3 November 2011
BT GROUP PLC
Results for the second quarter and half year to 30 September 2011
BT Group plc (BT.L) today announces its results for the second quarter and half year to
30 September 2011.
Second quarter and half year results:
Ian Livingston, Chief Executive, commenting on the results, said:
“We have increased cash flow, profits and underlying revenue2 in the quarter. This progress has been supplemented with positive operational performances in most of our businesses. We achieved a market leading 63% share of broadband net additions and another quarter of growth in fixed lines.
“We expect to continue to offset the economic headwinds through improved customer service and processes, better efficiency, and investment in the future of the business. This strategy and our financial results allow us to invest when others are merely talking about it. We are accelerating our fibre roll-out programme to cover two-thirds of the UK by the end of 2014 – one year earlier than planned and creating 520 new jobs. With the already announced government support, we believe there is the potential for fibre-based services to reach more than 90% of the UK within a few years thereafter.
“We are also investing across the world and have announced a programme to double our business in key Latin American countries in addition to our expansion in the Asia Pacific region announced last year.
“Our performance in the quarter reinforces but does not change our outlook for the year.”
1 Before specific items
2 Excluding transit
Unless otherwise stated, the changes in results are year on year against the second quarter or half year to 30 September 2010.
RESULTS FOR THE SECOND QUARTER AND HALF YEAR TO 30 SEPTEMBER 2011
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.
3) The income statement, cash flow statement, statements of comprehensive income and equity and balance sheet are provided on pages 11 to 15. A reconciliation of group operating profit to EBITDA (as defined above) is provided in Note 7. A reconciliation of reported profit before tax to adjusted profit before tax is provided in Note 8. A reconciliation of reported EPS (as defined above) to adjusted EPS is provided in Note 9. Reconciliations of free cash flow and net debt are provided in Notes 5 and 6, respectively.
4) 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
INTERIM MANAGEMENT REPORT
RESULTS FOR THE SECOND QUARTER TO 30 SEPTEMBER 2011
Operating results overview
Underlying revenue excluding transit increased by 0.4% due to growth in Openreach and in BT Global Services which benefitted from the acceleration of around £60m of contract milestones from the second half of the year. Adjusted revenue was 2% lower at £4,894m with transit revenue down by £127m (including mobile termination rate reductions of £80m), favourable foreign exchange movements of £38m and the negative impact of disposals of £10m. Reported revenue was 10% lower reflecting a specific charge to revenue of £410m (see Specific items below).
Adjusted EBITDA increased by 3% to £1,495m reflecting the delivery of cost reductions. Foreign exchange movements and disposals had a negative impact of £8m on EBITDA.
Total operating costs before depreciation and amortisation and specific items decreased by 3%, or £108m, to £3,498m. Depreciation and amortisation increased by 2% to £753m.
Total labour costs of £1,474m, including leaver costs of £29m (Q2 2011: £14m), decreased by 1% after adjusting for certain labour related costs of £23m classified as other costs in the prior year. Payments to telecommunications operators were down 19% reflecting lower mobile termination rates and lower transit and wholesale call volumes. Property and energy costs, and network operating and IT costs reduced due to efficiency improvements. Other costs increased by 10% largely reflecting the recognition of costs associated with the contract milestones achieved in the quarter.
Capital expenditure increased by 7% to £652m and is still expected to be around £2.6bn for the full year.
We added 166,000 retail broadband customers, up 46% over last year, representing 63% of the DSL and LLU market net additions of 263,000. We increased our lead as the UK’s number one broadband retailer with a customer base of around 6m at 30 September 2011. Take up of our super-fast broadband product, BT Infinity, increased with 88,000 customers added in the quarter and our customer base currently stands at over 300,000, having more than doubled in the last six months.
Net finance expense
Adjusted net finance expense was £174m, a reduction of £50m, primarily due to the reduction in net debt and the repayment of higher coupon debt in the second half of last year.
Profit before tax
Adjusted profit before tax was £570m, up 15%, reflecting the improved operating results and lower finance expense. Reported profit before tax was £552m, up 36%.
The effective tax rate on profit before specific items was 24.1% for the quarter (Q2 2011: 19.7%). This compares with the UK statutory rate of 26% (2011: 28%).
Specific items were a net charge of £18m before tax (Q2 2011: £90m) and a net credit of £63m after tax (Q2 2011: £2m).
Following a retrospective regulatory ruling in Germany in relation to the period from September 2006 to November 2010, a one-off charge of £410m was recognised against revenue with an equal reduction in operating costs. There is no impact on profits or cash.
During the quarter the group disposed of its subsidiary Accel Frontline resulting in a loss on disposal of £19m. Specific operating costs include property rationalisation charges of £28m (Q2 2011: £24m) and BT Global Services restructuring charges of £20m (Q2 2011: £47m). Net interest income on pensions was £49m (Q2 2011: £19m expense).
The UK Finance Bill, under which the UK corporation tax rate changes from 26% to 25% on 1 April 2012, was enacted in the quarter. As a result, a specific tax credit of £82m has been recognised for the re-measurement of deferred tax balances.
Earnings per share
Adjusted EPS was 5.6p, up 10%, due to the higher operating profit and lower finance expense. Reported EPS was 6.4p, up 25%. This is based on average shares in issue of 7,762m (Q2 2011: 7,750m).
Free cash flow
Adjusted free cash flow was an inflow of £671m, up £95m, reflecting the improved EBITDA. The cash cost of specific items was £42m (Q2 2011: £41m) principally comprising BT Global Services restructuring charges of £27m and property rationalisation costs of £15m, giving reported free cash flow of £629m (Q2 2011: £535m). We expect the cash outflow in respect of specific items to be around £180m for the full year, slightly higher than previously estimated.
Net debt and liquidity
Net debt was £8,317m at 30 September 2011, a reduction of £499m compared with 31 March 2011. At 30 September 2011 the group had cash and investment balances of £1.0bn and available facilities of £1.5bn.
The IAS 19 net pension position at 30 September 2011 was a deficit of £2.5bn net of tax (£3.3bn gross of tax) compared with a deficit of £1.4bn at 31 March 2011 (£1.8bn gross of tax). The market value of the BT Pension Scheme (BTPS) assets has decreased by £1.9bn since 31 March 2011 to £35.1bn at 30 September 2011. The IAS 19 value of the BTPS liabilities was £38.3bn (31 March 2011: £38.7bn). The liability valuation is based on the AA corporate bond rate of 5.10% (31 March 2011: 5.50%) and future inflation expectations. Long-term RPI inflation is expected to be 2.90%
(31 March 2011: 3.40%) and CPI inflation is assumed to be 1.05% below RPI (31 March 2011: 1.50% below RPI for one year and 1.0% below RPI thereafter). On a median valuation basis, which reflects the expected returns from assets and likely liabilities, we estimate that the BTPS was in a surplus of £1.0bn at 30 September 2011.
The Board has declared an interim dividend of 2.6p per share (Q2 2011: 2.4p), an increase of 8%. This will be paid on 6 February 2012 to shareholders on the register on 30 December 2011. The ex-dividend date is 28 December 2011. The election date for participation in BT's Dividend Investment Plan in respect of this dividend is 30 December 2011.
The interim dividend, amounting to £202m (Q2 2011: £186m), has not been included as a liability at 30 September 2011. The final dividend for the year to 31 March 2011 of 5.0p per share was approved at the Annual General Meeting on 13 July 2011 and was paid in the second quarter.
Our performance in the quarter reinforces but does not change our outlook for the year.
RESULTS FOR THE HALF YEAR TO 30 SEPTEMBER 2011
Operating results overview
Underlying revenue excluding transit decreased by 1%. Adjusted revenue was 3% lower at £9,658m with transit revenue down by £236m (including mobile termination rate reductions of £159m), favourable foreign exchange movements of £42m and the negative impact of disposals of £13m. Reported revenue was 7% lower reflecting a specific charge to revenue of £410m.
Adjusted EBITDA increased by 3% to £2,931m reflecting the delivery of cost reductions. Foreign exchange movements and disposals had no significant impact on EBITDA.
Total operating costs before depreciation and amortisation and specific items decreased by 5%, or £377m, to £6,924m. Depreciation and amortisation increased by 2% to £1,492m.
Total labour costs of £2,931m, including leaver costs of £57m (HY 2011: £24m), decreased by 2% after adjusting for certain labour related costs of £45m classified as other costs in the prior year. Payments to telecommunications operators were down by 17% reflecting lower mobile termination rates and lower transit and wholesale call volumes. Property and energy costs, and network operating and IT costs reduced due to efficiency improvements. Other costs increased by 2% reflecting the recognition of costs associated with the contract milestones achieved in the second quarter.
Capital expenditure increased by 9% to £1,234m.
Net finance expense
Adjusted net finance expense was £342m, a reduction of £110m, primarily due to the reduction in net debt and the repayment of higher coupon debt in the second half of last year.
Profit before tax
Adjusted profit before tax was £1,103m, up 17%, reflecting the improved operating results and lower finance expense. Reported profit before tax was £1,069m, up 37%.
The effective tax rate on profit before specific items was 24.1% for the half year (HY 2011: 22%).
Specific items were a net charge of £34m before tax (HY 2011: £161m) and a net credit of £44m after tax (HY 2011: £51m charge).
Following a retrospective regulatory ruling in Germany a one-off charge of £410m was recognised against revenue with an equal reduction in operating costs.
In the second quarter the group disposed of its subsidiary Accel Frontline resulting in a loss on disposal of £19m. Specific operating costs include property rationalisation charges of £72m
(HY 2011: £54m) and BT Global Services restructuring charges of £42m (HY 2011: £68m). Net interest income on pensions was £99m (HY 2011: £39m expense). A specific tax credit of £82m has also been recognised for the re-measurement of deferred tax balances.
Earnings per share
Adjusted EPS was 10.8p, up 14%, principally reflecting the higher operating profit and lower finance expense. Reported EPS was 11.3p, up 28%. This is based on average shares in issue of 7,759m (HY 2011: 7,747m).
Free cash flow
Adjusted free cash flow was an inflow of £979m, a decrease of £56m compared with last year. The decrease partly reflects the receipt in the prior year of around £200m relating to a major customer contract. The cash cost of specific items was £103m (HY 2011: £85m) principally comprising
BT Global Services restructuring costs of £73m and property rationalisation costs of £28m, giving reported free cash flow of £876m (HY 2011: £950m).
Related party transactions
Transactions with related parties during the half year to 30 September 2011 are disclosed in Note 12.
Principal risks and uncertainties
A summary of the group’s principal risks and uncertainties is provided in Note 13.
BT Global Services
Revenue increased by 1% reflecting an improved operational performance, contract milestones including the acceleration of around £60m of milestones from the second half of the year, and a £31m positive impact from foreign exchange movements offset by lower transit revenue, which declined by £59m, and a £10m negative impact from disposals. Underlying revenue excluding transit increased by 3%.
Total order intake in the quarter was £1.4bn compared with £2.1bn last year, which had benefitted from a £640m contract extension with the UK Ministry of Defence. Contracts signed in the quarter included a contract with Best Buy Europe to provide a wide area network transformation to 820 stores and a contract with CLSA Asia Pacific Markets, Asia’s leading independent brokerage and investment group, to provide voice, data and trading systems solutions across 14 countries. We have also expanded our contractual relationship with Novartis adding new services and connecting new global locations. In addition we signed a major networked IT services contract in Australia’s health sector in partnership with Serco reflecting both our investment in the Asia Pacific region and our global health sector expertise.
We recently announced a series of investments aimed at doubling our business in key Latin American countries. By recruiting 250 new staff, increasing our professional services capabilities, opening new centres of excellence and implementing a wide range of network and customer service improvements, we aim to better support global customers investing in this region and help large Latin American companies expand globally.
Net operating costs were flat or up 2% excluding the impact of transit costs, foreign exchange movements and disposals, reflecting the costs associated with the contract milestones. EBITDA was £159m, up 15%, after leaver costs of £7m. Last year leaver costs were included in the BT Global Services restructuring charge within specific items. Depreciation and amortisation increased by 6% as a result of contract-specific assets being brought into use which offset the impact of lower capital expenditure over the last two years. The operating loss reduced by 24%.
Capital expenditure increased by 25% principally due to a change in certain customer contract commitments in the quarter. As a result, operating cash flow was £27m lower. We continue to expect to generate around £200m of operating cash flow for the full year.
Consumer revenue decreased by 4% reflecting lower calls and lines revenue partially offset by growth in broadband revenue. Consumer ARPU increased by £5 in the quarter to £335 largely due to the increased penetration of broadband in our customer base. BT Vision net additions were the highest for more than two years at 41,000.
Business revenue decreased by 5% due to a reduced contribution from low-margin IT hardware and equipment sales and the ongoing decline in voice revenues as well as a full quarter’s impact of lower fixed to mobile call pricing.
BT Enterprises revenue, excluding foreign exchange movements, was broadly flat as growth in BT Conferencing and BT Expedite was offset by a decline in BT Redcare & Payphones.
BT Ireland revenue, excluding foreign exchange movements, was broadly flat despite the challenging economic environment. BT Ireland’s fibre roll-out in Northern Ireland has now reached around three-quarters coverage with almost 600,000 premises passed and Derry~Londonderry has become the first city in the UK to have all cabinets upgraded to fibre. Our fibre-based transmission network in the Republic of Ireland is now operational with its first corporate customer.
Net operating costs decreased by 6% as a result of lower revenue-related costs, including lower fixed to mobile termination rates, and a reduction in total labour costs of 3% achieved through cost transformation initiatives. As a result, EBITDA increased by 7% and with lower depreciation and amortisation, operating profit increased by 13%.
Capital expenditure increased by 10% reflecting the investment in broadband in the UK and in fibre-based transmission in the Republic of Ireland. Operating cash flow increased by 3%.
Revenue declined by 7% reflecting a reduction in transit revenue of £68m principally driven by mobile termination rate reductions. Underlying revenue excluding transit was flat, although the prior year was impacted by a one-off regulatory charge of £19m, as growth in managed network services (MNS) revenue was offset by the ongoing impact of broadband lines migrating to LLU.
During the quarter we signed a five-year contract with O2 for our IP Voice Services and a framework agreement with Colt Group to resell BT’s worldwide media network capability.
We continued to upgrade customers to Wholesale Broadband Connect (WBC), our next generation copper broadband service. During the quarter 145 new exchanges were enabled, increasing the total of WBC-enabled exchanges to more than 1,450, serving more than 70% of UK premises. We have grown our fixed Ethernet base with the number of lines more than doubling over the prior year. Operational delivery of our Mobile Ethernet Access Services for mobile operators continued to strengthen, with more than 1,000 sites added, increasing the total number of sites to more than 11,000.
In partnership with Everything Everywhere we started a 4G field trial in Cornwall where 200 end-users are now testing the application of Long Term Evolution (LTE) technology as a shared fixed and mobile platform and a potential infill solution for broadband ‘not spots’ in rural areas. The field trial is the first live end user trial of LTE technology in the UK and the world’s first trial of LTE as a shared fixed and mobile platform solution.
Net operating costs reduced by 7% or were up by 4% excluding the impact of transit costs, as the benefit of lower total labour costs was offset by the impact of changes in the product mix and network migration costs on some of our MNS contracts. EBITDA declined by 6% and, as previously stated, we expect this trend to continue for the remainder of the year. Depreciation and amortisation reduced by 4% and operating profit declined by 9%.
Capital expenditure increased by 13% principally as a result of increased investment in our WBC and Ethernet roll-out. Operating cash flow was flat as a result of positive working capital movements.
Revenue increased by 4%. External revenue was up 5% due to growth in Ethernet and ongoing migration to LLU. Internal revenue was up 3% due to growth in Ethernet and increased fibre revenue.
Our overall copper line base increased by 11,000 and has now grown in each of the last four quarters as customers recognise the advantages of fixed-line broadband.
Net operating costs increased by 1% as efficiency improvements were offset by higher total labour costs driven by additional engineering activity. EBITDA increased by 7% and depreciation and amortisation increased by 8%, reflecting the investment in super-fast broadband and Ethernet over the last 12 months. Operating profit increased by 5%.
Despite the general level of investment, capital expenditure decreased by 4% due to improved efficiency in asset utilisation and phasing. Following trials we have commercially launched pole and duct access products to assist the delivery of fibre infrastructure in rural areas. We have also recently announced the commercial launch of fibre-to-the-premises (FTTP) broadband with initial downstream speeds of up to 110Mbps, increasing to up to 300Mbps next spring. In addition, we now have industry approval that enables us to roughly double the download speeds delivered by fibre-to-the-cabinet (FTTC) broadband from up to 40Mbps to up to 80Mbps in 2012. Our super-fast broadband network now passes more than 6m premises and we are accelerating our roll-out programme to cover two-thirds of the UK by the end of 2014, one year earlier than planned.
Operating cash flow was up 37% primarily due to the increased EBITDA and the timing of debtor receipts.
A 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 third quarter results for 2012 are expected to be announced on 3 February 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
Independent review report to BT Group plc on the half year interim financial information
Forward-looking statements – caution advised