EXHIBIT 99.2
OPERATING AND FINANCIAL REVIEW AND PROSPECTS AT AND FOR
THE THREE MONTHS ENDED 30 JUNE 2004
References to "we", "us", "our", "Yell", the "Group" 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.
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, turnover, 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 8 June 2004 for a discussion of some of these factors. We
undertake no obligation publicly to 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 30 JUNE
---------------------------------------
2003 2004 CHANGE
---------------------------------------------------------
((POUND) IN MILLIONS) (%)
- ----------------------------------------------------------------------------------------------------------------------------
Turnover 262.2 280.9 7.1%
Cost of sales (117.7) (127.8) 8.6%
- ----------------------------------------------------------------------------------------------------------
Gross profit 144.5 153.1 6.0%
Distribution costs (9.3) (8.3) (10.8)%
Administrative costs (including exceptional items) (132.8) (85.5) (35.6)%
- ----------------------------------------------------------------------------------------------------------
OPERATING PROFIT BEFORE EXCEPTIONAL ITEMS 49.7 59.3 19.3%
Exceptional administrative costs (47.3) -
- ----------------------------------------------------------------------------------------------------------
OPERATING PROFIT 2.4 59.3
==========================================================================================================
(LOSS) PROFIT FOR THE FINANCIAL PERIOD (55.8) 14.4
==========================================================================================================
Gross profit margin (%) 55.1 54.5
EBITDA (1) 32.7 89.8 174.6%
EBITDA margin (%) 12.5 32.0
EBITDA before exceptional items (2) 80.0 89.8 12.3%
EBITDA margin (%) before exceptional items 30.5 32.0
Cash inflow from operations before exceptional items, less
capital expenditure 49.6 70.7 42.5%
Cash conversion before exceptional items (%) (3) 62.0 78.7
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(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 (loss) profit for
the financial period (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 of (pound)47.3 million
in the three months ended 30 June 2003. There were no exceptional
items for the three months ended 30 June 2004.
(3) Cash conversion represents cash flow from operations before
exceptional items and cash paid to our parent for shares, 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
THREE MONTHS ENDED 30 JUNE
----------------------------
2003 2004 CHANGE
---------------------------------------
UK printed directories
Unique advertisers (thousands) (1) 136 138 1.5%
Directory editions published (2) 26 28
Unique advertiser retention rate (%) (3) 78 76
Turnover per unique advertiser ((pound)) 989 1,004 1.5%
US printed directories
Unique advertisers (thousands) (1)(4) 105 124 18.1%
Directory editions published 121 126
Unique advertiser retention rate (%) (4) 68 70
Turnover per unique advertiser ($) 1,820 1,902 4.5%
Other UK products and services
Yell.com page impressions for June (millions) 43 63 46.5%
Yell.com searchable advertisers as at 30 June (thousands) (5) 81 110 35.8%
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(1) Number of unique advertisers in printed directories that were
recognised for turnover 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.
(2) The number of Yellow Pages directory editions published in the United
Kingdom has increased due to the rescoping of Glasgow North and
Glasgow South.
(3) The proportion of unique advertisers that have renewed their
advertising from the preceding publication. As a result of
improvements to our systems, we are now able to include national and
key accounts in our measurement of retention. If we had continued to
exclude these accounts, the retention rate for 2004 would have been
75% and last year's number would have been unchanged at 78%. These
improvements to our systems have not affected the reporting of our
financial results.
(4) As a result of the progress in the United States towards integrating
our customer databases, 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. We have not adjusted the previously
reported 2003 figure for any duplicated records in 2003. There
remains some overlap in reporting unique advertisers between Yellow
Book and the former McLeod that we expect to be removed. These
improvements to our systems have not affected the reporting of our
financial results.
(5) 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.
3
TURNOVER
THREE MONTHS ENDED 30 JUNE
---------------------------------
2003 2004 CHANGE
-------------------------------------------------
((POUND) IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------------
UK printed directories 134.9 138.9 3.0%
Other UK products and services 10.0 11.7 17.0%
- --------------------------------------------------------------------------------------------------------
TOTAL UK TURNOVER 144.9 150.6 3.9%
- --------------------------------------------------------------------------------------------------------
US printed directories:
US printed directories at constant exchange rate (1) 117.3 144.8 23.4%
Exchange impact (1) - (14.5)
- --------------------------------------------------------------------------------------------------------
TOTAL US TURNOVER 117.3 130.3 11.1%
- --------------------------------------------------------------------------------------------------------
GROUP TURNOVER 262.2 280.9 7.1%
====================================================================================================================
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(1) Constant exchange rate states current period results at the same
exchange rate as that used to translate the results for the same period
in the previous year. Exchange impact is the difference between the
results reported at a constant exchange rate and the actual results
reported using current period exchange rates.
Group turnover during the three months ended 30 June 2004 increased 7.1% to
(pound)280.9 million, or 12.7% at a constant exchange rate, from (pound)262.2
million last year. (1)
We recognise turnover from advertising sales for each printed directory on
completion of delivery of each directory.
UK Turnover
UK turnover increased (pound)5.7 million, or 3.9% to (pound)150.6 million.
Excluding the effects of our products discontinued in 2003 (the sale of Yell
Data, our data-service business, and the ending of our contract with BT to sell
advertising in its phone books), total UK turnover grew 5.0% from last year.
Printed directories turnover grew 3.0% to (pound)138.9 million, after the impact
of the 3.9% price reduction under the RPI-6% price cap. (2) Yell.com continued
its strong turnover growth with a 41.1% increase to (pound)7.9 million.
The total number of unique advertisers in the UK increased by 1.5% to 138,000.
We continued to add new advertisers to printed directories, and we believe we
are on track to meet our full year target of over 100,000 new customers.
- --------------
1. Throughout this report, unless otherwise indicated, references to "for
the three months" or the "three month period" are to the three months
ended 30 June 2004 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 three months ended 30 June 2003 and 2004, the
average price of advertising in our Yellow Pages decreased by 4.4% and
3.9%, respectively. We are not subject to any regulatory price
constraints in the United States. The relevant price cap applied to
approximately 49.0% and 47.0% of our Group turnover in the three months
ended 30 June 2003 and 2004, respectively.
Our retention rate has declined from 78% to 76% (or 78% to 75% if we continued
to exclude national advertisers). Our success in attracting over 100,000 new
customers in each of the past four years has diluted overall retention as new
4
advertisers are more difficult to retain than more established advertisers. Our
strategy to increase the customer base has contributed to sustained growth in
customer numbers and revenue.
Average turnover from unique advertisers improved 1.5%, after the 3.9% price
reduction, to (pound)1,004.
As part of our strategy to grow our advertiser base, we rescoped two directories
into four during the first quarter, reflecting changes in shopping and trading
patterns. Typically, these rescoped directories achieve little or no growth in
their first year. The second quarter will include three London rescopes and we
expect first half revenue growth to be below first quarter levels.
Yell.com continued to grow rapidly, increasing the number of searchable
advertisers 35.8% to 110,000 at 30 June 2004.
Overall, UK turnover remains on course to meet full year expectations.
US Turnover
US turnover increased by (pound)13.0 million, or 11.1%, from (pound)117.3
million to (pound)130.3 million after taking into account that turnover was
negatively affected by (pound)14.5 million from a weakening US dollar. On a
constant US dollar basis, US turnover grew by (pound)27.5 million, or 23.4%. The
average exchange rate was approximately $1.81: (pound)1.00 in the three months
ended 30 June 2004 against $1.63: (pound)1.00 in the same period in the previous
year.
Unique advertisers increased by 18.1% to 124,000 with average turnover per
unique advertiser up 4.5% to $1,902.
Organic turnover growth was 13.9% to which same-market growth contributed 10.6%,
and growth from four new launches contributed 3.3%. We expect the growth
momentum in the US business to continue into the second quarter.
Acquisitions, primarily Feist which we acquired in March 2004, contributed 11.1%
of the growth. This reflects a heavy first quarter publishing schedule for
Feist.
Overall turnover growth was slightly offset by the continuing planned running
down of the CCD partnership, which we acquired as part of McLeod.
5
COST OF SALES
THREE MONTHS ENDED 30 JUNE
-------------------------------
2003 2004 CHANGE
------------------------------------------------
((POUND) IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------------
UK printed directories 51.2 54.8 7.0%
Other UK products and services 2.9 3.1 6.9%
- ----------------------------------------------------------------------------------------------------
TOTAL UK COST OF SALES 54.1 57.9 7.0%
- ----------------------------------------------------------------------------------------------------
US printed directories:
US printed directories at constant exchange rate (1) 63.6 77.6 22.0%
Exchange impact (1) - (7.7)
- ----------------------------------------------------------------------------------------------------
TOTAL US COST OF SALES 63.6 69.9 9.9%
- ----------------------------------------------------------------------------------------------------
GROUP COST OF SALES 117.7 127.8 8.6%
====================================================================================================================
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(1) Constant exchange rate states current period results at the same
exchange rate as that used to translate the results for the same period
in the previous year. Exchange impact is the difference between the
results reported at a constant exchange rate and the actual results
reported using current period 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 costs of collecting advertising content, paper,
printing and pre-press production, as well as bad debt expense. The principal
costs of collecting advertising content, 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.
Cost of sales for the UK business increased by (pound)3.8 million, or 7.0%, to
(pound)57.9 million in the three months ended 30 June 2004 from (pound)54.1
million last year. Cost of sales as a percentage of turnover was 38.4% as
compared to 37.3% for the corresponding period in the prior year. The increase
in cost of sales as a percentage of turnover is mainly a result of increased
investment in our sales efforts to drive growth in customer numbers and higher
advertisement volumes.
The (pound)14.0 million, or 22.0%, increase in cost of sales at a constant
exchange rate for US printed directories reflected the increase in US turnover.
Cost of sales for US printed directories as a percentage of related turnover and
at a constant exchange rate was 53.6% as compared to 54.2% last year.
Our consolidated bad debt expense was (pound)15.6 million, or 5.6% of Yell Group
turnover in the three months ended 30 June 2004, as compared to (pound)13.8
million, or 5.3%, 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 7.1% of US printed directories turnover in the three
months ended 30 June 2004, as compared to 6.8% for the same period in the prior
financial year, reflecting the additional growth and new customers, which
historically have a higher risk of default.
6
GROSS PROFIT AND GROSS PROFIT MARGIN
THREE MONTHS ENDED 30 JUNE
-------------------------------
2003 2004 CHANGE
-----------------------------------------------
((POUND) IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
UK printed directories 83.7 84.1 0.5%
Other UK products and services 7.1 8.6 21.1%
- ----------------------------------------------------------------------------------------------------
TOTAL UK GROSS PROFIT 90.8 92.7 2.1%
- ----------------------------------------------------------------------------------------------------
US printed directories:
US printed directories at constant exchange rate (1) 53.7 67.2 25.1%
Exchange impact (1) - (6.8)
- ----------------------------------------------------------------------------------------------------
TOTAL US GROSS PROFIT 53.7 60.4 12.5%
- ----------------------------------------------------------------------------------------------------
GROUP GROSS PROFIT 144.5 153.1 6.0%
- ----------------------------------------------------------------------------------------------------
GROSS PROFIT MARGIN (%)
UK Operations 62.7 61.6
US Operations 45.8 46.3
GROUP TOTAL (%) 55.1 54.5
====================================================================================================
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(1) Constant exchange rate states current period results at the same
exchange rate as that used to translate the results for the same
period in the previous year. Exchange impact is the difference
between the results reported at a constant exchange rate and the
actual results reported using current period exchange rates.
Gross profit as a percentage of Group turnover was 54.5% for the three months
ended 30 June 2004 as compared to 55.1% last year, reflecting the trend of lower
margins in the UK operations partially offset by higher margins in the US
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 three months
ended 30 June 2004, for example, our gross profit margin for our UK operations
was 61.6%, compared to 46.3% 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)1.0 million, or 10.8%, from (pound)9.3
million in the three months ended 30 June 2003 (3.5% of Group turnover) to
(pound)8.3 million (3.0% of Group turnover) in the three months ended 30 June
2004. The reduction in distribution costs was primarily due to a weakening
dollar, which reduced US distribution costs by (pound)0.6 million. Group
distribution costs reduced by 4.3% at a constant exchange rate.
Our administrative costs 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 costs decreased from (pound)132.8 million to (pound)85.5 million
in the three months ended 30 June 2004. Administrative costs excluding
exceptional charges of (pound)47.3 million showed no movement, as an increase in
costs of (pound)4.2 million was offset by a corresponding exchange gain.
8
GROUP OPERATING PROFIT, EBITDA AND EBITDA BEFORE EXCEPTIONAL ITEMS
---------------------------------------
THREE MONTHS ENDED 30 JUNE
---------------------------------------
2003 2004 CHANGE
---------------------------------------------------------
((POUND) IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------
UK OPERATIONS
Operating profit, including exceptional items 31.9 39.2
Depreciation and amortisation 17.3 17.5
- --------------------------------------------------------------------------------------------------------
UK OPERATIONS EBITDA 49.2 56.7
Exceptional items 5.6 -
- --------------------------------------------------------------------------------------------------------
UK OPERATIONS EBITDA BEFORE
EXCEPTIONAL ITEMS 54.8 56.7 3.5%
- --------------------------------------------------------------------------------------------------------
US OPERATIONS
Operating (loss) profit, including
exceptional items (29.5) 20.1
Depreciation and amortisation 13.0 13.0
- --------------------------------------------------------------------------------------------------------
US OPERATIONS EBITDA (16.5) 33.1
Exceptional items 41.7 -
- --------------------------------------------------------------------------------------------------------
US OPERATIONS EBITDA BEFORE EXCEPTIONAL ITEMS 25.2 33.1 31.3%
- --------------------------------------------------------------------------------------------------------
US OPERATIONS EBITDA BEFORE EXCEPTIONAL ITEMS AT CONSTANT
EXCHANGE RATE (1) 25.2 36.8 46.0%
- --------------------------------------------------------------------------------------------------------
GROUP
Operating profit, including exceptional items 2.4 59.3
Depreciation and amortisation 30.3 30.5
- --------------------------------------------------------------------------------------------------------
GROUP EBITDA 32.7 89.8 174.6%
========================================================================================================
GROUP
Operating profit before exceptional items 49.7 59.3
Depreciation and amortisation 30.3 30.5
- --------------------------------------------------------------------------------------------------------
GROUP EBITDA BEFORE EXCEPTIONAL ITEMS 80.0 89.8 12.3%
========================================================================================================
GROUP EBITDA BEFORE EXCEPTIONAL ITEMS AT CONSTANT EXCHANGE
RATE(1) 80.0 93.5 16.9%
========================================================================================================
EBITDA MARGIN (%)
UK operations 34.0 37.6
US operations (14.1) 25.4
EBITDA MARGIN BEFORE EXCEPTIONAL ITEMS (%)
UK operations 37.8 37.6
US operations 21.5 25.4
========================================================================================================
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(1) Constant exchange rate states current period results at the same
exchange rate as that used to translate the results for the same
period in the previous year.
Group EBITDA before exceptional costs increased 12.3% to (pound)89.8 million, or
16.9% at a constant exchange rate. The Group adjusted EBITDA margin increased
1.5 percentage points to 32.0%, driven by the strong US performance.
UK EBITDA before exceptional costs rose 3.5%, or (pound)7.5 million to
(pound)56.7 million, reflecting the increase in UK turnover and the continued
progress of Yell.com, which increased EBITDA to (pound)2.4 million (operating
profit of (pound)1.9 million with depreciation of (pound)0.5 million added back)
from (pound)1.1 million last year (operating profit of (pound)0.6 million with
depreciation of (pound)0.5 million added back). The UK EBITDA margin was 37.6%,
compared with 37.8% last year, with Yell.com's margin increase partially
offsetting the decline in the printed directories' margin.
9
US EBITDA was (pound)33.1 million, an increase of 31.3% from (pound)25.2 million
excluding exceptional costs, or 46.0% at a constant exchange rate, after taking
into account the (pound)3.7 million reduction in earnings from the weaker US
dollar. The US EBITDA margin increased from 21.5% to 25.4%, driven by the strong
revenue growth and operational leverage.
NET INTEREST PAYABLE
Net interest payable was (pound)32.7 million in the three months ended 30 June
2004, a decrease of (pound)20.2 million from (pound)52.9 million last year
before exceptional interest charges of (pound)30.0 million of accelerated
finance fees. The decrease is a result of the new capital structure which our
parent company put in place following its initial public offering last year. Net
interest expense comprised (pound)20.2 million of net interest paid or to be
paid within a six-month period, (pound)2.5 million of interest rolled up into
our long-term debt, (pound)1.0 million of amortised financing costs and
(pound)9.0 million of interest payable to our parent company.
TAXATION
Taxation charge was (pound)12.2 million for the three months ended 30 June 2004
and (pound)3.1 million last year before exceptional tax credits of (pound)27.8
million, arising from exceptional charges in the quarter. Taxation is determined
on taxable profits that do not reflect certain amortisation charges. We expect
the future taxation charges to increase as we use up our net operating losses
that are available to offset our future taxable income in the United States.
NET PROFIT (LOSS)
The net profit was (pound)14.4 million for the three months ended 30 June 2004
compared to a net loss of (pound)55.8 million for the same period in the prior
year. Excluding the effect of the exceptional items, the net loss for the three
months ended 30 June 2003 would have been (pound)6.3 million. The increase in
profit reflects the improvement in turnover and substantial savings brought
about by the new capital structure.
LIQUIDITY AND CAPITAL RESOURCES
Apart from significant acquisitions, which we have funded through a combination
of borrowings 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 senior credit facilities, which expires on 7 July
2008.
10
Cash Flows
THREE MONTHS ENDED 30 JUNE
----------------------------------------
2003 2004
((POUND) IN MILLIONS)
- -------------------------------------------------------------------------------------------------------
Net cash inflow from operating activities 55.1 74.1
Net cash outflow from returns on investments
and servicing of finance (18.8) (15.1)
Taxation (1.0) (5.3)
Net cash outflow for capital expenditure and acquisitions (7.3) (3.7)
- -------------------------------------------------------------------------------------------------------
NET CASH INFLOW BEFORE FINANCING 28.0 50.0
Net cash outflow from financing - (22.5)
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 28.0 27.5
=======================================================================================================
Net cash inflow from operating activities for the three months ended 30 June
2004 was (pound)74.1 million, compared with an inflow of (pound)55.1 million for
the three months ended 30 June 2003. The increase is primarily driven by the
improvement in operating profit partially offset by investment in working
capital.
Net cash outflow from returns on investments and servicing of finance was
(pound)15.1 million of cash pay interest for the three months ended 30 June
2004. This compares to (pound)18.8 million for the three months ended 30 June
2003.
Net cash outflow for capital expenditure and financial investment comprises
capital expenditure on fixed assets and purchases of businesses, net of cash
acquired. Capital expenditure in the three months ended 30 June 2004 was
(pound)3.7 million compared to (pound)5.9 million in the same period last year.
In the same period last year there was also (pound)1.4 million of cash outflows
relating to the purchase of subsidiary undertakings.
Cash Conversion
The cash inflow from operations before payments of previously accrued
exceptional items and less capital expenditure was (pound)70.7 million for the
three months ended 30 June 2004 and (pound)49.6 million last year. The
underlying cash performance used by management excludes payments of previous
accrued exceptional items of (pound)0.3 million and (pound)0.4 million during
the three months ended 30 June 2004 and 2003, respectively, and is after capital
expenditure for the three months ended 30 June 2004 and 2003 of (pound)3.7
million and (pound)5.9 million, respectively.
Net cash inflow of (pound)70.7 million for 2004 as a percentage of EBITDA of
(pound)89.8 million was 78.7% ("cash conversion"). For 2003 the cash inflow of
(pound)49.6 million as a percentage of EBITDA (excluding exceptionals) of
(pound)80.0 million was 62.0%. Cash conversion normally varies quarterly during
the year according to timing of payments and receipts in relation to the phasing
of EBITDA.
11
Capital Resources
At 30 June 2004, we had cash of (pound)47.7 million, compared to (pound)18.4
million at 31 March 2004.
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)1,763.7 million at 30 June 2004, compared
to(pound)2,096.4 million at 31 March 2004 as set out below.
AT 31 MARCH AT 30 JUNE
2004 2004
--------------------------------------
((POUND) IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------
Long-term loans and other borrowings
Term Loan A1 - denominated in sterling 624.0 606.5
Term Loan A2 - denominated in US dollars 323.8 328.4
Term Loan - Senior revolving credit facility 5.0 -
Senior notes 308.2 312.8
Other 0.8 0.8
- -------------------------------------------------------------------------------------------------------------
Total debt owed to third parties 1,261.8 1,248.5
Subordinated parent company loans 873.1 582.1
- -------------------------------------------------------------------------------------------------------------
Total debt, including subordinated parent company loans 2,134.9 1,830.6
Unamortised financing costs (20.1) (19.2)
- -------------------------------------------------------------------------------------------------------------
Total debt, net of unamortised financing costs 2,114.8 1,811.4
Cash at bank (18.4) (47.7)
- -------------------------------------------------------------------------------------------------------------
NET DEBT AT END OF THE PERIOD 2,096.4 1,763.7
=============================================================================================================
From 1 April 2004, all UK tax resident companies in the Yell Group are subject
to new transfer pricing and thin capitalisation rules for tax purposes. Yell
Finance BV issued shares for a value of (pound)300 million to settle
subordinated parent company loans as a response to these rules. Yell Group made
an early payment of (pound)17.5 million on the senior credit facility, as
required by the senior credit facility agreement, and repaid (pound)5.0 million
that had been drawn down against the senior revolving credit facility at 31
March 2004.
Net third-party debt, excluding subordinated parent company loans, of
(pound)1,181.6 million as a multiple of EBITDA before exceptional items over the
last 12 months of (pound)369.9 million was 3.2. This compares to a multiple of
3.4 at 31 March 2004.
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.
12
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 the Senior Facilities Agreement dated 8 July 2003 we are
required to have fixed or capped interest on at least 50% of net interest
payments during the 21 months following each month end. This requirement ceases
once the Group Leverage Ratio falls below 3.5 times "EBITDA" (as defined in the
senior credit facilities). Over the period to June 2006 we have fixed interest
initially on 53% falling steadily to 50% of the indebtedness under the senior
credit facilities using interest rate swaps. This strategy is reviewed 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 June 2006,
falling to approximately 30% thereafter. At 30 June 2004, we had (pound)2.8
million net unrecognised gains 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 the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
No 133 "Accounting for Derivative Instruments and Hedging Activities", as
amended and interpreted, 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. The composition of our debt partially hedges exchange rate
fluctuations, because 37.2% of our third-party debt and 30.7% of our net
third-party interest expense are denominated in US dollars, thereby reducing our
US EBITDA exposure by approximately 29.5%. 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.
At 30 June 2004, we had (pound)471.5 million of borrowings denominated in US
dollars net of deferred financing fees, and (pound)924.3 million of borrowings,
also net of deferred financing fees, that accrue interest at variable rates,
before taking into account hedging arrangements. The following examples
illustrate the effect certain changes in foreign exchange rates and interest
rates would have had in the three months ended 30 June 2004. The following
discussion of estimated amounts generated from the sensitivity analysis is
forward-looking and involves risks and uncertainties. If the amount or mix of
long-term borrowings is different, then the following examples may not be
indicative of the effects of changing exchange rates and interest rates.
If the variable interest rates had been 1.0% higher or lower with no change in
foreign exchange rates, our interest charge for the three months ended 30 June
2004 would vary by approximately (pound)1.1 million higher or lower,
respectively, taking into account our hedging arrangements, or (pound)2.4
million higher or lower, respectively, without taking into account hedging
arrangements.
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If the average exchange rate of the US dollar as measured against the pound
sterling had been 10% higher or lower, with no change in variable rates of
interest, then the interest payable for the three months ended 30 June 2004
would have been approximately (pound)2.9 million lower or (pound)3.6 million
higher, respectively.
Our exposure to interest rate fluctuations will depend on the amount of
variable-rate indebtedness that we have outstanding and the extent of any
hedging arrangements that we put in place. Similarly, our exposure to currency
fluctuations will depend on the mix of US dollar and pounds sterling-denominated
indebtedness and the extent of any hedging arrangements.
Litigation
On 22 January 2004 Verizon filed suit in New York alleging that sales and
marketing communications published by Yellow Book USA are misleading and have
caused Verizon to lose revenue. We believe that the complaint is without merit
and we will vigorously resist any claim for relief. We believe that a material
adverse outcome to the company is considerably less than likely. We do not
believe that the legal proceedings which have now commenced will have a material
adverse effect on the financial position or results of the Group.
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.
It is expected that there will be significant continuing developments in IFRS
between now and our 2006 financial year, and consequently there is uncertainty
about exactly what IFRS will require on 1 April 2005. This uncertainty will be
reduced as the International Accounting Standards Board finalises and publishes
its standards. Please read the section entitled "Operating and Financial Review
and Prospects - International Financial Reporting Standards" in the 31 March
2004 Annual report on Form 20-F filed with the SEC on 8 June 2004 for a
description of IFRS standards issued. The UK Accounting Standards Board is
adopting a phased transition to the conversion of existing UK GAAP. It is
possible that by the implementation date set by the European Union, UK GAAP will
not be fully aligned with IFRS.
We will report our results for the three months ending 30 June 2005 in
accordance with IFRS with comparative information for the three months ended 30
June 2004 restated in accordance with IFRS. We have established a working party
to assess the effects of IFRS on our financial reporting and to prepare for
adoption of IFRS from 1 April 2005.
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 8 June 2004. 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.
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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 with 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 requirement of our parent company
to produce a UK GAAP to US GAAP reconciliation for US employees.
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