TIDMTALK
RNS Number : 9611Z
TalkTalk Telecom Group PLC
23 May 2019
23 May 2019
TalkTalk Telecom Group PLC
Preliminary results for the year ended 31 March 2019
Financial highlights
-- Total Headline (3) revenue (ex-Carrier and Off-net) up 2.2% to GBP1,544m
(FY18: GBP1,511m (2) ); Headline On-net revenue up 3.9% to GBP1,263m
(FY18: GBP1,216m (2) )
-- Statutory revenue of GBP1,632m (FY18: GBP1,653m (2) ), a 1.3% decline
-- Headline EBITDA (3) of GBP237m (FY18: GBP203m (2) ) (including FibreNation
costs)
-- YoY Headline EBITDA growth of 16.7% driven by a larger average base,
increased Fibre penetration and a materially lower cost base
-- Statutory operating profit of GBP47m (FY18: GBP44m loss (2) ); Statutory
loss before taxation of GBP5m (FY18: GBP100m loss (2) ),
after GBP42m of non-Headline costs associated with reorganising and
simplifying the business
-- Net debt of GBP781m (including finance leases of GBP39m) broadly flat
year on year (FY18: GBP776m (2) including finance leases of GBP31m)
-- Final dividend of 1.50p (FY18: 1.50p); total 2019 dividend of 2.50p
(2018: 4.00p)
Operational highlights
-- Accelerated Fibre uptake with 490k net adds in the year (FY18: 348k)
and a record 152k in Q4 (Q4 FY18: 98k)
-- Customer base growth of 150k (FY18: 192k), taking the closing base to
4,289k (1) . Q4 net adds of 2k (Q4 FY18: 109k) representing the ninth
consecutive quarter of base growth in a competitive market
-- Ongoing low level of churn at 1.20% (FY18: 1.22%)
-- Group On-net ARPU stabilising at GBP24.98 (FY18: GBP25.06 (2) ), with
year on year (YoY) Consumer ARPU growth
-- Good progress on cost reductions, including the move of our HQ to Salford,
creating one main campus and a more efficient operating model
-- Continued momentum in FibreNation rollout, with York build nearing completion
and investment partner process well underway
Looking forward
-- Remain confident in FY20 EBITDA growth, with Headline EBITDA (including
FibreNation costs) in line with market expectations (4)
-- Outlook underpinned by accelerated Fibre growth, coupled with modest
base growth, benefiting ARPU, lower Fibre wholesale costs due to commercial
discounts, ongoing cost to serve reductions as we transition to a self-service
model and significant cost savings from the move of our HQ to Salford
(GBP25m-GBP30m annualised, with GBP16m-GBP20m in FY20), offset in part
by continued Voice usage decline
Tristia Harrison, Chief Executive of TalkTalk, commented:
"Today's results show that two years after re-setting TalkTalk,
the fundamentals of the business are much stronger. We have grown
our customer base in a disciplined way, accelerated Fibre take-up,
and reduced costs. This is translating to revenue growth and a
c.17% increase in Headline EBITDA.
Looking forward the business will continue with the same plan,
focused on accelerating Fibre, reducing costs and simplifying the
business.
Having re-structured the customer base to reduce the difference
between our front and back book pricing, the business is also well
placed to benefit from imminent regulatory changes related to
fairer pricing. These trends, coupled with ongoing cost reductions
including our move to one Salford campus, mean we are confident in
delivering strong Headline EBITDA growth both next year and over
the medium term."
(1) All customer KPIs relate to the On-net base. The closing
Off-net base represented less than 1% of the total broadband base
(FY19: 29k, FY18: 43k).
(2) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
(3) See note 1 for an explanation of alternative performance
measures (APMs) and non-Headline items. See note 4 for a
reconciliation of Headline information to Statutory
information.
4 FY20 Headline EBITDA consensus: GBP266m (excluding FibreNation
costs) and GBP263m (including FibreNation costs), based on a range
of estimates between GBP247m and GBP282m. Source: Internally
compiled TalkTalk consensus published on corporate website
(https://www.talktalkgroup.com/events/events/FY19/FY19-Preliminary-Results-and-Consensus).
The person responsible for arranging the release of this
announcement on behalf of the Company is Tim Morris, General
Counsel and Company Secretary.
Presentation and Q&A
8.45am - Registration and coffee
9.00am - Presentation
Address
Deutsche Bank, 23 Great Winchester Street, London, EC2N 2DB
Webcast link:
https://webcast.merchantcantoscdn.com/webcaster/dyn/4000/7464/7467/113427/Lobby/default.htm
Conference call details: Participants do not need a PIN for the
live call - they simply need to ask to be put through to the
TalkTalk results call.
Live call: UK and International +44 (0) 20 3003 2666
Replay (available
for 7 days): UK and International +44 (0) 20 8196 1998
PIN: 0949083#
Contacts:
Investor Relations: Tim Warrington +44 (0) 20 3417 1821
Media: Iain Wood +44 (0) 79 9078 5019
FY19 financial results (1,2,3)
Base growth in all four quarters of the year means we went
through FY19 with a larger customer base and this, coupled with our
ambition to upgrade customers to faster, more reliable and ARPU
accretive Fibre products, has seen us increase Headline revenue
(excluding Carrier and Off-net) year on year by 2.2%. This growth
has been in the face of continued FLPP ARPU dilution, with higher
ARPU legacy customers migrating onto lower price packages, and
continued fixed line voice usage declines, due to consumers and
businesses using their landline less and less. At a gross margin
level, we have seen improved profit margins, due to lower Fibre
wholesale rates, with regulatory pricing (wholesale local access
(WLA) market review) and commercial discounts reducing our input
costs year on year. Throughout the year we have also been on a
relentless drive to simplify the business, doing fewer things and
focusing solely on core fixed connectivity, which has enabled us to
materially reduce our operating costs. Headline EBITDA has
therefore grown by 16.7% to GBP237m (FY18 restated: GBP203m).
As a result of simplifying the business over the last two years,
we have been able to reduce non-Headline items pre-tax from GBP115m
to GBP42m, with costs relating to the HQ move to Salford and our
multi-year network and IT transformation programme being the main
drivers of the remaining spend. This reduction alongside Headline
EBITDA growth has seen our Statutory loss before tax reduce from
GBP100m to GBP5m in the year.
Q4 trading - continued base growth and accelerating Fibre
penetration in a competitive market (1,2,3)
Q4 saw us continue to increase our focus on accelerating Fibre
growth, enabling us to add a record 152k to the Fibre base (Q4
FY18: 98k), exceeding the previous record quarters in Q2 (125k) and
Q3 (146k). The continued rise in net adds is driven both by
upgrading existing and re-contracting customers, as well as 71% of
new customers choosing to take one of our higher speed products
throughout Q4 (Q3 FY19: 66%).
Similarly, to the first quarter of the year, Q4 saw a large
number of FLPP customers come to the end of their contract. In this
context, we have been very pleased with high levels of
re-contracting, meaning churn only increased slightly from 1.16% in
Q3 to 1.21% in Q4, and the proportion of Consumer customers in
contract stayed broadly flat at 68% (Q3 FY19: 71%).
Our focus on accelerating Fibre mix and on existing customer
retention, against the backdrop of a competitive market, meant that
overall base growth was impacted, with 2k net adds for the quarter
(Q4 FY18: 109k), with growth in B2B offsetting a modest decline in
Consumer. With Copper fast becoming a declining product, shifting
our focus to Fibre is the right thing for us and the customer.
Fibre customers benefit from faster, more reliable connectivity,
whilst for us these customers are accretive to customer lifetime
value (CLV) with higher ARPU and lower churn and cost to serve.
The main revenue growth drivers, On-net and Data revenue, both
saw continued strong growth in Q4, with On-net revenue (comprising
Consumer, Wholesale and Direct B2B broadband) up 4.3% year on year
to GBP318m, driven by a larger average base and increased Fibre
penetration, offset by continued Consumer voice usage decline.
On-net ARPU continues to stabilise at GBP24.72 (Q3 FY19: GBP24.70,
Q4 FY18: GBP24.89), with Consumer ARPU growth, offset by the
Wholesale and Retail base mix. Within Corporate, Data revenue was
up 2.4% to GBP43m driven by a larger average base, as well as
upselling customers to higher speed and higher ARPU services.
Total Headline revenues of GBP387m excluding Carrier (GBP10m)
and Off-net (GBP3m) fell by 1.8% year on year during the quarter.
The main driver of this was a 44.7% decline in legacy Corporate
Voice (GBP26m), where the prior year number was increased by a
one-off re-allocation of revenues from Carrier, giving a larger
than usual quarterly Voice figure (Q4 FY18: GBP47m vs quarterly
average for FY18 of GBP33m).
(1) All customer KPIs relate to the On-net base. The closing
Off-net base represented less than 1% of the total broadband base
(FY19: 29k, FY18: 43k).
(2) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
(3) See note 1 for an explanation of alternative performance
measures (APMs) and non-Headline items. See note 4 for a
reconciliation of Headline information to Statutory
information.
CEO review
Core business performance (1,2,3)
Two years ago, we set out our strategy to be Britain's leading
value provider of core fixed connectivity. We said we would return
the customer base to growth, whilst radically simplifying TalkTalk
to focus on fewer priorities as a leaner, more efficient
business.
Two years on, our strategy is working, and we are well
positioned to execute our plan. FY19 saw us sustain our strong
customer growth, with 150k broadband net adds (FY18: 192k). We have
now seen nine consecutive quarters of base growth.
FY19 saw the benefits of a bigger base translate into improved
financial performance. Together with strong Consumer and B2B demand
for faster, higher ARPU services, Headline revenue (excluding
Carrier and Off-net) grew 2.2% to GBP1,544m. The high take-up of
faster services means Group ARPU continues to stabilise, with
Consumer ARPU growing as planned. This, combined with the benefits
of sustained cost reduction as we create a simpler, leaner
TalkTalk, means Headline EBITDA grew 16.7% to GBP237m (including
FibreNation costs). That means we exit the year with a larger, more
profitable customer base.
Crucially, the market dynamics continue to validate our
strategy. Demand for fixed connectivity continues to rise, with
data usage up 30-40% year on year, driven in part by streaming
services which are replacing the need for traditional premium TV
offerings. That is why our simplification to focus on fixed
connectivity whilst relentlessly reducing our central costs remains
the right approach. In an uncertain economic climate where price
really matters, our structural price advantage means TalkTalk is
well positioned to benefit as the only scale, value provider.
Consumer (1)
The Consumer business continues to benefit from the significant
increase in demand for Fibre products. We had our strongest ever
year of Fibre net adds, at 490k (FY18: 348k), including a record
152k in Q4 (Q4 FY18: 98k), where 71% of new customers took a Fibre
product (Q4 FY18: 45%). Fibre customers come at a higher ARPU and
the improved reliability of the products leads to lower cost to
serve, higher satisfaction and lower churn. The profitability of
our Fibre base was also materially improved by a significant
reduction in the wholesale price we pay Openreach for Fibre
products. This was delivered through a combination of regulatory
reductions and a commercial discount arrangement with Openreach.
That allows us to continue upgrading customers to future-proofed
services whilst continuing to grow EBITDA.
The Consumer business continues to offer a structurally fairer
proposition in the market. The introduction of Fixed Low Price
Plans (FLPP) has brought greater parity to the price paid by new
and existing customers. As part of our interim financial results
presentation, we highlighted that the average monthly price
differential paid by new and existing customers was GBP1-2 per
month, compared to GBP13-15 elsewhere in the market. That means the
Consumer business is well positioned to benefit from forthcoming
regulatory intervention designed to reduce the 'loyalty penalty'
paid by existing customers.
A combination of our FLPP and the mix-shift towards Fibre
products has seen the business bring churn down to 1.20% for FY19
(FY18: 1.22%). This is particularly significant given a record
number of customers came to the end of their first FLPP throughout
the year, enabling them to leave penalty free. Careful base
management and improved customer satisfaction ensured
re-contracting rates performed ahead of target, enabling us to
sustain our ongoing low churn.
TalkTalk Business
TalkTalk Business continued its strong growth in FY19, as it
cemented its position as one of the few scale B2B challengers to
BT. We continue to have the UK's largest wholesale broadband base,
with more than 50% market share.
In FY19, we restructured TalkTalk Business to maximise future
growth. The vast majority of B2B revenue (83%) and EBITDA comes
from our indirect business, where we wholesale connectivity to a
network of partners and resellers, which then sell it to end
customers. Whilst these customers typically have lower ARPU, they
also have much lower cost to serve, as partners and resellers
absorb the cost and complexity of issues like billing and customer
care. When combined with significantly lower subscriber acquisition
costs, it means indirect customers are equally as profitable as
ones we serve and manage directly.
Our Direct business, where we sell to end customers and manage
their service ourselves, is comparatively smaller, accounting for
17% of B2B revenue. We announced earlier in the year that we would
not be proceeding with the planned sale of the Direct business to
Daisy. Since then, to ensure we maximise the growth potential we
see for Direct, we have now structured it as a stand-alone business
division. This ensures it receives dedicated management focus as we
grow the business and continue to improve the quality of service we
provide to our Direct customers. We are no longer in a sale process
and have renewed focus on serving small, medium and large B2B
customers directly.
(1) All customer KPIs relate to the On-net base. The closing
Off-net base represented less than 1% of the total broadband base
(FY19: 29k, FY18: 43k).
(2) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
(3) See note 1 for an explanation of alternative performance
measures (APMs) and non-Headline items. See note 4 for a
reconciliation of Headline information to Statutory
information.
Network and connectivity
As we have simplified the business, we have been able to better
prioritise our capex on core, fixed connectivity. That has enabled
us to absorb a 30-40% year on year increase in traffic over our
network, whilst improving its performance for customers. This data
increase has largely been driven by video content, such as Netflix,
Amazon Prime and YouTube. We have invested to improve how we
deliver these services. For instance, we extensively cache this
content, effectively storing it on our network, moving it closer to
customers in a way that produces a more seamless viewing
experience, whilst also significantly reducing our costs.
Given our focus on core, fixed connectivity it is essential that
our foundations are strong and that we are able to adapt to the
changing needs of our customers, whilst continuing to scale. As
such, we will continue to incur non-Headline items in relation to
our multi-year network and IT transformation programme, which will
fundamentally restructure the Group's network, IT infrastructure
and technology organisation. This programme is expected to run
until 2021 and underpins the wider Group strategy ensuring that it
is fit for the future.
In FY19, we also launched new digital tools that improve how we
manage customer issues. Our new 'My Service Centre' tool allows
customers to self-diagnose and resolve issues without having to
contact us. Early results show improved customer satisfaction,
whilst reducing our operating costs. It is an important step on our
journey to a self-serve model, using new technology to improve the
quality of service whilst delivering ongoing cost reduction.
Fibre for Everyone
As Consumer and B2B customers increasingly demand faster, more
reliable services, it is crucial TalkTalk has a clear strategy to
offer a more diverse range of Fibre products that can accommodate
different needs.
In FY19 we launched Fibre for Everyone, a cross-group initiative
to ensure we are well positioned to benefit from existing and
future Fibre demand. In the short term, that means migrating a
greater proportion of our base onto Fibre to the Cabinet (FTTC)
services and ensuring TalkTalk is a fast adopter of products such
as Single Order Generic Ethernet Access (SOGEA) and G.Fast.
The only long term solution to rising demand, however, remains
Full Fibre. FY19 saw us make significant progress on our plan to
use our scale to unlock greater Full Fibre investment and ensure
the maximum number of customers benefit from gigabit services. We
launched FibreNation as a wholly owned subsidiary of TalkTalk and
initiated a formal process to identify the right long term funding
partner as it rolls out gigabit services to three million premises
as an independent company. In the meantime, we accelerated the
rollout to three additional towns and cities, Harrogate,
Knaresborough and Ripon, with building due to start in summer 2019.
That means the value of our asset increases as we finalise the long
term funding arrangement. In the areas not served by FibreNation,
we intend to wholesale Full Fibre services from Openreach and
potentially others. The Fibre for Everyone programme will ensure
the business is well positioned to negotiate access to the services
our customers need at a price they can afford.
Cost reduction (3)
We continue to make good progress in resetting TalkTalk as a
simpler, lower cost business. We have transitioned to selling
non-core products, such as mobile and TV, in a capital light way.
We have also significantly reduced the cost of providing our core
Fibre broadband services, through a meaningful reduction in the
wholesale cost we pay Openreach. Our operating costs will further
reduce as we roll out new digital tools that allow customers to
self-serve, such as 'My Service Centre'. 2019 also saw us complete
a rigorous review of all external spend, as we ensure our costs
reflect our simplified business.
As part of this radical simplification process, there is
significant opportunity to create a leaner, more efficient
operating model, as we focus on fewer priorities. In FY18 we
consolidated two offices, in Irlam and Warrington, onto a single
site, the Soapworks in Salford. The move has improved
collaboration, created a more agile culture and enabled us to
better recruit and retain critical talent. We are therefore going
further, relocating our headquarters from London and making the
Soapworks the single main campus for the business. The vast
majority of London roles will transition to the North West by
January 2020, with recruitment and hiring already underway. Whilst
the move will incur non-Headline costs of approximately GBP30m, of
which GBP22m has been recognised in FY19, we expect it to generate
annualised savings of c.GBP25m-GBP30m, with c.GBP16m-GBP20m of this
realised in FY20. This is an important move for the business as we
realise the financial benefits of our ongoing simplification.
(3) See note 1 for an explanation of alternative performance
measures (APMs) and non-Headline items. See note 4 for a
reconciliation of Headline information to Statutory
information.
Outlook (1,2,3)
As a consequence of our hard work and disciplined focus over the
last two years, the fundamentals of this business are now much
stronger. We have pivoted the customer base back to growth and the
trends on ARPU, churn and cost reduction are positive. That is
already delivering improved financial performance, with FY19
Headline EBITDA growth of 16.7%.
We remain confident in FY20 EBITDA growth, with Headline EBITDA
(including FibreNation costs) in line with market expectations.
This growth is underpinned by:
-- accelerating Fibre mix, modest base growth and adoption of fairly priced
add-ons, leading to moderately growing ARPU, offset by ongoing voice
usage decline;
-- regulatory and commercial tailwinds in costs of goods sold, as Ofcom's
WLA and BT Openreach commercial discounts continue to reduce the amount
we pay for wholesale FTTC services; and
-- relentless cost reduction, with lower cost to serve, as we benefit from
the implementation of our 'My Service Centre' tool and a self-service
model; lower central costs, as the financial benefits of our HQ move
to Salford feed through into the financials (GBP16m-GBP20m in FY20);
and significantly lower FibreNation costs.
As we look beyond FY20 and into the medium term, with the
customer base now larger and more stable, we can afford to be even
more disciplined on the cohorts of customers we acquire based on
customer lifetime value (CLV) analysis. Going forward, our focus on
growth remains, but shifts towards growing the Fibre mix within the
base, as copper fast becomes a legacy product. The improved
economics of Fibre customers, with higher ARPU and lower churn and
cost to serve, alongside our structural price advantage and
materially lower cost base, will lead to sustained revenue and ARPU
growth and continued EBITDA improvement.
(1) All customer KPIs relate to the On-net base. The closing
Off-net base represented less than 1% of the total broadband base
(FY19: 29k, FY18: 43k).
(2) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
(3) See note 1 for an explanation of alternative performance
measures (APMs) and non-Headline items. See note 4 for a
reconciliation of Headline information to Statutory
information.
CFO review
Financial information (1,2,3)
2019 2018 (restated (1) )
----------------------------------------
Headline Non-Headline Headline Non-Headline
(1,2) (1,2) Statutory (1,2) (1,2) Statutory
GBPm GBPm GBPm GBPm GBPm GBPm
---------------- --------------- ------------ --------- -------------- -------------
Revenue 1,609 23 1,632 1,605 48 1,653
Cost of sales (759) (11) (770) (774) (38) (812)
---------------- --------------- ------------ --------- -------------- ------------- --------------
Gross profit 850 12 862 831 10 841
Operating
expenses (613) (46) (659) (628) (103) (731)
---------------- --------------- ------------ --------- -------------- ------------- --------------
EBITDA 237 (34) 203 203 (93) 110
---------------- --------------- ------------ --------- -------------- ------------- --------------
Depreciation and
amortisation (138) (8) (146) (131) (12) (143)
Share of results
of joint
ventures (10) - (10) (11) - (11)
---------------- --------------- ------------ --------- -------------- ------------- --------------
Operating
profit/(loss) 89 (42) 47 61 (105) (44)
Net finance
costs (52) - (52) (46) (10) (56)
---------------- --------------- ------------ --------- -------------- ------------- --------------
Profit/(loss)
before
taxation 37 (42) (5) 15 (115) (100)
Taxation 32 5 37 (22) 22 -
---------------- --------------- ------------ --------- -------------- ------------- --------------
Profit/(loss)
for the
year
attributable to
the owners of
the Company 69 (37) 32 (7) (93) (100)
---------------- --------------- ------------ --------- -------------- ------------- --------------
Earnings/(loss)
per share
Basic 6.0 2.8 (0.7) (10.3)
Diluted 6.0 2.8 (0.7) (10.1)
---------------- --------------- ------------ --------- --------------- ----------------------------
2018
2019 (restated (1,2) )
Revenue summary GBPm GBPm
-----
On-net 1,263 1,216
Corporate 333 367
Off-net 13 22
------------------------------------------------- ----- -------------------
Headline revenue 1,609 1,605
Less Carrier (52) (72)
Less Off-net (13) (22)
------------------------------------------------- ----- -------------------
Headline revenue (excluding Carrier and Off-net) 1,544 1,511
------------------------------------------------- ----- -------------------
Throughout this CFO review, alternative performance measures
(APMs) are presented as well as Statutory measures and these
measures are consistent with prior periods. This presentation is
also consistent with the way that financial performance is measured
by management, reported to the Board, the basis of financial
measures for senior management's compensation schemes and provides
supplementary information that assists the user to understand the
financial performance, position and trends of the Group.
The Group has adopted a full retrospective approach to IFRS 15
'Revenue from Contracts with Customers' and IFRS 9 'Financial
Instruments' and therefore restated the prior period to reflect the
updated accounting policies and present a relevant comparative.
More details on the restatement are provided in the notes to the
consolidated financial statements.
Overview (1,2,3)
Continued base growth in all four quarters of the year means we
have now seen positive net adds for nine consecutive periods. The
resulting larger customer base, coupled with our ambition to
upgrade customers to faster, more reliable and ARPU accretive Fibre
products has seen us increase Headline revenue (excluding Carrier
and Off-net) year on year by 2.2%. This growth has been in the face
of continued FLPP ARPU dilution, with higher ARPU legacy customers
migrating onto lower price packages, and continued fixed line Voice
usage declines, due to consumers and businesses using their
landline less and less. At a gross margin level, we have seen
improved profit margins, due to lower Fibre wholesale rates, with
regulatory pricing and commercial discounts reducing our input
costs year on year. Throughout the year we have also been on a
relentless drive to simplify the business, doing fewer things and
focusing solely on core fixed connectivity, which has enabled us to
reduce our operating costs. Headline EBITDA has therefore grown by
16.7% to GBP237m (2018 restated: GBP203m).
(1) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
(2) See note 1 for an explanation of alternative performance
measures (APMs) and non-Headline items. See note 4 for a
reconciliation of Headline information to Statutory
information.
(3) All customer KPIs relate to the On-net base. The closing
Off-net base represented less than 1% of the total broadband base
(FY19: 29k, FY18: 43k).
As a result of simplifying the business over the last two years,
we have been able to reduce non-Headline items pre-tax from GBP115m
to GBP42m, with costs relating to the HQ move to Salford and our
multi-year network and IT transformation programme being the main
drivers of the remaining spend. This reduction alongside Headline
EBITDA growth has seen our Statutory loss before tax reduce from
GBP100m to GBP5m in the year. We have kept net debt (including
finance leases of GBP39m) broadly flat at GBP781m (2018 restated:
GBP776m including finance leases of GBP31m) and committed headroom
as at 31 March 2019 of GBP306m (2018 restated: GBP348m).
Group revenue (1,2,3)
Headline revenue (excluding Carrier and Off-net) (2) of
GBP1,544m was 2.2% higher year on year with On-net revenues up 3.9%
but Corporate revenues (excluding Carrier) 4.7% lower. The growth
in On-net revenues reflects the higher average Consumer and
Business bases compared to 2018 together with the increased
penetration of Fibre partly offset by FLPP ARPU dilution and
Consumer Voice revenue decline, which was down 20.3% year on year
due to lower usage of the platform. The contraction in Corporate
revenues was primarily due to Voice, which was down 18.8% on the
prior year, being offset by a 6.8% increase in Data revenue
reflecting a larger average base, as well as the upselling of
customers to higher speed and higher ARPU services.
The Group's total Headline revenue only grew by 0.2% to
GBP1,609m, with the growth above dampened by a 27.8% decline in
Carrier revenue, reflecting our decision to reduce activity in the
low margin business, as well as the expected continued decline in
Off-net revenues by GBP9m, which now represent less than 1% of
total Group revenue. Statutory revenue declined 1.3% due to MVNO
revenues which are down GBP25m year on year to GBP23m as we wind
down this business.
Gross margin (2,3)
Headline gross margin of 52.8% was 100bps higher year on year
reflecting the revenue benefits noted above and lower costs of
sales resulting from the WLA review and BT Openreach volume
discounts on FTTC products.
Statutory gross margin of 52.8% was 190bps higher year on year
reflecting the reasons above as well as the improvement in gross
margin of our MVNO proposition.
Operating expenses (2,3)
Headline operating expenses decreased by GBP15m year on year due
to reduced headcount across the business, disposal of small
customer bases, lower outsource partner costs and the benefits of
transitioning to a more self-serve model which have produced
significant savings in our costs to serve offset by FibreNation
costs and higher commissions incurred under a distribution
agreement with a major distribution partner and increased
investment in targeted channels.
The Group has moved to lower cost customer acquisition and
marketing models during the year; however, the benefits of this
were more than offset in the year by a higher base of customers
connected through a previous distribution agreement.
Statutory operating expenses were down GBP72m year on year as
non-Headline items reduced from GBP103m to GBP46m. See further
information on non-Headline items below.
Headline EBITDA (2,3)
Headline EBITDA increased by 16.7% to GBP237m (2018 restated:
GBP203m) reflecting the factors noted above.
Depreciation and amortisation
Headline depreciation and amortisation expense has increased
GBP7m year on year due to accelerated depreciation on certain
assets following the continued reassessment of useful economic
lives.
Share of results of joint ventures
Our share of results of joint ventures was marginally lower year
on year at GBP10m and consists of the Group's investment in
YouView.
Net finance costs
Statutory finance costs for the year were GBP52m compared to
GBP56m in 2018. This decrease was primarily due to the GBP10m in
relation to the non-Headline cost of repurchasing 100% of the $185m
USPP Notes in August 2017 and the re-financing during 2018,
partially offset by higher average net debt in 2019.
Taxation
The Statutory tax credit for the year of GBP37m is mainly due to
the recognition of deferred tax losses following agreement on loss
streaming methodology with HM Revenue & Customs.
(1) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
(2) See note 1 for an explanation of alternative performance
measures (APMs) and non-Headline items. See note 4 for a
reconciliation of Headline information to Statutory
information.
(3) All customer KPIs relate to the On-net base. The closing
Off-net base represented less than 1% of the total broadband base
(FY19: 29k, FY18: 43k).
Non-Headline items (2)
2019 2018
(restated
(1,2) )
--------------------------------------------------
GBPm GBPm
-------------------------------------------------- ----- ------------
MVNO closure 3 (42)
Network transformation (15) (17)
One Team operating model (22) -
Business reorganisation - (19)
Operating efficiencies - Property - (12)
Operating efficiencies - Making TalkTalk Simpler - (3)
-------------------------------------------------- ----- ------------
EBITDA (34) (93)
Depreciation and amortisation (8) (12)
Finance costs - (10)
Taxation 5 22
Non-Headline items (37) (93)
-----
(1) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
(2) See note 1 for an explanation of alternative performance
measures (APMs) and non-Headline items. See note 4 for a
reconciliation of Headline information to Statutory
information.
Within the Group's Statutory EBITDA there were non-Headline
items of GBP34m (2018: GBP93m) associated with the moving of our
head office to Salford and various transformation projects.
Following the Group's announcement in May 2017 to exit our MVNO
operations, the base has been wound down, leaving only a core base
of profitable customers remaining, resulting in trading profits of
GBP3m in the year, compared to a GBP9m loss in 2018. The Group
continues to transition from a wholesale agreement with Vodafone to
a mobile distribution agreement with Telefonica. The wholesale
agreement with Vodafone has been extended to support the smooth
transition of remaining customers. The MVNO trading activity will
continue to diminish with contractual commitments expiring in 2021.
Additionally, in the prior year the Group incurred exit costs in
relation to onerous supplier commitments, decommissioning, asset
write offs and redundancies totalling GBP33m, that were not
repeated in 2019.
Our multi-year network and IT transformation programme continued
during the year incurring costs of GBP15m (2018: GBP17m) which will
fundamentally restructure the Group's network, IT infrastructure
and technology organisation. This programme is expected to run
until 2021 and underpins the wider Group strategy ensuring that it
is fit for the future.
The Group incurred GBP22m (2018: GBP34m) in relation to
reorganisation programmes associated with the movement of our head
office to Salford, where 2018 costs are mainly associated with
implementing changes to the Group's organisational structure under
the new leadership team and the rationalisation of our property
estate.
Non-Headline depreciation and amortisation largely relate to
amortisation of acquisition intangibles as well as depreciation and
amortisation associated with reorganisation programmes noted above.
Non-Headline finance costs incurred in the prior year primarily
relate to the cost of repurchasing 100% of our $185m USPP Notes in
August 2017.
Earnings per share
2018
(restated (1,2)
2019 )
----
Headline earnings (GBPm) 69 (7)
Basic EPS 6.0p (0.7p)
Diluted EPS 6.0p (0.7p)
-------------------------- ---- ----------------
Statutory earnings (GBPm) 32 (100)
Basic EPS 2.8p (10.3p)
Diluted EPS 2.8p (10.1p)
-------------------------- ---- ----------------
(1) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
(2) See note 1 for an explanation of alternative performance
measures (APMs) and non-Headline items. See note 4 for a
reconciliation of Headline information to Statutory
information.
EPS on a Headline basis is provided alongside our Statutory
measures to assist in providing supplementary information that
assists the user to understand better the financial performance,
position and trends of the Group. A full reconciliation to
Statutory results can be found in note 4.
Basic Headline EPS was 6.0p (2018: (0.7p)) and on a Statutory
basis it was 2.8p (2018: (10.3p)). The year on year increase in EPS
reflects the increase in net profit described above.
Net debt and cash flow
2018
(restated (1,2)
2019 )
GBPm GBPm
-----
Opening net debt (1,2) (776) (819)
Headline EBITDA (1,2) 237 203
Working capital 11 (3)
Capital expenditure (113) (128)
Interest and taxation (50) (47)
Non-Headline items (1,2) (47) (73)
Acquisitions (7) (8)
Dividends (28) (71)
Share Issue - 201
Finance leases - non-cash movement (8) (31)
Closing net debt (1,2) (781) (776)
-----
(1) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
(2) See note 1 for an explanation of alternative performance
measures (APMs) and non-Headline items. See note 4 for a
reconciliation of Headline information to Statutory
information.
Net debt of GBP781m (including finance leases of GBP39m) was
broadly flat year on year (FY18: GBP776m (1) including finance
leases of GBP31m). Committed headroom at 31 March 2019 was GBP306m
(2018: GBP348m).
The Group had a net working capital inflow of GBP11m (2018:
GBP3m outflow) driven by the timing of supplier payments, which
will reverse, and the receipt of supplier compensation relating to
prior years.
Capital expenditure for the year was GBP113m (2018: GBP128m),
representing a decrease on prior year due to the simplification of
the business. This expenditure is primarily for continued
investment and enhancement of our network capability, investment in
FibreNation (GBP13m) and in our online systems.
Non-Headline items of GBP47m (2018: GBP73m) relate to the cash
outflows resulting from the decision to exit our MVNO operations
and the ongoing network transformation programme in addition to the
initial costs associated with the movement of our HQ to
Salford.
Acquisitions expenditure in the year of GBP7m (2018: GBP8m) has
broadly remained consistent with 2018 and continues to relate to
the YouView joint venture.
Dividends
Dividends of GBP28m paid in the year (2018: GBP71m) comprised
the final dividend for 2018 of 1.50p and the interim dividend for
FY19 of 1.00p.
The Board is committed to improving profitability, cash
generation and reducing leverage. In this context, the Board has
declared a final dividend for FY19 of 1.50p (2018: 1.50p), taking
the total dividend for the year to 2.50p (2018: 4.00p). For FY20
the Board expects to declare an interim cash dividend of 1.00p
(FY19: 1.00p) and a final cash dividend of 1.50p (FY19: 1.50p)
taking the total cash dividend for the year to 2.50p (FY19: 2.50p).
Looking beyond FY20, the Board expects to return to a more
normalised dividend policy once the business has reduced leverage
towards the Group's mid term net debt/Headline EBITDA target of
2.0x.
The final dividend for FY18 will be paid on 2 August 2019,
subject to approval at the AGM on 17 July 2019 for shareholders on
the register on 5 July 2019 (ex-dividend 4 July 2019).
Funding and capital structure
The Group is financed through a combination of bank facilities,
Senior Notes, receivables purchase facility, supply chain
financing, invoice discounting, retained profits and equity.
The Group continues to review its funding and capital structure
with the objectives of diversifying sources and managing both the
average tenor and interest cost. The average term of our debt at 31
March 2019 was two years ten months.
At 31 March 2019, the Group had total committed facilities of
GBP1,115m (2018: GBP1,115m), further detail of which is given in
the notes to the consolidated financial statements. At 31 March
2019, GBP809m (2018 restated: GBP767m) had been drawn under these
facilities, leaving GBP306m (2018 restated: GBP348m) of undrawn
facilities.
The Group was in compliance with the terms of all its
facilities, including the financial covenants, at 31 March 2019 and
throughout the year and expects to remain in compliance with the
terms going forward.
Going concern
The Directors have acknowledged the guidance 'Going Concern and
Liquidity Risk: Guidance for Directors of UK Companies 2009',
published by the FRC in October 2009.
Our business activities, together with the factors likely to
affect our future development, performance and position are set out
in the Business Review. Our financial position, cash and borrowing
facilities are described within this CFO review.
The breadth of our base, our value for money proposition,
continuing improvements in operating efficiency and the largest
unbundled network in the UK mean that the Directors are confident
in our ability to continue to compete effectively in the UK
telecoms sector.
We have GBP1,115m of committed credit facilities and as at 31
March 2019 the headroom on these facilities was GBP306m. Our
forecasts and projections, after assuming a soft/no Brexit, and
taking into account reasonably possible changes in trading
performance indicate that there is sufficient cash and covenant
headroom on our facilities. In considering reasonably possible
sensitivities, we have identified feasible mitigating actions and
cash management activities together with the use of additional,
currently uncommitted, facilities within our control to ensure
covenants are not breached. This, together with our market
positioning, means that we are well placed to manage our business
risks successfully and have adequate resources to continue in
operational existence for the foreseeable future. The Directors
have therefore adopted the going concern basis of accounting
preparing the financial statements.
Consolidated income statement
For the year ended 31 March 2019
2019 2018 (restated) (1)
------------------------------------ ------------------------------------
Notes Headline Non-Headline Statutory Headline Non-Headline Statutory
(2) (2)
------------------------- -------
(note (note
4) (2) 4) (2)
------------------------- -------
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- ------- --------- ------------- ---------- --------- ------------- ----------
Revenue 2 1,609 23 1,632 1,605 48 1,653
Cost of sales (759) (11) (770) (774) (38) (812)
------------------------- ------- --------- ------------- ---------- --------- ------------- ----------
Gross profit 850 12 862 831 10 841
Operating expenses
(2) (613) (46) (659) (628) (103) (731)
------------------------- ------- --------- ------------- ---------- --------- ------------- ----------
EBITDA (3) 4 237 (34) 203 203 (93) 110
Depreciation and
amortisation (138) (8) (146) (131) (12) (143)
Share of results
of joint ventures (10) - (10) (11) - (11)
------------------------- ------- --------- ------------- ---------- --------- ------------- ----------
Operating profit/(loss) 4 89 (42) 47 61 (105) (44)
Net finance costs (52) - (52) (46) (10) (56)
------------------------- ------- --------- ------------- ---------- --------- ------------- ----------
Loss before taxation 4 37 (42) (5) 15 (115) (100)
Taxation 4 32 5 37 (22) 22 -
------------------------- ------- --------- ------------- ---------- --------- ------------- ----------
Profit/(loss) for
the year attributable
to the owners of
the Company 4 69 (37) 32 (7) (93) (100)
------------------------- -------
Earnings/(loss) per
share
Basic (p) 5 2.8 (10.3)
Diluted (p) 5 2.8 (10.1)
------------------------- ------- --------- ------------- ---------- --------- ------------- ----------
(1) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
(2) Operating expenses includes GBP11m (2018: GBP20m) of credit
losses on financial assets.
(3) See note 1 for an explanation of Alternative Performance
Measures (APMs) and non-Headline items. See note 4 for a
reconciliation of Headline information to Statutory
information.
Consolidated statement of comprehensive income
For the year ended 31 March 2019
2018
(restated)
2019 (1)
GBPm GBPm
------------------------------------------------------ --- ----- -----------
Profit/(loss) for the year attributable to the owners
of the Company 32 (100)
----------------------------------------------------------- ----- -----------
Other comprehensive income
Items that may be reclassified to profit or loss:
Gain on a hedge of a financial instrument - 2
Gain on a hedge reclassified to income statement - 6
----------------------------------------------------------- ----- -----------
Total other comprehensive income - 8
----------------------------------------------------------- ----- -----------
Total comprehensive income/(expense) attributable
to the owners of the Company 32 (92)
----------------------------------------------------------- ----- -----------
(1) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
Consolidated balance sheet
2018
(restated)
2019 (1)(2)
As at 31 March 2019 Notes GBPm GBPm
---------------------------------------- ----- ------- -----------
Non-current assets
Goodwill 495 495
Other intangible assets 235 251
Property, plant and equipment 199 234
Investment in joint venture 2 3
Trade and other receivables 2 2
Contract costs 308 228
Deferred tax assets 118 81
---------------------------------------- ----- ------- -----------
1,359 1,294
---------------------------------------- ----- ------- -----------
Current assets
Inventories 34 29
Trade and other receivables 160 246
Contract assets 39 20
Cash and cash equivalents 67 43
---------------------------------------- ----- ------- -----------
300 338
---------------------------------------- ----- ------- -----------
Assets classified as held for sale (2) 47 34
---------------------------------------- ----- ------- -----------
Total assets 1,706 1,666
---------------------------------------- ----- ------- -----------
Current liabilities
Trade and other payables (491) (480)
Contract liabilities (20) (16)
Borrowings 6 (10) (96)
Provisions (35) (31)
---------------------------------------- ----- ------- -----------
(556) (623)
---------------------------------------- ----- ------- -----------
Liabilities classified as held for sale (7) (6)
---------------------------------------- ----- ------- -----------
Non-current liabilities
Trade and other payables (5) (6)
Borrowings 6 (838) (723)
Provisions (12) (28)
---------------------------------------- ----- ------- -----------
(855) (757)
---------------------------------------- ----- ------- -----------
Total liabilities (1,418) (1,386)
---------------------------------------- ----- ------- -----------
Net assets 288 280
---------------------------------------- ----- ------- -----------
Equity
Share capital 1 1
Share premium 684 684
Translation reserve (64) (64)
Demerger reserve (513) (513)
Retained earnings and other reserves 180 172
---------------------------------------- ----- ------- -----------
Total equity 288 280
---------------------------------------- ----- ------- -----------
(1) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
(2) See note 1 for further details on the restatement of the
assets classified as held for sale.
Consolidated cash flow statement
For the year ended 31 March 2019
2018
(restated)
2019 (1)
Notes GBPm GBPm
----------------------------------------------------- ----- ----------------- -----------
Operating activities
Operating profit/(loss) 47 (44)
Share-based payments 3 8
Depreciation of property, plant and equipment 71 72
Amortisation of other operating intangible assets 67 62
Amortisation of acquisition intangibles 8 9
Share of losses of joint ventures 10 11
Impairment of other operating intangible assets - 2
Reversal of cost of inventories previously written
down (2) (1)
Gain on disposal of customer base (2) -
Gain on disposal of joint venture - (1)
(Decrease)/increase in provisions (12) 23
----------------------------------------------------- ----- ----------------- -----------
Operating cash flows before movements in working
capital 190 141
Decrease in trade and other receivables 76 39
Increase in contract assets (99) (8)
(Increase)/decrease in inventory (3) 1
Increase/(decrease) in trade and other payables 25 (38)
(Decrease)/increase in contract liabilities 4 1
----------------------------------------------------- ----- ----------------- -----------
Cash flows generated from operating activities 193 136
Income taxes paid (1) -
----------------------------------------------------- ----- ----------------- -----------
Net cash flows generated from operating activities 192 136
----------------------------------------------------- ----- ----------------- -----------
Investing activities
Acquisition of subsidiaries and joint ventures,
net of cash acquired (9) (8)
Disposal of customer bases 2 -
Investment in intangible assets (67) (87)
Investment in property, plant and equipment (37) (38)
Cash flows used in investing activities (111) (133)
----------------------------------------------------- ----- ----------------- -----------
Financing activities
Settlement of Group ESOT shares 1 1
Issue of shares - 201
Repayments of obligations under finance leases (9) (4)
Repayments of borrowings (27) (391)
Drawdown of borrowings 55 309
Interest paid (43) (42)
Other finance costs (6) (13)
Equity dividends paid 3 (28) (71)
----------------------------------------------------- ----- ----------------- -----------
Cash flows used in financing activities (57) (10)
----------------------------------------------------- ----- ----------------- -----------
Net increase/(decrease) in cash and cash equivalents 24 (7)
Cash and cash equivalents at the start of the
year 43 50
----------------------------------------------------- ----- ----------------- -----------
Cash and cash equivalents at the end of the year 6 67 43
----------------------------------------------------- ----- ----------------- -----------
(1) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
Consolidated statement of changes in equity
For the year ended 31 March 2019
Retained
earnings
Share Share Translation Demerger and other Total
capital premium reserve reserve reserves equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
At 1 April 2017 as previously
reported 1 684 (64) (513) 32 140
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Change in accounting policies
in respect of IFRS 9 and IFRS
15 (net of tax) 1 - - - - 89 89
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
At 1 April 2017 (restated)
(1) 1 684 (64) (513) 121 229
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Loss for the year (restated) - - - - (100) (100)
Other comprehensive income
Items that may be reclassified
to profit or loss:
Gain on hedge of a financial
instrument - - - - 2 2
Gain on hedge of a financial
instrument - - - - 6 6
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Total other comprehensive income - - - - 8 8
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Total comprehensive expense
(restated) - - - - (92) (92)
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Transactions with the owners
of the Company
Share-based payments - - - - 12 12
Settlement of Group ESOT shares - - - - 1 1
Issue of shares - - - - 201 201
Equity dividends 3 - - - - (71) (71)
Total transactions with the
owners of the Company - - - - 143 143
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
At 31 March 2018 (restated) 1 684 (64) (513) 172 280
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Profit for the year - - - - 32 32
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Total comprehensive income - - - - 32 32
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Transactions with the owners
of the Company
Share-based payments - - - - 3 3
Settlement of Group ESOT shares - - - - 1 1
Equity dividends 3 - - - - (28) (28)
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Total transactions with the
owners of the Company - - - - (24) (24)
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
At 31 March 2019 1 684 (64) (513) 180 288
--------------------------------- ------ -------- -------- ----------- -------- ---------- -------
(1) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
1. Basis of preparation
The financial information is derived from the Group's
consolidated financial statements for the year ended 31 March 2019,
which have been prepared on the going concern basis in accordance
with International Financial Reporting Standards (IFRS) as adopted
for use in the European Union, IFRS Interpretations Committee and
those parts of the Companies Act 2006 (the Act) applicable to
companies reporting under IFRS. The financial statements have been
prepared on the historical cost basis, except for the revaluation
of certain financial instruments and investments. The financial
statements are presented in Sterling, rounded to the nearest
million, because that is the currency of the principal economic
environment in which the Group operates.
The consolidated financial statements were approved by the
Directors on 23 May 2019.
The financial information does not constitute statutory accounts
within the meaning of section 435 of the Act or contain sufficient
information to comply with the disclosure requirements of IFRS.
The Company's auditors, Deloitte LLP, have given an unqualified
report on the consolidated financial statements for the year ended
31 March 2019, which did not include reference to any matters to
which the auditors drew attention without qualifying their report
and did not contain any statement under section 498 of the
Companies Act 2006. Subject to approval by the Company's
shareholders, the consolidated financial statements will be filed
with the Registrar of Companies following the Company's Annual
General Meeting on 17 July 2019.
Alternative Performance Measures
The consolidated financial statements include APMs as well as
Statutory measures. These APMs used by the Group are not defined
terms under IFRS and may therefore not be comparable with similarly
titled measures reported by other companies. They are not intended
to be a substitute for, or superior to, GAAP measures. All APMs
relate to the current year results and comparative periods where
provided. This presentation is also consistent with the way that
financial performance is measured by management, reported to the
Board, the basis of financial measures for senior management's
compensation schemes and provides supplementary information that
assists the user in understanding the financial performance,
position and trends of the Group. The APMs were the same as those
that applied to the audited consolidated financial statements for
the year ended 31 March 2018. See note 4 for reconciliation of
Headline information to Statutory information.
During the prior year, the Group refined its policy in relation
to non-Headline items so as to streamline its application, simplify
the Group's reporting and ensure consistency between Headline and
non-Headline performance. In particular, the Board considers that
the recognition of service level related credits should be included
in Headline performance, consistent with the recognition of the
associated costs for which the Group is being compensated. The MVNO
operating result, being in relation to a business being exited, has
also been recognised within non-Headline results. There was no
impact on the Statutory performance of the Group or the Group's
consolidated balance sheet.
Performance is measured based on Headline EBITDA, defined as
operating profit or loss before non-Headline items, as presented to
the CODM. EBITDA is defined as the operating profit or loss before
depreciation, amortisation, share of results of joint ventures, net
finance costs and taxation.
Refer to the Glossary for comprehensive descriptions of all APMs
including their relevance in providing supplementary information
that assists the user to understand better the financial
performance, position and trends of the Group.
Application of significant new or amended EU-endorsed accounting
standards
IFRS 9
The Group has applied IFRS 9 retrospectively and restated
comparatives, to aid comparability of financial performance. The
adjustments arising from the adoption of IFRS 9 are reflected in
the restated balance sheet as at 31 March 2018 with an opening
cumulative effect being recognised in retained earnings as at 1
April 2017.
The application of IFRS 9's impairment requirements at 1 April
2017 and IFRS 15's collectability assessment resulted in a GBP33m
reduction in the Group's retained earnings as at 1 April 2017. A
related net deferred tax asset of GBP5m has also been
recognised.
IFRS 9 introduces new requirements for the following areas:
-- the classification and measurements of financial assets and financial liabilities;
-- impairment of financial assets; and
-- general hedge accounting.
Classification and measurement of financial assets and financial
liabilities
All recognised financial assets that are within the scope of
IFRS 9 are required to be subsequently measured at amortised cost
or fair value on the basis of the Group's business model for
managing financial assets and the contractual cash flow
characteristics.
The Group has not designated any debt investments that meet the
amortised cost or FVTOCI criteria as measured at fair value through
profit or loss (FVTPL).
The Directors of the Company reviewed and assessed the Group's
existing financial assets and liabilities based on the facts and
circumstances upon transition and concluded that the initial
application of IFRS 9 has had no impact on classification and
measurement, apart from the impairment of financial assets noted
below.
Impairment of financial assets
The only material impact on the consolidated financial
statements is in relation to the impairment of trade receivables
within financial assets.
IFRS 9 requires an Expected Credit Loss (ECL) model as opposed
to an incurred credit loss model under previous accounting policies
(IAS 39 'Financial Instruments: Recognition and Measurement'). The
ECL model requires the Group to account for lifetime ECL and
changes in those expected credit losses at each reporting date to
reflect changes in credit risk since initial recognition of the
financial assets. On this basis, it is no longer necessary for a
default event to have occurred before credit losses are recognised.
As a consequence of this change, credit losses are recognised
earlier than under IAS 39.
IFRS 9 requires the Group to assess the risk profile of its
trade receivables. The Group analysed the risk profile of trade
receivables based on past experience and an analysis of the
receivable's current financial position, adjusted for specific
factors, general economic conditions of the industry in which the
receivables operate and assessment of both the current and the
forecast direction of conditions at the reporting date. The Group
has performed the calculation of ECL separately for Consumer and
Business customers and rebutted the assumption under IFRS 9 that
all debts over 90 days should have a credit allowance.
General hedge accounting
In accordance with IFRS 9's transition provisions for hedge
accounting, the Group has applied the IFRS 9 hedge accounting
requirements retrospectively from the date of initial application
on 1 April 2017. The Group's qualifying hedging relationships in
place as at 1 January 2018 also qualified for hedge accounting in
accordance with IFRS 9 and were therefore regarded as continuing
hedging relationships. No rebalancing of any of the hedging
relationships was necessary on 1 April 2017. As the critical terms
of the hedging instruments match those of their corresponding
hedged items, all hedging relationships continue to be effective
under IFRS 9's effectiveness assessment requirements. The Group has
also not designated any hedging relationships under IFRS 9 that
would not have met the qualifying hedge accounting criteria under
IAS 39.
IFRS 15
Background and adoption
IFRS 15 'Revenue from Contracts with Customers' impacts the
amount, timing and recognition of revenue and certain associated
costs, as well as related disclosures. The Group has implemented
IFRS 15 in the current year and has applied the fully retrospective
approach meaning the comparative year has been restated and there
has been a one-off cumulative credit to retained earnings relating
to transition at 1 April 2017 of GBP144m and the recognition of a
GBP27m deferred tax liability.
IFRS 15 requires the Group to apportion revenue earned from
contracts with customers to performance obligations the Group has
with our customers, on the basis of stand-alone selling prices.
This is done through applying a five-step model defined in the
standard:
1. Identify the contract with the customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognise revenue when (or as) the entity satisfies a performance obligation.
In addition to the changes to revenue recognition described
above, IFRS 15 also provides guidance in relation to certain costs
incurred obtaining a contract or fulfilling the contract with the
customer, requiring such costs to be deferred over time.
The Group put in place a cross-functional team to assess the
impact of IFRS 15, determine appropriate accounting policies, and
implement appropriate systems and processes so as to be able to
calculate opening adjustments and ongoing IFRS 15 compliant
financial records. Assessment was also given to other matters such
as implications for employee remuneration, tax, forecasting and
covenant compliance.
Key impacts and changes in accounting policy
The key effects of the application of IFRS 15 are as
follows:
-- Revenue continues to be recognised upfront in relation to
hardware provided to the customer (routers, set top boxes, etc.);
however, whilst previously such revenue was recognised only to the
extent the customer contributed to this hardware, under IFRS 15
revenue is allocated to the hardware based on the relative
stand-alone selling prices of each of the performance obligations
of the contract regardless of their contract pricing. Stand-alone
selling prices are determined by reference to the price at which
the Group sells the individual goods or services stand-alone, their
assessed market value and a cost plus methodology. As the Group
often provides hardware free or at a discounted price to customers,
this results in more revenue being recognised at the commencement
of a contract when the hardware is provided, and less being
recognised over the remainder of the contract as the service is
provided.
-- Connection revenues, being fees charged to the customer to
connect them to the Group's network, were previously recognised at
the point the connection activity has been completed at the
commencement of the contract. Under IFRS 15 such activities are
typically not a performance obligation and therefore the revenue
forms part of the overall transaction price being allocated to each
of the actual performance obligations of the contract based on
their relative stand-alone prices.
-- Certain discounts and credits were previously deferred and
amortised over the minimum customer contract period and where such
a minimum period did not exist over the average customer tenure. As
these discounts are not related to performance obligations under
IFRS 15 they form part of the total transaction price and are
allocated to each of the performance obligations in line with their
relative stand-alone selling prices.
-- Incremental sales commission costs directly attributable to
obtaining contracts or pools of contracts and directly attributable
costs associated with fulfilling the customer contracts (largely
comprising the costs of connecting a customer) were previously
expensed as incurred. These costs are now recognised as an asset
and amortised over the period in which the corresponding benefit is
received, which is assessed to be average customer tenure (50-120
months). Average customer tenure is based on customer behaviour,
with specific reference to their propensity to churn. Commission
costs not incremental to new contracts continue to be expensed as
incurred.
-- A collectability assessment has been performed in relation to all streams of revenue. Where recoverability has been found not to be probable, which is the case in regard to certain early termination fees, the revenue is recognised when received rather than following the revenue recognition policies stated above.
-- The Group previously had certain arrangements whereby it
would repurchase stock owned by a third party, where this inventory
had been previously sold by the Group. IFRS 15 provides
prescriptive guidance on such repurchase arrangements and
consequently this is now treated as a financing arrangement.
Therefore, rather than derecognising the stock when sold to the
third party as was previously the treatment, the stock continues to
be recognised by the Group and a corresponding debt balance
recognised. This stock has been recognised applying the Group's
stock provision policy.
Summary of financial impact of retrospective adoption of IFRS 15
and IFRS 9 on consolidated financial statements
The following tables summarise the financial impacts of adopting
IFRS 15 and IFRS 9 on the Group's consolidated financial
statements:
Consolidated income statement and other comprehensive income
2018 2018 2018
Headline Non-Headline Statutory
------------------------------------ ------------------------------------ ------------------------------------
Previously IFRS As Previously IFRS As Previously IFRS As
reported 15 & restated reported 15 & restated reported 15 & restated
9 9 9
adjustments adjustments adjustments
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- ------------ --------- ----------- ------------ --------- ----------- ------------ ---------
Revenue 1,658 (53) 1,605 50 (2) 48 1,708 (55) 1,653
Cost of sales (774) - (774) (38) - (38) (812) - (812)
---------------- ----------- ------------ --------- ----------- ------------ --------- ----------- ------------ ---------
Gross profit 884 (53) 831 12 (2) 10 896 (55) 841
Operating
expenses (651) 23 (628) (109) 6 (103) (760) 29 (731)
EBITDA 233 (30) 203 (97) 4 (93) 136 (26) 110
---------------- ----------- ------------ --------- ----------- ------------ --------- ----------- ------------ ---------
Depreciation
and
amortisation (131) - (131) (12) - (12) (143) - (143)
Share of
results of
joint ventures (11) - (11) - - - (11) - (11)
---------------- ----------- ------------ --------- ----------- ------------ --------- ----------- ------------ ---------
Operating
profit/(loss) 91 (30) 61 (109) 4 (105) (18) (26) (44)
Net finance
costs (45) (1) (46) (10) - (10) (55) (1) (56)
---------------- ----------- ------------ --------- ----------- ------------ --------- ----------- ------------ ---------
Profit/(loss)
before
taxation 46 (31) 15 (119) 4 (115) (73) (27) (100)
Taxation (28) 6 (22) 22 - 22 (6) 6 -
---------------- ----------- ------------ --------- ----------- ------------ --------- ----------- ------------ ---------
Loss for
the period
attributable
to the owners
of the Company 18 (25) (7) (97) 4 (93) (79) (21) (100)
----------------
Total
comprehensive
expense (71) (21) (92)
---------------- ----------- ------------ --------- ----------- ------------ --------- ----------- ------------ ---------
Consolidated balance sheet
--------------------------------------
2018
(restated)
--------------------------------------------------
Previously IFRS 15 & As restated
reported 9 adjustments
(re-presented)(1)
GBPm GBPm GBPm
-------------------------------------- ------------------- --------------- ------------
Non-current assets
Goodwill 495 - 495
Other intangible assets 251 - 251
Property, plant and equipment 234 - 234
Investment in joint venture 3 - 3
Trade and other receivables 2 - 2
Contract costs - 228 228
Deferred tax assets 97 (16) 81
-------------------------------------- ------------------- --------------- ------------
1,082 212 1,294
-------------------------------------- ------------------- --------------- ------------
Current assets
Inventories 22 7 29
Trade and other receivables 361 (115) 246
Contract assets - 20 20
Cash and cash equivalents 43 - 43
-------------------------------------- ------------------- --------------- ------------
426 (88) 338
-------------------------------------- ------------------- --------------- ------------
Assets classified as held for sale
(1) 34 - 34
-------------------------------------- ------------------- --------------- ------------
Total assets 1,542 124 1,666
-------------------------------------- ------------------- --------------- ------------
Current liabilities
Trade and other payables (467) (13) (480)
Contract liabilities - (16) (16)
Borrowings (75) (21) (96)
Provisions (31) - (31)
-------------------------------------- ------------------- --------------- ------------
(573) (50) (623)
-------------------------------------- ------------------- --------------- ------------
Liabilities classified as held for
sale (6) - (6)
-------------------------------------- ------------------- --------------- ------------
Non-current liabilities
Trade and other payables - (6) (6)
Borrowings (723) - (723)
Provisions (28) - (28)
-------------------------------------- ------------------- --------------- ------------
(751) (6) (757)
-------------------------------------- ------------------- --------------- ------------
Total liabilities (1,330) (56) (1,386)
-------------------------------------- ------------------- --------------- ------------
Net assets 212 68 280
-------------------------------------- ------------------- --------------- ------------
Equity
Share capital 1 - 1
Share premium 684 - 684
Translation reserve (64) - (64)
Demerger reserve (513) - (513)
Retained earnings and other reserves 104 68 172
-------------------------------------- ------------------- --------------- ------------
Total equity 212 68 280
-------------------------------------- ------------------- --------------- ------------
(1) The Group has represented the net assets classified as held
for sale as at 31 March 2018 to GBP23m from GBP2m to include
additional non-current assets of GBP8m and inventory of GBP13m
reflecting those assets that qualify as held for sale under IFRS 5
(.)
Consolidated cash flow statement
2018
(restated)
Previously IFRS 15 As
reported & 9 adjustments restated
Impact on cash generated from operations: GBPm GBPm GBPm
--------------------------------------------------- ----------- ---------------- ----------
Operating activities
Operating loss (18) (26) (44)
Share-based payments 8 - 8
Depreciation of property, plant and equipment 72 - 72
Amortisation of other operating intangible assets 62 - 62
Amortisation of acquisition intangibles 9 - 9
Share of losses of joint ventures 11 - 11
Impairment of other operating intangible assets 2 - 2
Reversal of cost of inventories previously written
down - (1) (1)
Gain on disposal of joint venture (1) - (1)
Increase in provisions 23 - 23
---------------------------------------------------- ----------- ---------------- ----------
Operating cash flows before movements in working
capital 168 (27) 141
Decrease in trade and other receivables 12 27 39
Increase in contract assets - (8) (8)
Decrease in inventory (17) 18 1
Decrease in trade and other payables (45) 7 (38)
Increase in contract liabilities - 1 1
---------------------------------------------------- ----------- ---------------- ----------
Cash generated from operations 118 18 136
---------------------------------------------------- ----------- ---------------- ----------
IFRS 16
Transition approach
The Group will adopt this standard for the year ending 31 March
2020 under a modified retrospective approach. The Group has a
variety of operating leases and certain finance leases already
recognised within the Group financial statements. The accounting
for finance leases remains materially unchanged between IAS 17 and
IFRS 16. However, the accounting for operating leases in particular
will change when IFRS 16 is implemented.
Structure and status of IFRS 16 implementation project
The Group commenced an implementation project prior to 31 March
2017, whereby management performed a feasibility impact of the
proposed standard. This process and initial findings were discussed
with the Audit Committee in March 2017 following consultation with
advisers and the Group's auditor.
Following this feasibility review, management has implemented
specific governance around the project cumulating in the
development of an in-house central depositary platform for leases
and the associated relevant data in the Group's network. The
platform and its control environment will continue to be developed
as the Group transitions to IFRS 16 during the year ending 31 March
2020.
Implications of IFRS 16
Following a detailed review by management of the implications of
IFRS 16 the following can be noted:
-- a number of lease contracts currently disclosed within the
financial statements, which currently give rise to recurring
expenses within operating expenses, will be recognised on the
balance sheet as a 'right of use asset' for the year ending 31
March 2020;
-- a corresponding lease liability (current and non-current)
reflecting the Group's commitment to pay consideration to third
parties under these contracts will also be recognised, increasing
the Group's net debt although the cash flow profile remains the
same for the Group;
-- the Group will depreciate the right of use assets through
profit and loss over the shorter of the assets' useful lives and
the assessed lease term;
-- the Group will charge interest on the liability using the
rate of interest implicit in the lease or, if the interest rate
implicit in the lease cannot be determined, the Group's incremental
borrowing rate. Interest will be charged to finance costs; and
-- the profile of the overall expense in profit and loss will
change as the interest expense will be more front-loaded compared
to a straight line operating lease rental expense.
Specifically, for management to conclude on whether a contract
contains a lease, the following has been considered:
-- whether there is an identified asset that the Group has the
right to obtain substantially all the economic benefits;
-- whether the Group has the right to direct how and for what purpose the asset is used;
-- whether the Group has the right to operate the asset without
the supplier having the right to change those operating
instructions; and
-- whether the Group has designed the asset in a way that
predetermines how and for what purpose the asset will be used.
In addition, management has also considered other salient
factors in the assessment of the standard such as:
-- the length of assessed lease term taking into account the
non-cancellable period of the lease including periods covered by an
option to extend or an option to terminate if the Group is
reasonably certain to exercise either option; and
-- the applicability of interest rate implicit in the lease or
the Group's incremental borrowing rate.
Following the above assessment, management have concluded that
the following items that are currently classified as operating
leases will be recognised in the financial statements using the new
requirements:
-- certain property, including offices and data centres;
-- the Group's backhaul network, being backhaul circuits;
-- the Group's collector ring, being collector circuits;
-- elements of the Group's core network;
-- all dedicated bandwidth Fibres we rent from third parties;
-- the Group's interconnect network, being primarily ISI circuits and ducts;
-- IT equipment leases, including printers; and
-- motor vehicles.
Key IFRS 16 judgements
A high volume of transactions will be impacted by IFRS 16 and
material judgements will be required in identifying and accounting
for leases. The most significant judgements in applying IFRS 16
relate to the identification of leases and the determination of
lease term, particularly in relation to high volume network leases.
In identifying which arrangements contain a lease, management have
concluded that the following arrangements will be out of the scope
of IFRS 16 based upon the Group's specific network
circumstances:
-- the footprint the Group rents from BTOR in the unbundled
exchanges and in co-location data centres, as this is not
considered to be an identifiable asset that the Group has the right
to direct the use of;
-- the copper and Fibre lines the Group rents in the 'last
mile', comprising copper between the exchange and customer/business
premise for MPF and SMPF customers, and a combination of copper and
Fibre for our FTTC customers, as the Group does not have the
ability to control or direct the use of the equipment in full as
stipulated within IFRS 16; and
-- the determination of the lease term for high volume network
leases has been made using a portfolio approach, for which the
portfolio lease term has been determined as five years. This
determination has been made based on the best available evidence of
historical average use of such assets, taking into account
expectations of future usage. The Group will review its portfolio
term on an annualised basis. The potential impact on transition of
adopting a four or six-year lease term would decrease or increase
the lease liability respectively with a corresponding similar
decrease or increase in the right of use asset.
Exemptions and practical expedients to be applied and taken
Management has reviewed available exemptions contained within
IFRS 16 and concluded that tie cables, being the tie pairs the
Group rents from BTOR in the unbundled exchanges, and laptops will
fall under the low value asset exemption. The Group therefore
intends to utilise this exemption for these assets.
Management has concluded that the following areas give rise to
practical expedients which will be applied:
-- The Group plans to exclude directly attributable initial
costs from the measurement of the right of use asset on transition.
The Group will therefore apply transition provisions in relation to
previously capitalised connection costs and write off these costs
through opening reserves. Future connection costs after the date of
transition as will be included within the right of use asset.
-- The Group plans to assess if leases are onerous under IAS 37
immediately before transition opposed to performing an impairment
review under IAS 36.
-- The Group will apply on a lease by lease basis the short term
lease exemption under IFRS 16 for those leases with less than
twelve months remaining at the date of transition.
2. Segmental reporting
IFRS 8 'Operating Segments' requires the segmental information
presented in the financial statements to be that used by the Chief
Operating Decision Maker (CODM) to evaluate the performance of the
business and decide how to allocate resources. The Group has
identified the Board as its CODM. The Board considers the results
of the business as a whole when assessing the performance of the
business and making decisions about the allocation of resources.
Accordingly, the Group has one reportable operating segment with
all trading operations based in the United Kingdom.
2018
2019 (restated)
GBPm GBPm
--------------------- ----- -----------
Statutory revenue 1,632 1,653
Less MVNO revenue (23) (48)
--------------------- ----- -----------
Headline revenue (1) 1,609 1,605
--------------------- ----- -----------
2018
2019 (restated)
GBPm GBPm
--------------------------------------------------- ----- -----------
Headline EBITDA (1) 237 203
Depreciation of property, plant and equipment (71) (69)
Amortisation of operating intangibles (67) (62)
Share of results of joint ventures (10) (11)
Non-Headline items - gross profit 12 10
Non-Headline items - operating expenses (46) (103)
Non-Headline items - depreciation and amortisation (8) (12)
Statutory operating profit/(loss) (note 4) 47 (44)
--------------------------------------------------- ----- -----------
The Group's Headline revenue (1) is split by On-net, Off-net and
Corporate products as this information is provided to the Group's
CODM.
2018
2019 (restated)
GBPm GBPm
----------------------------------------------------- ----- -----------
On-net (3) 1,263 1,216
Corporate 333 367
Off-net 13 22
----------------------------------------------------- ----- -----------
Headline revenue (1),(2),(3) 1,609 1,605
Less Carrier (52) (72)
Less Off-net (13) (22)
----------------------------------------------------- ----- -----------
Headline revenue (excluding Carrier and Off-net) (1) 1,544 1,511
----------------------------------------------------- ----- -----------
(1) See note 1 for an explanation of alternative performance
measures (APMs) and non-Headline items. See note 4 for a
reconciliation of Headline information to Statutory
information.
(2) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
(3) Statutory revenue is equal to Headline revenue plus MVNO
revenue added to On-net.
The Group has no material overseas operations and, as a result,
a split of revenue and total assets by geographical location has
not been disclosed.
Corporate revenue is further analysed as:
2018
2019 (restated)
GBPm GBPm
------------------ ----- -----------
Carrier 52 72
Data 173 162
Voice 108 133
------------------ ----- -----------
Corporate revenue 333 367
------------------ ----- -----------
3. Dividends
Accounting policy
Dividend income is recognised when payment has been received.
Final dividend distributions are recognised as a liability in the
financial statements in the year in which they are approved by the
relevant shareholders. Interim dividends are recognised in the year
in which they are paid.
The following dividends were paid by the Group to its
shareholders:
2019 2018
GBPm GBPm
----------------------------------------------------------- ----- -----
Ordinary dividends
Final dividend for the year ended 31 March 2017 of 5.00p
per ordinary share - 47
Interim dividend for the year ended 31 March 2018 of 2.50p
per ordinary share - 24
Final dividend for the year ended 31 March 2018 of 1.50p
per ordinary share 17 -
Interim dividend for the year ended 31 March 2019 of 1.00p
per ordinary share 11 -
----------------------------------------------------------- ----- -----
Total ordinary dividends 28 71
----------------------------------------------------------- ----- -----
The proposed final dividend for the year ended 31 March 2019 of
1.50p per ordinary share on 1,143 million ordinary shares
(approximately GBP17m) was approved by the Board on 23 May 2019 and
will be recommended to shareholders at the AGM on 17 July 2019. The
dividend has not been included as a liability as at 31 March 2019.
The payment of this dividend will not have any tax consequences for
the Group.
The Group ESOT has waived its rights to receive dividends in the
current and prior year and this is reflected in the analysis
above.
4. Reconciliation of Headline information to Statutory
information
Headline information is provided because the Directors consider
that it provides assistance in understanding the Group's underlying
performance. Further details in relation to alternative performance
measures (APMs) are contained within note 1.
Accounting policy - non-Headline items
During the years under review, the non-Headline items excluded
from operating profit in arriving at Headline operating profit were
certain adjusting items, the operating results of a business to be
exited (MVNO operating profit/(loss)) and amortisation of
acquisition intangibles.
Examples of charges or credits meeting the definition of
adjusting items include where material, discontinued operations,
gains or losses associated with the acquisition/disposal/exit of
businesses, business restructuring and fundamental transformation
programmes. Certain transformation and rationalisation programmes
are so fundamental they may impact a number of years. In the event
that other items meet the criteria, which are applied consistently
from year to year, they are also treated as adjusting items.
Judgements in applying the Group's accounting policy
The classification of items as non-Headline is subjective in
nature and therefore judgement is required to determine whether the
item is in line with the accounting policies outlined above.
Determining whether an item is non-Headline is a matter of
qualitative assessment. Management consider amortisation of
acquisition intangibles to be a non-Headline item due to it being
inherently linked to losses associated with historic acquisitions
of businesses in accordance with the Group's non-Headline
accounting policy.
The following table includes details of non-Headline items and
reconciles Headline information to Statutory information:
Depreciation,
Gross amortisation
Revenue profit and results Profit/(loss) Profit
GBPm GBPm of Joint Operating before for
EBITDA Ventures profit taxation Taxation the year
Year ended 31 March 2019 GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- --------- ------- ------ ------------- --------- ------------- -------- ---------
Headline results 1,609 850 237 (148) 89 37 32 69
Adjusting items - network
transformation
(a) - - (15) - (15) (15) 2 (13)
Adjusting items - OneTeam
operating
model (b) - - (22) - (22) (22) 3 (19)
MVNO operating profit (c) 23 12 3 - 3 3 (1) 2
Amortisation of acquisition
intangibles (d) - - - (8) (8) (8) 1 (7)
Statutory results 1,632 862 203 (156) 47 (5) 37 32
---------------------------- --------- ------- ------ ------------- --------- ------------- -------- ---------
Depreciation,
Gross amortisation
Revenue profit and results Loss
GBPm GBPm of Joint Operating Loss before for
Year ended 31 March 2018 EBITDA Ventures profit/(loss) taxation Taxation the year
(restated) GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- --------- ------- ------ ------------- -------------- ----------- -------- ---------
Headline results
(restated) 1,605 831 203 (142) 61 15 (22) (7)
Adjusting items - network
transformation
(a) - - (17) (2) (19) (19) 4 (15)
MVNO operating loss (c) 48 10 (9) - (9) (9) 2 (7)
Amortisation of
acquisition
intangibles (d) - - - (9) (9) (9) 2 (7)
Adjusting items -
operating
efficiencies - MTTS (e) - - (3) (1) (4) (4) - (4)
Adjusting items -
operating
efficiencies -
fundamental
property rationalisation
(f) - - (12) - (12) (12) 2 (10)
Adjusting items - mobile
proposition
(g) - - (33) - (33) (33) 6 (27)
Adjusting items -
business
reorganisation (h) - - (19) - (19) (19) 4 (15)
Adjusting items - finance
expense
(i) - - - - - (10) 2 (8)
Statutory results
(restated) 1,653 841 110 (154) (44) (100) - (100)
------------------------- --------- ------- ------ ------------- -------------- ----------- -------- ---------
2018
2019 (restated)(1)
GBPm GBPm
----------------------------------- ----- --------------
Operating profit/(loss) 47 (44)
Share of results of joint ventures 10 11
Depreciation and amortisation 146 143
EBITDA 203 110
----------------------------------- ----- --------------
During the year ended 31 March 2019, cash adjusting items were
GBP47m (2018: GBP60m).
The above table shows how all APMs are reconciled to Statutory
performance measures with the exception of Headline earnings per
share and net debt.
(a) Network transformation
During the year ended 31 March 2019, the Group continued its
significant multi-year transformation programme which will
fundamentally restructure the Group's network, IT infrastructure
and technology organisation. The change the Group is undertaking
will ensure it is fit for the future and underpins the wider Group
strategy in providing an outstanding service to our customers as a
value provider in the industry. This is a discrete project expected
to run until 2021.
This programme has resulted in GBP15m (2018: GBP19m) of costs
including project management, consultancy, dual-running costs,
decommissioning costs, and accelerated depreciation.
A total taxation credit of GBP2m has been recognised on these
costs in the year ended 31 March 2019 (2018: GBP4m).
(b) OneTeam operating model
Net costs of GBP22m (2018: GBPnil) have been incurred associated
with simplifying the Group's organisational structure and
relocating roles to one primary location at the Soapworks in
Salford. These costs have been determined to be adjusting items and
are presented as non-Headline in accordance with the Group's
accounting policy as they represent a material business
restructuring programme.
The costs include redundancy payments, dual-running costs,
recruitment costs and other consultancy costs. The Group expects
the finalisation of this fundamental reorganisation within
FY20.
A taxation credit of GBP3m has been recognised on these costs
(2018: GBPnil).
(c) MVNO operating profit/(loss)
Following the Group's announcement in May 2017 to reassess the
Group's mobile strategy, the Group is now progressing with its
alternative mobile distribution strategy. Operating profits of
GBP3m (2018 restated: GBP9m loss) associated with this strategy
have been incurred; given this one-off strategic decision,
management considers these profits/(losses) are non-Headline items
though they do not meet the criteria under IFRS 5 for separate
disclosure as discontinued operations. The Group continues to
transition from a wholesale agreement with Vodafone to a mobile
distribution agreement with Telefonica. The wholesale agreement
with Vodafone has been extended to support the smooth transition of
remaining customers. The MVNO trading activity will continue to
diminish with contractual commitments expiring in 2021.
A taxation charge of GBP1m has been recognised on these costs
(2018: GBP2m credit).
(d) Amortisation of acquisition intangibles
An amortisation charge in respect of acquisition intangibles of
GBP8m was incurred during the year (2018: GBP9m).
A taxation credit of GBP1m has been recognised on these costs
(2018: GBP2m credit).
(e) Operating efficiencies - Making TalkTalk Simpler (MTTS)
During the year ended 31 March 2018, the Group completed its
wide-ranging transformation programme that delivered material
improvements to customer experience, driving operating cost
savings, lower churn and subscriber acquisition costs.
The wide-ranging transformation programme was considered so
fundamental that it impacted a number of years with the costs
incurred relating to the improvement of the Consumer and TalkTalk
Business systems and processes which focus on customer
experience.
These programmes resulted in GBP4m of costs including project
management, redundancy, consultancy, migration, call centre costs
and accelerated depreciation costs.
A total taxation credit of GBPnil has been recognised on these
costs in the year ended 31 March 2018.
(f) Operating efficiencies - fundamental property
rationalisation
During the year ended 31 March 2018, the Group completed its
fundamental rationalisation of the sites from which it operates
including the relocation of its Warrington and Irlam sites to one
site at the Soapworks in Salford together with the rationalisation
of its London property footprint. The revised estimated cost of
this property rationalisation programme was provided for giving
rise to additional costs of GBP12m during the prior year.
A total taxation credit of GBP2m has been recognised on these
costs in the year ended 31 March 2018.
(g) Mobile proposition
Following the Group's announcement in May 2017 to reassess the
Group's mobile strategy net exceptional costs were incurred in
relation to decommissioning costs, asset write offs, provision
releases, onerous supplier commitments and redundancies amounting
to GBP33m for the year ended 31 March 2018.
A total taxation credit of GBP6m has been recognised on these
costs in the year ended 31 March 2018.
(h) Business reorganisation
Net costs of GBP19m were incurred in the year ended 31 March
2018 associated with implementing changes to the Group's
organisational structure following the Group reorganising the
business under the new leadership team.
The costs include redundancy, other rationalisation costs and
consultancy costs.
A taxation credit of GBP4m has been recognised on these costs in
the year ended 31 March 2018.
(i) Finance expense
During the year ended 31 March 2018, the Group completed the
repurchase of its $185m US Private Placement Notes. This resulted
in incremental costs of GBP8m relating to the settlement of
derivative instruments in designated hedge accounting relationships
and associated fees. The Group also refinanced its revolving credit
facilities, resulting in the accelerated amortisation of
arrangement fees relating to the previous facilities leading to a
GBP2m charge in the year.
A taxation credit of GBP2m has been recognised on these costs in
the year ended 31 March 2018.
5. Earnings/(loss) per ordinary share
Earnings/(loss) per ordinary share are shown on a Headline and
Statutory basis to assist in the understanding of the performance
of the Group.
2018
2019 (restated)(1)
GBPm GBPm
--------------------------------------------- ----- --------------
Headline earnings/(loss) (note 4) 69 (7)
--------------------------------------------- ----- --------------
Statutory earnings/(loss) 32 (100)
--------------------------------------------- ----- --------------
Weighted average number of shares (millions)
Shares in issue 1,146 979
Less weighted average holdings by Group ESOT (3) (4)
--------------------------------------------- ----- --------------
For basic EPS 1,143 975
Dilutive effect of share options 13 12
--------------------------------------------- ----- --------------
For diluted EPS 1,156 987
--------------------------------------------- ----- --------------
2018
2019 (restated)
Pence Pence
---------------------------------- ------ -----------
Basic earnings per ordinary share
Headline 6.0 (0.7)
Statutory 2.8 (10.3)
---------------------------------- ------ -----------
2018
2019 (restated)
Pence Pence
------------------------------------ ------ -----------
Diluted earnings per ordinary share
Headline 6.0 (0.7)
Statutory 2.8 (10.1)
------------------------------------ ------ -----------
(1) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15 and IFRS 9.
6. Cash and cash equivalents and borrowings
(a) Cash and cash equivalents comprise:
2019 2018
GBPm GBPm
------------------------- ----- -----
Cash at bank and in hand 67 43
------------------------- ----- -----
The effective interest rate on bank deposits and money market
funds was 0.5% (2018: 0.2%).
(b) Borrowings comprise:
2018
2019 (restated)
Maturity GBPm GBPm
----------------------------------------------- --------- ----- -----------
Current
GBP75m receivables purchase agreement facility 2019 - 67
Finance leases 2019 10 8
Inventory financing 2019 - 21
----------------------------------------------- --------- ----- -----------
10 96
--------------------------------------------------------- ----- -----------
2018
2019 (restated)
Maturity GBPm GBPm
-------------------------------------- ------------------------ ----- -----------
Non-current
GBP400m Senior Notes 2022 400 400
GBP640m revolving credit facility 2022 348 300
GBP75m receivables purchase agreement
facility 2020 61 -
2020, 2021, 2022, 2023,
Finance leases 2024 29 23
-------------------------------------- ------------------------ ----- -----------
Non-current borrowings 838 723
---------------------------------------------------------------- ----- -----------
Total borrowings 848 819
---------------------------------------------------------------- ----- -----------
Net debt comprises:
2018
2019 (restated)
GBPm GBPm
------------------------- ----- -----------
Cash at bank and in hand (67) (43)
Borrowings 848 819
------------------------- ----- -----------
Net debt 781 776
------------------------- ----- -----------
Undrawn available committed facilities are as follows:
2018
2019 (restated)
Maturity GBPm GBPm
-------------------------------------------------- ----------- ----- -----------
Undrawn available committed facilities (excluding
finance leases) 2020, 2022 306 348
-------------------------------------------------- ----------- ----- -----------
The book value and fair value of the Group's borrowings are as
follows:
2018
2019 (restated)
GBPm GBPm
----------------- ----- -----------
Less than 1 year 10 96
1 to 2 years 71 7
2 to 3 years 406 7
3 to 4 years 359 406
4 to 5 years 2 303
Total borrowings 848 819
----------------- ----- -----------
(1) See note 1 for further details on the restatement of
comparative information due to the retrospective application of
IFRS 15.
The fair value of borrowings is not materially different to its
amortised cost.
Borrowing facilities
The Group's committed facilities total GBP1,115m (2018:
GBP1,115m). The Group's uncommitted facilities total GBP90m (2018
restated: GBP131m) giving headroom on committed facilities and
uncommitted facilities of GBP306m (2018: GBP348m) and GBP90m (2018
restated: GBP110m) respectively.
The financial covenants included in each bank facility restrict
the ratio of net debt to EBITDA and require minimum levels of
interest cover. The amounts used in the covenant calculations are
subject to adjustments for the receivables purchase agreement
facility and non-Headline items. As at 31 March 2019, net debt to
Headline EBITDA as calculated for the purposes of the Group's
borrowings equated to 3.1x (2018: 3.0x). The Group was also in
compliance with its covenants throughout the current and prior
year.
Details of the Group's borrowing facilities as at 31 March 2019
are set out below:
GBP400m Senior Notes
On 15 January 2017, TalkTalk Telecom Group PLC issued GBP400m
Senior Notes due 2022. The Senior Notes include incurrence-based
covenants customary for this type of debt, including limitations on
TalkTalk's ability to incur additional debt and make restricted
payments, subject to certain exceptions. The Group is permitted to
incur additional debt subject to compliance with a net debt to
EBITDA ratio of 4.0x and to pay dividends when net debt to EBITDA
is below 3.0x (2.75x from January 2019). Regardless of the
Company's net debt to EBITDA ratio, dividends are also permitted to
be paid out of a basket based on 50% of cumulative consolidated net
income from 1 October 2016. The interest rate payable on the notes
is 5.375% payable semi-annually.
GBP640m revolving credit facility (RCF)
On 8 May 2017, the Group signed a GBP640m RCF agreement, which
matures in May 2022. The interest rate payable in respect of
drawings under this facility is at a margin over LIBOR and for the
appropriate period. The actual margin applicable to any drawing
depends on the ratio of net debt to EBITDA calculated in respect of
the most recent accounting year.
GBP75m receivables purchase agreement
On 27 March 2019, the Group signed an extension to the GBP100m
receivables purchase agreement (GBP25m on an uncommitted basis)
which matures in June 2020 and is included within both the
committed and uncommitted facilities. The Group has the ability on
a rolling basis to sell its receivables to a third-party vehicle in
exchange for a discounted consideration. The Group is deemed to
control the third-party vehicle and therefore continues to
consolidate the relevant receivables and the external debt on the
grounds that substantially not all the risks and rewards of
ownership have been transferred under the programme.
Uncommitted money market facilities, inventory financing and
bank overdrafts
These facilities are used to assist in short term cash
management and bear interest at a margin over the applicable
borrowing rate. In the year ended 31 March 2019 the Group fully
repaid and cancelled the GBP21m inventory financing facility.
Finance leases
The Group uses finance leases as an alternative source of
financing for significant items of capital expenditure, matching
the cash profile with the life of the asset and offering
flexibility regarding ownership of the lease at the end of the
finance term. Finance leases at 31 March 2019 were GBP39m (2018:
GBP31m).
7. Analysis of changes in net debt
Net Non-cash
Opening cash flow movements Closing
GBPm GBPm GBPm GBPm
-------------------------- ------- ---------- ---------- -------
2019
Cash and cash equivalents 43 24 - 67
-------------------------- ------- ---------- ---------- -------
Borrowings (2) (788) (28) 7 (809)
(745) (4) 7 (742)
-------------------------- ------- ---------- ---------- -------
Finance leases (31) 9 (17) (39)
-------------------------- ------- ---------- ---------- -------
Net debt (1) (776) 5 (10) (781)
-------------------------- ------- ---------- ---------- -------
Net Non-cash
Opening cash flow movements Closing
GBPm GBPm GBPm GBPm
-------------------------- ------- ---------- ---------- -------
2018 (restated)
Cash and cash equivalents 50 (7) - 43
-------------------------- ------- ---------- ---------- -------
Borrowings (908) 120 - (788)
Derivatives 39 (39) - -
-------------------------- ------- ---------- ---------- -------
(869) 81 - (788)
-------------------------- ------- ---------- ---------- -------
(819) 74 - (745)
-------------------------- ------- ---------- ---------- -------
Finance leases - - (31) (31)
-------------------------- ------- ---------- ---------- -------
Net debt (1) (819) 74 (31) (776)
-------------------------- ------- ---------- ---------- -------
(1) See note 1 to the consolidated financial statements.
(2) (During the year, amortised borrowing costs of GBP10m were
reclassified from other receivables to Borrowings of which GBP3m
has been amortised during the year.)
Glossary: Alternative performance measures
APMs are the way that financial performance is measured by
management, reported to the Board, the basis of financial measures
for senior management's compensation schemes and provides
supplementary information that assists the user in understanding
the underlying trading results.
Closest Adjustments to
equivalent reconcile to IFRS Note reference
APM IFRS measure measure for reconciliation Definition and purpose
------------------- ---------------- ---------------------- -------------------- -----------------------------
Income statement
measure
------------------------------------- ---------------------- -------------------- -----------------------------
Headline Statutory Excludes non-Headline Note 2 Represents revenue
revenue revenue items, specifically excluding non-Headline
(excluding MVNO Revenue. In revenue and low
Carrier addition, also margin/volatile
and Off-net) excludes Carrier carrier revenue
and Off-net revenues and non-core Off-net
revenue.
This APMs purpose
is to allow the
user to understand
the Group's underlying
revenue performance
on a comparable
basis.
------------------- ---------------- ---------------------- -------------------- -----------------------------
EBITDA Operating Operating profit Note 1 Represents operating
profit or loss, before profit before depreciation,
or loss depreciation and amortisation and
amortisation, share share of results
of joint ventures, of joint ventures.
net finance costs
and taxation
------------------- ---------------- ---------------------- -------------------- -----------------------------
Headline Operating Operating profit Note 4 Represents operating
earnings profit or loss before profit before non-Headline
before or loss non-Headline items, items, depreciation,
interest, depreciation and amortisation and
tax, depreciation amortisation, share share of results
and amortisation of joint ventures, of joint ventures
(EBITDA) net finance costs to assist in the
and taxation understanding of
the Group's performance.
Management consider
amortisation of
acquisition intangibles
to be a non-Headline
item due to it being
inherently linked
to losses associated
with historic acquisitions
of businesses in
accordance with
the Group's non-Headline
accounting policy.
This APMs purpose
is to allow the
user to understand
the Group's underlying
financial performance
measured by management,
reported to the
Board and that is
a financial measure
senior management's
compensation schemes.
------------------- ---------------- ---------------------- -------------------- -----------------------------
Headline Basic EPS Basic EPS excluding Note 5 Represents Basic
basic EPS non-Headline items EPS excluding non-Headline
items and provides
supplementary information
that assists the
user in understanding
the underlying trading
results.
------------------- ---------------- ---------------------- -------------------- -----------------------------
Balance sheet
measure
--------------------- ---------------------------------------------------------------------------------------------
Net debt Total borrowings after Note 6 Represents total
derivatives offset by cash borrowings after
and cash equivalents derivatives offset
by cash and cash
equivalents. It
is a useful measure
of the progress
in generating cash
and strengthening
of the Group balance
sheet position
and is a measure
widely used by various
stakeholders.
------------------- ---------------------------------------- -------------------- -----------------------------
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR PGUWAAUPBUAW
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