DBRS Upgrades Yellow Pages and Yellow Pages Digital & Media Solutions, Trends Remain Positive

DBRS Limited (DBRS) has today upgraded the Issuer Rating of Yellow Pages Limited (Yellow Pages or the Company) to B from B (low) and has also upgraded Yellow Pages Digital & Media Solutions Limited’s Senior Secured Notes rating to B (high) from B (low) based on the upgrade of the Issuer Rating of Yellow Pages and an improvement in the recovery rating to RR3 from RR4. In addition, DBRS has upgraded Yellow Pages Digital & Media Solutions Limited’s Subordinated Exchangeable Debentures rating to CCC (high) from CCC with a recovery rating of RR6. The trends on all securities remain Positive.

The upgrades are a result of Yellow Pages’ strong traction of digital revenue growth over the last several quarters, combined with greater-than-expected debt reduction to date. The trends remain Positive, reflecting DBRS’s increasing confidence in the success of Yellow Pages’ digital business going forward and the expectation of further progress with the Company’s deleveraging plan. DBRS notes that the ratings continue to incorporate the ongoing erosion of print revenue as customers shift toward alternative forms of digital advertising.

Yellow Pages continues to establish itself as the most comprehensive digital marketing solutions provider in Canada with a focus on accelerating customer acquisitions and enhancing service and lead generation. Although consolidated revenues fell to $844 million for the last 12 months (LTM) ended June 30, 2015, from $878 million in 2014 and $972 million in 2013 because of declines in the print business, the more important digital revenues grew 8.0% in H1 2015 from the previous year. Digital revenues now represent 57% of the Company’s total revenues, up from 49% at the end of 2013. Digital growth can largely be attributed to traditional print media advertisers migrating toward online and mobile placements as well as customer acquisitions. DBRS notes that new customer acquisitions, the majority of which are digital, increased to 24,800 for the LTM ended Q2 2015 from 18,400 for the same prior-year period. EBITDA margins declined to 32.3% for the LTM ended June 30, 2015, from 36.0% in 2014 and 42.8% in 2013 because of the shift in mix toward lower-margin digital revenue as well as investments made to accelerate the Company’s digital transformation. As a result, EBITDA decreased to $272 million for the LTM ended June 30, 2015, from $316 in 2014 and $416 in 2013.

Yellow Pages continues to focus on investing in its digital strategy and directing free cash flow toward debt repayment. Since the beginning of 2014, the Company used $174 million of cash on hand and free cash flow toward the repayment of its Senior Secured Notes. Debt reduction partially offset declines in EBITDA and, as such, the Company’s gross debt-to-EBITDA ratio at the end of Q2 2015 stood at 2.1 times (x), up from 1.8x at the end of 2013. Over the same time period, EBITDA interest coverage decreased to 4.7x from 5.3x and free cash flow as a percentage of debt decreased to 15% from 30%.

DBRS forecasts that Yellow Pages’ overall revenue will continue to decline until 2017 as the Company’s high single-digit digital revenue growth will likely be outpaced by print declines in this time frame; however, consolidated top-line declines should moderate as Yellow Pages continues to accelerate customer acquisitions and upsell digital customers. As digital revenues continue to grow, EBITDA margins are expected to stabilize at approximately 30% over the medium term. Should digital revenue continue to grow at a pace similar to recent quarters over the next year, another positive rating action could result; however, should the pace of digital revenue growth moderate to the low-single digit range and/or gross debt-to-EBITDA increase above 2.5x, the trend could be revised to Stable.

In terms of financial profile, DBRS notes that Yellow Pages will continue to invest in its digital transformation and meet its mandatory debt payments. DBRS forecasts operating cash flow to increase to approximately $175 million in 2015, primarily as a result of a favourable tax settlement and lower interest expense. Capital expenditures is expected to decrease to approximately $75 million and, as such, the Company is expected to generate $100 million in free cash flow in 2015. DBRS notes that Yellow Pages repaid approximately $34 million of Senior Secured Notes in June and expects a further $66 million of debt reduction in December. As such, DBRS expects the Company’s credit metrics to remain stable at the end of 2015 (i.e., gross debt-to-EBITDA near 2.0x, EBITDA interest coverage of 4.8x and free cash flow as a percentage of debt above 15%).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Publishing Industry (May 2015), DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015) and DBRS Criteria: DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers (February 2015), which can be found on our website under Methodologies.