Yellow Pages (TSX: Y) posted Q1-2020 today and the results were somewhat surprising (the form of the surprise is “Wow, this is less worse than I was expecting”) – while it is generally well known that the revenues (and subsequently cash flows) are eroding, the rate of decline has generally been lower than my expectations. Management tries to spin it as the “decrease in decline”, and ultimately they will have to figure out how to stabilize the business in order to keep the entity viable, but the management of the decline so far has been superb.
The key metric in my book is customer count, which is down to 147,700 (31,100 less than the previous year’s quarter, a still fairly miserable decline), at an average spend of $2,571 per customer.
Employee count is down from 768 in Q4-2019 to 722 in Q1-2020.
Cash generation remains remarkably good, going from $44.4 million in December 31, 2019 to $70.9 million in March 31, 2020. The material debt on the books is the (TSX: YPG.DB) $107 million debenture which management has re-iterated will call at par on May 31, 2021 (before this date they would have to pay 110 on the dollar, which would be financially a net negative).
With the impact of Covid-19, on the conference call the following remarks were given by the CEO in response to the sole question:
Our — I mentioned that, yes, our bookings have taken somewhat of a hit that will be reflected somewhat in future quarters. We don’t have a quantification for you on that. But it’s in the scheme of things, I would characterize it as modest.
…
And on the biggest surprise to me, frankly, is on our cash collections. Our cash collections have continued virtually extremely significant sign of the strength of the continued virtually sector and the market that we serve and the anticipated health of that sector. Again, there’s no guarantees. We don’t make a guarantee, but I expected there to be large and noticeable declines in our receipts of revenue — receipts of cash from our customers. And if there is any effect, it’s imperceptible, actually.
Interesting colour commentary. The CFO accrued an extra $1.5 million for projected bad debt expense, but relatively speaking that isn’t a lot in relation to the overall business. The market very obviously anticipated some sort of COVID-19 impact, but they probably over-reacted (although Yellow’s customer base is concentrated almost directly in the COVID-19 crosshairs, short of airlines and cruise ships).
Finally, on plan, the company will be issuing an 11 cent per share dividend (about $3.1 million a quarter) – the first dividend in nearly a decade. I don’t think anybody a few years ago would have seen this coming. An interesting quirk – 4 cents will be eligible and 7 cents non-eligible. Accounting-wise, the ability to declare eligible dividends comes from the GRIP pool and this is generated through income taxed at the large corporation rate.
On the pension plan liability, the CEO said during the AGM that the plan has a surplus on a going concern basis:
This is David Eckert, the President and Chief Executive Officer of the corporation. And let me say, I thank you and appreciate that question. We take our obligations to our retirees’ and our pensioners’ defined benefit pension plan very seriously. We pay a lot of attention to that, and we have been working very hard for every dollar that almost every pensioner will ultimately and on a timely basis, be paid. Let me point out that at the time of the most recent valuation of that plan, the plan was actually showing a surplus on a going concern basis. And that assumes that the company is a going concern and is able to continue making payments into the plan. And we have been working very hard, as I think most all shareholders know for years now, to make sure that the company does well and is in a position to make payments on all of its obligations, including the defined benefit pension plan. I will point out that in just the last — we announced this morning that in just the last 9 quarters, as evidence of that, we have reduced our, what we call, our net debt in just 9 quarters from over $350 million to only $28 million. And that’s beneficial to everyone. With respect to your specific question, the voluntary additional contribution that we announced our intention to make this morning, beginning in June of this year, each month through the end of next year, would double our regular required monthly contributions. And those would go from approximately $150,000 a month to approximately $300,000 a month. But let me just reemphasize that at the point of the last valuation of the plan, the plan was actually in a surplus position, ongoing concern basis, and we have every intention, and I think the results of the last few years underscore this. Every intention of having this company continue to thrive as it has in recent times. And thank you for your question.
Looking at the financial statements, the plan is still in the liability column for $86 million, but this is a lot better than it was before (it was greatly helped by an increase in the discount rate from 3.1% to 3.8%). The details come out every annual filing, and at the end of 2019, the fair value of the plan assets were $484 million, while the benefit obligation was $573 million ($89 million liability).
I’ve had to downscale my own financial projection for Yellow due to COVID-19 and the general economic damage that the shutdown is going to cause. Yellow Pages will easily generate enough cash to pay the debentures, but the real question will be what happens to the remaining business. Going forward to 2022 and beyond, there is a very viable case for roughly $40 million/year or so in annual cash generation. Without debt, it makes the valuation easier – a multiple of cash. Again, this depends on the trajectory of the revenue curve and how viable management can make their business.
Now my pondering is whether the company will get on the radar of dividend ETFs. During COVID-19 I did some serious portfolio adjustments so Yellow is no longer my largest holding (it was painful getting proper liquidity) but I still hold some and do not see a reason to blow it out. I think almost everybody else has, so I wouldn’t anticipate supply pressure being extreme – others have likely dumped!
