This section provides an overview of our financial performance in 2014 compared to 2013 and 2012. We present several metrics to help investors better understand our performance. Some of these metrics are not measures recognized by IFRS. Definitions of these financial metrics are provided on page 3 of this MD&A and are important aspects which should be considered when analyzing our performance.

Overall

  • Revenues decreased by $94.2 million or 9.7% to $877.5 million compared to the previous year.
  • Income from operations before depreciation and amortization and restructuring and special charges (EBITDA) decreased by $100.1 million or 24.1% to $316 million compared to the previous year.
  • Digital revenues represented 50.5% of consolidated revenues for the year ended December 31, 2014, up from 41.8% for the same period in 2013.

Highlights
(in thousands of Canadian dollars - except per share information)
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1 Please refer to Section 4 for a reconciliation of free cash flow.
Years ended December 31,
  2014 2013
Revenues $877,528 $971,761
Income from operations before depreciation and amortization, and restructuring and special charges (EBITDA) $315,976 $416,112
EBITDA margin 36% 42.8
Net earnings (loss)1 $188,540 $176,530
Basic earnings per share attributable to common shareholders $6.95 $6.34
Cash flows from operating activities $156,507 $340,680
Free cash flow2 $72,557 $274,551
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Performance Relative to Business Strategy

To promote successful implementation of Yellow Pages’ Return to Growth Plan, the Company identified the following key areas of focus for 2014:

  • Extend the Brand Promise – Launch targeted advertising campaigns to increase digital brand awareness and perception among consumer audiences and SMEs, as well as underscore the brand’s digital transformation;
  • Attract Valuable Audiences – Deliver an enhanced user experience, improve the quality, completeness and relevance of content, and provide attractive digital properties for local neighbourhood discovery to promote growth in digital audiences;
  • Respond to Customer Needs – Provide valuable digital solutions, an improved sales experience, superior execution of clients’ marketing campaigns, as well as enhanced customer service to accelerate customer acquisition and protect customer retention;
  • Invest in Employees – Support the Company’s digital transformation by attracting and retaining the required expertise in information technology, digital media, sales and customer service, while providing the necessary training to increase digital skillsets across the organization; and
  • Improve Efficiencies – Implement technologies that will optimize processes, streamline business operations and promote profitability.

Extend the Brand Promise

In 2014, the Company invested in local and national branding campaigns dedicated to increasing digital brand awareness and perception among consumer audiences and SMEs, as well as underscore the brand’s digital transformation and grow traffic on its flagship YP mobile application. A television advertising campaign ran nationally from April to June 2014, introducing Canadians to the improved content and user functionalities available on the YP mobile application. This was followed by an extensive out-of-home and digital advertising campaign in Toronto, Montreal, Calgary and Vancouver in the summer and fall of 2014 to promote a more targeted adoption within Canada’s most populated urban centers. Both the national and local campaigns yielded favourable results, having contributed positively to increasing traffic on the YP mobile application and improving the Company’s digital brand recall and perception.

In conjunction, Yellow Pages rebranded its “yellowpages.ca” and “ShopWise” digital properties to “YP.ca” and “YP Shopwise,” respectively. The introduction of the YP acronym is modern, digital-oriented and easier to remember, and will also be used in the branding of Yellow Pages’ upcoming digital properties to further enhance brand recognition.

Following a 2013 launch in Toronto, Yellow Pages extended its corporate social responsibility campaign, STN to Montreal, Vancouver, Calgary and Ottawa in 2014. To celebrate small businesses and encourage Canadians to shop locally, STN was held during a weekend when many Canadians shop at U.S. retailers to take advantage of Black Friday and Cyber Monday deals. In 2014, STN attracted significant support from local media and celebrities, in addition to the participation of 200 Canadian business associations. Over 8,000 local SMEs also participated in the event, having uploaded 6,000 deals exclusive to YP’s digital properties for event day.

Lastly, as the “Yellow Pages” brand remains highly recognized, respected and reflective of the Company’s 100-year heritage of connecting businesses and consumers nationwide, the Company officially changed its holding name to “Yellow Pages Limited” on December 31, 2014.

Attract Valuable Audiences

To increase traffic across its network of digital properties, attract more business to current and prospective customers, and ultimately, improve ROI, Yellow Pages remains committed to delivering users with richer content and an enhanced search experience. Total digital visits, which measures the number of visits made across the YP, RedFlagDeals, YP Shopwise and C411 desktop and mobile properties, grew to 424.1 million in 2014. This represents a year-over-year growth of 6.8% relative to 397.1 million visits in 2013. For the three-month period ended December 31, 2014, total digital visits reached 117.4 million, growing 14.2% over the same period last year.

The Company aims to raise engagement and the frequency of use of its digital properties by offering shoppers more relevant and differentiated local content. In an effort to improve the accuracy of its business information, the Company has eliminated close to all stale, obsolete and duplicate business listings published across its media. In addition, Yellow Pages’ database of merchant information continues to rapidly expand. The Company’s properties now contain 1.8 million listings and over 480,000 merchant profiles containing pictures, videos, website links, mapping functionalities, deals, ratings and reviews. Editorial content is also being published to promote local neighbourhood discovery and extend users’ experience beyond business search. YP.ca now offers shoppers the ability to discover top-ranked merchants in and around their area, as well as consult a series of articles (Smart Tips) to help them make more informed decisions in such areas as health, personal finance, home renovation, travel, shopping and others.

In 2014, the Company launched new versions of YP.ca and the YP mobile application, YP Shopwise and C411, providing users with an easier-to-navigate interface, more dynamic search functionalities, and quicker response times. These enhancements were well recognized by the digital community, with the YP Shopwise and C411 applications each awarded the titles of “Best New App” by the Canadian App Store. The YP mobile application was also selected as one of Apple’s “Best New Apps of 2014” and included in Google Play’s “Best of 2014” editor’s list. In December 2014, Yellow Pages completed the acquisitions of 4400438 Canada Inc., doing business as Bookenda, and the business of Candia Digital Group Inc. (dine.TO), to acquire the talent and technologies required to accelerate the development of new media properties. With a strong presence in the restaurant industry within the Greater Montreal Area, Bookenda’s digital properties offer a leading online transaction platform for users and merchants to easily interact and manage bookings. dine.TO owns and operates local digital restaurant guides for the Greater Toronto Area, providing users with an extensive database of local restaurant listings, reviews, deals, playlists and events, as well as real-time online ordering capabilities.

Responding to Customer Needs

Yellow Pages must return to a growth in the customer count to ultimately deliver long-term, sustainable revenue and EBITDA growth. As at December 31, 2014, the Company’s customer count totalled 256,000, as compared to 276,000 customers for the same period last year. This represents a decrease in the customer count of 20,400 customers in 2014, relative to 33,100 customers the year prior. The acquisition of new customers continued to accelerate during the fourth quarter of 2014, fuelled by an expanding sales team, the launch of entry-level digital product offerings and the introduction of new sales incentive programs. For the twelve-month period ended December 31, 2014, YP acquired 22,100 new customers, exceeding its 2014 target of 20,000 new customers. Customer acquisition also remained stronger relative to prior periods, up from 15,200 for the same period last year and 20,200 for the twelve-month period ended September 30, 2014. For the twelve-month period ended December 31, 2014, customer renewal among YP’s customers reached 84%, down slightly when compared to 85% for the same period last year. Customer penetration of the Yellow Pages™ 360º Solution (360º), defined as customers who purchase three product categories or more, grew to 36.6% as at December 31, 2014, up from 27.1% at the same time last year, and continues to protect retention. Renewal among 360º Solution customers reached 90% for the twelve-month period ended December 31, 2014 as compared to 82% among non-360º customers. The Company continued to expand its 360º value proposition to local SMEs in 2014, having launched new Smart Digital Display and Facebook Solutions throughout 2014. Smart Digital Display helps local businesses build an online presence by exposing their digital banner ads to local online audiences, while Facebook Solutions allows SMEs to establish and maintain strong visibility across the leading social media property.

Recent efforts to improve the end-to-end customer experience have also played a key role in protecting customer retention levels. In 2014, YP launched its redesigned business-to-business (B2B) online 360º Business Centre (http://businesscentre.yp.ca/), now offering SMEs self-serve functionalities such as the ability to register and claim business listings, update and add content to their merchant profiles, track the performance of their marketing campaigns and pay their invoices. Technologies are also being rolled out across the organization to offer SMEs quality digital solutions and improved customer satisfaction. In the fourth quarter of 2014, Yellow Pages implemented a new business process management system, providing its digital fulfillment teams with improved content management capabilities and a more robust order management procedure to promote the timely delivery of website solutions. The Company is also expanding its customer service teams and currently providing them with better tools to enhance the speed and quality of issue resolution.

CUSTOMER RENEWAL AND ACQUISITION1

1Excludes the contribution of 411 and YP Next Home.
2YP core only, excludes Mediative, 411 and YP Next Home.
As at December 31,
  2014 2013
Customer count1 $256,000 $276,000
Customer renewal rate2 84% 85%
New customers2 $22,100 $15,200

Invest in Employees

Yellow Pages’ employees are a key success factor to its digital transformation. Over the course of 2014, the Company hired over 300 digital media and ISIT professionals to help execute upon the Plan. Employees were given access to a larger, more comprehensive catalogue of courses and training programs to foster digital literacy within the organization. In conjunction, Yellow Pages held conferences to promote mobilization across departments, offering employees an improved understanding of the objectives and initiatives underlying the Plan, as well as their roles as change agents of the Company’s digital transformation. Feedback received from these events was positive, with employees having expressed appreciation for the openness, transparency and interaction received from the executive team, as well as greater confidence in the Company’s ability to execute upon the Plan.

Improve Efficiencies

The Company continues to actively streamline operations to generate cost savings and protect long-term profitability and cash flow generation. Yellow Pages is currently operating under a new print directory distribution model, insourcing a portion of efforts while better aligning directory distribution with consumer usage. Cost savings will also be realized through the ongoing decommissioning and replacement of legacy print publishing systems and ISIT datacentres, and through the optimization of various customer service and digital fulfilment processes.

Consolidated Operating and Financial Results
(in thousands of Canadian dollars - except share and per share information)
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For the years ended December 31,
  2014 2013 2013
Revenues $877,528 $971,761 $1,107,715
Operating costs 561,552 555,649 538,335
Income from operations before depreciation and amortization, impairment of goodwill, intangible assets and property, plant and equipment, and restructuring and special charges (EBITDA) 315,976 416,112 569,380
Depreciation and amortization 78,076 60,164 104,293
Impairment of goodwill, intangible assets and property, plant and equipment –   –   3,267,847
Restructuring and special charges 18,359 23,338 44,923
Income (Loss) from operations 219,541 332,610 (2,847,683)
Financial charges, net 72,116 93,357 155,968
Gain on settlement of debt –   –   (978,589)
Earnings (loss) before dividends on Preferred shares, series 1 and 2, income taxes and earnings from investments in associates 147,425 239,253 (2,025,062)
Dividends on Preferred shares, series 1 and 2 –   –   17,694
(Recovery of) provision for income taxes ($40) 63,421 (78,809)
Earnings from investments in associates (178) (698) (1,893)
Net earnings (loss) 188,540 176,530 1,962,054
Basic earnings (loss) per share attributable to common shareholders 6.95 6.34 (70.95)
Diluted earnings (loss) per share attributable to common shareholders 5.81 5.46 (70.95)
Total assets 1,749,560 1,794,034 (1,756,476)
Long-term debt (including current portion, excluding exchangeable debentures) 507,911 647,468 801,831
Exchangeable debentures 88,959 87,934 86,667

Analysis of Consolidated Operating and Financial Results

Fiscal 2014 versus 2013

Revenues

Revenues decreased by 9.7% to $877.5 million during 2014 compared with $971.8 million for 2013. Revenues remain mostly impacted by the overall loss of customers. To offset existing trends and return to a growth in customer count by 2017, Yellow Pages continues to invest in accelerating the annual run-rate of customer acquisition and delivering an improved experience to current and prospective customers.

Albeit declining, print revenue decline rates are stabilizing. In 2014, consolidated print revenues decreased 23.1% year-over-year to reach $434.7 million. To support print revenues, the Company launched the Print Product Simplification (PPS) initiative in 2014 in select rural markets. By increasing print advertisement sizes at little to no incremental cost to the customer, PPS protects customer renewal while preserving content and promoting usage of the print directory. PPS also simplifies the selling process for our MACs by reducing the number of print offers available to customers. Following its success in rural markets, PPS will be expanded to nearly all rural and urban markets as well as select large urban markets throughout 2015.

Consolidated digital revenues reached $442.8 million in 2014 representing an increase of 9%. A key milestone was achieved during 2014 as consolidated digital revenues exceeded 50% of revenues. For the year ended December 31, 2014, consolidated digital revenues represented 50.5% of consolidated revenues, up from 41.8% for the same period last year. Digital revenues across the Company’s core YP operations, which exclude the impact of Mediative, 411 and YP Next Home, increased by 9.1% year-over-year. This growth remains driven by the ongoing migration of customers’ print spend towards digital solutions, as well as accelerated customer acquisition, as the majority of new customers only purchase digital products. As at December 31, 2014, digital-only customers grew to 37,000, compared to 23,900 as at the same date last year. Digital-only customers represented 14.5% of YP’s customer base as at December 31, 2014, up from 8.7% as at the same time last year.

As at December 31, 2014, 57.3% of YP’s customers were purchasing our owned and operated online priority placement products, compared to 47.1% as at the same date last year. Adoption of our mobile priority placement products also saw growth, with customer penetration reaching 24.1% as at December 31, 2014, as compared to 14.9% for the prior year. Yellow Pages continues to invest in growing traffic across its network of digital solutions to promote customer adoption, retention and ROI across its owned and operated priority placement products. Further supported by the continued adoption of the YP 360º Solution across the Company’s sales channels, Revenue Generating Units1,2 (RGU) per customer also continued to experience growth, increasing from 1.81 as at December 31, 2013 to 1.87 as at December 31, 2014.

CUSTOMER PENETRATION2

As at December 31,
  2014 2013
Print 85% 91%
Owned and Operated Digital Media33 63% 61%
Online priority placement 57% 47%
Mobile priority placement 24% 15%
Legacy 4% 14%
Digital Services4 10% 9%
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Spending Dynamics

For the years ended December 31
  2014 2013
Amongst Renewing Customers2  
Increase in spending5  
Customers distribution 31% 26%
% of revenues 30% 29%
Stable spending6  
Customer distribution 51% 55%
% of revenues 30% 27%
Decrease in spending7  
Customer distribution 18% 19%
% of revenues 40% 44%
Average Revenue per Customer (ARPC)8 $3,189 $3,259
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Operational Indicators

1 Revenue Generating Units measures the number of product groups selected by YP customers.
2 YP core only, excludes Mediative, 411 and YP Next Home.
3 Percentage of YP customers purchasing at least one Online Priority Placement, Mobile Priority Placement, Virtual Business Profile, HD Video, and/or Legacy product.
4 Percentage of YP customers purchasing at least one Website, SEO, SEM, Facebook Solution, and/or Smart Digital Display product.
5 Renewing YP customers experiencing an increase in spending over 5%, on a year-over-year basis.
6 Renewing YP customers experiencing an increase in spending between 0% and 5%, on a year-over-year basis.
7 Renewing YP customers experiencing a decrease in spending on a year-over-year basis.
8 Excludes the contribution of 411 and YP Next Home.
9 For the years ended December 31.
As at December 31,
  2014 2013
Yellow Pages 360º Solution Penetration2 36.6% 27.1%
RGU per customer2 1.87 1.81
Digital only customers6 37,000 23,900
Digital revenues (in thousands of Canadian dollars)9 $442,830 $406,311
Consolidated digital revenues as a percentage of total revenues9 $442,830 $406,311
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EBITDA

EBITDA decreased by $100.1 million to $316 million during 2014 compared with $416.1 million in 2013. The decrease in EBITDA is due mainly to lower revenues combined with a lower EBITDA margin. Our EBITDA margin for 2014 was 36% compared to 42.8% for 2013. Lower revenues and incremental investments related to the Return to Growth Plan were the main contributors to the decrease in EBITDA margin for 2014.

Cost of sales decreased by $10.7 million to $306.9 million during 2014 compared with $317.6 million for 2013. The decrease for the year results from lower sales costs associated with lower revenues, lower print manufacturing costs and workforce reductions associated with our declining legacy business. These cost savings were partly offset by an increase in provisioning and fulfillment costs of our digital products and services as well as expenses related to 411, a company acquired in 2014.

Gross profit margin decreased to 65% for 2014 compared to 67.3% for 2013. The decrease is primarily due to a decline in print revenues.

General and administrative expenses increased by $16.6 million to $254.7 million during 2014 compared with $238.1 million for the same period in 2013. The increase is mainly attributable to investments related to the digital transformation, partially offset by lower bad debts as well as a non-recurring benefit associated with the positive outcome of a litigation.

Depreciation and amortization

Depreciation and amortization increased to $78.1 million during 2014 from $60.2 million in 2013. The increase is due to higher capital expenditures in connection with the deployment of systems and platforms as the Company executes its digital transformation.

Restructuring and special charges

In 2014, we recorded restructuring and special charges of $18.4 million associated primarily with internal reorganizations and workforce reductions, partially offset by a curtailment gain related to workforce reductions. In 2013, we recorded restructuring and special charges of $23.3 million associated with a workforce reduction of approximately 300 employees, the termination and renegotiation of certain contractual obligations and the departure of the former President and Chief Executive Officer.

Financial charges

Financial charges decreased by $21.2 million to $72.1 million during 2014 compared with $93.4 million for 2013. The decrease for the year ended December 31, 2014 is mainly attributable to a lower level of indebtedness and higher interest income on the defined benefit plan’s assets. As at December 31, 2014, the effective average interest rate on our debt portfolio was 9% compared to 9.1% for 2013.

(Recovery of) provision for income taxes

The combined statutory provincial and federal tax rates were 26.56% and 26.46% for the years ended December 31, 2014 and 2013, respectively. The Company recorded a recovery of $40.9 million for the year compared to an expense of $63.4 million in 2013.

The difference between the effective and the statutory rates in 2014 is primarily due to a recovery of incomes taxes of $84.8 million related to the cancellation of certain income tax liabilities in the fourth quarter of 2014 following the settlement of tax assessments with the Canada Revenue Agency.

The difference between the effective and the statutory rates in 2013 is due to the non-deductibility of certain expenses for tax purposes.

Earnings from investments in associates

On June 1, 2014, we acquired the remaining 70% interest in 411. During 2014, we recorded earnings of $0.2 million for the period from January 1, 2014 up to the acquisition date as compared to $0.7 million for the year ended December 31, 2013. Our earnings from our investments in associates for the year ended December 31, 2013 included the amortization of intangible assets in connection with this equity investment.

Net earnings

We recorded net earnings of $188.5 million during 2014 compared with $176.5 million for 2013. This was principally explained by lower EBITDA, more than offset by a recovery of income taxes of $84.8 million related to the cancellation of certain income tax liabilities in the fourth quarter of 2014 following the settlement of tax assessments.

Fiscal 2013 versus 2012

Revenues

Revenues decreased by 12.3% to $971.8 million during 2013 compared with $1,107.7 million for 2012. On a comparable basis, when adjusting for the discontinuation of Canpages directories in 2012, revenues decreased by 10.7% during 2013. Revenues remained adversely impacted by lower print revenues, as larger customers reduced their print advertising spend, as well as a lower customer count amongst smaller, low-spend customers.

Digital revenues reached $406.3 million in 2013, representing a growth of 10.6%. On a comparable basis, when adjusting for the discontinuation of Canpages directories in 2012, digital revenues increased by 12.5% during 2013 when compared to the same period in 2012. During the fourth quarter of 2013, digital revenues represented 45.1% of total revenues, up from 37.7% during the same period in 2012.

Growth in digital revenues in 2013 resulted from the ongoing migration of traditional media customers towards digital products and services and continued adoption of the YP 360º Solution across YP’s sales channels. These factors also led to an improvement in RGU per advertiser from 1.74 as at December 31, 2012 to 1.81 as at December 31, 2013.

The Company had 276,000 customers as at December 31, 2013, compared to 309,000 as at December 31, 2012. Customer renewal rate decreased from 86% for the twelve-month period ended December 31, 2012 to 85% for the same in 2013. During 2013, YP acquired approximately 15,200 new customers, compared to 17,300 for 2012.

For the year ended December 31, 2013, 81% of renewing customers increased or maintained their level of spending compared to 82% in 2012. Customers who experienced a decrease in spending were mainly larger customers that represented approximately 44% of YP’s revenues for the year ended December 31, 2013.

EBITDA

EBITDA decreased by $153.3 million to $416.1 million during 2013 compared with $569.4 million in 2012. The decrease in EBITDA was due to print revenue pressure, as revenue growth from our digital products did not compensate for the loss in print revenues, combined with a lower EBITDA margin. Our EBITDA margin for 2013 was 42.8% compared to 51.4% for 2012. In addition to lower revenues, changes in product mix, investments in the business transformation and employee related expenses were the main contributors to the decrease in EBITDA margin. During 2013, we also recorded provisions associated with sales tax assessments.

Cost of sales decreased by $21.2 million to $317.6 million during 2013 compared with $338.8 million for 2012. The decrease in 2013 resulted mainly from lower sales costs associated with lower revenues and lower manufacturing costs associated with lower print revenues. These cost savings were partly offset by an increase in provisioning and fulfillment costs of our digital services.

Gross profit margin decreased to 67.3% for 2013 compared to 69.4% for 2012. The decrease was mainly due to a change in product mix which includes lower margins associated with some of our digital service offerings such as websites, SEO and SEM.

General and administrative expenses increased by $38.6 million to $238.1 million during 2013 compared with $199.5 million for 2012. The increase for the year ended December 31, 2013 was attributable to higher employee-related expenses, investments in branding associated with our Meet the New Neighbourhood advertising campaign, non-recurring provisions related to sales tax assessments and lower non-cash benefits resulting from the amendment to our employees’ pension and post-retirement benefit plans. This was partly offset by lower bad debts.

Depreciation and amortization

Depreciation and amortization decreased from $104.3 million to $60.2 million during 2013. The decrease was mainly attributable to lower amortization of certain intangible assets related to the acquisition of Canpages in 2010. These intangible assets resulted in a higher amortization expense in 2012 and were fully written off during the previous year. In addition, certain intangible assets and property, plant and equipment had a lower cost base in 2013 due to the impairment of $300 million recorded in the fourth quarter of 2012.

Impairment of goodwill, intangible assets and property, plant and equipment

During the first quarter of 2012, indicators that the Company’s assets may have been impaired were identified, requiring the Company to perform an impairment test. Also, as a result of the closing of the recapitalization during the fourth quarter of 2012, and the issuance of new debt, shares and warrants pursuant to the recapitalization, and in the context of its annual impairment testing, the Company determined that the recoverability of certain of its assets had to be reviewed for impairment purposes. Consequently, we recorded charges of $3,267.8 million in 2012, related to the impairment of goodwill and certain of our intangible assets and property, plant and equipment. No such charge was recorded during 2013.

Restructuring and special charges

In 2013, we recorded restructuring and special charges of $23.3 million associated with a workforce reduction of approximately 300 employees, the termination and renegotiation of certain contractual obligations and the departure of the former President and Chief Executive Officer. In 2012, we incurred restructuring and special charges of $44.9 million associated with a workforce reduction, a relocation of certain centres of excellence, as well as the termination and renegotiation of certain contractual obligations.

Financial charges

Financial charges decreased by $62.6 million to $93.4 million during 2013 compared with $156 million for 2012. The decrease for the year ended December 31, 2013 was mainly attributable to a lower level of indebtedness and lower deferred financing costs as a result of the December 2012 recapitalization transaction. During 2013, we incurred interest on long-term debt of $79 million and deferred financing costs of $0.1 million compared to interest on long-term debt of $119.3 million and deferred financing costs of $8.4 million for the preceding year. During 2013, the Company purchased on the open market $8 million of senior secured notes for a total cash consideration of $8.3 million and exercised its option to redeem $27 million of senior secured notes for a total cash consideration of $28.4 million. A total loss of $1.7 million was recorded in net earnings in financial charges. In 2012, we incurred a charge of $18.5 million related to an option associated with our investment in an associate. No such charge was recorded in 2013. As at December 31, 2013 and 2012, the effective average interest rate on our debt portfolio was 9.1%.

Gain on settlement of debt

During the fourth quarter of 2012, we recorded a gain of $978.6 million on the settlement of debt pursuant to the recapitalization, net of related fees of $69.5 million, write-off of deferred financing costs of $16.3 million, deferred gains of $5.5 million, an equity component of $7.2 million and a derivative component of $0.6 million, associated with our previous debt instruments.

Dividends on Preferred shares, series 1 and 2

Dividends on two series of redeemable preferred shares amounted to $17.7 million for the year ended December 31, 2012. Pursuant to the December 2012 recapitalization transaction, these preferred shares were cancelled.

Provision for (recovery of) income taxes

The combined statutory provincial and federal tax rate was 26.46% and 26.31% for the years ended December 31, 2013 and 2012, respectively. The Company recorded an expense of $63.4 million for the year compared to a recovery of $78.8 million in 2012. The Company recorded an expense of 26.51% on earnings for the year ended December 31, 2013.

The Company recorded a recovery of 3.9% on the loss for the year ended December 31, 2012. The difference between the effective and the statutory rates in 2012 was due to the gain on settlement of debt offset by the unrecognized capital losses on its investment in subsidiaries and to the impairment charge of $3,267.8 million, which was not fully deductible for tax purposes. Excluding these items, the effective tax rate in 2012 would have been in line with the statutory rate.

Earnings from investments in associates

During 2013, we recorded earnings from our investment in an associate in the amount of $0.7 million compared with $1.9 million for the same period in 2012. Effective January 1, 2012, we no longer account for our investment in Acquisio using the equity method and we recorded a gain of $2.1 million in 2012 on the revaluation of this investment. Our earnings from our investments in associates included the amortization of intangible assets in connection with these equity investments.

Net earnings (loss)

During 2013, we recorded net earnings of $176.5 million compared with a net loss of $1,962.1 million in 2012. The increase in earnings was mainly due to the impairment of goodwill, certain intangible assets and property, plant and equipment of $3,267.8 million recorded in 2012, offset by the gain on settlement of debt of $978.6 million recorded in 2012, lower depreciation and amortization of $44.1 million, lower restructuring and special charges of $21.6 million, and lower financial charges of $62.6 million, partly offset by a higher provision for income taxes of $142.2 million and lower EBITDA of $153.3 million.

Summary of Consolidated Quarterly Results

Quarterly Results
(IN THOUSANDS OF CANADIAN DOLLARS – EXCEPT PER SHARE INFORMATION)
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  2014   2013
  Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
218,42 220,57 223,20
Revenues $215,319 $7 $9 $3 $237,951 $237,350 $243,183 $253,277
Operating costs 150,487 143,165 139,318 128,582 146,698 135,203 135,949 137,799
Income from operations before depreciation and amortization, and restructuring and special charges (EBITDA) 64,832 75,262 81,261 94,621 91,253 102,147 107,234 115,478
EBITDA margin 30.1% 34.5% 36.8% 42.4% 38.3% 43% 44.1% 45.6%
Depreciation and amortization 22,003 19,723 18,146 18,204 16,106 15,589 14,779 13,690
Restructuring and special charges 5,714 2,746 6,784 3,115 13,134 4,011 –   6,193
Income from operations 37,115 52,793 56,331 73,302 62,013 82,547 92,455 95,595
Net earnings 95,225 26,542 27,551 39,222 30,964 41,775 50,326 53,465
Basic earnings per share attributable to common shareholders $3.53 $0.98 $1.01 $1.43 $1.11 $1.51 $1.81 $1.91
Diluted earnings (loss) per share attributable to common shareholders $2.88 $0.84 $0.87 $1.22 $0.97 $1.30 $1.55 $1.64
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Revenues decreased throughout the quarters due to the overall loss of customers and the reduction of print advertising spend amongst larger customers, partially offset by an increase in revenues of our digital products. Revenues for the fourth quarter of 2013 were favourably impacted by non-recurring print revenues.

In the first and second quarters of 2013, operating costs were positively impacted by non-cash benefits of $2.6 million and $4.6 million, respectively, related to amendments to our pension and post-retirement benefit plans. The fourth quarter of 2013 was negatively impacted by non-recurring legal provisions and a sales tax assessment while the first quarter of 2014 was impacted by a non-recurring benefit associated with the positive outcome of a litigation. Our EBITDA margin decreased throughout 2013 and 2014, with the exception of the first quarter of 2014, primarily reflecting lower print revenues, the loss of margin from a change in product mix and investments made to support our digital transformation, partly offset by improvements in the collection experience of our trade receivables resulting from lower bad debts.

Workforce reductions and cost containment initiatives resulted in restructuring and special charges impacting certain of our quarterly results presented above. The increase in depreciation and amortization quarter-over-quarter is due to increased capital expenditures in connection with the deployment of platforms as the Company continues its digital transformation.

Our net earnings for the fourth quarter of 2014 were positively impacted by a recovery of income taxes of $84.8 million related to the cancellation of certain income tax liabilities following the settlement of tax assessments.

Analysis of fourth quarter 2014 results

Revenues

Revenues decreased by 9.5% to $215.3 million during the fourth quarter of 2014 compared with $238 million for the same period last year. Revenues remain mostly impacted by the overall loss of customers.

Albeit declining, print revenue decline rates are stabilizing. Print revenues decreased 24.6% year-over-year to reach $98.4 million during the fourth quarter of 2014. During the fourth quarter of 2013, print revenues were favourably impacted by non-recurring transactions, and excluding these non-recurring revenues, print revenues declined 22.4% year-over-year.

Consolidated digital revenues reached $116.9 million in the fourth quarter of 2014 representing a growth of 8.9% compared to the same period last year. For the fourth quarter ended December 31, 2014, consolidated digital revenues represented 54.3% of consolidated revenues, up from 45.1% for the same period last year. Digital revenues across the Company’s core YP operations, which exclude the impact of Mediative, 411 and YP Next Home, increased by 6.5% year-over-year for the fourth quarter of 2014.

EBITDA

EBITDA decreased by $26.4 million to $64.8 million during the fourth quarter of 2014 compared with $91.3 million for the same period in 2013. The decrease in EBITDA is due mainly to lower revenues combined with a lower EBITDA margin. Our EBITDA margin for the fourth quarter of 2014 was 30.1% compared to 38.3% for the same period in 2013. Lower revenues and investments related to the Return to Growth Plan were the main contributors to the decrease in EBITDA margin for the fourth quarter of 2014. The Company significantly increased spending during the fourth quarter of 2014 to promote timely and successful execution of its Return to Growth Plan. These included investments in branding and promotion, customer acquisition, and digital media development, in addition to program management expenses related to the launch of new products, delivery of enhanced customer service and realization of operational efficiencies.

Cost of sales decreased by $1.2 million to $79.5 million during the fourth quarter of 2014 compared with $80.7 million for the same period in 2013. The decrease for the fourth quarter of 2014 results mainly from lower sales costs associated with lower revenues, lower print manufacturing costs and workforce reductions associated with our declining legacy business. These cost savings were partly offset by an increase in provisioning and fulfillment costs of our digital products and services as well as expenses related to the newly acquired company, 411.

Gross profit margin decreased to 63.1% for the fourth quarter of 2014 compared to 66.1% for the same period in 2013. The decrease is mainly due to a decline in revenues.

General and administrative expenses increased by $5 million to $71 million during the fourth quarter of 2014 compared with $66 million for the same period in 2013. The increase is primarily due to investments in our digital transformation, partially offset by lower bad debts and employee-related expenses as well as a non-recurring provision related to a legal dispute recorded in the fourth quarter of 2013.

Depreciation and amortization

Depreciation and amortization increased to $22 million during the fourth quarter of 2014 from $16.1 million in the fourth quarter of 2013. The increase is due to capital expenditures in connection with software development and ISIT equipment as the Company executes its digital transformation.

Restructuring and special charges

During the fourth quarter of 2014, we recorded restructuring and special charges of $5.7 million associated primarily with internal reorganizations and workforce reductions, partially offset by a curtailment gain related to a workforce reduction. During the fourth quarter of 2013, we recorded restructuring and special charges of $13.1 million, which was mainly composed of a workforce reduction of approximately 300 employees and the termination and renegotiation of certain contractual obligations.

Financial charges

Financial charges decreased by $6.7 million to $17.2 million during the fourth quarter of 2014 compared with $24 million for the same period in 2013. The decrease for the fourth quarter of 2014 is mainly attributable to a lower level of indebtedness.

(Recovery of) provision for income taxes

The combined statutory provincial and federal tax rates were 26.56% and 26.46% for the three-month periods ended December 31, 2014 and 2013, respectively. The Company recorded a recovery of 379.2% for the fourth quarter of 2014 compared to an expense of 19% of earnings for the same period last year.

The difference between the effective and the statutory rates for the fourth quarter of 2014 is primarily due to a recovery of incomes taxes of $84.8 million related to the cancellation of certain income tax liabilities in the fourth quarter of 2014 following the settlement of tax assessments with the Canada Revenue Agency.

The difference between the effective and the statutory rates for the fourth quarter in 2013 is due to the de-recognition of previously recognized tax attributes on assets of our foreign subsidiaries as well as non-taxable and non-deductible items.

Earnings from investments in associates

On June 1, 2014, we acquired the remaining 70% interest in 411. Consequently, as of June 1, 2014, 411’s results are consolidated within YP. During the fourth quarter of 2013, we recorded earnings in 411 of $0.2 million.

Net earnings

We recorded net earnings of $95.2 million during the fourth quarter of 2014 compared with $31 million for the same period last year. This was principally explained by lower EBITDA, more than offset by a recovery of income taxes of $84.8 million related to the cancellation of certain income tax liabilities following the settlement of tax assessments.