EXHIBIT 99.2
OPERATING AND FINANCIAL REVIEW AND PROSPECTS AT AND FOR
THE THREE AND NINE MONTHS ENDED 31 DECEMBER 2005
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 International Financial Reporting Standards
("IFRS"). IFRS differs in certain important respects from accounting principles
generally accepted in the United States ("US GAAP").
Results previously reported for the three and nine months ended 31 December 2004
were reported under UK GAAP. Figures reported here are reported under IFRS. A
detailed explanation of the changes can be obtained in the IFRS conversion
statements published on our website on 13 June 2005. Updates to the published
IFRS conversion statements are set out on page F-6.
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, revenue, 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 13 June 2005 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 NINE MONTHS ENDED
31 DECEMBER 31 DECEMBER
------------------------------------------------------------------
2004 2005 CHANGE 2004 2005 CHANGE
------------------------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
Revenue 293.3 399.9 36.3% 897.9 1,111.0 23.7%
Cost of sales (139.0) (187.6) 35.0% (410.6) (512.0) 24.7%
- ------------------------------------------------------------- -------------------
Gross profit 154.3 212.3 37.6% 487.3 599.0 22.9%
Distribution costs (8.4) (11.4) 35.7% (26.1) (33.2) 27.2%
Administrative expenses (including
exceptional items) (75.4) (101.9) 35.1% (216.7) (249.8) 15.3%
- ------------------------------------------------------------- -------------------
OPERATING PROFIT BEFORE EXCEPTIONAL
ITEMS 70.5 101.0 43.3% 257.3 315.4 22.6%
Exceptional items - (2.0) (12.8) 0.6
- ------------------------------------------------------------- -------------------
OPERATING PROFIT 70.5 99.0 40.4% 244.5 316.0 29.2%
============================================================= ===================
PROFIT FOR THE FINANCIAL PERIOD BEFORE
EXCEPTIONAL ITEMS 29.7 39.9 34.3% 110.1 126.0 14.4%
PROFIT FOR THE FINANCIAL PERIOD 29.7 38.6 30.0% 102.1 123.0 20.5%
==========================================================================================================
Gross profit margin (%) 52.6 53.1 54.3 53.9
EBITDA (a) 77.6 115.1 48.3% 266.0 350.6 31.8%
EBITDA margin (%) 26.5 28.8 29.6 31.6
EBITDA before exceptional items (b) 77.6 117.1 50.9% 278.8 350.0 25.5%
EBITDA margin before exceptional
items (%) 26.5 29.3 31.1 31.5
Cash inflow from operations before
payments of exceptional items, less
capital expenditure 90.6 127.4 40.6% 261.2 340.1 30.2%
Cash conversion before exceptional
items (%) (c) 116.8 108.8 93.7 97.2
(a) EBITDA comprises total operating profit before depreciation and
amortisation of fixed assets, both being non-cash items. EBITDA is not a
measurement of performance under IFRS 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 and
EBITDA".
(b) EBITDA before exceptional items comprises EBITDA as described above and in
the nine months ended 31 December 2005 excludes exceptional costs of
(pound)4.4 million arising from the TransWestern acquisition and an
exceptional credit of (pound)5.0 million from releasing an unused provision
for IPO costs in the UK. EBITDA before exceptional items for the nine
months ended 31 December 2004 is stated before exceptional costs of
(pound)12.8 million ((pound)8.0 million net of tax credit) which was the
cost of litigation brought against our US operations.
(c) Cash conversion represents cash flow from operations before payments of
items described as exceptional in note b, 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 and EBITDA".
2
YELL GROUP OPERATIONAL INFORMATION
UNAUDITED NINE MONTHS ENDED 31 DECEMBER
---------------------------------------
2004 2005 CHANGE
-------------- ------------------------
UK PRINTED DIRECTORIES
Unique advertisers (thousands) (a) 354 340 (4.0)%
Directory editions published 74 76
Unique advertiser retention rate (%) (b) 75 75
Revenue per unique advertiser ((pound)) 1,210 1,282 6.0%
US PRINTED DIRECTORIES (YELLOW BOOK)
Unique advertisers (thousands) (a) (c) 346 373 7.8%
Directory editions published 401 419
Unique advertiser retention rate (%) (c) 71 71
Revenue per unique advertiser ($) 2,285 2,525 10.5%
US PRINTED DIRECTORIES (TRANSWESTERN)
Unique advertisers (thousands) (a) (c) - 80
Directory editions published - 128
Unique advertiser retention rate (%) (c) - 69
Revenue per unique advertiser ($) - 2,037
OTHER UK PRODUCTS AND SERVICES
Yell.com searchable advertisers at 31 December (thousands) (d) 133 167 25.6%
Yell.com searches for December (millions) 15 21 40.0%
Yell.com revenue per average searchable advertiser ((pound)) (e) 219 272 24.2%
US INTERNET
Yellowbook.com advertisements online at 31 December
(thousands)(f) 543 1,051 93.6%
Yellowbook.com unique visitors at 31 December (millions) (g) 2.6
- -----------------------
(a) 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.
(b) The proportion of unique advertisers that have renewed their advertising
from the preceding publication.
(c) 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 figure for the
nine months ended 31 December 2004 for any duplicated records in that
period. There remains some overlap in reporting unique advertisers between
Yellow Book and acquired businesses that we expect to be removed. These
improvements to our systems have not affected the reporting of our
financial results. Retention in the United States is based on unique
directory advertisers.
(d) 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 only products such as
banners and domain names.
(e) Yell.com revenue per average searchable advertiser is calculated by
dividing the recognised revenue for Yell.com in the nine month period by
the average number of Yell.com searchable advertisers (2004-118,000;
2005-154,000) in that period.
(f) Represents all paid for searchable advertisements appearing on the
Yellowbook.com website. Includes advertisements appearing on
Worldpages.com, acquired with TransWestern.
(g) The number of individuals who have visited Yellowbook.com at least once in
the month shown. Includes visitors to Worldpages.com, acquired with
TransWestern.
3
REVENUE
THREE MONTHS ENDED 31 NINE MONTHS ENDED
DECEMBER CHANGE 31 DECEMBER CHANGE
--------------------------- -----------------------
2004 2005 2004 2005
------------------------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
- --------------------------------------------------------------------------------------------------------
UK printed directories 127.9 130.2 1.8% 428.8 436.1 1.7%
Other UK products and services 13.7 21.2 54.7% 37.8 56.5 49.5%
- ----------------------------------------------------------------- --------------------------
TOTAL UK REVENUE 141.6 151.4 6.9% 466.6 492.6 5.6%
- ----------------------------------------------------------------- --------------------------
US printed directories:
US printed directories at
constant exchange rate (a) 151.7 232.4 53.2% 431.3 601.9 39.5%
Exchange impact (a) - 16.1 - 16.5
- ----------------------------------------------------------------- --------------------------
TOTAL US REVENUE 151.7 248.5 63.8% 431.3 618.4 43.4%
- ----------------------------------------------------------------- --------------------------
GROUP REVENUE 293.3 399.9 36.3% 897.9 1,111.0 23.7%
================================================================== ===========================
- ----------------
(a) 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 revenue during the nine months ended 31 December 2005 increased 23.7% to
(pound)1,111.0 million, or 21.9% at a constant exchange rate, from (pound)897.9
million last year(1). Excluding the revenue of (pound)92.1 million from the
TransWestern acquisition completed on 15 July 2005, Group revenue increased
13.5%.
We recognise revenue from advertising sales for each printed directory on
completion of delivery of each directory.
UK REVENUE
UK revenue increased 5.6% to (pound)492.6 million. This growth was driven by a
62.4% increase in revenue by Yell.com to (pound)41.9 million. Revenue from
printed directories grew 1.7% to (pound)436.1 million. The effect of RPI minus
6%(2) was to reduce Yellow Pages rate card prices by an average of 2.9%.
The total number of unique print advertisers in the first nine months dropped
4.0% to 340,000 reflecting increased competition. Retention remained the same as
last year at 75%. The 6.0% growth in yield (average revenue per unique
advertiser) to (pound)1,282 resulted from higher spending and the slightly
higher retention of higher value advertisers.
- -----------------
1. Throughout this report, unless otherwise indicated, references to "for the
nine months" are to the nine months ended 31 December 2005 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
nine months ended 31 December 2004 and 2005, the average price of
advertising in our Yellow Pages decreased by 3.4% and 2.9%, respectively.
We are not subject to any regulatory price constraints in the United
States. The relevant price cap applied to approximately 46.2% and 38.0% of
our Group revenue in the nine months ended 31 December 2004 and 2005,
respectively.
4
Yell.com's revenue growth of 62.4% to (pound)41.9 million was driven by growth
in customer numbers and yield on the back of increased usage. Searchable
advertisers grew 25.6% at the end of the period to 167,000 and yield (recognised
revenue per average searchable advertiser) grew 24.2%. The introduction of
higher prices reflected increased value for advertisers through increased usage.
Searches were up 40% on the same period last year.
US REVENUE
Total US revenue grew 43.4% to (pound)618.4 million, or 39.5% at a constant
exchange rate. The average exchange rate was approximately $1.80: (pound)1.00
against $1.83: (pound)1.00 in the same period last year.
Excluding the new advertisers from TransWestern, Yellow Book increased unique
advertisers by 7.8% to 373,000 and average revenue per unique advertiser by
10.5% to $2,525. Retention was flat at 71%.
Organic revenue growth contributed 17.0% to the total revenue growth of 39.5%
and is made up of same market growth, launches and internet revenue growth.
o On a like for like basis, same market growth was 9.3% and contributed
9.0% to organic growth. This was stronger than we expect it to be in
the final quarter, which includes some lower growth directories.
o Launches contributed 7.0% to organic growth. Just under 20% of full
year launch revenue is outstanding.
o Yellowbook.com grew 51% to $23.2 million, contributing 1.0% to organic
growth. Total internet revenue, including Worldpages.com (part of
TransWestern), was $29.2 million.
Looking forward, we are confident that we will meet the organic growth consensus
for the full year.
Revenue from acquired books publishing for the first time contributed 23.1% to
the total revenue growth. This included (pound)92.1 million from TransWestern
which performed in line with expectations, providing 20.5% of overall revenue
growth. At the year end, we expect it will have contributed about $280 million
to revenue for the eight and a half months it will have been part of the Group.
A further 2.6% of the overall revenue growth came from in-fill acquisitions. On
a year to date basis, and including Clarke Directory Publications, acquired in
January, we have invested $106 million on in-fill acquisitions adding annualised
revenue of $35 million. We expect the in-fill acquisitions to contribute $24
million in the current year.
Revenue growth was slightly offset by 0.6% as a result of rescheduling
directories into later months.
5
COST OF SALES
THREE MONTHS ENDED NINE MONTHS ENDED
31 DECEMBER 31 DECEMBER
--------------------------- -----------------------
2004 2005 CHANGE 2004 2005 CHANGE
-----------------------------------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
UK printed directories 52.2 46.4 (11.1)% 162.3 158.1 (2.6)%
Other UK products and services 3.6 9.5 163.9% 10.5 17.8 69.5%
- ---------------------------------------------------------------- -----------------------
TOTAL UK COST OF SALES 55.8 55.9 0.2% 172.8 175.9 1.8%
- ---------------------------------------------------------------- -----------------------
US printed directories:
US printed directories at
constant exchange rate (a) 83.2 123.3 48.2% 237.8 327.3 37.6%
Exchange impact (a) - 8.4 - 8.8
- ---------------------------------------------------------------- -----------------------
TOTAL US COST OF SALES 83.2 131.7 58.3% 237.8 336.1 41.3%
- ---------------------------------------------------------------- -----------------------
COST OF SALES 139.0 187.6 35.0% 410.6 512.0 24.7%
================================================================ =======================
- -------------------
(a) 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)3.1 million, or 1.8%, to
(pound)175.9 million in the nine months ended 31 December 2005 from (pound)172.8
million last year. Cost of sales as a percentage of revenue decreased to 35.7%
compared to 37.0% for the corresponding period in the prior year.
Cost of sales for US printed directories increased by 37.6% at a constant
exchange rate, reflecting the increase in US revenue and the TransWestern
acquisition. Cost of sales for US printed directories as a percentage of related
revenue and at a constant exchange rate was 54.4%, a decrease from 55.1% last
year.
Our consolidated bad debt expense was (pound)63.5 million, or 5.7% of Yell Group
revenue in the nine months ended 31 December 2005, as compared to (pound)50.7
million, or 5.6%, last year. The charge for UK bad debts was 3.7% of UK printed
directories and other products and services revenue compared to 4.3% last year.
The US bad debt expense was 7.3% of US printed directories revenue in the nine
months ended 31 December 2005, as compared to 7.1% 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 NINE MONTHS ENDED
31 DECEMBER 31 DECEMBER
-------------------------- ---------------------------
2004 2005 CHANGE 2004 2005 CHANGE
--------------------------------------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------
UK printed directories 75.7 83.8 10.7% 266.5 278.0 4.3%
Other UK products and services 10.1 11.7 15.8% 27.3 38.7 41.8%
- -------------------------------------------------------------- ------------------------
TOTAL UK GROSS PROFIT 85.8 95.5 11.3% 293.8 316.7 7.8%
- -------------------------------------------------------------- ------------------------
US printed directories:
US printed directories at
constant exchange rate (a) 68.5 109.1 59.3% 193.5 274.6 41.9%
Exchange impact (a) - 7.7 - 7.7
- -------------------------------------------------------------- ------------------------
TOTAL US GROSS PROFIT 68.5 116.8 70.5% 193.5 282.3 45.9%
- -------------------------------------------------------------- ------------------------
GROSS PROFIT 154.3 212.3 37.6% 487.3 599.0 22.9%
=====================================================================================================================
GROSS PROFIT MARGIN (%)
UK operations 60.6 63.1 63.0 64.3
US operations 45.2 47.0 44.9 45.7
GROUP TOTAL (%) 52.6 53.1 54.3 53.9
=====================================================================================================================
- -----------------
(a) 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 revenue was slightly down at 53.9% for the
nine months ended 31 December 2005 compared to 54.3% for 2004.
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 nine months
ended 31 December 2005, for example, our gross profit margin for our UK
operations was 64.3%, compared to 45.7% 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)7.1 million, or 27.2%, from (pound)26.1
million (2.9% of Group revenue) in the nine months ended 31 December 2004 to
(pound)33.2 million (3.0% of Group revenue) in the nine months ended 31 December
2005. Group distribution costs increased by 24.9% at a constant exchange rate.
Our distribution costs have increased in line with the growth of our business.
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 increased from (pound)216.7 million to (pound)249.8 million
in the nine months ended 31 December 2005. Administrative costs excluding net
exceptional credits of (pound)0.6 million in 2005 and exceptional costs of
(pound)12.8 million in 2004 increased from (pound)203.9 million to (pound)250.4
million in the nine months ended 31 December 2005; an increase of (pound)46.5
million or 22.8% from last year.
8
GROUP OPERATING PROFIT AND EBITDA
THREE MONTHS ENDED NINE MONTHS ENDED
31 DECEMBER 31 DECEMBER
---------------------------------------------------------------------------------
2004 2005 CHANGE 2004 2005 CHANGE
---------------------------------------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------------
UK OPERATIONS
Operating profit, including
exceptional items 35.1 41.4 157.3 173.2
Depreciation and amortisation of
non-current assets 2.9 2.7 8.8 8.3
- ---------------------------------------------------------------------- ---------------------------
UK OPERATIONS EBITDA 38.0 44.1 16.1% 166.1 181.5 9.3%
Exceptional items - - - (5.0)
- ---------------------------------------------------------------------- ---------------------------
UK OPERATIONS EBITDA BEFORE
EXCEPTIONAL ITEMS 38.0 44.1 16.1% 166.1 176.5 6.3%
- ---------------------------------------------------------------------- ---------------------------
US OPERATIONS
Operating profit 35.4 57.6 87.2 142.8
Depreciation and amortisation of
non-current assets 4.2 13.4 12.7 26.3
- ---------------------------------------------------------------------- ---------------------------
US OPERATIONS EBITDA 39.6 71.0 79.3% 99.9 169.1 69.3%
Exceptional items - 2.0 12.8 4.4
US OPERATIONS EBITDA BEFORE
EXCEPTIONAL ITEMS 39.6 73.0 84.3% 112.7 173.5 53.9%
- ---------------------------------------------------------------------- ---------------------------
US OPERATIONS EBITDA BEFORE
EXCEPTIONAL ITEMS AT CONSTANT
EXCHANGE RATE (a) 39.6 70.2 77.3% 112.7 168.6 49.6%
- ---------------------------------------------------------------------- ---------------------------
GROUP
Operating profit, including
exceptional items 70.5 99.0 244.5 316.0
Depreciation and amortisation of
fixed assets 7.1 16.1 21.5 34.6
- ---------------------------------------------------------------------- ---------------------------
Group EBITDA 77.6 115.1 48.3% 266.0 350.6 31.8%
====================================================================== ===========================
GROUP
Operating profit before exceptional
items 70.5 101.0 257.3 315.4
Depreciation and amortisation of
non-current assets 7.1 16.1 21.5 34.6
- ---------------------------------------------------------------------- ---------------------------
GROUP EBITDA BEFORE EXCEPTIONAL ITEMS 77.6 117.1 50.9% 278.8 350.0 25.5%
====================================================================== ===========================
GROUP EBITDA BEFORE EXCEPTIONAL ITEMS
AT CONSTANT EXCHANGE RATE (a) 77.6 114.3 47.3% 278.8 345.1 23.8%
====================================================================== ===========================
EBITDA MARGIN (%)
UK operations 26.8 29.1 35.6 36.8
US operations 26.1 28.6 23.2 27.3
EBITDA MARGIN BEFORE EXCEPTIONAL
ITEMS (%)
UK operations 26.8 29.1 35.6 35.8
US operations 26.1 29.4 26.1 28.1
=========================================================================================================================
- ------------------
(a) 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 items increased by 25.5% to (pound)350.0
million, or 23.8% at a constant exchange rate. The Group EBITDA margin before
exceptional items increased 0.4 percentage points to 31.5%, reflecting the
strong performances of Yell.com and the US business. EBITDA before exceptional
items for the nine months ended 31 December 2005 is stated before exceptional
costs of (pound)4.4 million on the TransWestern acquisition and an exceptional
credit of (pound)5.0 million from releasing a provision for IPO costs in the UK.
UK EBITDA before exceptional credits rose 6.3%, or (pound)10.4 million, to
(pound)176.5 million, reflecting the sustained progress of Yell.com, which
partially offset our continued investment to support the revenue growth of
printed directories. Yell.com more than doubled its EBITDA to (pound)15.9
million (operating profit of (pound)14.6 million with depreciation of (pound)1.3
million added back) from (pound)6.8 million last year (operating profit of
(pound)5.4 million with depreciation of (pound)1.4 million added back). The UK
EBITDA margin before exceptional credits was 35.8%, compared with 35.6% in the
previous year, reflecting strong performance by Yell.com. Printed directories'
EBITDA margins declined to 35.5% from 36.2% for the same period last year,
reflecting the investment required to grow revenue under the regulatory price
cap.
In the US, revenue growth and operational leverage, as well as the TransWestern
acquisition, resulted in 53.9% growth in EBITDA before exceptional costs to
(pound)173.5 million, a 49.6% increase at a constant exchange rate. The US
EBITDA margin before exceptional costs increased from 26.1% to 28.1%.
NET FINANCE COST
Net finance cost was (pound)119.4 million in the nine months ended 31 December
2005, an increase of (pound)22.6 million from (pound)96.8 million last year. Net
finance cost comprised (pound)73.5 million of net interest paid or to be paid
within a six-month period, (pound)9.0 million of interest rolled up into our
long-term debt, (pound)12.9 million of amortised financing costs and (pound)24.0
million of interest payable to our parent company. The amortised financing costs
of (pound)12.9 million include (pound)7.8 million of exceptional interest which
is the accelerated amortisation of finance fees related to bank debt refinanced
on 15 July 2005.
TAXATION
The taxation charge was (pound)73.6 million for the nine months ended 31
December 2005, and (pound)45.6 million last year.
PROFIT AFTER TAX
The profit after tax was (pound)123.0 million for the nine months ended 31
December 2005 compared to a profit after tax of (pound)102.1 million for the
same period in the prior year. This increase in profit reflects the strong
EBITDA growth described above.
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.
10
CASH FLOWS
THREE MONTHS ENDED NINE MONTHS ENDED
31 DECEMBER 31 DECEMBER
----------------------------------------------------
2004 2005 2004 2005
----------------------------------------------------
((POUND) IN MILLIONS) ((POUND) IN MILLIONS)
- -------------------------------------------------------------------------------------------------------
Net cash inflow (outflow) from operating activities 42.8 (2.9) 119.4 115.9
Net cash used in investing activities (13.5) (28.6) (22.2) (948.4)
Net cash (used in) provided by financing activities - 36.8 (45.0) 815.6
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 29.3 5.3 52.2 (16.9)
=======================================================================================================
Net cash inflow from operating activities for the nine months ended 31 December
2005 was (pound)115.9 million, compared with a net inflow of (pound)119.4
million for the nine months ended 31 December 2004. The decrease from last year
is largely driven by the increase in interest payments to our parent company
exceeding the improvement in operating profit.
Net cash used in investing activities was (pound)948.4 million for the nine
months ended 31 December 2005 for the purchase of subsidiary undertakings,
including TransWestern, tangible fixed assets and shares in our parent company.
This compares to (pound)22.2 million for the nine months ended 31 December 2004
for the purchase of tangible fixed assets and shares in our parent company.
Net cash provided by financing activities was (pound)815.6 million in the nine
months ended 31 December 2005 from the net acquisition of new loans, and net
cash used in financing activities was (pound)45.0 million in the nine months
ended 31 December 2004 which comprised repayments of borrowings.
The net increase in cash and cash equivalents is stated before the effects of
foreign currency exchange movements. Foreign currency exchange movements had the
effect of increasing cash and cash equivalents by (pound)1.9 million in the nine
months ended 31 December 2005 (2004 - decreasing by (pound)2.1 million).
CASH CONVERSION
The cash generated from operations after capital expenditure but before payments
of exceptional costs was (pound)340.1 million for the nine months ended 31
December 2005 and (pound)261.2 million last year. This was an increase of 30.2%
after accounting for foreign currency exchange movements, or 28.6% at a constant
exchange rate. This underlying cash performance ("operating cash flow") is used
by management to monitor business performance. In this performance measure we
included capital expenditure for the nine months ended 31 December 2005 and 2004
of (pound)18.4 million and (pound)15.6 million, respectively. We excluded
payments of litigation costs of (pound)13.6 million during the nine months ended
31 December 2004 and excluded payments of litigation costs and TransWestern
acquisition related expenses totalling (pound)3.0 million during the nine months
ended 31 December 2005. We excluded (pound)64.8 million of cash paid in December
2005 to repair our pension deficit. We also excluded share based payments
totalling (pound)2.8 million in the nine months ended 31 December 2005 and
(pound)2.5 million in the corresponding period of 2004.
Our performance measure operating cash flow of (pound)340.1 million for the nine
months ended 31 December 2005 as a percentage of EBITDA before exceptional items
of (pound)350.0 million was 97.2% ("cash conversion"). The performance measure
operating cash flow of (pound)261.2 million for the nine months ended 31
December 2004 as a percentage of EBITDA before exceptional items of (pound)278.8
million was 93.7%. Cash conversion can vary quarterly during the year according
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to timing of payments and receipts in relation to the phasing of EBITDA. We now
expect year end cash conversion to be better than previously expected at around
80% to 85%. This is before the pension deficit repair payment of (pound)64.8
million in the third quarter.
CAPITAL RESOURCES
At 31 December 2005, we had cash of (pound)38.1 million, compared to (pound)53.1
million at 31 March 2005.
We made an additional annual pension contribution of (pound)8.8 million in the
nine months ended 31 December 2005, and a deficit repair payment of (pound)64.8
million. While these payments reduce cash flow from operating activities, they
have no effect on amounts presented in our consolidated income statements.
We expect that any future significant acquisitions or other significant
expenditures, including those related to the development of our online services,
will be financed through any one or more of operating cash flow, credit
facilities and the issue of new debt and equity securities.
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We had net debt of (pound)2,491.1 million at 31 December 2005, compared to
(pound)1,645.9 million at 31 March 2005 as set out below.
AT 31 MARCH AT 31 DECEMBER
2005 2005
------------------------------------
((POUND) IN MILLIONS)
- -----------------------------------------------------------------------------------------------------------
Long-term loans and other borrowings
Term Loan A1 - denominated in sterling (a) 544.0 300.0
Term Loan A2 - denominated in US dollars (b) 315.6 1,163.7
Senior notes 314.7 339.1
Revolving credit facility - 268.8
Other 1.3 0.6
- ------------------------------------------------------------------------------------------------------------
Total debt owed to third parties 1,175.6 2,072.2
Unamortised financing costs (14.0) (12.5)
- ------------------------------------------------------------------------------------------------------------
Third party debt, net of unamortised financing costs 1,161.6 2,059.7
Cash and cash equivalents (53.1) (38.1)
- ------------------------------------------------------------------------------------------------------------
NET THIRD PARTY DEBT AT END OF THE PERIOD 1,108.5 2,021.6
Subordinated parent company loans 537.4 469.5
- ------------------------------------------------------------------------------------------------------------
NET DEBT AT END OF THE PERIOD 1,645.9 2,491.1
============================================================================================================
(a) The old Term Loan A1 was refinanced and a new Term Loan A1 of (pound)300
million obtained on 15 July 2005.
(b) The old Term Loan A2 was refinanced and a new Term Loan A2 of $2 billion
obtained on 15 July 2005.
Net third-party debt, which excludes subordinated parent company loans, of
(pound)2,021.6 million as a multiple of pro forma (as if TransWestern had been
part of the Group for the entire period) EBITDA before exceptional items over
the last 12 months of (pound)490.3 million was 4.1. This compares to 2.8 times
EBITDA before exceptional items at 31 March 2005.
The movements in net third party debt between 31 March 2005 and 31 December 2005
are as follows:
NET DEBT
- --------------------------------------------------------------------------------
AT 31 MARCH 2005 1,108.5
Net cash inflow from operating activities (115.9)
Net cash used in investing activities 948.4
Net finance costs increasing third party debt, and other 20.4
Currency movements 60.2
- --------------------------------------------------------------------------------
AT 31 DECEMBER 2005 2,021.6
================================================================================
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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 facility
agreement) and EBITDA to net cash interest payable.
OTHER MATTERS
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements.
MARKET-RELATED RISKS
Interest is payable under our credit facilities at a variable rate. We could,
therefore, be adversely affected if interest rates were to rise significantly.
Over the period to December 2007 we have fixed interest initially on
approximately 50% of the indebtedness under our bank 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 59% of our total gross debt until December 2007, falling to
approximately 18% thereafter. At 31 December 2005, we had (pound)3.6 million net
gains on interest rate swaps that have been recognised in the Statement of
Recognised Income and Expense.
All of these instruments are entered into for hedging purposes and, under IFRS,
gains and losses on these instruments are recognised directly in equity.
Instruments entered into before 1 April 2005 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 64.6% of our external debt and 52.0% of our net external
interest expense are denominated in US dollars, thereby reducing our US EBITDA
exposure by approximately 22.8%. 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.
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At 31 December 2005, we had (pound)1,331.0 million of borrowings denominated in
US dollars net of deferred financing fees, and (pound)1,722.5 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 nine months ended 31 December 2005. 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 finance costs for the nine months ended 31 December
2005 would vary by approximately (pound)6.2 million higher or lower,
respectively, taking into account our hedging arrangements, or (pound)12.4
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 finance costs for the nine months ended 31 December 2005
would have been approximately (pound)2.3 million lower or (pound)2.8 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
The lawsuit filed by Verizon was settled in October 2004. In subsequent months,
Yellow Book USA was served with complaints filed as class actions in five US
states and the District of Columbia. In these actions, the plaintiffs alleged
violations of consumer protection legislation and placed reliance on findings of
the New York Court in the now settled suit. On 26 August 2005, the court in New
Jersey approved a comprehensive national settlement, with no admission of
liability. Yell Finance B.V. fully accrued the estimated costs in the last
quarter of the year ended 31 March 2005 arising from this class action.
CURRENT UK REGULATORY REVIEW
Following the publication of the Notification of Emerging Thinking on 24 January
2006, we continue to contribute fully to the investigation of "Classified
Directories Advertising Services" by the Competition Commission.
We will continue to provide the Commission with evidence of the increasing and
diversifying competition in the market including the impact that we expect the
entry of BT and the growth of internet usage to have in the future. We are
demonstrating the excellent value we give advertisers in terms of value for
money and service, bringing to the Commission's notice the reduction in prices
since 2001 far beyond that required by regulation. We believe that the body of
evidence we have provided and will continue to provide supports the view that
regulation is no longer required.
The next publication, as set out in the Commission's timetable, is the
Notification of Provisional Findings which is expected to be published in April
2006. The Commission currently expects to publish its final report at the end of
the summer of 2006.
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All published information relating to the investigation can be found on the
Commission's website at www.competition-commission.org.uk.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are set out in our conversion statements for the periods
ended 31 March 2005. These accounting policies are the policies we expect to
apply in our financial statements for the year ended 31 March 2006, which will
be prepared in accordance with IFRS. 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 within the
Form 20-F filed with the SEC on 13 June 2005.
CONSOLIDATED RESULTS OF OUR PARENT COMPANY
Our parent company, Yell Group plc, and its subsidiaries, also provides
consolidated financial information to the SEC, in order to disclose what it
reports to the London Stock Exchange and to satisfy its requirement to produce
an IFRS to US GAAP reconciliation for US employees.
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