12 May 2011
BT Group plc
Results for the fourth quarter and year to 31 March 2011
BT Group plc (BT.L) today announces its results for the fourth quarter and year to 31 March 2011.
Ian Livingston, Chief Executive, commenting on the results, said:
“We have delivered profits and free cash flow ahead of expectations for the year, while making significant investment in the business for the future. Free cash flow has nearly trebled compared with two years ago.
“We have consolidated our position as the leading provider of broadband in the UK with our highest quarterly share of DSL broadband net additions for eight years. BT Global Services order intake was up 10% at £7.3bn and it has turned cash flow positive a year ahead of plan. Openreach saw growth in its copper line base in the year, reversing historic trends. Our roll out of super-fast broadband is one of the most rapid in the world, passing an average of 80,000 additional premises each week and we have plans to roughly double the speed of our fibre-to-the-cabinet based service in 2012.
“We expect to continue to grow our profits and free cash flow whilst investing to return BT to growth. These results show we are making progress, but we are well aware there remains a lot more to do.”
- Full year results in line with or ahead of our outlook for the year
- Revenue of £20bn in line with our outlook, underlying revenue excluding transit down 3% in the year
- Operating cost savings of £1.1bn in the year, ahead of our outlook of around £900m
- Net debt reduced to £8.8bn, in line with our outlook, after pension deficit payments of £1.0bn in the year
- Free cash flow1,2 of £2.2bn, ahead of our outlook and nearly trebled from two years ago
- Proposed final dividend of 5.0p, up 9%, giving a full year dividend of 7.4p, up 7%
- BT Global Services operating cash flow positive a year ahead of plan at £119m
- IAS 19 pension deficit of £1.4bn (net of tax), down £4.3bn in the year
- DSL broadband net additions of 252,000 in the quarter, of which BT’s retail market share was 64%
- Underlying revenue excluding transit to be in the range of down 2% to flat in 2012 and to grow by up to 2% in 2013
- Adjusted EBITDA to grow in 2012 and to be above £6.0bn in 2013
- Adjusted free cash flow to be above 2011 level in both 2012 and 2013
1 Before specific items
2 Before pension deficit payments
Unless otherwise stated, the changes in results are year on year against the fourth quarter or year to 31 March 2010. The references 2010, 2011, 2012 and 2013 are the financial years to 31 March 2010, 2011, 2012 and 2013, respectively, except in relation to our fibre roll out plans which are based on calendar years.
RESULTS FOR THE FOURTH QUARTER AND YEAR TO 31 MARCH 2011
Line of business results
1 Before specific items. Specific items are defined below and analysed in note 4. In 2011, net interest on pensions has been included within specific items because of its volatile nature. Accordingly specific items for comparative periods have been re-presented.
2 Before pension deficit payments of £505m in Q4 2011 and £1,030m in FY 2011 (Q4 2010: £nil, FY 2010: £525m).
3 Adjusted for the impact of customer account moves and after reflecting the impact of changes in the internal trading model. The effect of the changes is primarily to reduce internal revenue in both BT Wholesale and Openreach by around £62m per quarter in 2011. There is no impact from these changes on total group revenue. In the line of business commentaries for BT Wholesale and Openreach, revenue has been measured against an adjusted basis reflecting the impact of changes in the internal trading model to enable a like for like comparison.
4 Restated for the impact of customer account moves.
n/m = not meaningful
Specific items - unless otherwise stated, any reference to 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 EBITDA, reported operating profit, reported profit before tax and reported EPS are the equivalent unadjusted or statutory measures.
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 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.
BT Group plc
RESULTS FOR THE YEAR TO 31 MARCH 2011
Operating results overview
Revenue of £20,076m was in line with our outlook of around £20bn for the year. Foreign exchange movements had a negative impact of £44m and low-margin transit revenue reduced by £214m (including mobile termination rate reductions of £82m). Transit revenue was £1,518m in the year (2010: £1,758m). Underlying revenue excluding transit was down 3%.
Adjusted EBITDA increased by 4% to £5,886m, ahead of our outlook of around £5.8bn for the year. Foreign exchange movements had no significant impact on EBITDA in the year.
Total group operating costs decreased by £1,147m, or 6%, to £17,542m. Depreciation and amortisation decreased by 2% to £2,979m reflecting the lower levels of capital expenditure in the last two years partly offset by higher expenditure on shorter lived assets. Excluding depreciation and amortisation, group operating costs reduced by £1,087m, or 7%, ahead of our outlook of around £900m for the year.
Total labour costs decreased by 5% to £5,845m. Indirect labour costs reduced by 18% as we continue to reduce agency and contractor resource and redeploy existing permanent staff. Direct labour costs remained broadly flat at £4,830m with the reduction in labour resource being offset by pay inflation and increased pension costs. Leaver costs more than halved to £57m (2010: £142m). Payments to telecommunications operators were down 8%, reflecting lower mobile termination rates and reduced transit and wholesale call volumes. Property and energy costs and network maintenance and IT costs were 11% and 10% lower, respectively, as the group continues to drive efficiency improvements. Other operating costs decreased by 5%.
Capital expenditure was £2,590m, in line with our capital expenditure expectations of around £2.6bn for the year.
Net finance expense
Net finance expense was £845m, a decrease of £45m, due to the reduction in net debt and the repayment of higher coupon debt in the second half of the year.
The effective tax rate on the profit before specific items for the year was 21.7% (2010: 22.9%), reflecting the utilisation of tax losses and continued focus on tax efficiency within the group.
Specific items in the year resulted in a net charge after tax of £127m (2010: £308m), the principal components of which are described below.
BT Global Services restructuring charges of £192m have been recognised in the year (2010: £301m) principally comprising network, people and property costs. Further charges of around £50m are expected to be incurred in 2012 in relation to the costs associated with BT Global Services network rationalisation programme. Specific operating costs also include property rationalisation charges of £88m (2010: £121m) and intangible asset impairment charges of £49m (2010: £nil).
Net interest expense on pensions was £79m (2010: £279m). In addition, there was a profit of £42m from disposing of a 6.5% interest in our associate Tech Mahindra during the year, reducing our holding to 23.5%.
The tax credit in respect of the above specific items was £72m (2010: £190m). A specific tax credit of £172m (2010: £nil) has been recognised for the re-measurement of deferred tax balances due to the change in the UK statutory corporation tax rate to 26%, effective from 1 April 2011. In addition, a specific tax charge of £5m (2010: £230m credit) was recognised relating to the settlement of outstanding tax matters from prior years.
Earnings per share
Adjusted EPS was 21.0p, up 21%, principally reflecting the higher operating profit and lower finance expense. Reported EPS was 19.4p, up 46%. This is based on average shares in issue of 7,750m (2010: 7,740m). A reconciliation of reported EPS to adjusted EPS is provided in Note 10.
Free cash flow
Free cash flow before specific items of £2,223m was ahead of our outlook of £2bn for the year.
Reported free cash flow was an inflow of £2,011m, up 4%, despite the prior year including the benefit of tax repayments and associated interest of £226m. Excluding this, free cash flow increased by 18% reflecting improved earnings and working capital. This level of working capital improvement is not expected to be repeated in 2012. A reconciliation of cash generated from operations to free cash flow is provided in Note 6.
Net debt and liquidity
Net debt was £8,816m at 31 March 2011, a reduction of £467m in the year. This reduction was after making pension deficit payments of £1,030m (2010: £525m). Net debt is reconciled in Note 7.
During the year we repaid maturing debt of £2.5bn from cash and investment balances. In March 2011, a new five year £1.5bn committed facility was agreed. At 31 March 2011, the group had cash and investment balances of £370m and available facilities of £1.5bn. There are no significant debt maturities until the 2013 financial year.
The IAS 19 net pension position at 31 March 2011 was a deficit of £1.4bn net of tax (£1.8bn gross of tax), compared with a deficit of £5.7bn at 31 March 2010 (£7.9bn gross of tax). The market value of the BT Pension Scheme assets increased by £1.7bn to £37.0bn at 31 March 2011, and the value of liabilities reduced by £4.3bn to £38.7bn. The increase in scheme assets reflects £1.0bn of deficit payments and the asset performance during the year offset by benefit payments. The liability valuation is based on the AA corporate bond rate of 5.50% (31 March 2010: 5.50%) and future inflation expectations. RPI inflation is assumed to be 3.40% (31 March 2010: 3.60%) and CPI inflation is assumed to be 1.5% below RPI for one year and 1.0% below RPI thereafter.
We expect the pensions operating charge for the BT Pension Scheme to be around £25m lower in 2012 as a result of the lower inflation assumptions. The net pension interest within specific items is expected to be a credit of around £200m, an improvement of around £275m as a result of the reduced deficit. We also expect the regular cash contributions to be around £130m lower in 2012 but to revert to around 2011 levels in 2013.
Since the funding valuation at 31 December 2008, the assets have generated investment returns equivalent to 11% per annum and the Trustee’s initial estimate is that the funding deficit, on the prudent valuation basis, has reduced to around £3.2bn at 31 December 2010 after the deficit payment of £0.5bn in March 2011. On a median valuation basis, which reflects the expected returns from the assets held and likely liabilities, we estimate the scheme was in surplus of £3.2bn at 31 March 2011.
The Pensions Regulator’s review of the 2008 BTPS funding valuation and recovery plan is now on hold and is not expected to recommence until the outcome of the final Court decision, including any potential appeals, is known on the Crown Guarantee. We do not expect this to be before the completion of the next triennial funding valuation as at 31 December 2011. As is usual, BT and the Trustee will engage with the Pensions Regulator regarding the 2011 valuation.
The Board is committed to progressive dividends whilst balancing the need to invest in the business, reduce our net debt and support the pension fund. Taking these considerations into account, the Board is proposing a final dividend of 5.0p, up 9%, giving a full year dividend of 7.4p, up 7%.
Principal risks and uncertainties
The group’s principal risks and uncertainties, which will be included in the BT Group plc Annual Report & Form 20-F 2011, expected to be published on 27 May 2011, are disclosed in Note 11.
We are focussing on long-term profitable revenue growth. As transit traffic is low-margin and significantly impacted by regulatory reductions in mobile termination rates, with no impact on the group’s profitability, we have excluded transit from our key measure of the underlying revenue performance of the group. Transit revenue declined by £214m in 2011, and we expect it to decline by around a further £400m in 2012 and £200m in 2013, largely due to mobile termination rate reductions. Underlying revenue excluding transit was down 3% in 2011 and we expect it to be in the range down 2% to flat in 2012 and to grow by up to 2% in 2013.
Adjusted EBITDA is expected to show further growth in 2012 and to be above £6.0bn in 2013. We expect adjusted free cash flow to be above the 2011 level in 2012 and 2013, with BT Global Services generating operating cash flow of around £200m in 2012.
RESULTS FOR THE FOURTH QUARTER TO 31 MARCH 2011
Operating results overview
Revenue was £5,055m, down 6%. Foreign exchange movements had a negative impact of £32m and low-margin transit revenue reduced by £92m (including mobile termination rate reductions of £28m). Underlying revenue excluding transit was down 4%. In addition, last year included revenue of around £100m from the early delivery of contract milestones in BT Global Services.
Adjusted EBITDA increased by 3% to £1,551m. Foreign exchange movements had no significant impact on EBITDA in the quarter.
Total group operating costs reduced by 8% to £4,367m. Depreciation and amortisation decreased by 3% to £762m. Excluding depreciation and amortisation, group operating costs reduced by £365m, or 9%.
Total labour costs decreased by 1% to £1,447m. Indirect labour costs reduced by 8% as we continue to reduce agency and contractor resource and redeploy existing permanent staff. Direct labour costs were broadly flat at £1,185m with the reduction in labour resource being offset by pay inflation and higher pension costs. Leaver costs were £21m (Q4 2010: £18m). Payments to telecommunications operators were down 6%, reflecting lower mobile termination rates and reduced transit and wholesale call volumes. Property and energy costs and network maintenance and IT costs were 8% and 18% lower, respectively, as the group continues to drive efficiency improvements. Other operating costs reduced by 21%.
Capital expenditure was £779m.
Net finance expense
Net finance expense was £186m, a decrease of £42m, due to the reduction in net debt and the repayment of higher coupon debt in the second half of the year.
Specific operating costs comprised BT Global Services restructuring charges of £84m (Q4 2010: £52m), property rationalisation charges of £8m (Q4 2010: £121m) and intangible asset impairment charges of £10m (Q4 2010: £nil). In addition, there was a profit of £7m from the disposal of a 1.0% interest in our associate Tech Mahindra. Net interest expense on pensions was £20m (Q4 2010: £71m). The tax credit in respect of these items was £19m (Q4 2010: £56m). A specific tax credit of £96m (Q4 2010: £nil) has been recognised for the re-measurement of deferred tax balances due to the change in the UK statutory tax rate to 26%, effective from 1 April 2011.
Earnings per share
Adjusted EPS was 6.2p, up 22%. Reported EPS was 6.1p, up 126%.
Free cash flow
Free cash flow before specific items was £619m (Q4 2010: £1,089m) reflecting a more even quarterly profile of cash generation throughout the year. Reported free cash flow was an inflow of £546m (Q4 2010: £1,045m). There was a net cash outflow of £73m relating to specific items (Q4 2010: £44m outflow) principally comprising BT Global Services restructuring charges.
BT Global Services
Revenue decreased by 9% in the quarter. Excluding the negative impact of foreign exchange movements of £27m and the reduction in low-margin transit revenue of £76m, underlying revenue excluding transit was down 5%. In addition last year included revenue of around £100m from the early delivery of contract milestones. Revenue in the year decreased by 5% and underlying revenue excluding transit decreased by 4%, reflecting reduced UK calls and lines revenue and the impact of the prior year contract milestones.
Total order intake was £1.9bn for the quarter and £7.3bn for the year, up 10%. In the quarter, we signed a number of contracts with leading organisations around the world including Carillion, to provide managed voice and data services to 800 sites in the UK and BASF, to deliver network services to 900 sites globally as well as local network and IP telephony services to more than 300 sites in North and South America and Asia-Pacific. We also signed a contract with Grupo Konecta in Spain to provide customer relationship management and wide area network services globally, and with Ecopetrol, Colombia’s largest company, to manage the customer’s information and communication technology environment.
Our investment in the Asia-Pacific region is on track in terms of recruitment, product roll-out, pipeline and contract wins. For example, in the quarter we signed a contract with PSA Corporation Limited, which operates the world’s largest container transhipment hub in Singapore, to support its IT requirements.
Net operating costs reduced by 11%, or 7% excluding transit, as a result of further progress with our cost efficiency initiatives. EBITDA was £184m, up 4%. Depreciation and amortisation reduced by 20% as a result of the lower capital expenditure over the last two years. This contributed to a £56m reduction in the operating loss.
Capital expenditure was 34% lower due to the timing of capital expenditure across certain of our large customer contracts and the flattening of the expenditure profile over the year.
Operating cash flow for the year was an inflow of £119m, achieving our cash generation target a year early. This compares with an outflow of £482m last year. This improvement has been achieved through higher earnings, better working capital performance and greater efficiencies in capital expenditure. Operating cash flow for the quarter was £70m compared with £113m last year, reflecting a more even cash profile during the year. We expect to generate around £200m of operating cash flow in 2012.
Revenue decreased by 4% in the quarter and 5% in the year. Revenue in the second half of the year was down 3%, an improvement on the 5% decline in the first half of the year, after excluding a one-off benefit in 2010 relating to prior periods.
Consumer revenue decreased by 5% in the quarter and 6% in the year. Active consumer line losses in the quarter were at the lowest level for four years but the year on year decline, combined with lower call volumes, more than offset the growth in broadband revenue. Consumer ARPU increased by £4 to £326, largely due to the increasing penetration of broadband in our customer base.
Business revenue was broadly flat in the quarter and decreased by 1% in the year. Business line losses were at the lowest level for more than three years although revenue was impacted by lower than expected IT hardware sales. However, revenue from IT services and mobility increased by 4% and 15%, respectively, in the quarter.
Enterprises revenue fell by 7% in the quarter and 2% in the year. In the quarter revenue was down primarily due to reduced low-margin revenue from videoconferencing equipment sales. Ireland revenue decreased by 4% in the quarter and 3% in the year, excluding the impact of foreign exchange and transit revenue reductions, in a difficult economic climate. BT Ireland secured a number of contracts in the quarter including a £33m contract with Three Ireland to roll out BT’s high speed fibre network to mobile sites.
Broadband net additions were 162,000, representing a 64% market share of DSL and LLU net additions, our highest share for more than eight years, reflecting the success of our broadband strategy. During the quarter we launched a new energy-efficient Home Hub 3, including Smart Wireless which looks for the best wireless channel to ensure the strongest possible connection at all times. Net additions for BT Infinity, our super-fast broadband service, are currently running at an average of around 5,000 per week, and our BT Infinity customer base currently stands at 144,000. In areas where it is available, almost half of our new broadband customers are now opting for BT Infinity.
BT Vision net additions were 30,000 in the quarter, taking our customer base to 575,000. We continue to enhance our TV offering with BBC iPlayer currently being rolled out and faster HD downloads now available.
We have also seen continued rapid growth of our wi-fi network with over 2.8m hotspots. Customer usage has more than doubled over the year to almost 1bn minutes in the quarter.
Net operating costs decreased by 8% with savings being partially offset by the planned investments in subscriber acquisition costs, marketing and product development. The decrease in costs was driven by reductions in total labour costs of 6% resulting from productivity and efficiency improvements, coupled with procurement savings. EBITDA increased by 9% and with depreciation and amortisation increasing by 5%, operating profit grew by 10%.
Capital expenditure decreased by 18%, principally as a result of the phasing of expenditure in the year. Operating cash flow reduced by 1% as last year included strong working capital receipts.
Adjusted revenue decreased by 5% in the quarter and 4% in the full year. The decline reflects the impact of reductions in low-margin transit revenue which declined by £16m in the quarter and £81m in the year, driven by mobile termination rate reductions. Underlying revenue excluding transit declined by 4% in the quarter and 3% in the year, primarily due to the continuing trend of migration to LLU and the associated reduction in broadband revenue. The full year includes a charge relating to prior periods following an Ofcom determination which we are appealing. The decline in underlying revenue excluding transit has been partially offset by further growth in our managed network services (MNS) revenue. MNS revenue represented 24% of external revenue in the year, up from 21% last year, and external revenue underpinned by long-term contracts has been maintained at 40%.
Wholesale Broadband Connect, our next generation copper broadband product offering speeds of up to 20Mbps, is enabled from over 1,000 exchanges serving over 65% of UK premises. We plan to extend this capability to around 80% of UK premises by December 2011. We have also enabled the 1,000th Ethernet over fibre node, reinforcing our position as the UK’s leading Ethernet over fibre network provider.
Net operating costs decreased by 5%, or by 4% excluding transit, after reflecting the impact of changes in the internal trading model. The decrease was due to a reduction in total labour costs from process simplification, systems automation and continued control of discretionary expenditure, as well as lower payments to telecommunications operators due to lower transit revenue. EBITDA decreased by 4% and with depreciation and amortisation reducing by 7%, operating profit declined by 1%.
Capital expenditure decreased by 19%, principally as a result of the phasing of expenditure, which was broadly flat for the year. After adjusting for the effect of a prior year intra group VAT settlement with Openreach, operating cash flow decreased by 22% primarily due to the EBITDA decline and the timing of working capital payments.
Adjusted revenue increased by 2% in the quarter. External revenue was up 17% in the quarter, continuing the trend seen over the year as communications providers (CPs) continue to migrate customers from WLR to full LLU, together with further growth in Ethernet and copper line volumes. Internal revenue decreased by 3%, after reflecting the impact of changes in the internal trading model. Adjusted revenue for the year was marginally down as higher LLU and Ethernet volumes and provision activity were largely offset by the impact of the migration from WLR.
In the quarter, our overall copper line base increased by 26,000, continuing the trend in the previous quarter. This gives an increase of 11,000 for the full year compared with a loss of over 300,000 in the prior year. This is the first growth in the copper line base since the formation of Openreach in 2006 and reflects customers recognising the advantages of fixed-line broadband.
After reflecting the impact of changes in the internal trading model, net operating costs reduced by 3%. This reduction was achieved after investing in customer service and reflects process efficiencies in our engineering activities. EBITDA increased by 10%, compared with a weak fourth quarter last year. Depreciation and amortisation increased by 5% reflecting investment in next generation broadband, Ethernet and fibre services. Operating profit increased by 14%.
Capital expenditure increased by 6% due to the investment in our fibre roll out and the increase in CPs’ infrastructure build and provision activities. The fibre roll out programme, in which we have invested a total of £0.6bn to date, is one of the most rapid in the world with an average of around 80,000 new premises being passed every week. We expect to have passed 5m homes in the next few weeks and aim to increase this to 10m by 2012. During 2012 we will continue to expand our 100Mbps fibre-to-the-premises (FTTP) services and to test a 1Gbps service and we expect to roughly double our fibre-to- the-cabinet (FTTC) speeds to up to 80Mbps. Future changes are expected to take the potential for FTTC to over 100Mbps.
Operating cash flow was up 5% after adjusting for the effect of a prior year intra group VAT settlement with BT Wholesale, as higher EBITDA and improved working capital more than offset the increased capital expenditure.
The fourth quarter and full year 2011 results presentation for analysts and investors will be held in London at 9.00am today and a simultaneous webcast will be available at www.bt.com/results.
The BT Group plc Annual Report & Form 20-F is expected to be published on 27 May 2011. The Annual General Meeting of BT Group plc will be held at Old Billingsgate, London on 13 July 2011. Results for the first quarter to 30 June 2011 are expected to be announced on 28 July 2011.
The full release and financial accounts are available to download as a PDF documents .
Full financial release
Group income statement
Group statement of comprehensive income
Group statement of changes in equity
Group cash flow statement
Group balance sheet
Notes to the condensed consolidated financial statements
Forward-looking statements – caution advised