SECOND QUARTER REPORT 2007

Transcription

1 PERIOD ENDED JUNE 30, 2007 Q2 Yellow Pages Income Fund 16 Place du Commerce Nuns Island Verdun, Quebec H3E 2A5 This quarterly report is printed on Rolland Enviro 100, the environmentally responsible choice, because it is processed chlorine free, accredited Eco-Logo (Environment Canada) and 100% post-consumer. In other words, no trees have been cut to produce this paper, and all the fiber comes from recycling bin.

2 Table of Contents Message to Unitholders Interim Consolidated Financial Statements of Yellow Pages Income Fund...33

3 MESSAGE TO UNITHOLDERS Yellow Pages Income Fund continued to demonstrate strong organic growth in its core directory business, while progressing well on the integration of its vertical media business in the second quarter of For the second quarter ended June 30, 2007, consolidated net earnings amounted to $127.6 million, compared to $114.2 million during the same period of Income from operations reached $170.3 million for the quarter, up from $140.4 million in the prior year. Adjusted Revenues grew 21.3% to $412.8 million and Adjusted EBITDA grew by 19.2% to $219.4 million compared to the corresponding period last year. This growth is mainly attributed to the contribution from acquired businesses in the Directories and Vertical Media segments. Organic growth in the directory business both print and online also drove the Fund s performance. Online revenues for Directories and Vertical Media combined were $42.2 million for the quarter or approximately $169 million annualized. The momentum in online revenues refl ects the success of our Directory Plus bundled offer as well as the introduction of stand-alone online products. The Fund s improved operating metrics continue to be accretive to distributable cash. Distributable cash grew by 18.5% to $177.3 million and by 10% on per-unit basis from $0.30 to $0.33 per unit, when compared to the same period last year. Directories We continue to be among the leading directory publishers globally in terms of organic revenue growth and margin performance. On a comparable basis, Directories Adjusted Revenues increased by 5.1%, while Adjusted EBITDA increased by 6.6%. YPG s Adjusted EBITDA margin reached 58.8% for the quarter. During the quarter, we completed the purchase of Aliant Directory Services in Atlantic Canada, further strengthening our position in the Canadian directory market. We expect the integration of these operations to be largely completed by the end of the fourth quarter. The integration initiatives should further accrete to margins in Vertical Media In the second quarter of 2007, Trader Corporation (Trader) generated revenues of $90.7 million, representing growth on a comparable basis of 5.1%, and EBITDA on a comparable basis grew by 12.3% to reach $30.0 million. We expect Trader to progressively realize benefi ts from investment in business processes and technology in During the quarter, Trader acquired a 50% ownership interest in and entered into a partnership with LesPAC, Quebec s number one classifi ed web site. This partnership increases Trader s presence in the generalist product vertical in Quebec. 1

4 Consistent with our goal of introducing innovative print products that leverage our Trader business, YPG began bundling the new Yellow Pages Auto Edition with the latest Auto Trader issue in both Toronto and Montreal. This initiative is intended to promote the cross-selling of our products. More targeted print product roll-outs are planned for later this year and in Outlook Each year, we establish targets to advance our goals and drive results through execution of initiatives to maximize revenue growth and cash fl ow generation in both of our platforms. For the fiscal year 2008, our guidance for Directories is 4% to 5% growth on a comparable basis in Adjusted Revenues and 4% to 7% growth in Adjusted EBITDA. The Vertical Media segment is expected to grow its revenues on a comparable basis by 5% to 7% while EBITDA should grow between 7% to 9% as benefi ts progressively accrue to results of operations from re-engineering of business processes. We expect online revenues from Directories and Vertical Media combined to grow by approximately 30% on a comparable basis in Following the enactment of the proposed legislation announced on October 31, 2006 by the Federal Minister of Finance, regarding the taxation of fl ow-through entities, we are adopting a more prudent approach to cash distributions and will continue to closely monitor our payout ratio. After careful consideration, we believe it is more appropriate during the transition period for our Fund to provide guidance and report on annual expected growth in distributable cash per unit rather than provide guidance on cash distributions declared. Consequently, our objective of growing the Fund s cash distributions per unit by 6% has been achieved in 2007 with the increase in distributions effective January 15, 2007, from $1.03 to $1.09. Following this change in our approach to guide and report on distributable cash rather than distributions declared, our objective for 2008 is to grow Distributable Cash per unit at a rate between 8% and 10% per unit. To summarize, our results for the fi rst half of 2007 remain among the best in our industry. We are confi dent in our ability to sustain this level of growth for the remainder of the year, and we believe we are well positioned for strong performance in Marc P. Tellier President & CEO and Trustee Marc L. Reisch Chairman of the Board 2

5 MANAGEMENT S DISCUSSION AND ANALYSIS August 9, 2007 This management s discussion and analysis ( MD&A ) is intended to assist in the understanding and assessment of the trends and significant changes in the results of operations and financial condition of Yellow Pages Income Fund and its subsidiaries during the six-month period ended June 30, 2007 and should be read in conjunction with our audited consolidated financial statements, accompanying notes and MD&A for the year ended December 31, 2006 as well as our unaudited interim consolidated financial statements and accompanying notes for the period ended June 30, Quarterly reports, the annual report and supplementary information can be found under financial reports on our corporate web site at Additional information, including our annual information form can be found on SEDAR at In this MD&A, the Fund refers to Yellow Pages Income Fund and we, us, our, the Company, and YPG refer to YPG LP and its subsidiaries, which are reported in the following segments: Directories, which refers to our core print and online directories as well as our specialized guides. Vertical Media, which refers to our print and online vertical publications. We define vertical media as the segmentation of content into print publications and web sites by topic or area of interest. Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance. This MD&A contains forward-looking statements about the objectives, strategies, financial condition, results of operations and businesses of YPG. These statements are forward-looking as they are based on current expectations about our business and the markets we operate in, and on various estimates and assumptions. Forward-looking statements in this MD&A describe our expectations on August 9, Our actual results could be materially different from our expectations if known or unknown risks affect our business, or if our estimates or assumptions turn out to be inaccurate. As a result, we cannot guarantee that any forward-looking statements will materialize. Forward-looking statements do not take into account the effect that transactions or non-recurring items announced or occurring after the statements are made may have on our business. We disclaim any intention or obligation to update any forward-looking statements even if new information becomes available, as a result of future events or for any other reason. Risks that could cause our actual results to differ materially from our current expectations are discussed in section 7 Risks and Uncertainties. This MD&A is divided into the following sections: 1. Our Business, Mission and Strategy Capability to Deliver Results Results Liquidity and Capital Resources Critical Assumptions Outlook Risks and Uncertainties Controls and Procedures

6 1. Our Business, Mission and Strategy Our Business Directories We are Canada s largest directories publisher and the exclusive owner of the Yellow Pages, Pages Jaunes and Walking Fingers & Design trademarks in Canada. Through our predecessor businesses, we have been an industry leader since we published our first directory in We are the official publisher of Bell Canada s directories. We are also the official publisher of TELUS directories, MTS Allstream s directories, Bell Aliant s directories as well as of a number of other incumbent telephone company directories that have a leading market share in their respective markets. YPG publishes annually more than 340 different telephone directories with a total circulation of approximately 30 million copies. With more than 425,000 customers, we manage one of the largest face-to-face sales forces for small and medium-sized enterprises ( SMEs ) in Canada. We also operate the leading online directories in Canada, YellowPages.ca, Canada411.ca and the CanadaPlus.ca group of city sites. This online presence allows us to offer bundled packages of print and online directory advertising products on a national scale. Our directories are delivered into almost every household and business in our markets, and are available online and through wireless devices. Our content draws consumers to our directories, which in turn attracts advertisers. Vertical Media The Fund acquired Trader Media Corp. ( TMC ) and Classified Media (Canada) Holdings Inc. ( Trader Canada ) on February 14, 2006 and June 8, 2006, respectively. TMC was Ontario s largest publisher of classified advertising and related web sites while Trader Canada was a leading publisher of classified advertising and related web sites in all Canadian provinces except Ontario. The combined vertical businesses were merged on January 1, 2007 and renamed Trader Corporation ( Trader ) which resulted in the creation of a national platform of vertical media with approximately 200 publications and 20 web sites covering four main product verticals: (i) automotive, (ii) real estate, (iii) general merchandise, and (iv) employment, comprising brands such as Auto Trader, Auto Hebdo MC, The Bargain Finder, Home Renters Guide, Renters News, and Buy & Sell. Mission and Strategy Our mission and strategy statements have not changed since the release of our MD&A for the year ended December 31, Therefore, to review our mission and strategy, please refer to the corresponding sections in the MD&A for the year ended December 31, Capability to Deliver Results Our capabilities to deliver results have not changed since the release of our MD&A for the year ended December 31, In order to review our capabilities to deliver results, please refer to the corresponding section in the MD&A for the year ended December 31,

7 3. Results Overall Performance Adjusted Revenues increased by $72.4 million or 21.3% over the second quarter of 2006 to $412.8 million. Revenues increased by $70.8 million or 20.8% to $411.1 million in the same period; Adjusted EBITDA increased by $35.4 million or 19.2% over the second quarter of 2006 to $219.4 million. EBITDA increased by $37.1 million or 20.3% to $220.3 million in the same period; and Distributable cash per unit at $0.33 increased by 10% over the second quarter of Highlights by Segment 1 (in thousands of Canadian dollars) Three-month periods ended June 30, Directories Vertical Media Consolidated Revenues $320,421 $287,093 $90,689 $53,231 $411,110 $340,324 EBITDA $190,348 $165,892 $29,971 $17,315 $220,319 $183,207 Cash flow from operating activities $175,262 $165,466 Adjusted Revenues $322,112 $287,219 $90,689 $53,231 $412,801 $340,450 Adjusted EBITDA $189,462 $166,743 $29,971 $17,315 $219,433 $184,058 Distributable cash $177,308 $149,636 Distributable cash per unit $0.33 $ We closed the TMC acquisition on February 14, 2006, the Trader Canada acquisition on June 8, 2006 and the MTS acquisition on October 2, In addition, we closed the LesPAC acquisition on April 19, 2007 and the Aliant acquisition on April 30, As such, included in the 2006 and 2007 results are the results of each acquired business from the respective date of acquisition to period end. Adjusted Revenues (in millions of dollars) 21.3% Adjusted EBITDA (in millions of dollars) % Distributable Cash per Unit 10% 0.35 $0.33 $ Q Q Q Q Q Q Directories Vertical Media Directories Vertical Media 5

8 Adjusted Revenues We provide guidance and report on our revenue, adjusted for comparability purposes ( Adjusted Revenues ) by removing the effect of purchase accounting related to the acquisitions of Advertising Directory Solutions Holdings Inc. ( ADS ) and the assets of MTS Media ( MTS ) and Aliant Directory Services ( Aliant ). Adjusted Revenues are a non-gaap measure and not likely to be comparable to similar measures used by other issuers; for a reconciliation with Canadian generally accepted accounting principles ( GAAP ), please refer to Consolidated Operating and Financial Results in this section. Adjusted Revenues reflect the level of advertising activity and are generally billed in accordance with contractual terms with advertisers and recognized on a monthly basis over the estimated life of our products, commencing with the delivery of our print directories or display date of the online advertisement, respectively. Amounts billed up front for the directories are deferred and recognized over the period for which the corresponding directories are in circulation. Revenues are generally recognized and billed over periods not exceeding twelve months, or in the case of certain alphabetical directories, not exceeding twentyfour months. Adjusted Income from Operations before Depreciation and Amortization (Adjusted EBITDA) We provide guidance and report on our EBITDA (Income from operations before depreciation and amortization), adjusted for comparability purposes ( Adjusted EBITDA ) by removing the effect of purchase accounting related to the acquisitions of ADS, MTS and Aliant and by excluding the impact of non-recurring transition expenses relating to acquisitions in the core Directories segment because it is a key measure used by management to evaluate performance. Adjusted EBITDA is utilized in measuring compliance with debt covenants and in making decisions relating to distributions to unitholders. We believe Adjusted EBITDA assists investors in assessing our performance on a consistent basis without regard to restructuring and special charges which are non-recurring by nature and to depreciation and amortization, which are non-cash in nature and can vary significantly depending on accounting methods or non-operating factors such as historical cost. EBITDA is not a calculation based on GAAP, and is not considered an alternative to income from operations or net earnings in measuring the Company s performance. EBITDA does not have a standardized meaning and is therefore not likely to be comparable with similar measures used by other issuers. For a reconciliation with GAAP, please refer to Consolidated Operating and Financial Results in this section. EBITDA should not be used as an exclusive measure of cash flow since it does not account for the impact of working capital changes, capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed in the consolidated statements of cash flows. Distributable Cash Following the revised Staff Notice issued by the Canadian Securities Administrators ( CSA ) in 2006 in which they concluded that distributable cash can only be considered as a cash flow measure, we adopted their recommendations in the third quarter of 2006, retroactive to January 1, In July 2007, the CSA issued a replacement to National Policy to provide additional guidance with respect to disclosures on distributable cash. We also adopted these new recommendations in the second quarter of 2007 which had no impact on distributable cash. Distributable cash is a non-gaap measure generally used by Canadian income trusts as an indicator of financial performance, and it should not be seen as a measurement of liquidity or a substitute for comparable metrics prepared in accordance with GAAP. This measure is commonly used by investors, management and other stakeholders to evaluate the ongoing performance of the Fund. Distributable cash may differ from similar calculations as reported by other entities and, accordingly, may not be comparable to distributable cash as reported by such entities. For a reconciliation with GAAP, please refer to the Distributable Cash in section 4 Liquidity and Capital Resources. 6

9 Cash Distributions per Unit We provide guidance and report on cash distributions per unit because it is a measure of return used by investors. Cash distributions per unit depend on our distributable cash and YPG s distribution policy. The Fund makes monthly cash distributions to Unitholders of record on the last business day of each month, net of estimated cash amounts required for expenses and other obligations of the Fund, potential cash redemptions of units and any tax liability. We periodically review cash distributions taking into account our current and prospective performance. Some of the factors considered in making decisions related to distributions include cash amounts to service debt obligations, maintenance capital expenditures, taxes and other items considered to be prudent. We increased cash distributions per unit by 5.8% from $1.03 to $1.09 beginning with the distribution paid on January 15, This increase in cash distributions was based on sustained growth in distributable cash and management s confidence in our future prospects. This increase in cash distributions is also consistent with management s objective of growing cash distributions by approximately 6% in Performance Relative to Business Strategy Key priorities identified to achieve sustainable organic growth Directories - Continued focus on customer relationship management The release of our client information tools launched in Ontario and Quebec last year will be extended to regions in which we have acquired businesses in the last two years including our newly acquired businesses in Manitoba and Atlantic Canada. This will enable us to eliminate inefficiencies associated with duplicate legacy systems. We will ensure all regions first proceed with the release covering the business profile (single source of customer profiles and production information), sales collateral (flow of information between sales, assignment center and ad production) and call planning (sales assignment and call planning) before we plan for the deployment of contract closure (electronic retirement of revenues and value based pricing) which will allow for optimal sharing of best practices across regions. The deployment date of the last phase is expected to begin late in the fourth quarter. Enhancement and expansion of our product and service offerings We are currently completing the sales cycle of our parent & kids guide to be distributed in the third quarter. This new offering is along the same lines as our initial rollout of the home improvement and family care guides as part of our partnership with Transcontinental Media. Also, we are currently working on a number of new online products which are expected to be launched in the third and fourth quarter of this year. Vertical Media - Integration of operations and improvement of productivity through investment in technology and business processes The national integration of our vertical media business is progressing according to plan. Our main focus is the creation of a centralized database from which we will benefit from a deeper understanding of our clients and advertisers needs. This effort is leading to the creation of a new sales model that will offer customers an enhanced value-added proposition. Furthermore, the automation of the sales process will result in an almost paperless environment, which will allow our sales force more time to focus on customers needs and seek out new accounts. In addition, the integration of systems from the previously separate businesses will allow for standardization and cost savings. Our intent is to deploy the new integrated national platforms regionally until all provinces are operational. The rollout is expected to be finalized in mid

10 Consolidated Operating and Financial Results Consolidated Results (in thousands of Canadian dollars) Three-month periods ended June 30, Six-month periods ended June 30, Revenues $411,110 $340,324 $795,351 $636,094 Operating costs 190, , , ,305 Income from operations before depreciation and amortization (EBITDA) 220, , , ,789 Depreciation and amortization 49,982 42,800 94, ,512 Income from operations 170, , , ,277 Financial charges, net 34,828 34,001 69,916 61,783 Earnings before dividends on preferred shares, income taxes and non-controlling interest 135, , , ,494 Dividends on preferred shares 3,776-4,684 - Earnings before income taxes and noncontrolling interest 131, , , ,494 Provision for (recovery of) income taxes 3,600 (7,785) 6,066 (11,930) Non-controlling interest Net earnings $127,573 $114,191 $248,524 $199,424 Basic earnings per unit $0.24 $0.23 $0.47 $0.40 Diluted earnings per unit $0.23 $0.22 $0.45 $0.40 Revenues $411,110 $340,324 $795,351 $636,094 Elimination of purchase accounting impact 1, ,578 3,701 Adjusted Revenues 1 $412,801 $340,450 $797,929 $639,795 Income from operations before depreciation and amortization $220,319 $183,207 $423,762 $350,789 Elimination of purchase accounting impact (886) (178) (1,381) 80 Transition expenses - 1,029-2,287 Adjusted EBITDA 1 $219,433 $184,058 $422,381 $353,156 Adjusted EBITDA margin 53.2% 54.1% 52.9% 55.2% 1 Adjusted Revenues and Adjusted EBITDA The acquisitions of ADS, MTS and Aliant (the acquisitions ) were accounted for using the purchase method of accounting which resulted in the elimination of deferred revenues and deferred publication costs related to those directories published prior to each acquisition. These deferred revenues along with related deferred publication costs would have been recognized in 2005 through 2009, had the acquisitions not occurred. As a result, reported revenues and expenses are not representative of revenues and expenses that would have otherwise been reported and are not representative of revenues and expenses that will be reported in subsequent periods. The adjusted results are derived by excluding from the reported amounts the impact of purchase accounting and non-recurring transition expenses relating to acquisitions in the core Directories segment. 8

11 Analysis of Consolidated Operating and Financial Results Revenues Revenues increased by $70.8 million to $411.1 million during the second quarter of 2007 and by $159.3 million to $795.4 million for the six-month period ended June 30, 2007, compared with the same periods last year. For the three-month period ended June 30, 2007, $52.7 million is attributable to the contribution of acquired businesses in 2006 and 2007, excluding their 2007 organic growth. For the six-month period ended June 30, 2007 this explanation accounts for $119.5 million. Online revenues from the Directories and the Vertical Media segments combined reached $42.2 million during the second quarter of 2007 and $77.3 million for the first six months of Online growth is driven by strong adoption of our online products especially in Western Canada and the introduction of new pay for performance products. Our network of web sites in Directories and Vertical Media attracted 10.1 million unduplicated unique visitors 1 on average during the second quarter of EBITDA Online Usage Unduplicated Unique Visitors (in millions) June 2006 Q For the month of June 2006 including TMC and Trader Canada, but excluding MTS, Aliant and LesPac. EBITDA increased by $37.1 million to $220.3 million during the second quarter of 2007 and by $73 million to $423.8 million for the six-month period ended June 30, 2007, compared with the same periods last year. The increase for the second quarter and the six-month period ended June 30, 2007 is mainly attributable to the contribution from Trader, MTS and Aliant. Cost of sales increased by $23.3 million to $113 million during the second quarter of 2007 and by $61 million to $218.6 million for the six-month period ended June 30, 2007, compared with the same periods last year. The increase for the second quarter and the six-month period ended June 30, 2007 substantially relates to the acquisitions made in 2006 and 2007 as the second quarter of 2006 included the results of TMC and also Trader Canada, but only as of June 8, 2006, while it did not include the results of MTS. The 2006 results also included only 12.86% of Aliant. Gross profit margin decreased from 73.7% in the second quarter of 2006 to 72.5% in the second quarter of 2007 and from 75.2% to 72.5% for the six-month periods ended June 30, 2006 and June 30, 2007, respectively. The decrease for the second quarter and the six-month period ended June 30, 2007 is attributable to lower margins in the Vertical Media segment, which is included for the first six months of The 2006 results included the results from the Vertical Media segment only from their respective dates of acquisition of February 14, 2006 and June 8, General and administrative expenses increased by $10.3 million to $77.8 million during the second quarter of 2007 and by $25.3 million to $153 million for the six-month period ended June 30, 2007, compared with the same periods last year. The increase for the second quarter and the six-month period ended June 30, 2007 is mainly attributable to the acquisitions of Trader, MTS and Aliant. Depreciation and amortization Depreciation and amortization increased from $42.8 million to $50 million during the second quarter of 2007 and decreased from $101.5 million to $94 million for the six-month period ended June 30, 2007, compared with the same periods last year. The increase of $7.2 million during the second quarter relates to the amortization of certain intangible assets related to the acquisitions of Aliant and MTS. The decrease in the first six months of 2007 compared to the same period in 2006 substantially relates to the amortization of certain intangible assets of ADS acquired in May 2005 which were fully amortized at the end of the second quarter of 2006, offset in part by the amortization of intangible assets of Trader and MTS acquired during 2006 and Aliant acquired in Financial charges Financial charges remained stable from $34 million in the second quarter of 2006 to $34.8 million in the second quarter of For the six-months ended June 30, 2007, financial charges increased from $61.8 million to $69.9 million when compared with the same period last year. This was a result of the interest on new net debt incurred to finance business acquisitions, offset by other charges related to derivative financial instruments last year that did not occur this year. The effective average interest rate on our debt portfolio as of June 30, 2007 was 5.4 %. 1 Source: comscore Media Metrix Canada adjusted to include LesPAC for

12 Dividends on preferred shares Pursuant to the issuance of Preferred Shares Series 1 in March 2007 and of Preferred Shares Series 2 in June 2007, dividends accrued for these preferred shares amounted to $3.8 million for the second quarter of 2007 and $4.7 million for the six-month period ended June 30, Dividends on the Preferred Shares Series 1 of $3.9 million were paid during the second quarter of Provision for (recovery of) income taxes The combined effective provincial and federal tax rates were 31.1% and 31.6% in 2007 and 2006, respectively. The Fund recorded a tax expense of 2.7% of earnings and 2.4% of earnings for the second quarter and year-to-date of 2007, respectively. The Fund s subsidiary, YPG LP, is a limited partnership, and as such, is not subject to income taxes whereas YPG LP s subsidiaries are subject to income tax. The difference between the statutory and the effective tax rates is primarily due to intercompany revenues which are not currently taxable when received by YPG LP. The enactment of the Budget Implementation Act 2007 (Bill C-52) on June 22, 2007 which contained legislation implementing proposed changes to the manner in which publiclytraded income-trusts such as the Fund and the distributions from such entities will be taxed effective in the 2011 taxation year (the SIFT Rules ) has no impact on YPG s current earnings. The operating activities are being carried on in corporate entities and as such, future income taxes are being calculated on all underlying operating assets and liabilities. For more complete description of Bill C-52 and its impact on our results, see section 7 Risk and Uncertainties. Net earnings Net earnings increased by $13.4 million to reach $127.6 million during the second quarter of 2007 and by $49.1 million to reach $248.5 million for the six-month period ended June 30, 2007, compared with the same periods last year. In addition to the organic growth in the Directories segment, the positive variance for the quarter and for the six-month period ended June 30, 2007, is also due to net earnings generated by the acquisitions of Trader, MTS and Aliant. Analysis of Adjusted Consolidated Operating and Financial Results Adjusted Revenues Adjusted Revenues increased by $72.4 million to $412.8 million during the second quarter of 2007 and by $158.1 million to reach $797.9 million for the six-month period ended June 30, 2007, compared with the same periods last year. The portion of the increase for the second quarter of 2007 and for the six-month period ended June 30, 2007 attributable to the businesses acquired in 2006 and 2007 represents $52.7 million and $119.5 million of the variance, respectively. Adjusted EBITDA Adjusted EBITDA increased by $35.4 million to $219.4 million during the second quarter of 2007 and by $69.2 million to reach $422.4 million for the six-month period ended June 30, 2007, compared with the same periods last year. These increases are largely due to the contribution from acquired businesses. Cost of sales increased by $25.4 million to $115.6 million during the second quarter of 2007 and by $60.9 million to $222.5 million for the six-month period ended June 30, 2007, compared with the same periods last year. The increase for the second quarter and the six-month period ended June 30, 2007 compared to the same periods last year substantially relates to the acquisitions of Trader and MTS. The 2006 results also included only 12.86% of Aliant. Gross profit margin decreased from 73.5% in the second quarter of 2006 to 72% in the second quarter of Over the six-month period ended June 30, 2007, gross profit margin decreased to 72.1%, from 74.7% recorded during the same period last year. The decrease for the second quarter and the six-month period ended June 30, 2007 compared to the same periods last year is attributable to lower margins in the Vertical Media segment which is included for the first six months of The 2006 results included the results from the Vertical Media segment only from their respective dates of acquisition of February 14, 2006 and June 8, General and administrative expenses increased by $11.6 million to $77.8 million in the second quarter of 2007 and by $28.1 million to $153 million for the six-month period ended June 30, 2007, when compared to the same periods last year. Again, the increase for the second quarter and the six-month period ended June 30, 2007, compared to the same periods last year is largely attributable to the acquisitions of Trader, MTS and Aliant. 10

13 Summary of Consolidated Quarterly Results Quarterly Results (in thousands of Canadian dollars) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Revenues $411,110 $384,241 $378,987 $369,875 $340,324 $295,770 $276,232 $260,579 Operating costs 190, , , , , , , ,014 Income from operations before depreciation and amortization, restructuring and special charges and impairment of intangible assets (EBITDA) 220, , , , , , , ,565 Depreciation and amortization 49,982 44,030 37,096 33,632 42,800 58,712 76,492 84,899 Restructuring and special charges ,363 - Impairment of intangible assets - - 8, Income from operations 170, , , , , ,870 66,679 73,666 Financial charges, net 34,828 35,088 34,827 37,696 34,001 27,782 32,028 22,080 Earnings before dividends on preferred shares, income taxes and non-controlling interest 135, , , , ,406 81,088 34,651 51,586 Dividends on preferred shares 3, Earnings before income taxes and noncontrolling interest 131, , , , ,406 81,088 34,651 51,586 Provision for (recovery of) income taxes 3,600 2,466 4,734 7,472 (7,785) (4,145) (6,549) (21,090) Non-controlling interest Net earnings $127,573 $120,951 $113,038 $119,471 $114,191 $85,233 $41,200 $72,676 Basic earnings per unit $0.24 $0.23 $0.21 $0.23 $0.23 $0.17 $0.09 $0.15 Diluted earnings per unit $0.23 $0.22 $0.20 $0.23 $0.22 $0.17 $0.09 $0.15 Revenues $411,110 $384,241 $378,987 $369,875 $340,324 $295,770 $276,232 $260,579 Elimination of purchase accounting impact 1, , ,575 6,243 18,355 Adjusted Revenues $412,801 $385,128 $380,032 $369,875 $340,450 $299,345 $282,475 $278,934 Income from operations before depreciation and amortization, restructuring and special charges and impairment of intangible assets (EBITDA) $220,319 $203,443 $197,695 $198,271 $183,207 $167,582 $151,534 $158,565 Elimination of purchase accounting impact (886) (495) (625) (515) (178) 258 (1,337) 1,035 Transition expenses ,029 1,258 11,582 1,016 Adjusted EBITDA $219,433 $202,948 $197,070 $197,756 $184,058 $169,098 $161,779 $160,616 Adjusted EBITDA margin 53.2% 52.7% 51.9% 53.5% 54.1% 56.5% 57.3% 57.6% Adjusted Revenues reflect steady organic growth in our Directories segment quarter over quarter. In addition, Adjusted Revenues were favourably impacted by the acquisition of TMC on February 14, 2006, Trader Canada on June 8, 2006, MTS on October 2, 2006 and Aliant on April 30,

14 The decrease in Adjusted EBITDA margins in 2006 reflects lower margins generated by acquired businesses in Vertical Media in the first and second quarters of The margins in the second half of 2006 have also been impacted by nonrecurring transition expenses of $9.5 million relating to the integration of the acquired businesses. Net earnings were affected by purchase accounting and are not comparable quarter over quarter. Segmented Information Directories Key Performance Indicators Each year, we set targets to advance our goals and drive results. The targets below have been established through our ongoing planning process. Year-over-Year Performance Adjusted Revenue growth On a comparable basis Adjusted EBITDA growth On a comparable basis 2007 Target Three-month period ended June 30, 2007 Six-month period ended June 30, % to 5% 5.1% 5.4% 4% to 7% 6.6% 7.2% Adjusted Revenues on a comparable basis as if YPG had owned the entities from the beginning of each reporting period, grew at a level above our 2007 target ranges, at 5.1%. Adjusted EBITDA on a comparable basis grew at 6.6% for the second quarter of 2007, which is within our target range and grew at a level above our 2007 target range for the six-month period ended June 30, 2007 at 7.2%. These results reflect a stronger performance in our online revenues as a result of an accelerated adoption of our online offerings in Western Canada combined with cost containment efforts and higher synergies being realized from our integration of MTS. The table below provides supplemental information incorporating the results of MTS and Aliant (the Acquired Entities ) in 2006 as if YPG had owned those entities all year in order to better discuss performance on a comparable basis. Combined Financial Results of YPG and Acquired Entities Three-month period ended June 30, 2006 (in thousands of Canadian dollars) YPG Acquired Entities 1 Total Adjusted Revenues $287,219 $23,899 $311,118 Adjusted EBITDA $166,743 $14,133 $180,876 Adjusted EBITDA margin 58.1% 59.1% 58.1% Combined Financial Results of YPG and Acquired Entities Six-month period ended June 30, 2006 (in thousands of Canadian dollars) YPG Acquired Entities 1 Total Adjusted Revenues $570,460 $47,673 $618,133 Adjusted EBITDA $331,712 $27,549 $359,261 Adjusted EBITDA margin 58.1% 57.8% 58.1% 1 Includes 87.14% of Aliant 12

15 Operating and Financial Results Operating Results 1,2 (in thousands of Canadian dollars) Three-month periods ended June 30, Six-month periods ended June 30, Revenues $320,421 $287,093 $629,388 $566,759 Operating costs 130, , , ,414 Income from operations before depreciation and amortization (EBITDA) 190, , , ,345 Depreciation and amortization 38,598 35,952 71,552 91,913 Income from operations $151,750 $129,940 $302,242 $237,432 Revenues $320,421 $287,093 $629,388 $566,759 Elimination of purchase accounting impact 1, ,578 3,701 Adjusted Revenues $322,112 $287,219 $631,966 $570,460 Income from operations before depreciation and amortization (EBITDA) $190,348 $165,892 $373,794 $329,345 Elimination of purchase accounting impact (886) (178) (1,381) 80 Transition expenses - 1,029-2,287 Adjusted EBITDA $189,462 $166,743 $372,413 $331,712 1 The results of the specialized guides that were previously reported as part of the Vertical Media segment are included in the three-month and sixmonth periods ended June 30, 2006 of the Directories segment. As such, a reclassification of the six-month results has been performed to reflect this inclusion in the Directories segment. 2 See Note 17 - Segmented Information of the interim consolidated financial statements of the Company for the period ended June 30, Adjusted Revenues - Directories (in millions of dollars) Adjusted EBITDA - Directories (in millions of dollars) % % Q Q Q Q

16 Analysis of Operating and Financial Results Revenues and Adjusted Revenues Revenues increased by $33.3 million to $320.4 million during the second quarter of 2007 and by $62.6 million to reach $629.4 million for the six-month period ended June 30, 2007, compared with the same periods last year. For the three-month period ended June 30, 2007, $19.4 million is attributable to the contribution of acquired businesses in 2006 and For the sixmonth period ended June 30, 2007, this explanation accounts for $29.9 million. Excluding the effect of purchase accounting, Adjusted Revenues increased by $34.9 million to $322.1 million during the second quarter of 2007 and by $61.5 million to $632 million for the six-month period ended June 30, 2007, compared with the same periods last year. Organic growth amounted to $16 million or 5.1% for the second quarter of 2007, and $33.3 million or 5.4% for the six-month period ended June 30, EBITDA and Adjusted EBITDA EBITDA increased by $24.5 million to $190.3 million in the second quarter of 2007 and by $44.4 million to reach $373.8 million for the six-month period ended June 30, 2007, compared with the same periods last year. Excluding the effect of purchase accounting and non-recurring transition expenses related to the acquisition of ADS, Adjusted EBITDA increased by $22.7 million to $189.5 million in the second quarter of 2007 and by $40.7 million to $372.4 million for the six-month period ended June 30, 2007, compared with the same periods last year. Cost of sales amounted to $70.6 million in the second quarter of 2007 compared with $65.3 million for the same period last year. In the first six months of 2007, cost of sales was $137.8 million compared to $125.7 million for the first six months of Excluding the effect of purchase accounting, cost of sales increased in the second quarter of 2007 to $73.2 million compared with $65.9 million for the same period last year and to $141.7 million for the six-month period ended June 30, 2007 compared to $129.9 million for the same period last year, mainly due to the acquisitions of MTS and Aliant and higher direct costs related to increased revenues. Gross profit margin was 78% in the second quarter of 2007 compared to 77.3% for the same period last year and 78.1% for the six-month period ended June 30, 2007 compared to 77.8% for the same period last year. Excluding the effect of purchase accounting, gross profit margin was 77.3% in the second quarter of 2007 compared to 77.1% for the same period last year and 77.6% for the six-month period ended June 30, 2007 compared to 77.2% for the same period last year. General and administrative expenses in the second quarter of 2007 increased by $3.6 million to $59.5 million and by $6.2 million to $117.8 million for the six-month period ended June 30, 2007, compared with the same periods last year. The results of 2006 do not include MTS, which was acquired in the fourth quarter of 2006, and include only 12.86% of Aliant. Depreciation and amortization Depreciation and amortization increased from $36 million in the second quarter of 2006 to $38.6 million in the second quarter of The increase in the second quarter compared to the same period last year is due to the acquisitions of MTS and Aliant and the related increase of intangible assets. Over the first six months of 2007, when compared to the same period last year, depreciation and amortization decreased to $71.6 million from $91.9 million. The decrease in the six-month period ended June 30, 2007 when compared to the same period last year, substantially relates to the acquisition of ADS where the amortization of customer contracts amortized over a period not exceeding 11 months ceased in the second quarter of Excluding the effect of purchase accounting, depreciation and amortization was $9.6 million for the second quarter of 2007, up slightly from $9 million for the second quarter of 2006 and $18.9 million for the six-month period ended June 30, 2007 when compared to $19.3 million for the same period last year. 14

17 Segmented Information Vertical Media This segment includes the results of Trader in It also includes the results from the new partnership with LesPAC from the date of acquisition on April 19, For the first six months of 2006, the results include TMC only from the date of acquisition on February 14, 2006, and Trader Canada only from its acquisition on June 8, As such, comparative figures are not meaningful. Key Performance Indicators Each year, we set targets to advance our goals and drive results. The targets below have been established through our ongoing planning process. Year-over-Year Performance Revenue growth On a comparable basis EBITDA growth On a comparable basis 2007 Target Three-month period ended June, 30, 2007 Six-month period ended June 30, % to 7% 5.1% 4.7% 7% to 9% 12.3% 8.8% Revenues on a comparable basis, as if YPG had owned the entities from the beginning of each reporting period, grew at a level below our 2007 target range, at 5.1% for the second quarter of 2007, but higher than the previous quarter of 3.9% which results in a lower revenue growth than expected of 4.7% for the six-month period ended June 30,2007. The focus on change management continues to result in short-term negative variances in terms of revenue growth. EBITDA, however, grew at a level above our 2007 target range, at 12.3% for the second quarter of 2007 and is in line with expectations for the six-month period ended June 30, 2007 at 8.8%. The table below provides supplemental information incorporating the results of Trader and LesPAC in 2006 as if YPG had owned those entities all year in order to better discuss performance on a comparable basis Results of Trader and LesPAC on a stand-alone basis (in thousands of Canadian dollars) Q1 Q2 Revenues $73,210 $86,702 EBITDA $19,756 $26,883 EBITDA margin 27% 31% 15

18 Operating and Financial Results Operating Results 1, 2 (in thousands of Canadian dollars) Three-month periods ended June 30, Six-month periods ended June 30, Revenues $90,689 $53,231 $165,963 $69,335 Operating costs 60,718 35, ,995 47,891 Income from operations before depreciation and amortization (EBITDA) 29,971 17,315 49,968 21,444 Depreciation and amortization 11,384 6,848 22,460 9,599 Income from operations $18,587 $10,467 $27,508 $11,845 1 The results of the specialized guides that were previously reported as part of the Vertical Media segment are included in the three-month and sixmonth periods ended June 30, 2006 of the Directories segment. As such, a reclassification of the six-month results has been performed to reflect this inclusion in the Directories segment. 2 See Note 17 Segmented Information of the interim consolidated financial statements of the Company for the period ended June 30, Analysis of Operating and Financial Results Revenues Revenues from our Vertical Media segment amounted to $90.7 million in the three-month period ended June 30, 2007 compared to $53.2 million for the same period last year, and $166 million for the six-month period ended June 30, 2007 compared to $69.3 million for the same period last year. The portion attributable to each product vertical is 65% for Automotive, 18% for Real Estate, 14% for general merchandise and 3% for Employment and Other. EBITDA EBITDA increased by $12.7 million to $30 million for the three-month period ended June 30, 2007 and increased by $28.5 million to $50 million for the six-month period ended June 30, 2007, compared to the same periods last year. Cost of sales amounted to $42.4 million for the second quarter of 2007 compared to $24.4 million for the same period last year. For the six-month period ended June 30, 2007, cost of sales was $80.8 million compared to $31.8 million for the same period last year. Gross profit margin was 53.2% for the second quarter of 2007 compared to 54.2% for the same period last year and 51.3% for the six-month period ended June 30, 2007 compared to 54.1% for the same period last year. General and administrative expenses amounted to $18.3 million in the second quarter of 2007 compared to $11.6 million for the same period last year. For the six-month period ended June 30, 2007, general and administrative expenses were $35.2 million compared to $16.1 million for the same period last year. Depreciation and amortization Depreciation and amortization amounted to $11.4 million in the second quarter of 2007 compared to $6.8 million for the same period last year and $22.5 million for the six-month period ended June 30, 2007 compared to $9.6 million for the same period last year. Excluding the effect of purchase accounting, depreciation and amortization was $2.7 million for the second quarter of 2007 compared to $1 million for the same period in 2006, and $5.1 million for the first six months of 2007 compared to $1.3 million for the same period last year. 16

19 4. Liquidity and Capital Resources Financial Position Capital Structure (in thousands of Canadian dollars) As at June 30, 2007 As at December 31, 2006 Cash and cash equivalents $52,411 $57,408 Medium Term Notes 2,044,474 2,050,000 Exchangeable Debentures 278, ,501 Commercial Paper facility (drawn amount) 111, ,800 Obligations under capital leases 17,961 11,033 Long-term debt, including current portion $2,451,664 $2,592,334 Total net debt (net of cash and cash equivalents) $2,399,253 $2,534,926 Preferred shares 486,363 - Total net debt and preferred shares (net of cash and cash equivalents) 2,885,616 $2,534,926 Unitholders equity 5,798,430 5,831,544 Total capitalization including preferred shares 8,684,046 $8,366,470 Net debt to total capitalization 27.6% 30.3% Net debt and preferred shares to total capitalization 33.2% 30.3% Net Debt to EBITDA Multiple Capital Structure and Financial Leverage (in millions of dollars) Net debt to total capitalization x 10,000 8, % 27.6% x 6,000 5,832 5, ,000 2,000 2,535 2, Dec. 31, 2006 Jun. 30, 2007 Dec. 31, 2006 Jun. 30, 2007 Net Debt Preferred Shares Equity 17

20 As at June 30, 2007, YPG had approximately $2.4 billion of debt net of cash and cash equivalents, or $2.9 billion including preferred shares issued during the first half of The net debt and preferred shares position has increased from the end of the last quarter mostly due to additional financing related to the acquisition of Aliant and the investment in LesPAC.com. These acquisitions were funded with a combination of cash on hand and the issuance of commercial paper on our existing facility. The net debt to EBITDA ratio 1 as of June 30, 2007 stands at 2.8 times compared to 3.2 times as of December 31, The net debt and preferred shares to EBITDA ratio 1 stands at 3.4 times as of June 30, The net debt to total capitalization stands at 27.6% compared to 30.3% as of December 31, 2006, and the net debt and preferred shares to total capitalization stands at 33.2% as of June 30, Cumulative Redeemable First Preferred Shares, Series 1 On March 6, 2007, YPG Holdings Inc., a subsidiary of the Fund, issued 12,000,000 cumulative redeemable preferred shares, Series 1 (the Preferred Shares Series 1 ) for gross proceeds of $300 million. A dividend of $ per share per annum is payable on the Preferred Shares Series 1, yielding 4.25% per annum, payable quarterly. The Preferred Shares Series 1 are redeemable by the issuer at par for cash on or after March 31, 2012, or by the issuance of units of the Fund between March 31, 2012 and December 31, The Preferred Shares Series 1 are also retractable for cash at the holder's option on or after December 31, 2012 at a price equal to $25.00 per share plus any accrued and unpaid dividends in arrears. Net proceeds from the issuance of the Preferred Shares Series 1 were used to repay commercial paper borrowings and for general corporate purposes. The Preferred Shares Series 1 were issued under a Short Form Prospectus dated February 28, Cumulative Redeemable First Preferred Shares, Series 2 On June 8, 2007, YPG Holdings Inc., a subsidiary of the Fund, issued 8,000,000 cumulative redeemable preferred shares, Series 2 (the Preferred Shares Series 2 ), for gross proceeds of $200 million. A dividend of $1.25 per share per annum is payable, yielding 5.0% per annum, payable quarterly. The Preferred Shares Series 2 are redeemable by the issuer at a decreasing premium for cash on or after June 30, 2012, or by the issuance of units of the Fund between June 30, 2012 and June 30, The Preferred Shares Series 2 are also retractable for cash at the holder s option on or after June 30, 2017 at a price equal to $25.00 per share plus any accrued and unpaid dividends in arrears. Net proceeds from the issuance of the Preferred Shares Series 2 were used to repay commercial paper borrowings. The Preferred Shares Series 2 were issued under a Short Form Prospectus dated June 1, An amount of $1.6 million representing the value of the redemption option has been classified as a derivative financial instrument on the balance sheet. Both the Preferred Shares Series 1 and Preferred Shares Series 2 were assigned a rating of P-3 by Standard and Poor s and Pfd-3 (high) by DBRS. Revolving Credit Facilities and Commercial Paper Program The Fund currently has in place a $700 million senior unsecured revolving credit facility (the Revolving Facility ). The Revolving Facility which is composed of two tranches was amended on March 6, 2007 to extend the term of its tranches: (i) the $500 million 364-day revolving tranche with a 2-year term-out option will now mature in May 2010; and (ii) the $200 million 5-year revolving tranche will now mature in May The total amount of the Revolving Facility can be used as back-up for the commercial paper program and for general corporate purposes. The 364-day tranche can be extended annually, subject to the Lender s consent. If not extended, any amount drawn may be converted, at our option, into a 2-year non-revolving term loan. As of June 30, 2007, no amount was drawn under the Revolving Facility. The Revolving Facility is subject to customary terms and conditions including limits on pledging assets without the consent of lenders. These facilities are also subject to the maintenance of a maximum ratio of funded debt to EBITDA of 4.25 times and a minimum ratio of EBITDA to interest expense on total debt of 3.5 times. YPG Holdings Inc., a subsidiary of the Fund, maintains a commercial paper program with an authorized limit of $500 million. The Revolving Facility serves as a back-up facility for the program. As at June 30, 2007, commercial paper outstanding amounted to $111 million. YPG Holdings Inc. was in compliance with all of its debt covenants as at June 30, Latest twelve month EBITDA giving effect to the impact of acquisitions. 18