets? I mean, I spoke with IR last year and from what I had understood, there weren't any other impairments envisaged for the year. Do you see any further impairments for 2018?
This is an annual process. And it gets based on the historical trends that we've seen. So, I mean, when you see historical trends of revenue declining, that's what precipitated this year's. Whoever you spoke to last year wouldn't have anticipated that at the time. So certainly, where we are today is based on what our expectations would be based on the analysis and again, heavily weighted on historical information. We don't include anything that may happen and we may identify and execute in the future, which will hopefully be in the other direction.
And let me point to what I said -- I think I said in the press release that you may have seen. We'd like to have write-downs in the past, which -- we very much would like to put the past in the past. And I hope that we're -- today, I hope we're closer to having all of the past in the past than we were yesterday. And that we could focus only on the future and move forward and move upward, and create value and create a success story. So, a lot of things we're doing is to try to put some of -- a lot of the past into the past.
Okay. And for my second question, I was taking a look at your operating costs. And of the $562 million operating cost you have this year around, almost half was in salaries. Are you guys considering laying off some of the workforce as you're transitioning to becoming an online business? I mean, the impact on the EBITDA and the free cash flow would be great. So I don't know if you're considering this or you expect to announce any strategic measures regarding the workforce you have.
You may -- as you may know, just a week or 2 ago, we announced that we had put in place the largest reduction in the company's history in the work -- regrettably, it's never good to part ways with our valued colleagues. But we announced that we had reduced the workforce by approximately 500 people, which is approximately 18% of the total. And that we had done that in January of 2018. And predicted that we'd take a one-time charge relating to severance and so forth on that. So that is a -- that's certainly one step of what you're describing. It's a step of what you're describing, I think.
Correct. And on that impact, what you think the impact would be on the EBITDA and free cash flow?
Yes. We're not providing any guidance as David mentioned earlier. I mean, we're in a -- in my prepared remarks, we're in a period of identifying and implementing significant change. We won't provide guidance on any specific actions.
But approximately 500 people and you can do your own arithmetic. So we are very serious about -- even when it's painful, like asking our colleagues not to be with the company anymore. We are very serious about aligning the spending that we do in this company with the realities of our revenue.
There are no further questions registered at this time. So this concludes today's call. So the conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.
Thank you very much.
Thank you.