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1. Our Business, Mission, Strategy and Capability to Deliver Results

Our Business

Yellow Pages Group is a leading media company serving Canadians and Canadian businesses from coast to coast. This section provides an overview of our business, how we strive to manage it and our ongoing priorities.

Directories

We are Canada's largest directories publisher and the exclusive owner of the Yellow PagesTM, Pages JaunesTM and Walking Fingers & DesignTM trademarks in Canada. We have been an industry leader since we published our first directory in 1908.

In recent years we have expanded our reach, acquiring directory operations serving British Columbia, Alberta, Manitoba and the four Atlantic Provinces to complement our strong presence in Ontario and Quebec. YPG now publishes annually more than 340 different telephone directories with a total circulation of approximately 30 million copies. With approximately 420,000 advertising customers, we manage one of the largest face-to-face sales forces for small and medium-sized enterprises (SMEs) in Canada.

We are the official publisher of directories for Bell Canada (Bell), TELUS Communications Inc. (TELUS), Bell Aliant Regional Communications LP (Bell Aliant), MTS Allstream Inc. and for a number of other incumbent telephone companies that have a leading share in their respective markets.>

We also operate the leading online directories in Canada including YellowPages.caTM, Canada411.caTM as well as the CanadaPlus.caTM group of city sites. This complementary online presence allows us to package print and online advertising products and offer them on a national basis.

Our directories are delivered into almost every household and business in our markets, and are available online and through a variety of digital options. Our content is rich and diverse which draws consumers to our directories by generating leads, calls, visits and clicks, and in turn attracts yet more advertisers.

Vertical Media

To expand our business into related media, we broadened the scope of our operations by entering the Vertical Media market in 2006. We acquired and are integrating two companies seen as leaders in the vertical business in Canada. These combined businesses were renamed Trader Corporation (Trader) on January 1, 2007. Trader is a national platform of Vertical Media with approximately 200 publications and 20 web sites covering four main product verticals: automotive, real estate, employment, and generalist. Trader is home to such print brands as Auto TraderTM, Auto HebdoMC, The Bargain FinderTM, Home Renters' GuideTM, Renters NewsTM, and Buy & SellTM. In online, Trader owns Internet destinations such as www.autotrader.ca, www.autohebdo.net, www.homebase.ca, www.visitenet.com, www.buysell.com and lesPAC.com.

Mission

We are aligning our print and online strategies in a continuous effort to find the best seller for each buyer.

Strategy

We have implemented a business strategy to improve our operations and achieve sustainable growth in revenues and profitability while pursuing two avenues for growth: organic and external.

Organic Growth:

Organic growth means creating new opportunities to extend and enhance our existing print and online product and service offerings. This brings greater value to existing assets, provides new advertising opportunities to our advertisers and gives users new capabilities to find what they need.

As we did in 2007, we will continue to focus on the following areas to enhance organic growth:

  • enhancing both YPG and Trader product offerings in response to consumer and advertiser needs and preferences allowing us to create new revenue and cross-selling opportunities;
  • securing compelling online opportunities for our advertisers and users;
  • leveraging relationships with key portals;
  • including directory content with Trader properties;
  • packaging and communicating value to our customer base;
  • exploring new efficiencies in the sales process in both Directories and Vertical Media; and,
  • sharing best practices across both organizations to drive productivity and sales efficiency.

External Growth:

External growth means acting on opportunities to create new sources of revenue, largely through acquiring or developing new assets. During the past several years, we have acted decisively and effectively in this area through the acquisition of new directory operations and through our entry into Vertical Media. Our preference remains to expand our geographic presence in our directory business. Our second choice is to expand in related media.

Sustainable profitability:

We achieve sustainable profitability by maximizing our operating efficiency and constantly reviewing all of our operations with a view to ensuring we maintain a competitive cost structure. Enhancements to our cost structure remain a key priority and will continue to be gained through:

  • business process redesign;
  • cost containment initiatives; and,
  • investment in technology to better support our operations and customer service.

Directories

For a review of developments and performance relative to key priorities identified for 2007, see section 2 – Results.

Our key priorities for 2008 in our directory business are:

  • Continued focus on customer relationship management through our “Customer First” program; and,
  • Enhancement and expansion of our product and service offerings.

Customer First

Customer First has formed the centrepiece of our customer retention and service enhancement activities for the past three years. We operate in a highly competitive environment and the onus is on us to devise new and better ways of serving customers to ensure they continue to use our products and services. Customer First encompasses two elements:

A philosophy that defines how we treat our customers, how we reward them for their loyalty and the overall attitude we expect our employees to adopt in all their customer interactions – the customer must always be our first priority; and,

A computer-based tool that allows us to act on that philosophy and improve service to our customers and add value in very tangible and meaningful ways.

This new tool enables us to conduct our operations in a virtual paperless environment. The phases of implementation include:

  1. Business profiles – providing a single source of complete customer profiles and production information combined with real-time claim processing;
  2. Ad request process – covering the flow of information between the sales organization and both the assignment center and ad production;
  3. Call planning – addressing sales assignment and call planning via a multi-dimensional view; and,
  4. Contract closure – allowing for value-based pricing.

Phases 1, 2 and 3 have been launched and phase 4 is currently being assessed. We are gradually training our employees on the different components of the tool which allows for seamless sharing of best practices across the country. Once we have fully trained all our employees on our Customer First tool, we believe we will be even better positioned to continue the development of new offerings. This will remain a key priority for the Company in 2008.

Enhancement and expansion of Product Services

During 2008, we will build on a number of enhancements and special features to our directories offering in both printed versions and online; these include:

  • Directory Plus – A specialized offering providing cost-effective pricing for advertisers who opt to advertise in our print directories along with a complementary online presence and access to Google AdwordsTM, an expanded partnership with Google to become the first Canadian reseller of Google Adwords;
  • Light Edition – First introduced in Calgary in September 2007, the Yellow Pages directory Light Edition is a small, portable companion guide for people on the move; it's sized for a glove compartment or briefcase and is ideal for people on the road or at the cottage;
  • Profile Plus – A new feature on YellowPages.caTM, consisting of a multimedia service which allows advertisers to expand their online profile through the addition of video clips, a photo gallery and other useful information;
  • Microsoft® Virtual EarthTM – An online mapping service which provides an enhanced user experience allowing the user to get visual directions to a business location;
  • A suite of innovative services that provide enhanced access to our advertisers: by text messaging (YELLOW – 935569); browsing by cell phone at mobile.yp.ca; instant messaging at poynt@yellowpages.ca; and in some markets by phone by calling Yellow Pages 411TM;
  • Brand Finder – A new feature allowing users to search both print and online directories by brand, allowing them to concentrate their search efforts on the advertisers that carry the specified brand; and,
  • Eco Finder – A new section embedded in the directory showcasing the municipality's environmentally friendly initiatives and separate headings whose advertisers' qualities and initiatives are green.

Vertical Media

For a review of developments and performance relative to key priorities identified for 2007, see section 2 – Results.

Our key priorities for 2008 in Vertical Media are:

  • Integration of operations across the country; and,
  • Improvement of productivity through investments in technology, business processes and our people.

As we did in 2007, Trader will continue focusing on new technology implementation and integration across Canada while sharing and harmonizing best practices and initiatives to increase sales force effectiveness and operating efficiencies.

During 2008, we will continue to roll-out the new digital ad-taking system across the country. Trader Dealer Showroom is a unique data capture automated tool which gives our Auto TraderTM dealers the functionality they need to create, market and manage their inventory. In addition, we will also continue with the implementation of a new national sales platform allowing our sales people to adopt a more consultative approach, and to develop a better understanding of our customers so that we can offer them value-added programs in all four of our product verticals.

Capability to Deliver Results

This section of our MD&A explains how we are equipped to continue to operate our business on a financially viable and progressive basis.

Capital Resources

YPG generates sufficient cash flow from its operations to fund cash distributions to its unitholders, to support required capital expenditures and to service its debt obligations. Its cash flow, along with its ability to access external capital if necessary, and the availability under its long term committed bank facilities provide sufficient resources to finance its cash requirements in the foreseeable future and to keep our business fully liquid. Please refer to the Distributable Cash section 4 of this MD&A to understand the impact of new tax proposals issued on October 31, 2006 by the Federal Minister of Finance on cash flow from operations.

Non-capital Resources

YPG's critical intangible resources are:

  • its various brands;
  • its established relationships with customers;
  • its breadth and depth of local print and online content;
  • its employees;
  • its established relationships with incumbent telephone companies; and,
  • the culture and values that characterize our organization.

Brands

As stated previously, YPG is the exclusive owner of a number of leading brands which have high-recognition value among our various audiences.

Established Relationships with Customers

We employ a sales force of approximately 1,800 people, including sales support staff. This large and primarily face-to-face sales force is broken down into various customer segments allowing a more dedicated relationship between the sales force and the SMEs resulting in over 90% of our advertisers renewing their advertising with us each year.

Local Print and Online Content

The quality of our print and online content generates usage which in turn encourages local advertisers to advertise in our directories. Over the past month 74%1 of Canadians have used a print or online directory.

1 2007 Canadian Business Usage Study.

Employees

Over the past four years since becoming a publicly traded entity, our employees have consistently improved our operations. We have achieved constant growth in revenues, profitability and free cash flow generation. Our employees have executed on the initiatives needed to build an impressive track record of delivering against our major objectives and our commitments to our investors.

Long-term Relationships with Incumbent Telephone Companies

We are the official and exclusive publisher of telephone directories of Bell, TELUS, Bell Aliant and MTS Allstream Inc. YPG has entered into royalty-free, 30-year licenses which grant us the right to use the Bell (up to 2032), TELUS (up to 2031), Bell Aliant (up to 2037) and MTS Allstream Inc. (up to 2036) trademarks in connection with the publication of print and online telephone directories in any format (subject to certain exceptions). In addition, Bell, TELUS, Bell Aliant and MTS Allstream Inc. have agreed not to compete with YPG in the creation, publication, distribution or marketing of telephone directories (subject to certain exceptions) for a period of 30 years from the time we entered into these business arrangements with them.

Culture and Values

We have a performance-based culture. That culture is defined by all of our values and influences our thinking and our actions which drive our desire to compete to win. This focus on performance also dictates the competencies and skills we seek to attract and retain. All our employees are expected to value teamwork and be focused on our customers, they should act with respect and passion for the job at hand while maintaining open communications. We believe that our culture and our values form the foundation of this organization and are critical to its sustained success.