Tag: Y

Today on SEDAR, Empyrean Capital Partners disclosed a purchase of shares in Yellow Pages (TSX: Y) and their holdings are now 5.64 million shares, which is up approximately 677,000 shares from their previous disclosure (which was nearly two years ago).

Combined with the 63,750 shares that Yellow has repurchased in the month of August, this means the public float not held by the 10% owners is approximately 6.39 million shares, or about 23% of the shares outstanding.

The massive short position that was in the company last year has nearly exited the position – short interest is about 18,500 shares. This is unfortunate, as I rather enjoyed receiving an extra 10% yield on my shares as they were periodically being lent out for short sellers.

With the amount of cash flow they are able to generate, they will be paying the entirety of their convertible debentures (TSX: YPG.DB) on May 31, 2021, if the stock price is not above the conversion price ($19.04/share) at that time. After paying off the debt (or having it converted), I would view it more probable than not that the dividend and/or buybacks will increase significantly from the current quarterly 11 cents per share. I’m quite surprised the rest of the float hasn’t been taken private – I’d guess a lowball offer around $15-16 is incoming. When you consider the company has generated more than $4/share in cash in the past four quarters, this actually seems low.

Yellow Pages (TSX: Y) is up around 25% today as I write this on their quarterly report showing that things aren’t as bad for them as expected.

Although year-over-year revenues are still declining sequentially (17% for Q2), cash generation continues to be extremely high. As-in, eye-popping high. Of $88.3 million in revenues earned for the quarter, this translated into $31.7 million in operating cash flow. For the half-year, these numbers are $176.6 million in revenues and $58.8 million in operating cash flow. Subtracting $4.2 million in capex and lease payments, this leaves $54.6 million in free cash flow for the half year.

They also gave out $2.9 million in dividends in the quarter (the first dividends in nearly a decade).

Needless to say, especially after Covid-19, this cash generation blew my expectations away by a mile. I have never seen anything like this before in a business, where cost controls in such a significant revenue decline situation still produces an amazing amount of cash.

On the downside, it is not entirely clear the impact of the CEWS program on margins; and the customer count continues to decline (32k lost from the previous year).

Yellow ended June 30, 2020 with $97.7 million in cash in the bank (my expectations were about $7 million less). Their only debt (aside from lease obligations) is $107 million in 8% debentures which will most certainly be redeemed on May 31, 2021. At this point, this debenture is almost as good as a 9-month GIC, earning 8% if you can get it at par.

Management also indicated that the cash balance on August 5, 2020 was $109.7 million in cash. This implies that in the 5 weeks since the end of the quarter, they generated another $12 million in cash (implying a $125 million cash generation run rate, or about $4.46/share). Note this could be misleading due to the timing of payments. However, if they can stabilize cash generation at even half of this level, the stock is vastly undervalued even at the current trading price of $10/share. This has always been the big “if” for the company. Management has alluded to some revenue initiatives coming ahead.

Yellow continues to remain one of my larger positions. I did some diversification during the COVID crisis, but the remaining amount is still significant.

I still believe the likely scenario for the company is going private. It is 75% owned by three major institutions, and this fraction goes up if they execute on their NCIB and suck up more shares from an already relatively illiquid public float.

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!

I couldn’t think of a worse stock to be holding (other than cruise ships, airlines and tourism stocks) than the Yellow Pages (TSX: Y) during the CoronaCrisis. It ticks the Corona-Avoidance investment list of “non-essential”, “small business” parameters. On the flip side, the type of work they can do can be done remotely by employees, if they have the right mechanisms for remote work. Not helping is that their headquarters is in Montreal, Quebec, and the province of Quebec is nearly competing with Italy for the COVID-19 management award (for those sensitive readers out there with relatives in elder care homes in Quebec: this is not to make fun of what is going on – it is indeed very tragic, both in Quebec and around the world).

A very smart investor I respect (John Cole) dumped out in early March, noting the stock’s bad liquidity and getting an opportunity to bail out just as the Coronacrisis was coming into full steam, but also citing customer comments over the internet as being incredibly adverse. Indeed, it doesn’t take too much searching to find people incredibly angry at the perceived value they received, coupled with being locked into one year contracts that they can’t get out of mid-term. These concerns came up to me in my initial due diligence screens (indeed, it was pretty difficult to avoid it) but I will just retort with two words – Rogers Wireless. You (mostly) only hear about the complainers that have experienced some sort of injustice (name it – roaming fees, data overages, billing issues, long distance, SMS scams, whatever). This is exactly why every telecommunications company has developed ‘flanker’ brands, so their primary names don’t get sullied (Rogers – Fido/Chatr, Telus – Koodoo/Public, Bell – Virgin, Shaw – Freedom). When you have 153,000 customers with an average annual billing of about $214/mo, you’re going to get some pissed off people over anything, especially if they are sold some $25/mo web package and they don’t discover their sales quadruple overnight.

Some companies have gotten smart about this (“reputation management”) and have started to overtly hire third parties to manage the image of certain brands, by basically spamming the internet with false reviews, and so forth. Explicitly note this is not an accusation of Rogers/Bell/etc. doing this, but in a world where it is perceived that having a positive reputation on Google Reviews, Amazon, Yelp, etc., make a difference, you can be very sure that there will be entities out there that will explicitly game the system.

I even look at people that complain about Interactive Brokers, and having used the platform now for more than 15 years (and still finding it superior to anything I have seen out there, which in itself is an amazing accomplishment), hearing people talk about it negatively makes me chuckle. Questrade has a small staff that is dedicated to their online reputation management. (Indeed, if you want some amusement, go read this Reddit thread claiming the poster lost a bunch of money trading options due to Questrade being down, and apparently at some point the police got involved because he threatened to burn down their offices).

Angry customers love to make noise. They’ve been burnt, it is personal, and emotional, and emotions cause people to do very strange things, some of which gets online. They will do so 10 times, if not 100 times more in magnitude than happy customers will openly praise.

It leads to the conclusion that Yellow Pages’ big mistake on this front was not engaging in more proactive “reputation management”, which is a mild slight against them given that they’re now in that business sector! (Hint hint, if anybody from Yellow Pages executive management is listening, this is a pretty good business segment to get into…)

But anyhow, I go back to the original topic. Prior to Covid-19, and especially after their February quarterly report, all of the stars were lining up on the astrology charts for their stock to break out into the upper teens. It was really obvious. Then Covid-19 hit, and everything went to crap. I managed to get some liquidity on the way down and it is no longer my largest holding, but I do own a moderate amount of stock, although I would have preferred to diversify it into some other holdings, especially in late March and early April. At the price they were trading at those times, there was really no point in liquidating (my estimate had them still worth more).

Also, it was very peculiar that Goldentree Asset Management was purchasing shares of Yellow in the upper 6’s (the last purchase being on April 15) and prior to this they were a 30.3% owner in the company. Were they doing this for value, or were they doing this to keep the asset value on their balance sheet at an acceptable level? One will never know. Although they filed twice to sell shares (February 3, 2020 and March 5, 2020) they never sold any.

What are we going to see in the upcoming May 13, 2020 quarterly report? Oddly, I’m expecting a reasonably decent quarter, but with cautionary notes of collections and uncertainty regarding Covid-19. The biggest problem going forward deals with the following line on their AIF:

Furthermore, the Corporation has entered into Billing and Collection agreements with Bell (up to 2020) and Telus (up to 2031), whereby each performs billing and collection services on behalf of the Corporation, including billing and collecting directory advertising fees from certain Yellow Pages customers who are also customers of the Telco Partners.

Bundling of YPG billings in Bell Canada’s billings ends on December 31, 2020 (page 37 of the MD&A) and most business owners will pay consolidated phone bills, but it is less likely they will pay for separate billings.

A few other notes of mention:

The company on April 15 announced they opened an NCIB to repurchase YPG.DB, which makes sense as they were going to do so at par in May 2021. Might as well do so now (and even at a mild discount) and save the coupon, although the total amount they can obtain is limited to liquidity and a block purchase every week.

Finally, the CEO has a significant carrot that is dangled in front of his nose as per the following in the management information circular:

Pursuant to Mr. Eckert’s Long-Term Incentive Plan Grant Agreement, a one-time grant covering the three-year term of his agreement of 701,875 Options at a stock price of $7.97 per share was awarded to Mr. Eckert on September 15, 2017. The Options are to vest and be exercised on September 15, 2020 at 9:30 EST. The Corporation is to cause a cashless exercise of the Options, whereby the cash proceeds are to be paid to Mr. Eckert as soon as practicable after the settlement of the sale of the underlying Shares. Further, pursuant to Mr. Eckert’s Long-Term Incentive Plan Grant Agreement, a grant of 701,875 Share Appreciation Rights (‘‘SARs’’) was awarded to Mr. Eckert on September 15, 2017. The fair market value per share on the September 15, 2017 grant date was $7.97 per share. The SARs are to vest on September 15, 2020 at 9:30 EST. Upon vesting of the SARs, Mr. Eckert will receive a payment in cash representing the excess of the fair market value of Yellow Pages Limited’s shares on the vesting date less the fair market value of Yellow Pages Limited’s Shares on the grant date. Mr. Eckert’s Long-Term Incentive Plan Agreement also included a grant of 156,839 RSUs. The fair market value per share on the September 15, 2017 grant date was $7.97 per share. The RSUs are to vest on September 15, 2020 at 9:30 EST.

Can anybody say “incentive to get the stock as high as possible on September 15, 2020?”.

I still believe the end game for the company is to be taken over in a strategic acquisition by some other marketing company. Possession of a 150,000 customer base paying an average of $2,500/year is not a trivial asset, and it would merge quite well into a digital marketing firm looking to increase its customer count and penetration into a wide market across Canada.

Overall, however, COVID-19 has put a huge dent into the thesis. Part of the ultra-bull case was reliant on momentum trading combined with ETFs blindly getting in because the company is going to be a dividend stock. I still believe they will issue a dividend, but a smaller one than the 11 cents per quarter they originally intended on from their February announcement. Fundamentally, businesses still need to reach out to the universe, and they will do so digitally. But if the underlying businesses are hurting (which they are), it will most certainly lead to continued revenue pressures, which does very little to “bend the curve” since everybody else is so focused on trying to flatten it!