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Executives

Marc Tellier - President and CEO

Ginette Maillé - Chief Financial Officer

Analysts

Jeremy Lucas - Scotia Capital

Samuel Sakain - ALJ Capital

Peter Gallup - P&P

Yellow Media Inc. (YLWPF.PK) Q3 2012 Results Earnings Call November 6, 2012 9:00 AM ET

Operator

All participants please standby, your conference is read to begin. Good morning, ladies and gentlemen. Welcome to Yellow Media’s 2012 Third Quarter Earnings Results Conference Call.

We remind you that forward-looking statements are being made pursuant to the Safe Harbor provisions of applicable securities regulations. This call is being recorded and webcast, and all of the disclosure documents are available on Yellow Media Inc.’s website and on SEDAR.

I will now like to turn the meeting over to Mr. Marc Tellier, President and Chief Executive Officer. Please go ahead, Mr. Tellier.

Marc Tellier

Thank you, Jason. Good day, everyone. Welcome to our third quarter 2012 investor conference call for Yellow Media Inc. Joining me today is Ginette Maillé, our CFO.

The recapitalization continued to be a strong focus of our throughout the third quarter as you would expect, recognizing the importance of quickly aligning our capital structure with our operational strategy, the company announced in February of this year that it had begun evaluating alternatives to refinance maturities in 2012 and beyond.

The company announced the proposed recapitalization transaction on July 23, 2012. The recapitalization is aimed at improving our capital structure and enhancing our financial flexibility to ensure we can pursue our ongoing business transformation and generate long-term value for our stakeholders.

At their respective meeting held on September 6th, the recapitalization was approved by a majority of our existing debtholders and shareholders. The recapitalization received approximately 70% of support from the existing debtholders and approximately 77% of support from the existing shareholders.

In addition, the company recently reached a settlement with the ad hoc committee of existing holders of convertible debentures. As a result of this settlement, the committee has agreed to support the recapitalization and withdraw our contestation. The hearing for the final approval of the recapitalization by the Quebec Superior Court ended on October 23, 2012, and a final ruling by the court is currently ending.

Now we’ll focus on our business transformation. As you all know Canadian consumer habits are consistently evolving, whether beyond line or through their mobile devices, consumers are constantly searching for local information to make smarter, more informed shopping decisions within their neighborhood or any neighborhood they might find themselves in.

Despite this rapidly evolving digital marketplace, the basic needs of Canadian small and medium size businesses remain unchanged. They want to ensure more customers walk through their door on a daily basis.

To meet these needs Canadian businesses needs to connect with local consumers at the right time with the right message. What they require most of all is a smarter, simpler way to mange their local digital marketing needs and gets superior value for their dollar and that’s exactly where Yellow Media fits in. Our transformation goes hand-in-hand with the Canadian business’ ability to remain competitive and attract client in today’s crowded and fragmented digital marketplace.

Yellow Media has longstanding trusted relationships and understanding of small and medium size businesses local needs and a comprehensive and growing multi-platform product layout -- lay lined up.

Through the Yellow Pages 360 Solution we can offer Canadian businesses single point of access to a comprehensive suite of products and services, including online mobile and print media platform, managed website services, customize search engine marketing such as resell in Google, Yahoo and Bing and search engine optimization, as well as Yellow Page and Analytics.

Our digital tools, platforms and expertise allow us to connect consumers with local businesses like never before, helping contribute to the success of these businesses and their neighborhood economy.

In response to the changes we see and how consumers and businesses bond each other, we launched a brand new add campaign in early October. The new campaign is focused around Meet the New Neighborhood.

It conveys our relevance in today’s marketplace that demonstrating how we bring consumers and local neighborhood businesses together via our products and services, thereby positively impacting local economies across the country.

We welcome all of you to further discover our brand new brand promise and advertising campaign at our corporate website, ypg.com.

The Yellow Pages 360 Solution continued to see progress during the third quarter. Our advertisers are realizing value from being present across both print and digital platforms. The advertiser penetration of YPG 360 Solution, defined as advertisers who subscribe three products or more grew to 14%, compared to 4.1% at September 30 last year.

During the quarter, the company revamped the messaging behind its 360 Solution. The value proposition offered to advertisers via 360 Solution has shifted from a product focus offering to a needs and benefit-based approach.

Accordingly, all products and services offered through YPG 360 Solutions are designed to meet the following three advertiser needs. The first, going digital via the products offer through 360 Solutions, such as websites, business profiles and yp.ca video.

The second, boosting sales, by generating qualified leads through online and mobile priority placement and print advertising. And the third, by extending online reach through investments such as search engine optimization, as well as search engine marketing. Our 360 Solution site has also been completely redesigned to reflect this new positioning for advertisers.

In an effort to meet the needs of our larger advertisers, Yellow Pages Group has joined efforts with Mediative, one of Canada’s leading digital media advertising company to develop a new program call Digital PowerPlay.

Digital PowerPlay determines the necessary steps to maximize the businesses qualified leads across various digital channels. It provides a holistic search product to improve the online visibility of businesses, delivering search engine optimization, search engine marketing, as well as usability services. Digital PowerPlay has been launched within our diamond sales channel which currently serve our largest local customers.

Mobile also continues to be a key component of 360 Solution and has experienced significant growth over the past year. Our mobile app has been downloaded more than 4.7 million times, compared to about 3 million times as of Q3 in 2011. Approximately 22,000 Canadian small and medium size businesses are subscribed mobile products, representing approximately 40,000 mobile unit sold.

During the third quarter, the yp.ca mobile app on the iPhone was redesigned to include more user relevant content. Our Home Deck now includes access to popular search categories and neighborhood deal, quickly connecting the user to the right business listing based on their desired search activity.

Our public application programming interface YellowAPI.com also has over 2.2000 software developers enrolled. These developers feed the mobile application they use or they built, by taping into our database of 1.5 million business listings, further increasing the digital presence of our customers.

During the third quarter, MyCityWay released Canadian version of their local discovery applications using the data available through YellowAPI. MyCityWay is currently one of the top tier and award winning local search and discovery application in the U.S.

Also during the quarter, Mediative expanded their offering to national clients by launching a flexible mobile advertising network. This mobile network currently holds the marketing power of 18 mobile apps connecting advertisers of mobile consumers based on their intent to buy.

Before as, Ginette, goes over the recap in more detail and reviews the third quarter results, I’d like to address the recently announced nominees for the new Board of Directors. The proposed nominee directors were selected as part of an extensive process completed by the search committee.

The search committee consisted of two members designated by the initial consenting noteholders group. David Leith, who is an existing Director of the company who will be continuing on as a Director and myself.

The proposed nominee directors include David Lazzarato, Robert MacLellan, Judith McHale, Kalpana Raina and Michael Sifton. The Company Directors who will continue to serve are Craig Forman, David Leith, Martin Nisenholtz and myself. Robert MacLellan will be appointed as the Chairman of the new Board of Directors.

The extensive expertise of the proposed nominees with corporate finance, corporate development and the online media and communications industry will be beneficial in further accelerating our digital transformation. The following individuals will be appointed the new Board of Directors of company upon the recapitalizations becoming effective.

Ginette will now review our third quarter results. Ginette?

Ginette Maillé

Thanks, Marc. For the quarter ended September 30, 2012, net earnings totaled $24 million. This compared to a net loss from continuing operations of $2.8 billion last year, as a result of a goodwill impairment charge of $2.9 billion.

Net earnings from continuing operations before the impairment charge were $74.6 million. Net earnings for the quarter ended September 30, 2012 include $37.6 million of non-recurring expenses, which do not reflect the ongoing operations of the business. These charges were associated with our proposed recapitalization transaction, our workforce reduction and the termination and renegotiation of contractual obligations.

Adjusted earnings for the quarter were $77.1 million or $0.15 per share versus $69.2 million, or $0.14 per share last year. The increase in adjusted earnings is due principally to lower interest payments and cash taxes, partially offset by lower EBITDA.

Revenues for the quarter were $267.7 million compared to $323.4 million in 2011. The 17.2% decrease is mainly due to lower print revenues, the discontinuation of books published at Canpages and the divestiture of LesPAC on November 14, 2011.

Online revenues were $92 million compared to $87.3 million last year, representing growth of 5.3%. On a comparable basis, excluding the impact of the changes to the Canpages business, the LesPAC divestiture and YPG USA, total revenues decreased by 12.5% due to a print revenue pressure of 22%, partly offset by online revenue growth of 14.1%. Online revenues now represent over 34% of total revenues compared to 27% last year.

Revenues continued to be impacted by secular pressure, related to challenges associated with the migration of our print and legacy online product, particularly among the larger advertisers who are currently reducing their advertising spend. The company does not expect online revenue growth to compensate for the declining revenue in our traditional print offerings in the near future.

EBITDA for the quarter declined from $166 million last year to $137.8 million, while the EBITDA margin remained stable at 51.5% compared to 51.3% last year. Cash flow from operations for the quarter increased to $49.6 million compared to $44 million last year. This was mainly due to lower interest paid and lower cash taxes, partially offset by lower EBITDA and restructuring and special charges.

At quarter end, YPG had approximately $1.4 billion of net debt, including convertible instruments, representing a leverage ratio of 2.7 times compared to 2.5 times at the end of 2011.

New plan implementation of the recapitalization, Yellow Media will have debt of approximately $877.5 million, consisting of $775 million of senior secured notes and $102.5 million of subordinated unsecured exchangeable debentures. Annual interest expense will also be reduced by approximately $45 million.

As for the recapitalization, the company will exchange existing credit facilities and medium-term notes, representing $1.8 billion of the company’s debt for a combination of $775 million of 9% senior secured notes due in 2018, $100 million of subordinated unsecured exchangeable debentures due in 2022, with interest payable in cash at 8% or in additional debentures at 12%, approximately $23 million new common shares, representing 82.5% of new common shares and $250 million of cash.

Holders of existing convertible debentures will receive, in exchange for their securities, $2.5 million of subordinated unsecured exchangeable debentures, approximately 498,000 new common shares, representing 1.8% of the new common shares and approximately 484,000 warrants, representing in the aggregate 1.7% of the new common shares.

Lastly, holders of existing preferred shares and common shares will receive, in exchange for their securities, approximately 4.4 million new common shares, representing 15.7% of the new common shares and approximately 2.5 million warrants, representing in the aggregate 9% of the new common shares.

We would like to reiterate that the recapitalization will not impact customers, suppliers and other business partners of Yellow Media. Our obligation to employees including our pension and benefit plan obligation are also unaffected by the recapitalization.

Further details on the recapitalization are provided in a management proxy circular, which was distributed to credit facility lenders, noteholders, convertible debenture holders and shareholder on July 30, 2012. The proxy can also be found on SEDAR and on our corporate website.

As Marc mentioned, hearing for the final order of the recapitalization concluded on October 23, 2012, and the final decision of the court is pending.

Now here’s Marc with his wrap-up.

Marc Tellier

Merci, Ginnette. Overall, we remain committed to creating an industry leading digital media and marketing solutions company. As reflected by our operational initiatives and results today, Yellow Media continues to make progress on its business transformation. The company has seen an increase in advertiser demand for products offered in 360 Solution.

In addition, our online and mobile platforms continue to be a trusted search tool for Canadian shoppers. The company has also repositioned its brand through its Meet the New Neighborhood ad campaign. This campaign reflects the Yellow Media’s relevance in local -- today’s local neighborhood, connecting local businesses with ready to buy customers for its various product platforms and services.

Needless to say, this is the beginning of a journey in terms of repositioning the brand. But despite this progress, we do recognize challenges inherent in our transformation and recognize that it will take time.

First off, we need to implement the proposed recapitalization. This will provide the company with the financial flexibility critical in supporting its business transformation and to further advance our transformation, we must also make the necessary investments to grow Yellow Media audiences.

This can be achieved by improving the user experience through enhanced content and features, investing in traffic and distribution partnerships as well as investing in our brand visibility. We must also be able to monetize these audiences by improving current operations, sales effectiveness, product fulfillment as well as customer support.

Lastly, our current product portfolio needs to evolve. And we must continue introducing new products and services to further meet advertisers need. We look forward to communicating the progress of our recapitalization and business transformation to all of you. And we will continue to offer visibility on recent and expected trends and key operating and financial metrics.

We thank you for joining us today. And Jason, we’ll now turn it over back to you to moderate the Q&A session. Jason?

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Jeremy Lucas of Scotia Capital. Please go ahead.

Jeremy Lucas - Scotia Capital

Good morning. If you look into your revenues going forward, is this sort of mid-teens decline rate? Is that something that you see as stable going forward or is that something that might accelerate, can you speak to some of the color regarding the -- your revenues you currently booked?

Ginette Maillé

Yeah. Well, we’re not -- as you know, we’re not giving guidance per se, but when we look at the transparency we can assume that it will continue at an approximate phase that its similar to what we see right now.

Jeremy Lucas - Scotia Capital

Okay. Great. And just turning to the recapitalization, it sound like the court wrapped up their hearings on the final order two weeks ago, but what are your expectations for timing with respect to hearing and answer in the court?

Marc Tellier

Look, I mean, there is no -- there is no signs to this. It did wrap-up two weeks ago at the close of business today. What I can do is repeat what the judge said in terms of when he was wrapping up -- when we were wrapping up the hearing.

Basically, he underscored to all of the parties that he understood the need to swiftly but then he reminded all of us that obviously that this was something that he needed to put in the right level of time and investment to our finance. So, people read into that that. You know that it would take a reasonable timeframe.

A reasonable timeframe is somewhere between two weeks and a month but candidly, that speculation by all the parties. So it’s early up and right at the stage, Jeremy. Unfortunately, there is not much more color to offer than that.

Jeremy Lucas - Scotia Capital

I understand. If we move forward just running through a scenario, but if this plan is not approved, can you speak to the next steps that Yellow Media would pursue?

Marc Tellier

Look, I mean we remain -- and you would expect us to, we obviously remained confident and believe in our plan. The plan got overwhelming support, approximately 70% support of the debt holder class and approximately 77% of support of the shareholder class. Should that happen, we’ll cross that bridge when we get there. But obviously we remained very confident in terms of the plan we’ve got in front of us.

Jeremy Lucas - Scotia Capital

Yeah. I guess I’m trying to kick it out is, would you considerably be cutting the plan or do you move to filing under CCAA?

Marc Tellier

I won’t provide any color on that in the call today. I mean we -- as I said, we’ll cross that bridge when we get there. But the focus now is 100% of our energies are behind the plan that’s in front of all us. And hopefully, we will get support from the courts quickly.

Jeremy Lucas - Scotia Capital

Okay. And then more of an admin question, assuming it is proved, what is the expected timing for issuing the new securities?

Marc Tellier

Well, I would likely take -- likely take a few days to close and then the process with TDS and stuff is also a few days. So it’s somewhere between two and five days, would probably be the expected process at this stage.

Jeremy Lucas - Scotia Capital

Okay. And then a final question, just surrounding your cash balance. Post recapitalization in the $250 million payment to the unsecured holders, what options would be available for you to deploy that cash? What would be your thoughts about what you would do with that cash balance?

Marc Tellier

Well, I mean at this time relative to the recap plan obviously the cash would be available for normal course operations. And from that perspective, we wouldn’t be looking to do anything with the cash other than investing where we need in our business transformation and have the cash build up as part of -- as part of what we’ve got on the table here, the agreement with the recapitalization plan.

As you know there is a -- there is a cash sweep of 70% on a bi-annual basis. So the company feels comfortable that we have the flexibility and the cash required under the plan, should the plan be approved, in order to invest appropriately in its business transformation. But we wouldn’t be looking to do anything beyond that at this time with our cash -- with our excess cash.

Jeremy Lucas - Scotia Capital

Great. That’s all for me. Thanks Marc.

Marc Tellier

Thank you, Jeremy.

Operator

Thank you. The next question is from Samuel Sakain of ALJ Capital. Please go ahead.

Samuel Sakain - ALJ Capital

I have couple of questions, just with the tax guarantee you gave on the supplemental disclosure. So it looks…

Marc Tellier

Can you speak up a bit? Can you speak up little bit please?

Samuel Sakain - ALJ Capital

Yeah. Sure. On the tax guarantee you gave on the supplemental disclosure that was still $125 million, but as through Q3 you guys have only paid out 55. So is that what we should expect coming off in Q4?

Ginette Maillé

No. But $125 million also include sales tax. And when we look at the total amount cash outflow for both income tax and sales tax, it is still projected to be approximately $125 million.

Samuel Sakain - ALJ Capital

So where we now through Q3 in sales tax?

Ginette Maillé

It would be approximately $26 million.

Samuel Sakain - ALJ Capital

Okay. Also in the cash balance on the MD&A you guys said, you had $396 million as of yesterday, $396 million. Suppose, I guess suppose the recap take up $250 million, where do you guys see your cash balance staying?

Ginette Maillé

Well, actually, I won’t give you the exact number. But I can tell you that we will have sufficient cash to -- for operation.

Samuel Sakain - ALJ Capital

So I mean, in professional fees and things like that, I mean does that -- a lot has already been paid or just kind of -- just trying to get a sense of what it will be like at the end of the year?

Ginette Maillé

There’s probably -- you’re referring to the plan…

Samuel Sakain - ALJ Capital

Yeah.

Ginette Maillé

To the recap plans?

Samuel Sakain - ALJ Capital

Yeah.

Ginette Maillé

There’s approximately one third that has been paid so far.

Samuel Sakain - ALJ Capital

Got it. And is there any tax -- so, the tax balance for next year was $140 million, is that still the same?

Ginette Maillé

Well, if yeah. And this is obviously assuming that there is no recapitalization. Clearly once we go ahead with the recapitalization, we’ll have a new view of our tax assessment. But what I can tell you is with or without recapitalization, if you look at the years 2012, ‘13, ‘14, in total, the amount are pretty much the same and 2013 is a good proxy at this point.

Samuel Sakain - ALJ Capital

And you also talked about kind of going forward that your margins will continue to come down. I mean obviously, you guys did pretty well this quarter. I mean do you guys still see that kind of 40% range and is that -- in the long-term, is that kind of sustainable margin, do you think that you guys fail to achieve kind of the growing Internet business?

Marc Tellier

Yeah. I mean if you look at our product line and just break it down quickly. If you look at our product line, if you look at print and the YellowPages.ca placement for example, those margins are reasonably comparable. If you look at websites and actually I should have included mobile in the first category.

If you look at websites video and so on, the margins are closer to just south of the 40% range. And then if you look at margins in SEO would be in that category and if you look at margins like SEM, it’s much lower. So, as we’re looking at our revenue performance today 2012. We’re a little behind placement, where we want to be. And we’re a little ahead of SEM. So, when we extrapolate that, so that’s on a published revenue basis and not a reported revenue basis.

So, as we look to reported revenue in 2013, we’re seeing a more pressure on margin as a result of mix. And we’re also seeing more pressure as a result of what I would call a normalized data business. We need to continue to invest repositioning the brand and given the circumstances this year, we chose not to invest in the brand until the beginning of October about a month ago.

So, if you take a more normalized, annualized basis from a brand spend as well as traffic and distribution, we would expect in 2013, some pressure on our margin bringing us directionally to what we’ve been guiding two, four, five quarters now, a more normalized kind of post transformation of approximately 40% EBITDA margin.

Samuel Sakain - ALJ Capital

And for next year, do you have a sense how much your digital business will be in terms of total revenue. I mean, it gives already if 34% this quarter and so is that, I mean should we see that going forward or continue to grow, I mean how do you guys project that?

Marc Tellier

We were not providing guidance on that but I can give you a data point. We gave in the last call and Ginette gave in the last call. We can give it to on this call as well. If we look at core directories only, so excluding Wall2Wall and Mediative, our print revenues have decreased by about 22% and our online revenues have increased by about 20%. So, that should give you some data points to basically that to answer your question.

Samuel Sakain - ALJ Capital

Yeah. Thank you.

Marc Tellier

Thank you.

Operator

(Operator Instructions) There are no further questions registered. I would like to return -- sorry, we do have question from [Mr. Peter Gallup of P&P]. Please go ahead.

Peter Gallup - P&P

Yeah. You said, you are working with Mediative, do you own Mediative or what is the ownership of that company?

Marc Tellier

You’re right. We do own Mediative. And what I was referring to specifically thank you for the question. The Mediative really is focused on, let’s call at the top 1,500 customers in the country and serving them directly or indirectly through either traditional advertising agencies or partnering with digital advertising agencies.

And what we’ve done when I referred to you and you’re right, it was a little confusing in our script. What we referred to is some of those higher end products for lack of a better expression, we’ve packaged into a new product offering called Digital PowerPlay. And Digital PowerPlay, we are now making available to the larger local businesses. But to your question specifically, we do wholly own the Mediative division.

Peter Gallup - P&P

Thank you.

Marc Tellier

Thank you, Peter.

Operator

Thank you. There are no further questions registered at this time. I would like to return the meeting over to, Mr. Tellier.

Marc Tellier

Thank you, Jason. Well, as we’ve said clearly we do remain very committed to creating an industry-leading digital media marketing solutions company. The company has been an increase in advertiser demand for product offered under 360.

Despite this progress, we do recognize the challenges in our transformation. But there are challenges and that it will take time. But we do look forward to communicating the progress of our recapitalization and business transformation to all of you. So, thank you for joining us today and stay tuned.

Operator

Thank you. Mr. Tellier. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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