EXHIBIT 99.2
OPERATING AND FINANCIAL REVIEW AND PROSPECTS AT AND FOR
THE THREE AND SIX MONTHS ENDED 30 SEPTEMBER 2003
References to "we", "us", "our", "Yell", and the "Yell Group" are to Yell
Finance B.V., a company incorporated with limited liability under the law of the
Netherlands, and its consolidated subsidiaries. Except as otherwise indicated
these terms also refer to the business of McLeodUSA Media Group, Inc. ("McLeod")
and its subsidiaries acquired on 16 April 2002 and, after 31 December 2002, the
business of National Directory Company ("NDC") (which together are referred to
throughout this document as Yellow Book West).
The following information should be read in conjunction with the unaudited
financial information for the Yell Group. The attached financial information has
been prepared in accordance with accounting principles generally accepted in the
United Kingdom ("UK GAAP"). UK GAAP differs in certain important respects from
accounting principles generally accepted in the United States ("US GAAP").
This report contains forward-looking statements. These statements appear in a
number of places in this report and include statements regarding our intentions,
beliefs or current expectations concerning, among other things, our results of
operations, financial condition, liquidity, prospects, growth, strategies, new
products, the level of new directory launches and the markets in which we
operate.
You are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those in the forward-looking statements as a result
of various factors. You should read the section entitled "Risk Factors" in our
annual report on Form 20-F filed with the US Securities and Exchange Commission
(the "SEC") on 1 July 2003 for a discussion of some of these factors. We
undertake no obligation to publicly update or revise any forward-looking
statements, except as may be required by law.
INTRODUCTION
The Yell Group is the leading provider of classified directory advertising and
associated products and services in the United Kingdom and the leading
independent provider of classified directory advertising in the United States.
SUMMARY RESULTS
THREE MONTHS ENDED SIX MONTHS ENDED
30 SEPTEMBER 30 SEPTEMBER
-------------------------- -------------------------
2002 2003 CHANGE 2002 2003 CHANGE
-------------------------------------------------------------------------------
((POUND)IN MILLIONS) ((POUND)IN MILLIONS)
- -----------------------------------------------------------------------------------------------------------------------------------
Turnover 282.4 306.4 8.5% 530.9 568.6 7.1%
Cost of sales (115.7) (133.4) 15.3% (233.8) (251.1) 7.4%
- -------------------------------------------------------------------------- ------------------------
Gross profit 166.7 173.0 3.8% 297.1 317.5 6.9%
Distribution costs (8.5) (7.9) (7.1)% (17.5) (17.2) (1.7)%
Administrative costs (including exceptional items) (94.0) (130.6) 38.9% (188.7) (263.4) 39.6%
- -------------------------------------------------------------------------- ------------------------
Operating profit before exceptional items 64.2 77.3 20.4% 105.9 127.0 19.9%
Exceptional administrative costs - (42.8) (15.0) (90.1)
- -------------------------------------------------------------------------- ------------------------
Operating profit 64.2 34.5 (46.3)% 90.9 36.9 (59.4)%
===================================================================================================================================
Profit (loss) for the financial period before
exceptional items 2.6 28.4 (17.3) 22.1
Profit (loss) for the financial period 2.6 (33.4) (30.0) (89.2)
===================================================================================================================================
Gross profit margin (%) 59.0 56.5 56.0 55.8
EBITDA (1) 95.0 64.8 (31.8)% 150.6 97.5 (35.3)%
EBITDA margin (%) 33.6 21.1 28.4 17.1
EBITDA before exceptional items (2) 95.0 107.6 13.3% 165.6 187.6 13.3%
EBITDA margin (%) before exceptional items 33.6 35.1 31.2 33.0
Cash inflow from operations before exceptional
items, less capital expenditure 70.7 104.1 47.2% 143.9 153.7 6.8%
Cash conversion (%) (3) 74.4 96.7 86.9 81.9
(1) EBITDA comprises total operating profit before depreciation and
amortisation, both being non-cash items. EBITDA is not a measurement of
performance under UK or US GAAP and you should not consider EBITDA as an
alternative to (a) operating profit or net profit/(loss) (as determined in
accordance with generally accepted accounting principles), (b) cash flows
from operating, investing or financing activities (as determined in
accordance with generally accepted accounting principles), or as a measure
of our ability to meet cash needs or (c) any other measures of performance
under generally accepted accounting principles. EBITDA is not a direct
measure of our liquidity, which is shown by the Group's cash flow statement
and needs to be considered in the context of our financial commitments.
EBITDA may not be indicative of our historical operating results and is not
meant to be predictive of our potential future results. We believe that
EBITDA is a measure commonly reported and widely used by investors in
comparing performance on a consistent basis without regard to depreciation
and amortisation, which can vary significantly depending upon accounting
methods (particularly when acquisitions have occurred) or non-operating
factors. Accordingly, EBITDA has been disclosed in this financial
information to permit a more complete and comprehensive analysis of our
operating performance relative to other companies and of our ability to
service our debt. Because all companies do not calculate EBITDA
identically, our presentation of EBITDA may not be comparable to similarly
titled measures of other companies. See "--Group Operating Profit, EBITDA
and EBITDA Before Exceptional Items".
(2) EBITDA before exceptional items comprises EBITDA as described above and
excludes expenses incurred in connection with the initial public offering
by our parent company, Yell Group plc and subsidiaries, of (pound)90.1
million in the six months ended 30 September 2003 (six months ended 30
September 2002 - (pound)15.0 million expenses of our parent company's
withdrawn initial public offering).
(3) Cash conversion represents cash flow from operations before exceptional
items, less capital expenditure, as a percentage of EBITDA before
exceptional items. We believe cash conversion is a relevant measure used by
companies to assess performance as it gives a relative measure of the
efficiency with which EBITDA is converted into cash. Cash conversion should
not be considered by investors as an alternative to group operating profit
or profit on ordinary activities before taxation as an indicator of
operating performance or as an alternative to cash flow from operating
activities. See "--Group Operating Profit, EBITDA and EBITDA Before
Exceptional Items".
2
YELL GROUP OPERATIONAL INFORMATION
SIX MONTHS ENDED
30 SEPTEMBER
--------------------------------------
2002 2003 CHANGE
--------------------------------------------------
UK printed directories
Unique advertisers (units) (1) 233,005 250,621 7.6%
Directory editions published (units) (2) 49 50
Unique advertiser retention rate (%) (3) 78 78
Turnover per unique advertiser ((pound)) 1,230 1,178 (4.2)%
US printed directories
Unique advertisers (units) (1) 197,314 209,866 6.4%
Directory editions published (units) 248 250
Unique advertiser retention rate (%) (3) 70 70
Turnover per unique advertiser ($) 1,719 1,960 14.0%
Other UK products and services
Yell.com page impressions for September (in millions) 39 51 30.8%
Yell.com searchable advertisers (units) as at 30 September (4) n/a 86,508
- ----------------
(1) Number of unique advertisers in printed directories that were recognised
for revenue purposes and have been billed. Unique advertisers are counted
once only, regardless of the number of advertisements they purchase or the
number of directories in which they advertise.
As a result of the progress in the United States towards integrating our
customer database, we have been able to make improvements in the ways in
which we capture, record and analyse customer information. This has led to
a significant overall elimination of duplicate records of unique
advertisers which has resulted in a restatement of the prior year unique
advertisers. There remains some overlap in reporting unique advertisers
between Yellow Book and the former McLeod directories that we expect to be
removed during the second half of the 2004 financial year. However, these
improvements have not affected the reporting of our financial results.
(2) The Yellow Pages directory editions increased as a result of rescoping the
Colchester directory into two directories, Ipswich and Colchester.
(3) The proportion of unique advertisers that have renewed their advertising
from the preceding publication. In the United Kingdom, this measure
excludes national and key accounts where retention is very high. In the
United States, this measure is based on unique directory advertisers. The
2002 retention rate is for Yellow Book only, prior to the acquisition of
McLeod, while the 2003 retention rate is for Yellow Book, including the
former McLeod directories.
(4) Unique customers with a live contract at month end. These figures refer to
searchable advertisers only, i.e. advertisers for whom users can search on
Yell.com. It excludes advertisers who purchase products such as banners and
domain names. This information is not available for 2002 because new
systems were being put in place during that period.
3
TURNOVER
THREE MONTHS ENDED SIX MONTHS ENDED
30 SEPTEMBER 30 SEPTEMBER
--------------------------- ---------------------------
2002 (1) 2003 CHANGE 2002 (1) 2003 CHANGE
----------------------------------------------------------------------------------
((POUND)IN MILLIONS) ((POUND)IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------------------
UK printed directories 157.7 160.3 1.6% 286.5 295.2 3.0%
Other UK products and services 9.7 9.4 (3.1)% 19.8 19.4 (2.0)%
- --------------------------------------------------------------------- ------------------------
TOTAL UK TURNOVER 167.4 169.7 1.4% 306.3 314.6 2.7%
- --------------------------------------------------------------------- ------------------------
US printed directories:
US printed directories at constant
exchange rate (2) 115.0 142.3 23.7% 224.6 272.4 21.3%
Exchange impact (2) - (5.6) - (18.4)
- --------------------------------------------------------------------- ------------------------
TOTAL US TURNOVER 115.0 136.7 18.9% 224.6 254.0 13.1%
- --------------------------------------------------------------------- ------------------------
GROUP TURNOVER 282.4 306.4 8.5% 530.9 568.6 7.1%
===============================================================================================================================
- -------------------------------
(1) Prior year results include McLeod from 16 April 2002, when it was acquired,
and exclude NDC (acquired on 31 December 2002).
(2) Constant exchange rate states current year results at the same exchange
rate as that used to translate the previous year's results for the
corresponding period. Exchange impact is the difference between the results
reported at a constant exchange rate and the actual results reported using
current year exchange rates.
Group turnover during the six months ended 30 September 2003 increased by
(pound)37.7 million, or 7.1%, compared to the same period last year (1),
reflecting, in particular, the increased turnover during the period from US
printed directories, which grew by 13.1%.
We recognise turnover from advertising sales for each printed directory on
completion of delivery of each directory.
UK Turnover
Total UK turnover grew by 2.7% from last year. Excluding the effects of our
discontinued products, total UK turnover grew 3.4% from last year.
Turnover from UK printed directories increased by (pound)8.7 million, or 3.0%,
despite an average reduction in prices of 4.7% (5.0% reduction in the three
months ended 30 September 2003) as a result of the price cap (2) of RPI minus 6%
applicable to Yellow Pages directories.
- ----------------------------
1 Throughout this report, unless otherwise indicated, references to "for the
six months" or the "six month period" are to the six months ended 30
September 2003 and references to "last year", the "prior year" or the
"prior period" are to the corresponding period in the previous financial
year.
2 Effective from January 2002 and pursuant to undertakings given to the UK
Secretary of State for Trade and Industry in July 1996, we are required to
cap the rates charged for advertising sold after that date in our UK
printed consumer classified directories at the Retail Price Index ("RPI")
minus 6% for an expected period of four years from January 2002. During the
six months ended 30 September 2002 and 2003, the average price of
advertising in our Yellow Pages decreased by 4.4% and 4.7%, respectively.
We are not subject to any regulatory price constraints in the United
States. The relevant price cap applied to approximately 52.0% and 49.9% of
our Group turnover in the six months ended 30 September 2002 and 2003,
respectively.
4
Overall growth of printed directories was affected by the adverse performance of
one directory, London Central, as a result of a reduction of its sales from
neighboring directory areas. Underlying growth of all directories excluding
London Central was 3.9%. Metro directories, excluding London Central, performed
at similar levels to non-metro directories.
Our growth reflected:
o a 7.6% increase in the number of unique advertisers from 233,005 to
250,621, as a result of the continued success of our first-year advertiser
discount programmes and our ability to retain 78% of existing customers. We
attracted 56,574 new advertisers for the six months as compared to 51,612
last year; and
o turnover per unique advertiser in our UK printed directories decreased from
(pound)1,230 to (pound)1,178. This focus on new advertisers results in
lower yield, although our experience is that the value of retained new
advertisers grows over future years. In addition, the turnover per unique
advertiser was affected by the performance of the London Central directory
and the 4.7% price reduction.
Turnover from our online directory service increased by (pound)1.7 million, or
17.3%, from (pound)9.8 million to (pound)11.5 million. This increase was offset
by a reduction in turnover from our other products and services, primarily from
discontinued products resulting from the sale of our data-service business, Yell
Data, and the ending of our contract with BT to sell advertising in their phone
books. We nearly doubled the number of advertisers in our telephone based
classified directory service since 31 March 2003, when we replaced Talking Pages
with Yellow Pages 118 24 7.
US Turnover
US turnover increased by (pound)29.4 million, or 13.1%, from (pound)224.6
million last year to (pound)254.0 million in the current period. Turnover was
negatively affected by (pound)18.4 million from a weakening US dollar. On a
constant US dollar basis, US turnover grew by (pound)47.8 million, or 21.3%. The
effective exchange rates were approximately $1.62 to (pound)1.00 in the six
months to September 2003 and $1.51 to (pound)1.00 in the prior year.
The Group had 209,866 unique advertisers in the United States for the six months
ended 30 September 2003 compared to 197,314 in the prior year. Average turnover
per unique advertiser grew 14.0% from $1,719 to $1,960.
Same-market growth of 9.3% has grown from 4.5% last year in spite of unique
market conditions in Manhattan, where we publish one of our largest US
directories. Excluding the Manhattan directory, same-market growth would have
been 10.5%, up from 6.2% last year. NDC books published in the first six months
of the current year are treated as acquisitions published for the first time and
are not included in the same-market growth results.
The former McLeod directories are now performing in line with Yellow Book East
same-market growth, excluding the Manhattan directory. We believe that this
growth reflects the benefits of integration of Yellow Book West into the Yell
Group and the adoption of the Yellow Book sales approach. The first six months
included four metro-market relaunch directories, which achieved growth in
turnover in excess of 40%. There is one more relaunch planned for the third
quarter.
5
Remaining growth was due to three new directory launches (contributing 1.5% to
the growth), one directory publishing for the first time after acquisition and
the inclusion of a full six months of results of acquisitions of McLeod and NDC
(contributing 12.7% to the growth), offset primarily by a few directories which
were moved into future periods (reducing growth by 2.4%) for inclusion in
rescopes and to balance production schedules as a result of the integration of
Yellow Book West.
COST OF SALES
THREE MONTHS ENDED SIX MONTHS ENDED
30 SEPTEMBER 30 SEPTEMBER
------------------------- -----------------------------
2002 (1) 2003 CHANGE 2002 (1) 2003 CHANGE
---------------------------------------------------------------------------------
((POUND)IN MILLIONS) ((POUND)IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------------
UK printed directories 50.3 54.9 9.1% 97.5 106.1 8.8%
Other UK products and services 3.4 3.2 (5.9)% 6.8 6.1 (10.3)%
- ----------------------------------------------------------------- --------------------------
TOTAL UK COST OF SALES 53.7 58.1 8.2% 104.3 112.2 7.6%
- ----------------------------------------------------------------- --------------------------
US printed directories:
US printed directories at constant
exchange rate (2) 62.0 78.8 27.1% 129.5 149.3 15.3%
Exchange impact (2) - (3.5) - (10.4)
- ----------------------------------------------------------------- --------------------------
TOTAL US COST OF SALES 62.0 75.3 21.5% 129.5 138.9 7.3%
- ----------------------------------------------------------------- --------------------------
COST OF SALES 115.7 133.4 15.3% 233.8 251.1 7.4%
===========================================================================================================================
- ------------------------
(1) Prior year results include McLeod from 16 April 2002, when it was acquired,
and exclude NDC (acquired on 31 December 2002).
(2) Constant exchange rate states current year results at the same exchange
rate as that used to translate the previous year's results for the
corresponding period. Exchange impact is the difference between the results
reported at a constant exchange rate and the actual results reported using
current year exchange rates.
We recognise the cost of sales for each directory on completion of delivery of
that directory.
Our cost of sales consists principally of costs associated with the publication
of directories, including advertising sales, paper, printing and pre-press
production, as well as bad debt expense. The principal components of advertising
sales costs, which represent a significant portion of our cost of sales, are
employee costs of the sales force, including salaries, benefits and commissions,
and associated direct costs.
The (pound)7.9 million, or 7.6%, increase in cost of sales for the UK business,
from (pound)104.3 million to (pound)112.2 million in the six months ended 30
September 2003, reflected higher advertisement volumes. Cost of sales as a
percentage of turnover was 35.7% as compared to 34.1% for the corresponding
period in the prior financial year.
The (pound)19.8 million, or 15.3%, increase in cost of sales at a constant
exchange rate for US printed directories reflected the full integration of
acquisitions. Cost of sales for US printed directories as a percentage of
related turnover and at a constant exchange rate was 54.8% as compared to 57.7%
last year. In the three months ended 30 September 2003, cost of sales as a
percentage of related turnover and at a constant exchange rate was 55.4% as
compared to 53.9% last year. This increase was the result of the alignment of
Yell Group accounting policies together with the investment in the metro-market
relaunches. Paper, printing and binding, and pre-press costs as a percentage of
turnover for the six months ended 30 September 2003 of 21.1% decreased from
23.6% last year, representing benefits arising from the integration of the
McLeod acquisition and cost savings from volume price reductions.
6
Our consolidated bad debt expense was (pound)30.2 million, or 5.3% of Yell Group
turnover in the six months ended 30 September 2003, as compared to (pound)30.1
million, or 5.7%, last year. The charge for UK bad debts was 4.2% of UK printed
directories and other products and services turnover compared to 4.1% last year.
The US bad debt expense was 6.7% of US printed directories turnover in the six
months ended 30 September 2003, as compared to 7.8% for the same period in the
prior financial year, reflecting the more developed US directory profile and the
relatively low level of launches. The US bad debt expense varies by directory.
Therefore, we expect the charge in the second half of the year to increase
compared to the first six months as these directories traditionally incur higher
bad debt expense. However, the full year charge is expected to improve in
comparison to the prior year charge.
GROSS PROFIT AND GROSS PROFIT MARGIN
THREE MONTHS ENDED 30 SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER
------------------------- ---------------------------
2002 (1) 2003 CHANGE 2002 (1) 2003 CHANGE
---------------------------------------------------------------------------
((POUND)IN MILLIONS) ((POUND)IN MILLIONS)
- -----------------------------------------------------------------------------------------------------------------------
UK printed directories 107.4 105.4 (1.9)% 189.0 189.1 0.1%
Other UK products and services 6.3 6.2 (1.6)% 13.0 13.3 2.3%
- ------------------------------------------------------------------- ------------------------
TOTAL UK GROSS PROFIT 113.7 111.6 (1.8)% 202.0 202.4 0.2%
- ------------------------------------------------------------------- ------------------------
US printed directories:
US printed directories at constant
exchange rate (2) 53.0 63.5 19.8% 95.1 123.1 29.4%
Exchange impact (2) - (2.1) - (8.0)
- -------------------------------------------------------------------- ------------------------
TOTAL US GROSS PROFIT 53.0 61.4 15.8% 95.1 115.1 21.0%
- -------------------------------------------------------------------- ------------------------
GROSS PROFIT 166.7 173.0 3.8% 297.1 317.5 6.9%
=========================================================================================================
GROSS PROFIT MARGIN (%)
UK operations 67.9 65.8 65.9 64.3
US operations 46.1 44.9 42.3 45.3
GROUP TOTAL (%) 59.0 56.5 56.0 55.8
=========================================================================================================
- -----------------
(1) Prior year results include McLeod from 16 April 2002, when it was acquired,
and exclude NDC (acquired on 31 December 2002).
(2) Constant exchange rate states current year results at the same exchange
rate as that used to translate the previous year's results for the
corresponding period. Exchange impact is the difference between the results
reported at a constant exchange rate and the actual results reported using
current year exchange rates.
Gross profit as a percentage of Group turnover was 55.8% as compared to 56.0% in
the prior year.
During the six months ended 30 September 2002 and 2003, over 55% of our turnover
came from our UK operations. Our printed directories business in the United
Kingdom, which we view as more developed than that in the United States, and
which covers substantially all of the United Kingdom, has historically had
higher gross profit margins than those in the United States.
In the United States, the different market dynamics and the younger portfolio
result in lower gross profit margins. In the six months ended 30 September 2003,
for example, our gross profit margin for our UK operations was 64.3%, compared
to 45.3% for our US operations. Our overall gross profit margin is therefore
affected and will continue to be affected by lower gross profit margins in the
United States to the extent our US operations continue to form an increasing
portion of the geographic mix of our business.
7
DISTRIBUTION COSTS AND ADMINISTRATIVE COSTS
Our distribution costs consist mainly of amounts payable to third-party delivery
companies with which we contract for the delivery of our printed directories.
These costs vary principally due to the number of directories delivered in a
financial period. Our distribution costs related to a directory are recognised
when the directory is delivered.
Distribution costs decreased by (pound)0.3 million, or 1.7%, from (pound)17.5
million in the six months ended 30 September 2002 (3.3% of Group turnover)
compared to (pound)17.2 million (3.0% of Group turnover) in the six months ended
30 September 2003. The reduction in distribution costs was primarily due to a
weakening dollar, which reduced US distribution costs by (pound)0.8 million.
Group distribution costs grew 2.9% at a constant exchange rate.
Our administrative expenses consist principally of amortisation and
depreciation, advertising, promotion and marketing expenses, administrative
staff expenses, information technology costs and staff training. Advertising,
promotion and marketing costs represent our most significant discretionary
expenses.
Administrative expenses, including exceptional items, increased by (pound)74.7
million, or 39.6%, from (pound)188.7 million in the six months ended 30
September 2002 to (pound)263.4 million in the six months ended 30 September
2003. The increase was largely due to:
o the expensing of (pound)57.0 million for employee incentive plans, which
were contingent upon our parent company's initial public offering in July
2003;
o the expensing of (pound)28.9 million in fees, including VAT, paid to the
previous owners as a result of the initial public offering;
o the expensing of (pound)4.2 million for other exceptional costs; and
o the effects of including a full six months of Yellow Book West
administrative costs in the current period and foreign exchange movements.
These increases were partially offset by the absence of (pound)15.0 million in
costs incurred for the withdrawn initial public offering of our parent company
in July 2002.
8
GROUP OPERATING PROFIT, EBITDA AND EBITDA BEFORE EXCEPTIONAL ITEMS
THREE MONTHS ENDED SIX MONTHS ENDED
30 SEPTEMBER 30 SEPTEMBER
------------------------------ ---------------------------------
2002 (1) 2003 CHANGE 2002 (1) 2003 CHANGE
---------------------------------------------------------------------------------------
((POUND)IN MILLIONS) ((POUND)IN MILLIONS)
- -----------------------------------------------------------------------------------------------------------------------------------
UK OPERATIONS
Operating profit, including
exceptional items 55.3 26.9 75.5 58.8
Depreciation and amortisation 16.9 17.5 35.0 34.8
- ----------------------------------------------------------------------- -------------------------
UK OPERATIONS EBITDA 72.2 44.4 110.5 93.6
Exceptional items - 29.7 14.7 35.3
- ----------------------------------------------------------------------- -------------------------
UK OPERATIONS EBITDA BEFORE
EXCEPTIONAL ITEMS 72.2 74.1 2.6% 125.2 128.9 3.0%
- ----------------------------------------------------------------------- -------------------------
US OPERATIONS
Operating profit (loss), including
exceptional items 8.9 7.6 15.4 (21.9)
Depreciation and amortisation 13.9 12.8 24.7 25.8
- ----------------------------------------------------------------------- -------------------------
US OPERATIONS EBITDA 22.8 20.4 40.1 3.9
Exceptional items - 13.1 0.3 54.8
- ----------------------------------------------------------------------- -------------------------
US OPERATIONS EBITDA BEFORE EXCEPTIONAL
ITEMS 22.8 33.5 46.9% 40.4 58.7 45.3%
- ----------------------------------------------------------------------- -------------------------
US OPERATIONS EBITDA BEFORE EXCEPTIONAL
ITEMS AT CONSTANT EXCHANGE RATE (2) 22.8 34.7 52.2% 40.4 62.7 55.2%
- ----------------------------------------------------------------------- -------------------------
GROUP
Operating profit, including exceptional
items 64.2 34.5 90.9 36.9
Depreciation and amortisation 30.8 30.3 59.7 60.6
- ----------------------------------------------------------------------- -------------------------
GROUP EBITDA 95.0 64.8 (31.8)% 150.6 97.5 (35.3)%
======================================================================= =========================
GROUP
Operating profit before exceptional items 64.2 77.3 105.9 127.0
Depreciation and amortisation 30.8 30.3 59.7 60.6
- ----------------------------------------------------------------------- -------------------------
GROUP EBITDA BEFORE EXCEPTIONAL ITEMS 95.0 107.6 13.3% 165.6 187.6 13.3%
======================================================================= =========================
GROUP EBITDA BEFORE EXCEPTIONAL ITEMS AT
CONSTANT EXCHANGE RATE(2) 95.0 108.8 14.5% 165.6 191.6 15.7%
======================================================================= =========================
EBITDA MARGIN (%)
UK operations 43.1 26.2 36.1 29.8
US operations 19.8 14.9 17.9 1.5
EBITDA MARGIN BEFORE EXCEPTIONAL ITEMS (%)
UK operations 43.1 43.7 40.9 41.0
US operations 19.8 24.5 18.0 23.1
===================================================================================================================================
- -----------------
(1) Prior year results include McLeod from 16 April 2002, when it was acquired,
and exclude NDC (acquired on 31 December 2002).
(2) Constant exchange rate states current year results at the same exchange
rate as that used to translate the previous year's results for the
corresponding period.
9
EBITDA from UK operations before exceptional items increased by 3.0% to
(pound)128.9 million from (pound)125.2 million, reflecting primarily the
progress of Yell.com. Yell.com reported EBITDA of (pound)2.1 million for the six
months ended 30 September 2003 (operating profit of (pound)1.0 million adding
back depreciation of (pound)1.1 million), compared to a loss of (pound)0.3
million in the prior year (operating loss of (pound)1.6 million adding back
depreciation of (pound)1.3 million). UK printed directories EBITDA increased by
2.1% to (pound)128.6 million from (pound)125.9 million. Exceptional items of
(pound)35.3 million in the six months ended 30 September 2003 were incurred in
connection with the initial public offering of our parent company in July 2003
and other non-recurring transaction charges, and (pound)14.7 million was charged
in the previous financial year for the withdrawn initial public offering in July
2002.
US operations EBITDA before exceptional items and at a constant exchange rate
increased by (pound)22.3 million, or 55.2%. This increase reflects the
profitability of our directories by leveraging our existing operations and
administrative cost base to yield additional turnover from our directories
without a corresponding increase in costs. In addition, the increase reflects
the inclusion of prior year acquisitions for a full period during the six months
ended 30 September 2003. We expect the US EBITDA margin before exceptional items
to be slightly lower in the second half of the year due to continued investment
in our business.
Excluding the exceptional items in 2003 and 2002, Group EBITDA increased by
(pound)22.0 million, or 13.3%. Excluding the exceptional items and at a constant
exchange rate, Group EBITDA would have increased by (pound)26.0 million, or
15.7%.
NET INTEREST PAYABLE
Net interest expense was (pound)146.6 million. Net interest before exceptional
items was (pound)88.2 million in the six months ended 30 September 2003,
compared to (pound)115.8 million last year. The exceptional items of (pound)58.4
million comprised (pound)27.7 million accelerated amortisation of deferred
financing costs in connection with the repayment of the senior credit facilities
on 15 July 2003 and senior notes on 18 August 2003; (pound)19.7 million early
redemption of 35% of our senior notes on 18 August 2003; (pound)2.3 million
arrangement fee on the undrawn revolving credit facility; and (pound)8.7 million
exceptional charge from our parent company for accelerated amortisation of
deferred financing fees. Net interest expense before exceptional items comprised
(pound)57.1 million of net interest paid or to be paid within a six-month
period, (pound)28.2 million of interest rolled-up into our long-term debt and
(pound)2.9 million of amortised financing costs.
TAXATION
Taxation before exceptional items was (pound)16.7 million for the six months
ended 30 September 2003 and (pound)7.4 million last year. Taxation is determined
on taxable profits that do not reflect certain amortisation charges. Tax credits
in the amount of (pound)37.2 million for the six months ended 30 September 2003
and (pound)2.3 million last year were recognised as a benefit arising from
exceptional items. Our future taxation charge will depend on our taxable income
in the United Kingdom and the United States and our ability to continue using
our net operating losses to offset our future taxable income in the United
States.
NET LOSS
The net loss was (pound)89.2 million for the six months ended 30 September 2003
compared to a net loss of (pound)30.0 million for the same period in the prior
year. Excluding the effect of the exceptional items, the net profit for the six
months ended 30 September 2003 would have been (pound)22.1 million compared to a
net loss of (pound)17.3 million for the same period last year.
10
LIQUIDITY AND CAPITAL RESOURCES
Apart from significant acquisitions, which we have funded through a combination
of borrowings, cash from contributions from the investment funds which
previously owned our parent company and cash flows from operations, we have
funded our existing business largely from cash flows generated from our
operations. We believe that we have sufficient working capital to meet our
operating and capital expenditure requirements. In addition, we have access to a
(pound)200 million revolving credit facility as part of the new senior credit
facilities, which expires on 7 July 2008, of which none was drawn down during
the period ended 30 September 2003.
Cash Flows
THREE MONTHS ENDED SIX MONTHS ENDED
30 SEPTEMBER 30 SEPTEMBER
- ---------------------------------------------------------------------------------------------------------
2002 2003 2002 2003
- ---------------------------------------------------------------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
Net cash inflow from operating activities 71.0 39.5 145.9 94.6
Net cash outflow from returns on investments
and servicing of finance (48.3) (96.5) (80.0) (115.3)
Taxation (7.6) (3.6) (7.6) (4.6)
Net cash outflow for capital expenditure and
acquisitions (2.3) (6.4) (431.6) (13.7)
- ---------------------------------------------------------------------------------------------------------
Net cash inflow (outflow) before financing 12.8 (67.0) (373.3) (39.0)
Net cash (outflow) inflow from financing (26.4) 101.5 382.4 101.5
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (13.6) 34.5 9.1 62.5
=========================================================================================================
Net cash inflow from operating activities for the six months ended 30 September
2003 was (pound)94.6 million, compared with an inflow of (pound)145.9 million
for the six months ended 30 September 2002. The decrease in cash flows reflected
the timing of charges from year end which were paid during the first three
months of the 2004 financial year and the exceptional items paid.
The cash inflow from operations before exceptional items less capital
expenditure was (pound)153.7 million for the six months ended 30 September 2003
and (pound)143.9 million last year, or a 6.8% increase. The underlying cash
performance from our operations excludes payments of exceptional items included
in our operating profit for the six months ended 30 September 2003 of
(pound)69.7 million and (pound)5.9 million last year.
Net cash outflow from returns on investments and servicing of finance of
(pound)115.3 million for the six months ended 30 September 2003 comprises
(pound)59.9 million of cash pay interest, (pound)19.6 million of rolled up
interest settled, (pound)19.7 million of premiums on early redemption of senior
notes and (pound)16.1 million in costs associated with the Group's refinancing.
Net cash outflow for capital expenditure and financial investment comprises
capital expenditure on fixed assets and purchases of subsidiary undertakings,
net of cash acquired. Capital expenditure in the six months ended 30 September
2003 was (pound)10.6 million compared to (pound)7.9 million last year. We
continued to augment our growth in the United States with further selective
acquisitions totalling (pound)3.1 million in the first half of this year.
11
On 16 April 2002, we purchased McLeod for $600.0 million ((pound)417.0 million)
plus expenses of $10.0 million ((pound)6.9 million). We financed the McLeod
acquisition through $250.0 million ((pound)173.7 million) of senior bank
financing and a $250.0 million ((pound)173.7 million) bridge facility together
with $88.3 million ((pound)61.3 million) of additional funds in the form of
equity and subordinated non-cash pay loans from the funds that owned our parent
company before the global offer described below, and $37.3 million ((pound)25.9
million) of unrestricted cash from our available cash balances.
Capital Resources
At 30 September 2003, we had cash of (pound)91.3 million.
We expect that any significant acquisitions or other significant expenditures,
including those related to the development of our online services, would in the
future be financed through any one or more of operating cash flow, credit
facilities and the issue of new debt and equity securities.
We had net debt of (pound)2,120.0 million at 30 September 2003, as set out
below.
- ---------------------------------------------------------------------------------------------------------------------
((POUND) IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------
Long-term loans and other borrowings
Term Loan A1 - denominated in sterling 664.0
Term Loan A2 - denominated in US dollars 358.6
Senior notes 318.3
Other 1.1
- ---------------------------------------------------------------------------------------------------------------------
Total debt owed to third parties 1,342.0
Subordinated parent company loans 891.8
- ---------------------------------------------------------------------------------------------------------------------
Total debt, including subordinated parent company loans 2,233.8
Unamortised financing costs (22.5)
- ---------------------------------------------------------------------------------------------------------------------
Total debt, net of unamortised financing costs 2,211.3
Cash at bank (91.3)
- ---------------------------------------------------------------------------------------------------------------------
NET DEBT AT END OF THE PERIOD 2,120.0
=====================================================================================================================
Our Parent Company's Global Offer and Refinancing
On 15 July 2003, our parent company, Yell Group plc, completed raising
(pound)433.6 million (gross proceeds) through a global offer of shares to
institutional investors, also referred to as an "initial public offering".
12
A portion of the net proceeds were passed to us as consideration for shares
issued and as additional loans. We used these monies to repay approximately
(pound)54 million of debt under the senior credit facilities and to redeem 35%
((pound)173 million) of the senior notes pursuant to the optional redemption
features under the indentures. Additionally, we replaced our remaining senior
credit facilities with new senior credit facilities of (pound)664 million and
$596 million and an undrawn revolving credit facility of (pound)200 million. As
part of the refinancing, the subordinated parent company loan ceased bearing
interest to reflect the fact that the equivalent amounts borrowed by our parent
company were settled upon the initial public offering.
As a result of the capital-raising, we incurred a number of exceptional or
one-off costs, including: cash and non-cash interest charges relating to
premiums paid in connection with the redemption of the senior notes and to the
write-off of deferred finance costs; charges relating to option grants under
existing share ownership plans; fees paid to the owners of our parent company
before the global offer; and other transaction fees and costs arising out of the
offering. In addition, participants in a plan implemented for certain key
employees of Yellow Book and its subsidiaries were entitled to a payment under
the Yellow Book Phantom DDB Plan, under which the participants as a group are
treated economically as if they had invested approximately (pound)32 million in
the Yell Group in the same manner as the funds advanced by the owners of our
parent company before the global offer. We recorded a compensation charge of $63
million ((pound)39 million) in connection with this. In satisfaction of those
obligations, the plan participants exchanged their interests in the plan for
equity in our parent company.
Debt Obligations
We are required to satisfy interest and principal payments on our borrowings as
they become due. To the extent we are not able to fund any principal payment at
maturity or any interest payment when due from cash flow from operations, we
would be required to refinance this indebtedness pursuant to credit facilities
and/or the issue of new debt and equity securities into the capital markets. No
one has guaranteed our obligations under the senior notes or has any obligation
to provide additional equity financing to us.
The terms of our senior credit facilities require us to maintain specified
consolidated financial ratios for net total debt to Earnings Before Interest,
Tax, Depreciation and Amortisation ("EBITDA", as defined in the senior credit
facilities), EBITDA to net cash interest payable and, until 31 March 2005, net
senior debt to EBITDA.
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OTHER MATTERS
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements other than the hedges
discussed below.
Market-Related Risks
Interest is payable under our senior credit facilities at a variable rate. We
could, therefore, be adversely affected if interest rates were to rise
significantly. Under our previous senior credit facilities, we were required to
hedge at least 50% of the variable-rate indebtedness under the senior credit
facilities for at least two years. Under our new senior facilities agreement we
are required to have fixed interest on at least 50% of all interest payments
during the 21 months following each month end. This requirement ceases once the
Group leverage ratio falls below 3.5 times. We have fixed interest on nearly 55%
of the indebtedness under the senior credit facilities using interest rate swaps
falling to 50% over the period to December 2005, with a review of this strategy
on a quarterly basis. When combined with the fixed rate senior notes, we have
fixed our interest rates on approximately 64% of our total gross debt until
December 2005, falling to approximately 26% thereafter. At 30 September 2003, we
had (pound)12.2 million net unrecognised losses on these instruments that will
be recognised when the interest is paid.
All of these instruments are entered into for hedging purposes and, under UK
GAAP, gains and losses on these instruments are deferred and only recognised in
income when the underlying transaction is recorded. Such instruments have not
been designated and do not qualify for hedge accounting under Statement of
Financial Accounting Standards No 133 "Accounting for Derivative Instruments and
Hedging Activities" for US GAAP purposes.
All significant cash inflows and outflows associated with our operations in the
United Kingdom are denominated in pounds sterling, and all significant cash
inflows and outflows associated with our operations in the United States are
denominated in US dollars. However, our financial information is presented in
pounds sterling, and changes in the exchange rate between the US dollar and
pounds sterling will affect the translation of the results of our operations
into pounds sterling. We do not currently intend to hedge any foreign exchange
rate risk relating to US dollar-denominated notes, although we will continue to
review this practice. The dilution of our earnings reported in pounds sterling
as a result of the weakening US dollar is partially offset by natural hedging
from debt denominated in US dollars.
14
At 30 September 2003, we had (pound)506.4 million of borrowings denominated in
US dollars net of deferred financing fees, and (pound)1,022.6 million of
borrowings, also net of deferred financing fees, that accrue interest at
variable rates, before taking into account hedging arrangements. At 30 September
2003, and after considering the effect of our post-IPO debt structure and
hedging arrangements, if the annualised variable interest rates had been 1.0%
higher or lower with no change in exchange rates, our half year interest charge
would vary by approximately (pound)2.3 million higher or lower, respectively,
taking into account our hedging arrangements, or (pound)5.1 million higher or
lower, respectively, without taking into account hedging arrangements. Further,
taking into account our US dollar-denominated liabilities on our post-IPO debt
structure, if the average US dollar/pound sterling exchange rate during the
period had been $1.78 to (pound)1.00, for example, instead of $1.62 to
(pound)1.00, the approximate rate effective for the six months ended 30
September 2003, then our half year interest charge would have been approximately
(pound)1.0 million lower.
International Financial Reporting Standards
In June 2002, the Council of Ministers of the European Union approved a
regulation (the "Regulation") requiring all companies that are governed by the
law of a Member State of the European Union and whose securities are admitted to
trading on a regulated market of any Member State to prepare their consolidated
financial statements in accordance with International Financial Reporting
Standards ("IFRS") as adopted by the European Union. The Regulation is to be
effective for each financial year starting on or after 1 January 2005.
The International Accounting Standards Board issued IFRS1, a standard on
transition to IFRS, in June 2003. It is expected that there will be significant
continuing developments in IFRS between now and 2005 and consequently there is
uncertainty about exactly what IFRS will require in 2005. This uncertainty will
be reduced as the International Accounting Standards Board finalises and
publishes its standards on the first time adoption of IFRS and other key areas
such as business combinations and share-based payments.
In the meantime, the UK Accounting Standards Board is adopting a phased
transition to the conversion of existing UK GAAP and plans to issue around 40
new standards or revisions to existing standards over the next two years, some
of which have already been issued in the form of Financial Reporting Exposure
Drafts ("FREDs"). It is also possible that by the implementation date set by the
European Union, UK GAAP will not be fully aligned with IFRS.
The Yell Group will adopt any standards arising from FREDs when they become
effective and part of UK GAAP. The transition of UK GAAP to IFRS and/or the
adoption of IFRS could possibly have a material impact on the Group's financial
position and reported results, although it is not possible for the Directors to
quantify the impact at this time.
15
Recent US GAAP Accounting Pronouncements
In April 2003, the FASB issued Statement of Financial Accounting Standards No
149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). This standard amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
"derivatives") and for hedging activities under FASB Statement No 133,
"Accounting for Derivative Instruments and Hedging Activities". This standard is
effective prospectively for contracts entered into or modified after 30 June
2003 and prospectively for hedging relationships designated after 30 June 2003.
Adoption of this standard has had no material effect on our results.
Critical Accounting Estimates
In general, our accounting policies are consistent with those generally adopted
by others operating within the same industry in the United Kingdom. Our
accounting policies are set out in our audited financial statements contained
within the Form 20-F filed with the SEC on 1 July 2003. A discussion of the most
significant policies that require our management to make subjective and complex
judgements or to consider matters that are inherently uncertain are also
contained in that document.
CONSOLIDATED RESULTS OF OUR PARENT COMPANY
We have included the financial information of our parent company, Yell Group
plc and its subsidiaries, as an exhibit to the consolidated financial
information of Yell Finance B.V., in order to disclose what our parent company
reports to the London Stock Exchange and to satisfy the requirements of our
parent company to produce a UK GAAP to US GAAP reconciliation for our US
employees.
16