Regulation and prices
The RPI minus 7.5 price control is estimated to have affected about 52% of the groupís total turnover for the year ended 31 March 1996. And, if the RPI at June 1996 shows an annual increase at the same rate as the 2.4% increase experienced for the twelve months to April 1996, the price control will require the group to reduce prices of its main services during the year commencing 1 August 1996, by about 5.1%. A further reduction of about 1.4% must also be made before the current price control year ends on 31 July 1996.
Oftel is currently consulting with BT and other interested parties, including competitors, consumers and others outside the industry, on the structure of the successor price control to the current RPI minus 7.5 formula, which expires on 31 July 1997.
Competition and the UK economy
BT expects a continuing increase in competitive pressure as a result of the growth in market share of recent entrants to the UK telecommunications industry. BT will defend its markets vigorously but nevertheless the company expects that the overall impact of these competitors will become increasingly material.
The strength of the UK economy is an important determinant of BTís business volumes and the gross domestic product grew by 2.0% in the year ended 31 March 1996, compared with 3.9% in the previous year.
The groupís turnover is analysed as follows:
Price reductions had a major impact on inland telephone call turnover for the second year in succession. The combined effect of the price changes described above totalled over £330 million, which was equivalent to a 7% reduction in call prices following a 12% fall in the previous year. Call volume growth of 6% largely mitigated the price reduction effect, resulting in total inland call turnover declining by 1.2% in the year.
International call turnover rose by 2.3% as a result of strong call volume growth of 9% offset by price reductions averaging about 7%.
Turnover from exchange line rentals grew by 6.0%. The increased turnover was the combined result of a 5% price increase in February 1995 and the growth in business line connections. The number of these connections grew by 5.2% in the year with high speed digital ISDN services contributing significantly to the growth. For the first time, the numbers of residential lines declined due mainly to the new competition from the cable operators. Although the decline was slight, being limited to 113,000 lines, it partially offset the growth in business lines and BTís total exchange line connections grew by 0.8% to 27.3 million.
Cellnet added 655,000 telephone users to its network in the year to bring its total to just under 2.4 million, almost matching that of its major UK competitor. Mobile communications turnover consequently grew by 30% in the year to £856 million. The continuing high costs of this expansion have been included in the results.
BTís expansion worldwide with Concert services was a primary reason for the 17.5% increase in other sales and services. Concert, BTís joint venture company with its US partner, MCI Communications Corporation, specialises in products and services for multinational businesses and provides services in 60 countries.
Total operating costs as a percentage of total turnover decreased from 80.8% in the previous financial year to 78.5%. Excluding redundancy charges, operating costs as a percentage of turnover increased by nearly one percentage point over the previous year.
The groupís operating efficiency continued to improve with a reduction of 6,800 people employed in the year, compared with a reduction of 18,500 in the previous year. Staff costs were reduced by 5.9% as a result of savings from these reductions more than offsetting pay increases.
Payments to other telecommunication operators increased by 16.0% as the result of the growing number of calls terminating on UK competitorsí networks, the increased volume of outgoing international calls and BTís expanding operations overseas.
Other operating costs, which rose by 11.6% in the year, include the maintenance and support of the networks, occupancy costs and the cost of sales of customer premises equipment. The rapid expansion of Cellnetís services has resulted in additional costs being incurred in winning new business and supporting additional customers. Higher expenditure on these cellular and other marketing activities were the main factors behind the increase in costs. A further contributor to the increase was the cost of Concertís expanding operations.
The redundancy costs incurred as a result of the workforce reductions discussed above totalled £421 million in the year, compared with £820 million in the previous year. The lower costs reflect the fewer number of people leaving the group during the year. BT will be continuing to reduce the number of employees, but at a slower pace than in recent years.
Associates, disposals and interest charge
The profit on disposal of group undertakings in the previous year arose primarily from the sale of AT&T Corporation shares which had been converted in 1994 from BTís interest in McCaw Cellular Communications, Inc., a former associate.
The net interest charge of £170 million was £89 million or 34.4% lower than the interest charge in the previous year, after excluding the premium of £75 million incurred on repurchasing Government held bonds in that year. The lower charge was due to strong positive cash flow and the repayment of significant amounts of high coupon debt in the previous year. The net interest charge was covered 18.2 times by operating profit.
Profit and taxation
Earnings and dividends per share
The dividends paid and recommended of 18.7 pence per share represent a 5.6% increase on the previous year and are covered 1.7 times by earnings. The dividends comprise the interim dividend of 7.45 pence per share, which was paid in February 1996, and the proposed final dividend of 11.25 pence per share which, if approved at the annual general meeting, will be paid on 16 September 1996 to shareholders on the register on 13 August 1996. The dividends absorb £1,184 million.
Net cash inflow from operating activities of £5,829 million
in the year was 14.0% higher than in the previous year.
This improvement in part reflects the lower redundancy
costs in the year and the absence of an additional
contribution to the pension fund, compared with a
£250 million payment in the prior year.
Tax paid in the year, principally on the prior yearís profit, amounted to £784 million. The decrease of £391 million on the previous year is mainly due to the timing of tax payments made.
Net cash outflow from investing activities of £3,156 million mainly comprises expenditure on plant, equipment and property of £2,547 million.
In the year, the group drew down £175 million in long-term loans and long-term debt repaid totalled £133 million. During the year, the group also received £130 million for new shares subscribed by employees under share option schemes.
Treasury policy and capital resources
The Board sets the departmentís policy and its activities are subject to a set of controls commensurate with the magnitude of investments and borrowings under its management. Counterparty credit risk is closely monitored and managed within controls set by the Board. Derivative instruments including forward foreign exchange contracts are entered into for hedging purposes only.
At 31 March 1996, the group had cash and short-term investments of £2,689 million. At that date, £13 million of short-term debt was outstanding.
The ratio of net debt (borrowings net of cash and short-term investments) to shareholdersí equity and minority interests was 7.4% at 31 March 1996, compared with 17.8% at 31 March 1995. The group had £948 million net debt at 31 March 1996, a decrease of £1,319 million in the year through cash flow.
The directors have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future and therefore they continue to adopt the going concern basis in preparing the financial statements.
The group expects capital expenditure in the year ending 31 March 1997 to be at a slightly higher level than that in the year under review. BT expects that future capital expenditure will be provided from net cash inflows from operating activities supplemented, if appropriate, by external financing.
Return on capital employed
Foreign currency exposure
BTís expanding overseas operations are likely to lead to a gradual increase in its foreign currency exposure in the future.
Monopolies and Mergers Commission
The MMC also reported on BTís Yellow Pages directories business referred to it by the Office of Fair Trading, in view of its large market share in the specialised classified directory advertising industry. As a result of the report, BTís directory advertising prices are to be controlled under an RPI minus 2 formula, similar to that on BTís main services discussed above, and BT will be limited to publishing one directory in any one area. BT will be required to publish financial information relating to this business.