EXHIBIT 99.2
OPERATING AND FINANCIAL REVIEW AND PROSPECTS AT AND FOR
THE THREE MONTHS AND SIX MONTHS ENDED 30 SEPTEMBER 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 SIX MONTHS ENDED
30 SEPTEMBER 30 SEPTEMBER
2003 2004 CHANGE 2003 2004 CHANGE
------------------------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------
Turnover 306.4 323.7 5.6% 568.6 604.6 6.3%
Cost of sales (133.4) (143.8) 7.8% (251.1) (271.6) 8.2%
- --------------------------------------------------------------------------------------------------------------
Gross profit 173.0 179.9 4.0% 317.5 333.0 4.9%
Distribution costs (7.9) (9.4) 19.0% (17.2) (17.7) 2.9%
Administrative costs (including
exceptional items) (130.6) (97.7) (25.2)% (263.4) (183.2) (30.4)%
- --------------------------------------------------------------------------------------------------------------
OPERATING PROFIT BEFORE EXCEPTIONAL ITEMS 77.3 85.6 10.7% 127.0 144.9 14.1%
Exceptional administrative costs (42.8) (12.8) (90.1) (12.8)
- --------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 34.5 72.8 36.9 132.1
==============================================================================================================
PROFIT (LOSS) FOR THE FINANCIAL PERIOD
BEFORE EXCEPTIONAL ITEMS 28.4 31.2 (22.1) 45.6
(LOSS) PROFIT FOR THE FINANCIAL PERIOD (33.4) 23.2 (89.2) 37.6
==============================================================================================================
Gross profit margin (%) 56.5 55.6 55.8 55.1
EBITDA (1) 64.8 103.4 59.6% 97.5 193.2 98.2%
EBITDA margin (%) 21.1 31.9 17.1 32.0
EBITDA before exceptional items (2) 107.6 116.2 8.0% 187.6 206.0 9.8%
EBITDA margin (%) before exceptional items 35.1 35.9 33.0 34.1
Cash inflow from operations before
exceptional items, less capital
expenditure 104.1 99.9 (4.0)% 153.7 170.6 11.0%
Cash conversion before
exceptional items (%) (3) 96.7 86.0 81.9 82.8
(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 exceptional costs of (pound)12.8 million incurred in the six
months ended 30 September 2004 relating to litigation brought against our
US operations. EBITDA before exceptional items in 2003 excludes expenses
incurred in connection with the initial public offering by our parent
company, Yell Group plc, of (pound)90.1 million.
(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
SIX MONTHS ENDED 30 SEPTEMBER
-------------------------------
2003 2004 CHANGE
-------------------------------
UK printed directories
Unique advertisers (thousands) (1) 251 254 1.2%
Directory editions published 50 55
Unique advertiser retention rate (%) (2) 78 75
Turnover per unique advertiser ((pound)) 1,178 1,183 0.4%
US printed directories
Unique advertisers (thousands) (1)(3) 210 238 13.3%
Directory editions published 250 259
Unique advertiser retention rate (%) (3) 70 72
Turnover per unique advertiser ($) 1,960 2,133 8.8%
Other UK products and services
Yell.com page impressions for September (millions) 51 70 37.3%
Yell.com searchable advertisers as at 30 September (thousands)(4) 87 121 39.1%
___________________
(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 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 74%. We have not adjusted previously reported
2003 figures. These improvements to our systems have not affected the
reporting of our financial results.
(3) 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. Retention in the US is based on unique
directory advertisers.
(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. They exclude advertisers who purchase products such as banners
and domain names.
3
TURNOVER
THREE MONTHS ENDED SIX MONTHS ENDED
30 SEPTEMBER 30 SEPTEMBER
--------------------------- ------------------------
2003 2004 CHANGE 2003 2004 CHANGE
------------------------------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------
UK printed directories 160.3 162.0 1.1% 295.2 300.9 1.9%
Other UK products and services 9.4 12.4 31.9% 19.4 24.1 24.2%
- -------------------------------------------------------------- ------------------------
TOTAL UK TURNOVER 169.7 174.4 2.8% 314.6 325.0 3.3%
- -------------------------------------------------------------- ------------------------
US printed directories:
US printed directories at
constant exchange rate (1) 136.7 168.6 23.3% 254.0 313.4 23.4%
Exchange impact (1) - (19.3) - (33.8)
- -------------------------------------------------------------- -------------------------
TOTAL US TURNOVER 136.7 149.3 9.2% 254.0 279.6 10.1%
- -------------------------------------------------------------- -------------------------
GROUP TURNOVER 306.4 323.7 5.6% 568.6 604.6 6.3%
==============================================================================================================
_________________
(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 six months ended 30 September 2004 increased 6.3% to
(pound)604.6 million, or 12.3% at a constant exchange rate, from (pound)568.6
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)10.4 million, or 3.3%, to (pound)325.0 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 3.9% from last year.
Printed directories turnover grew 1.9% to (pound)300.9 million. The effect of
the RPI -6% price cap (2) was to reduce our prices by an average of 3.5%.
Yell.com continued its strong turnover growth with a 42.6% increase from last
year to (pound)16.4 million.
The total number of unique advertisers in the UK increased by 1.2% to 254,000.
_________________
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 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
six months ended 30 September 2003 and 2004, the average price of
advertising in our Yellow Pages decreased by 4.7% and 3.5%, respectively.
We are not subject to any regulatory price constraints in the United
States. The relevant price cap applied to approximately 49.9% and 47.8% of
our Group turnover in the six months ended 30 September 2003 and 2004,
respectively.
4
Our retention rate has declined from 78% to 75% (excluding national and key
accounts). Our success in attracting over 100,000 new customers in each of the
past four years has inevitably diluted overall retention. New advertisers are
now proving more difficult to retain in a competitive market than those
advertisers for whom the value of advertising in Yellow Pages is proven. Our
strategy to increase the customer base has contributed to sustained growth in
customer numbers and revenue.
Average turnover from unique advertisers improved slightly, to (pound)1,183 from
(pound)1,178 last year.
As part of our strategy to grow our advertiser base, we rescoped five
directories into ten during the first six months, reflecting changes in shopping
and trading patterns. These included three of the five we are rescoping in
London, which is traditionally a more competitive market than the rest of the
UK. Typically, these rescoped directories achieve little or no growth in their
first year.
Yell.com continued to grow rapidly, increasing the number of searchable
advertisers by 39.1% to 121,000 at 30 September 2004, with turnover growth at
42.6%.
Overall, UK turnover remains on course to meet full year expectations.
US Turnover
US turnover increased by (pound)25.6 million, or 10.1%, from (pound)254.0
million to (pound)279.6 million after taking into account that turnover was
negatively affected by (pound)33.8 million from a weakening US dollar. On a
constant US dollar basis, US turnover grew by (pound)59.4 million, or 23.4%. The
average exchange rate was approximately $1.81 : (pound)1.00 in the six months
ended 30 September 2004 against $1.62 : (pound)1.00 in the same period last
year.
Unique advertisers increased by 13.3% to 238,000 with average turnover per
unique advertiser up 8.8% to $2,133 and retention up from 70% to 72%.
Organic turnover growth was 16.0% to which same-market growth contributed 12.3%,
and growth from six new launches contributed 3.7%. Acquisitions, primarily Feist
which we acquired in March 2004, contributed 10.2% of the growth, reflecting a
heavy first half publishing schedule for Feist. Growth was marginally slowed by
changes in operating practices including the intentional running down of the CCD
partnership and production rescheduling.
US turnover growth for the year should be in line with expectations. However
third quarter growth is expected to slow slightly as a result of the effects of
fewer launches and production rescheduling following acquisitions.
5
COST OF SALES
THREE MONTHS ENDED SIX MONTHS ENDED
30 SEPTEMBER 30 SEPTEMBER
----------------------- ----------------------
2003 2004 CHANGE 2003 2004 CHANGE
-------------------------------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------
UK printed directories 54.9 55.3 0.7% 106.1 110.1 3.8%
Other UK products and services 3.2 3.8 18.8% 6.1 6.9 13.1%
- ------------------------------------------------------------- ----------------------
TOTAL UK COST OF SALES 58.1 59.1 1.7% 112.2 117.0 4.3%
- ------------------------------------------------------------- ----------------------
US printed directories:
US printed directories at
constant exchange rate (1) 75.3 95.5 26.8% 138.9 173.1 24.6%
Exchange impact (1) - (10.8) - (18.5)
- ------------------------------------------------------------- ----------------------
TOTAL US COST OF SALES 75.3 84.7 12.5% 138.9 154.6 11.3%
- ------------------------------------------------------------- ----------------------
COST OF SALES 133.4 143.8 7.8% 251.1 271.6 8.2%
==============================================================================================================
_______________
(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 content, paper, printing and
pre-press production, as well as bad debt expense. The principal costs of
collecting 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)4.8 million, or 4.3%, to
(pound)117.0 million in the six months ended 30 September 2004 from (pound)112.2
million last year. Cost of sales as a percentage of turnover was 36.0% as
compared to 35.7% for the corresponding period in the prior year. The percentage
increase in cost of sales was higher than the percentage increase in turnover
mainly because of an increased investment in our sales efforts to drive growth
in customer numbers and higher advertisement volumes.
The 24.6% 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 55.2% as compared to 54.7% last year.
Our consolidated bad debt expense was (pound)34.5 million, or 5.7% of Yell Group
turnover in the six months ended 30 September 2004, as compared to (pound)30.2
million, or 5.3%, last year. The charge for UK bad debts was 4.3% of UK printed
directories and other products and services turnover compared to 4.2% last year.
The US bad debt expense was 7.3% of US printed directories turnover in the six
months ended 30 September 2004, as compared to 6.7% 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 SIX MONTHS ENDED
30 SEPTEMBER 30 SEPTEMBER
--------------------- -----------------------
2003 2004 CHANGE 2003 2004 CHANGE
- ----------------------------------------------------------------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
- ----------------------------------------------------------------------------------------------------------
UK printed directories 105.4 106.7 1.2% 189.1 190.8 0.9%
Other UK products and services 6.2 8.6 38.7% 13.3 17.2 29.3%
- ----------------------------------------------------------- ----------------------
TOTAL UK GROSS PROFIT 111.6 115.3 3.3% 202.4 208.0 2.8%
- ----------------------------------------------------------- ----------------------
US printed directories:
US printed directories at
constant exchange rate (1) 61.4 73.0 18.9% 115.1 140.2 21.8%
Exchange impact (1) - (8.4) - (15.2)
- ----------------------------------------------------------- ----------------------
TOTAL US GROSS PROFIT 61.4 64.6 5.2% 115.1 125.0 8.6%
- ----------------------------------------------------------- ----------------------
GROSS PROFIT 173.0 179.9 4.0% 317.5 333.0 4.9%
==========================================================================================================
GROSS PROFIT MARGIN (%)
UK operations 65.8 66.1 64.3 64.0
US operations 44.9 43.3 45.3 44.7
GROUP TOTAL (%) 56.5 55.6 55.8 55.1
==========================================================================================================
________________
(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 almost flat at 55.1% for the
six months ended 30 September 2004 as compared to 55.8% last year.
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 2004, for example, our gross profit margin for our UK
operations was 64.0%, compared to 44.7% 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 increased by (pound)0.5 million, or 2.9%, from (pound)17.2
million (3.0% of Group turnover) in the six months ended 30 September 2003 to
(pound)17.7 million (2.9% of Group turnover) in the six months ended 30
September 2004. The increase in distribution costs was primarily due to books
publishing for the first time in the US, offset by the effects of the weaker US
dollar. Group distribution costs increased by 10.5% 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)263.4 million to (pound)183.2 million
in the six months ended 30 September 2004. Administrative costs excluding
exceptional charges of (pound)12.8 million in 2004 and (pound)90.1 million in
2003 decreased by (pound)2.9 million, or 1.7%, from last year. Group
administrative costs increased by (pound)5.1 million at a constant exchange
rate.
8
GROUP OPERATING PROFIT, EBITDA AND EBITDA BEFORE EXCEPTIONAL ITEMS
THREE MONTHS ENDED SIX MONTHS ENDED
30 SEPTEMBER 30 SEPTEMBER
----------------------- -----------------------
2003 2004 CHANGE 2003 2004 CHANGE
-------------------------------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------
UK OPERATIONS
Operating profit, including
exceptional items 26.9 57.9 58.8 97.1
Depreciation and amortisation 17.5 17.6 34.8 35.1
- ------------------------------------------------------------ ----------------------
UK OPERATIONS EBITDA 44.4 75.5 93.6 132.2
Exceptional items 29.7 - 35.3 -
- ------------------------------------------------------------ ----------------------
UK OPERATIONS EBITDA BEFORE
EXCEPTIONAL ITEMS 74.1 75.5 1.9% 128.9 132.2 2.6%
- ------------------------------------------------------------ ----------------------
US OPERATIONS
Operating profit (loss), including
exceptional items 7.6 14.9 (21.9) 35.0
Depreciation and amortisation 12.8 13.0 25.8 26.0
- ------------------------------------------------------------ ----------------------
US OPERATIONS EBITDA 20.4 27.9 3.9 61.0
Exceptional items 13.1 12.8 54.8 12.8
- ------------------------------------------------------------ ----------------------
US OPERATIONS EBITDA BEFORE
EXCEPTIONAL ITEMS 33.5 40.7 21.5% 58.7 73.8 25.7%
- ------------------------------------------------------------ ----------------------
US OPERATIONS EBITDA BEFORE
EXCEPTIONAL ITEMS AT CONSTANT
EXCHANGE RATE (1) 33.5 45.9 37.0% 58.7 82.7 40.9%
- ------------------------------------------------------------ ----------------------
GROUP
Operating profit, including
exceptional items 34.5 72.8 36.9 132.1
Depreciation and amortisation 30.3 30.6 60.6 61.1
- ------------------------------------------------------------ ----------------------
GROUP EBITDA 64.8 103.4 59.6% 97.5 193.2 98.2%
============================================================ ======================
GROUP
Operating profit before exceptional
items 77.3 85.6 127.0 144.9
Depreciation and amortisation 30.3 30.6 60.6 61.1
- ------------------------------------------------------------ ----------------------
GROUP EBITDA BEFORE EXCEPTIONAL
ITEMS 107.6 116.2 8.0% 187.6 206.0 9.8%
============================================================ ======================
GROUP EBITDA BEFORE EXCEPTIONAL
ITEMS AT CONSTANT EXCHANGE RATE(1)
108.8 121.4 11.6% 187.6 214.9 14.6%
============================================================ ======================
EBITDA MARGIN (%)
UK operations 26.2 43.3 29.8 40.7
US operations 14.9 18.7 1.5 21.8
EBITDA MARGIN BEFORE EXCEPTIONAL
ITEMS (%)
UK operations 43.7 43.3 41.0 40.7
US operations 24.5 27.3 23.1 26.4
=================================================================================================
_________________
(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.
9
Group EBITDA before exceptional costs increased 9.8% to (pound)206.0 million, or
14.6% at a constant exchange rate. The Group adjusted EBITDA margin increased
1.1 percentage points to 34.1%, driven by the strong US performance.
UK EBITDA before exceptional costs rose 2.6%, or (pound)3.3 million to
(pound)132.2 million, reflecting the continued progress of Yell.com, which
increased EBITDA to (pound)5.1 million (operating profit of (pound)4.2 million
with depreciation of (pound)0.9 million added back) from (pound)2.1 million last
year (operating profit of (pound)1.0 million with depreciation of (pound)1.1
million added back). The UK EBITDA margin was 40.7%, broadly in line with the
previous year after excluding exceptional IPO costs.
US EBITDA before exceptional costs was (pound)73.8 million, an increase of 25.7%
from (pound)58.7 million last year, or 40.9% at a constant exchange rate,
removing the effect of the weaker US dollar. The US EBITDA margin of 21.8% is
significantly higher than last year's margin of 1.5%, which was suppressed by
the exceptional costs of our parent's initial public offering. Excluding
exceptional costs, the US EBITDA margin increased from 23.1% to 26.4%, driven by
the strong revenue growth and operational leverage.
NET INTEREST PAYABLE
Net interest payable was (pound)68.1 million in the six months ended 30
September 2004, a decrease of (pound)20.1 million from (pound)88.2 million last
year before exceptional interest charges of (pound)58.4 million. 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)39.3 million of net interest paid or to be paid within a six-month
period, (pound)5.1 million of interest rolled up into our long-term debt,
(pound)2.1 million of amortised financing costs and (pound)21.6 million of
interest payable to our parent company.
TAXATION
Taxation charge was (pound)31.2 million for the six months ended 30 September
2004 before exceptional tax credits of (pound)4.8 million, and (pound)16.7
million last year before exceptional tax credits of (pound)37.2 million. We
expect the future taxation charges to increase once we recognise our use of net
operating losses that are available to offset future taxable income in the
United States.
NET PROFIT (LOSS)
The net profit was (pound)37.6 million for the six months ended 30 September
2004 compared to a net loss of (pound)89.2 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 2004 would have been (pound)45.6 million,
compared to (pound)22.1 million in 2003. This latter increase in profit reflects
the improvement in turnover, margins in the US, 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 SIX MONTHS ENDED
30 SEPTEMBER 30 SEPTEMBER
- -------------------------------------------------------------------------------------------------------
2003 2004 2003 2004
-------------------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
- -------------------------------------------------------------------------------------------------------
Net cash inflow from operating activities 39.5 96.2 94.6 170.3
Net cash outflow from returns on
investments and servicing of finance (96.5) (23.3) (115.3) (38.4)
Taxation (3.6) (9.5) (4.6) (14.8)
Net cash outflow for capital expenditure
and acquisitions (6.4) (5.0) (13.7) (8.7)
- -------------------------------------------------------------------------------------------------------
Net cash (outflow) inflow before financing (67.0) 58.4 (39.0) 108.4
Net cash inflow (outflow) from financing 101.5 (63.0) 101.5 (85.5)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 34.5 (4.6) 62.5 22.9
=======================================================================================================
Net cash inflow from operating activities for the six months ended 30 September
2004 was (pound)170.3 million, compared with a net inflow of (pound)94.6 million
for the six months ended 30 September 2003. The net inflow last year was
suppressed by large one-off payments for costs related to our parent's initial
public offering. The remaining increase from last year 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)38.4 million of cash-pay interest for the six months ended 30 September
2004. This compares to (pound)115.3 million for the six months ended 30
September 2003, which included one-off payments of (pound)35.8 million
associated with refinancing the group at the time of our parent's initial public
offering.
Net cash outflow for capital expenditure and acquisitions comprises capital
expenditure on fixed assets and purchases of businesses, net of cash acquired.
Capital expenditure in the six months ended 30 September 2004 was (pound)8.7
million compared to (pound)10.6 million in the same period last year. In the
same period last year there was also (pound)3.1 million of cash outflows
relating to the purchase of subsidiary undertakings.
Cash Conversion
The cash inflow from operations before payments of exceptional items and after
capital expenditure was (pound)170.6 million for the six months ended 30
September 2004 and (pound)153.7 million last year. This underlying cash
performance ("operating cash flow") used by management to monitor business
performance excludes payments of exceptional items of (pound)9.0 million and
(pound)69.7 million during the six months ended 30 September 2004 and 2003,
respectively, and is after capital expenditure for the six months ended 30
September 2004 and 2003 of (pound)8.7 million and (pound)10.6 million,
respectively.
Operating cash flow of (pound)170.6 million for 2004 as a percentage of EBITDA
before exceptional items of (pound)206.0 million was 82.8% ("cash conversion").
For 2003 the operating cash flow of (pound)153.7 million as a percentage of
EBITDA before exceptional items of (pound)97.5 million was 81.9%. Cash
conversion can vary quarterly during the year according to timing of payments
and receipts in relation to the phasing of EBITDA.
11
Capital Resources
At 30 September 2004, we had cash of (pound)41.8 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)1,719.9 million at 30 September 2004, compared to
(pound)2,096.4 million at 31 March 2004 as set out below.
AT 31 MARCH AT 30 SEPTEMBER
2004 2004
----------------------------------
((POUND) IN MILLIONS)
- --------------------------------------------------------------------------------------------------------
Long-term loans and other borrowings
Term Loan A1 - denominated in sterling 624.0 584.0
Term Loan A2 - denominated in US dollars 323.8 329.0
Term Loan - Senior revolving credit facility 5.0 -
Senior notes 308.2 315.6
Other 0.8 0.6
- --------------------------------------------------------------------------------------------------------
Total debt owed to third parties 1,261.8 1,229.2
Subordinated parent company loans 873.1 550.6
- --------------------------------------------------------------------------------------------------------
Total debt, including subordinated parent company loans 2,134.9 1,779.8
Unamortised financing costs (20.1) (18.1)
- --------------------------------------------------------------------------------------------------------
Total debt, net of unamortised financing costs 2,114.8 1,761.7
Cash at bank (18.4) (41.8)
- --------------------------------------------------------------------------------------------------------
NET DEBT AT END OF THE PERIOD 2,096.4 1,719.9
========================================================================================================
From 1 April 2004, all European companies in the Yell Group are subject to new
transfer pricing and thin capitalisation rules for tax purposes. Yell Finance
B.V. issued shares in April 2004 for a value of (pound)300 million to settle
subordinated parent company loans as a response to these rules. Yell Group made
payments during the six months ended 30 September 2004 of (pound)40.0 million on
the senior credit facility as required by the senior credit facility agreement,
as well as repaying (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)1,169.3 million as a multiple of EBITDA before exceptional items over the
last 12 months of (pound)378.5 million was 3.1. 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.
12
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.
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 were
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 ceased
once the Group Leverage Ratio fell below 3.5 times "EBITDA" (as defined in the
Senior Facilities Agreement). Over the period to September 2006 we have fixed
interest initially on approximately 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 65% of our total gross debt until September
2006, falling to approximately 30% thereafter. At 30 September 2004, we had
(pound)0.2 million net unrecognised gains on interest rate swaps 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 39.2% of our external debt and 34.4% of our net external
interest expense are denominated in US dollars, thereby reducing our US EBITDA
exposure by approximately 24.7%. 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 September 2004, we had (pound)475.2 million of borrowings denominated in
US dollars net of deferred financing fees, and (pound)903.0 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 six months ended 30 September 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.
13
If the variable interest rates had been 1.0% higher or lower with no change in
foreign exchange rates, our interest charge for the six months ended 30
September 2004 would vary by approximately (pound)1.7 million higher or lower,
respectively, taking into account our hedging arrangements, or (pound)4.8
million higher or lower, respectively, without taking into account hedging
arrangements.
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 six months ended 30 September 2004
would have been approximately (pound)1.4 million lower or (pound)1.7 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 were misleading and caused
Verizon to lose revenue. On 7 October 2004, the court delivered its final
judgment in which it approved the terms of a settlement agreement reached
between the parties.
International Financial Reporting Standards
In June 2002, the Council of Ministers of the European Union approved a
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 developments in IFRS will continue 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 and six months ending 30 September 2005
in accordance with IFRS with comparative information for the three and six
months ended 30 September 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
judgments 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 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.
14