3 February 2012
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BT GROUP PLC
RESULTS FOR THE THIRD QUARTER AND NINE MONTHS TO 31 DECEMBER 2011
BT Group plc (BT.L) today announces its results for the third quarter and nine months to
31 December 2011.
Third quarter and nine months results:
Ian Livingston, Chief Executive, commenting on the results, said:
“We have delivered another quarter of growth in profits and cash flow despite the economic headwinds.
“Our investment to support our customers and improve our services has resulted in new contract wins around the world, with orders so far this year up over 50% in Asia Pacific and Latin America. In the UK, our fibre roll-out has accelerated bringing super-fast broadband within reach of over 7m homes and businesses and we remain the number one broadband retailer with over 6m customers. Our fixed-line base has now grown for the last five quarters and our active consumer line loss is at its lowest for five years.
“We expect to achieve our 2013 EBITDA1 target of above £6bn a year early and to deliver free cash flow2 of around £2.4bn this year.”
1 Before specific items
2 Before specific items and pension deficit payments
Unless otherwise stated, the changes in results are year on year against the third quarter and nine months to
31 December 2010.
RESULTS FOR THE THIRD QUARTER AND NINE MONTHS TO 31 DECEMBER 2011
Line of business results1
1) Unless otherwise stated, any reference to revenue, earnings before interest, tax, depreciation and amortisation (EBITDA), operating profit, operating costs, profit before tax and earnings per share (EPS) are measured before specific items. The commentary focuses on the trading results on an adjusted basis being before specific items. This is consistent with the way that financial performance is measured by management and is reported to the Board and the Operating Committee and assists in providing a meaningful analysis of the trading results of the group. The directors believe that presentation of the group’s results in this way is relevant to the understanding of the group’s financial performance as specific items are those that in management’s judgement need to be disclosed by virtue of their size, nature or incidence. In determining whether an event or transaction is specific, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. Specific items may not be comparable to similarly titled measures used by other companies. Reported revenue, reported EBITDA, reported operating profit, reported profit before tax and reported EPS are the equivalent unadjusted or statutory measures.
2) Underlying revenue is a measure which seeks to reflect the underlying revenue performance of the group that will contribute to long-term profitable growth. As such it excludes any increases or decreases in revenue as a result of acquisitions or disposals, any foreign exchange movements affecting revenue and any specific items. We are focusing on the trends in underlying revenue excluding transit revenue as transit traffic is low-margin and is significantly affected by reductions in mobile termination rates which have no impact on the group’s profitability. Underlying costs is a measure which seeks to reflect the underlying costs of the group as a result of operational efficiency improvements. As such it excludes any decreases or increases in costs as a result of acquisitions or disposals, any foreign exchange movements affecting costs and any specific items.
3) Unless otherwise stated, the references 2011 and 2012 are the financial years to 31 March 2011 and 2012, respectively, except in relation to our fibre roll-out plans which are based on calendar years.
BT Group plc
RESULTS FOR THE THIRD QUARTER TO 31 DECEMBER 2011
Operating results overview
Revenue was down 5% at £4,774m, with transit revenue down by £109m (including mobile termination rate reductions of £79m) and after a £15m negative impact from disposals.
Underlying revenue excluding transit reduced by 3% in the quarter. This was a weaker performance than in the previous quarter mainly due to the impact of around £60m of contract milestones in BT Global Services which were achieved in the second quarter rather than this quarter. For the nine months to 31 December 2011 underlying revenue excluding transit reduced by 1.8%, consistent with our outlook for the full year.
Total operating costs before depreciation and amortisation and specific items were £3,343m, down £314m or 9% in the quarter and down £691m or 6% in the nine months. Underlying operating costs were also down 6% in the nine months.
Total labour costs of £1,432m, including leaver costs of £11m (Q3 2011: £12m), decreased by 3% after adjusting for certain labour related costs of £22m classified as other costs in the prior year. Payments to telecommunications operators were down 15% reflecting lower mobile termination rates and lower transit and wholesale call volumes. We saw further reductions across all our other cost categories due to further efficiency improvements.
The reduction in our cost base resulted in adjusted EBITDA increasing by 3% to £1,524m.
Depreciation and amortisation decreased by 2% to £734m. Capital expenditure decreased by 2% to £665m and is still expected to be around £2.6bn for the full year.
We added 146,000 retail broadband customers, representing 56% of the broadband market net additions1 of 262,000 taking our retail broadband customer base to 6.1m at 31 December 2011. Take up of our super-fast broadband product, BT Infinity, increased with 95,000 customers added in the quarter and we now have more than 400,000 customers.
Net finance expense
Adjusted net finance expense was £166m, a reduction of £41m, primarily due to lower net debt and the repayment of higher coupon debt in the second half of last year.
Profit before tax
Adjusted profit before tax was £628m, up 18%, reflecting the improved operating results and lower finance expense. Reported profit before tax (which includes specific items) was £652m, up 48%.
The effective tax rate on profit before specific items was 24.1% for the quarter (Q3 2011: 21.3%). This compares with the UK statutory rate of 26% (2011: 28%).
Specific items were a net credit of £24m before tax (Q3 2011: £90m net charge) and a net credit of £15m after tax (Q3 2011: £71m net charge).
Specific operating costs include property rationalisation charges of £18m (Q3 2011: £26m) and BT Global Services restructuring charges of £8m (Q3 2011: £40m). These were more than offset by the net interest income on pensions of £50m (Q3 2011: £20m expense).
Earnings per share
Adjusted EPS was 6.1p, up 13%, due to the higher operating profit and lower finance expense. Reported EPS (which includes specific items) was 6.3p, up 40%.
Free cash flow
Adjusted free cash flow was an inflow of £634m (Q3 2011: £569m), up £65m, principally reflecting lower capital expenditure and lower regular pension contributions in the quarter. The cash cost of specific items was £48m (Q3 2011: £54m) comprising BT Global Services restructuring charges of £27m and property rationalisation costs of £21m, resulting in reported free cash flow of £586m (Q3 2011: £515m).
Net debt and liquidity
Net debt was £7,736m at 31 December 2011, a reduction of £1,080m compared with 31 March 2011. At 31 December 2011 the group had cash and current investment balances of £1.6bn and available facilities of £1.5bn. Over the last three years net debt has been reduced by £3.3bn.
The IAS 19 net pension position at 31 December 2011 was a deficit of £4.1bn net of tax (£5.4bn gross of tax), compared with a deficit of £2.5bn at 30 September 2011 and a deficit of £1.4bn at
31 March 2011.
The deficit includes the impact of particularly low real corporate bond yields partly reflecting the impact of quantitative easing and recent inflation being higher than the long-term assumptions. This higher inflation will be applied to the annual pension increase in April and has contributed to the increased liabilities.
The market value of the BT Pension Scheme (BTPS) assets has decreased by £1.2bn since 31 March 2011 to £35.8bn at 31 December 2011.
The IAS 19 value of the BTPS liabilities was £41.1bn (31 March 2011: £38.7bn). The liability valuation is based on the AA corporate bond rate of 4.70% (31 March 2011: 5.50%) and future inflation expectations. Long-term RPI inflation is expected to be 2.85% (31 March 2011: 3.40%) and long-term CPI inflation is assumed to be 1.15% below RPI (31 March 2011: 1.50% below RPI for one year and 1.00% below RPI thereafter) which is more prudent than the current Office for Budget Responsibility forecast of 1.30% to 1.50%.
We expect to achieve our 2013 adjusted EBITDA target of above £6bn a year early and to deliver adjusted free cash flow of around £2.4bn this year.
1 DSL, LLU and fibre, excluding cable
BT Global Services
Revenue decreased by 4%. As expected, this was a weaker performance than in the previous quarter mainly due to the impact of around £60m of contract milestones which were achieved in the second quarter rather than this quarter. Revenue for the nine months decreased by 3%. Excluding transit revenue which declined by £45m, a £15m negative impact from disposals and a £3m negative impact from foreign exchange movements, underlying revenue excluding transit decreased by 1% in the quarter and was flat in the nine months.
Total order intake in the quarter was £1.6bn. In the quarter we signed contracts with Sainsbury’s and Standard Life in the UK, and with leading companies across the world including Staples, Eni Group, Bristol-Myers Squibb and Deutsche Post DHL. We also signed two major contracts with the European Parliament. We are seeing the benefits from our investments in Asia Pacific and Latin America where the combined order intake so far this year was up over 50%.
Net operating costs were down 5%, or down 2% excluding transit costs, foreign exchange movements and disposals. EBITDA was £144m, up 2%, and up 8% in the nine months. Leaver costs were £4m. Depreciation and amortisation reduced by 4% as a result of lower overall capital expenditure over the last two financial years. This contributed to a 29% improvement in the operating loss.
Capital expenditure increased by 9% principally due to the delivery of new contracts in EMEA and Latin America. Operating cash flow improved by £19m. Our cash flow profile is still weighted to the second half of the year and we continue to expect to generate around £200m of operating cash flow for the full year.
Revenue decreased by 5% reflecting the ongoing decline in calls and lines revenue and lower IT hardware sales.
Consumer revenue decreased by 6% due to lower calls and lines revenue, and lower call volumes in part reflecting the warmer weather compared with the same quarter last year.
The operating metrics for Consumer were encouraging. In addition to our 56% share of broadband market net additions1, active consumer line loss was at its lowest for five years. The uptake of BT Vision has maintained good momentum with net additions of 39,000 in the quarter. Consumer ARPU was up 5% to £337 reflecting the increased take up of broadband and BT Vision.
Business revenue decreased by 6% almost all of which was due to lower IT hardware sales reflecting tougher market conditions and an increased focus on higher margin products and services.
Net operating costs decreased by 7% primarily as a result of our cost transformation initiatives, lower IT hardware sales and reductions in fixed to mobile termination rates. EBITDA was broadly flat as cost and revenue reductions offset each other. Depreciation and amortisation reduced by 8% and operating profit increased by 3%.
Capital expenditure decreased by 6% with continued investment in broadband being more than offset by efficiencies. Operating cash flow decreased by 12% primarily due to the timing of working capital outflows.
1 DSL, LLU and fibre, excluding cable
Revenue declined by 8% mainly due to a £64m reduction in transit revenue principally driven by mobile termination rate reductions. Underlying revenue excluding transit was down 3% reflecting the ongoing migration of broadband lines to LLU and the transition towards IP-based products.
Total order intake in the quarter was around £340m. This included the extension of our managed network services (MNS) voice contract with Virgin Media for a further three years. We also renewed our outside broadcasting contract with Sky Sports for the next six years.
Our Mobile Ethernet Access Service is now available at more than 12,000 mobile sites, an increase of over 1,000 in the quarter, reinforcing our market leading position. IP Exchange, which simplifies VOIP interconnect, now has over 200 customers and is growing rapidly, with voice minutes increasing by over 50%.
Net operating costs reduced by 9%, or were flat excluding transit costs, as the benefit of lower total labour costs was offset by the impact of changes in our product mix and network migration costs on some of our contracts. As a result, EBITDA declined by 8%. Depreciation and amortisation reduced by 3% and operating profit declined by 13%.
Capital expenditure decreased by 10% principally due to better utilisation of our assets and lower requirements on MNS contracts, partly offset by increased investment in our Wholesale Broadband Connect roll-out. Operating cash flow was 3% higher as the decline in EBITDA was more than offset by improved customer collections.
Revenue was up 5% driven by growth in Ethernet, LLU and fibre-based broadband.
Our overall copper line base increased by 34,000, the fifth successive quarter of growth, and has increased by 88,000 over the past 12 months.
Net operating costs increased by 3% as efficiency improvements were offset by higher total labour costs driven by additional engineering activity. EBITDA increased by 7%. Depreciation and amortisation increased by 7% reflecting the investment in our fibre roll-out and Ethernet over the last 12 months. Operating profit increased by 8%.
The accelerated investment in our fibre roll-out programme was offset by lower spend on DSL, resulting in capital expenditure reducing by 1%. We recently announced 178 new exchange locations across the UK for the next two phases of our fibre roll-out programme. More than 7m premises now have access to fibre-based broadband and we expect to roughly double the download speeds provided by fibre-to-the-cabinet (FTTC) broadband from up to 40Mbps to up to 80Mbps in the Spring. We are rolling out our fibre-to-the-premises (FTTP) service offering speeds of 110Mbps and are on track to launch our 330Mbps product in the Spring. We are also testing a 1Gbps FTTP speed variant. In addition, we have successfully tested, and are trialling, a new technological development that enables FTTP to be provided in FTTC-enabled areas in response to customer demand.
Operating cash flow was down 4% primarily due to the timing of debtor receipts offsetting the increase in EBITDA.
A conference call for analysts and investors will be held at 9.00am today and a simultaneous webcast will be available at www.bt.com/results
The fourth quarter and full year results for 2012 are expected to be announced on 10 May 2012.
The full release and financial accounts are available to download as a PDF documents
Full financial release
Group income statement
Group cash flow statement
Group balance sheet
Notes to the condensed consolidated financial statements
Forward-looking statements – caution advised