Our key revenue measure was flat – a significantly improved performance

Underlying operating costs excluding transit down 2%, despite our investments

EBITDA1 up 4% and earnings per share1 up 22%

Fibre available to more than half of UK homes and businesses and roll out accelerating in rural areas

Fibre customer base more than doubled, now at more than 1.5m

BT Global Services order intake of £2.0bn Key points for the year:

Results in line with or better than expectations

Underlying operating costs1 excluding transit down 6%

EBITDA up 2%

Normalised free cash flow of £2.3bn

Net debt reduced by £1,285m

Proposed final dividend of 6.5p, up 14%, giving a full year dividend of 9.5p, also up 14%BT Group plc
RESULTS FOR THE YEAR TO 31 MARCH 2013
GROUP RESULTSOperating results overview for the year
Our key measure of the group’s revenue trend, underlying revenue excluding transit, was down 3%. In line with our guidance, underlying revenue excluding transit showed an improved trend in the second half of the year declining 1.8%, compared with a 4.4% decline in the first half of the year. This improvement includes stronger performances in the fourth quarter from BT Global Services, BT Consumer, BT Business and BT Wholesale.The decline in underlying revenue excluding transit this year reflects lower revenue from calls and lines, the tough conditions in Europe and the financial services sector and regulatory price reductions.Adjusted revenue was down 5% at £18,253m with a £293m reduction in transit revenue (including mobile termination rate reductions of £187m), a £168m negative impact from foreign exchange movements and a £36m negative net impact from acquisitions and disposals. Reported revenue, which includes specific items, was also 5% lower, at £18,017m. Underlying operating costs excluding transit were down 6%, reflecting our cost transformation activities and reduced cost of sales due to the decline in revenue. Operating costs decreased by £1,166m, or 9%, to £12,464m. In aggregate, operating costs1 and capital expenditure have reduced by £4.7bn over the last four years despite greater investment in new areas of the business. Net labour costs decreased by 4% as improved productivity and better systems and processes offset our investment programmes, the recruitment of around 1,600 engineers and the insourcing of around 4,000 jobs. Payments to telecommunications operators were down 15% reflecting lower mobile termination rates and reduced transit and wholesale call volumes. Property and energy costs were 4% lower in total as we drove better space utilisation but lower energy usage was more than offset by higher energy prices. Network operating and IT costs were 7% lower as we rationalise our networks and systems. Other operating costs decreased by 11% principally reflecting lower cost of sales due to the decline in revenue and the benefit of our cost transformation activities.Adjusted EBITDA of £6,181m increased by 2%.Depreciation and amortisation decreased by 4% to £2,843m largely due to more efficient delivery of our capital investment programmes over the last four years.Net finance expense
Net finance expense was £653m, a decrease of £28m, due to a lower average cost of net debt.Profit before tax
Adjusted profit before tax was £2,694m, up 11% reflecting the higher EBITDA, lower depreciation and amortisation and lower finance expense. Reported profit before tax (which includes specific items) was £2,501m, up 2%.Tax
The effective tax rate on the profit before specific items for the year was 22.5% (2011/12: 24.1%). For 2013/14 we expect the effective tax rate to be around 23%. Earnings per share
Adjusted EPS of 26.6p was up 12% principally reflecting the growth in profit before tax. Reported EPS (which includes specific items) was 26.7p, up 3%. These are based on a weighted average number of shares in issue of 7,832m (2011/12: 7,763m). Specific items
Specific items resulted in a net credit after tax of £3m (2011/12: £166m). Charges of £151m and £36m were recognised against revenue and EBITDA, respectively, following Ofcom’s determinations on historic Ethernet pricing. One-off charges of £85m and £58m were recognised against revenue and EBITDA, respectively, following the Court of Appeal decision that wholesale ladder termination pricing should not be applied for 0800, 0845 and 0870 calls from mobile phones terminating on our network. We also increased our provisions for insurance and litigation risks by £43m, having reassessed potential claims relating to certain historic matters. Restructuring charges of £204m (2011/12: £64m) were incurred. These include amounts relating to the next phase of our group-wide restructuring programme which started in the third quarter. This programme includes rationalising and transforming our resources, processes, networks and systems within BT Global Services and reorganising BT Innovate & Design and BT Operate, our two internal service units, to form BT Technology, Service & Operations (BT TSO). By improving group-wide processes and simplifying our business, we will improve customer service and generate future cost savings. A profit of £130m was recognised on the disposal of our remaining 23.2% interest in Tech Mahindra. Net interest income on pensions was £31m (2011/12: £197m). A specific item tax credit of £105m (2011/12: £164m) has also been recognised for the re-measurement of deferred tax balances due to the change in the UK statutory tax rate to 23% from 1 April 2013.Capital expenditure
Capital expenditure excluding the purchases of telecommunications licences was £2,438m. Despite the accelerated fibre programme and other new investments, this was 6% lower than the prior year and below our guidance of around £2.6bn due to further efficiencies in our capital programmes. In the fourth quarter we also secured a 4G licence in the UK for a cost of £202m. This will enable us to provide our business and consumer customers with an enhanced range of mobile broadband services, building on our existing strength in wi-fi. Free cash flow
Normalised free cash flow was broadly level at £2,300m (2011/12: £2,307m) with lower capital expenditure and growth in EBITDA largely offset by working capital movements.The cash cost of specific items was £366m (2011/12: £204m) mainly comprising restructuring costs of £147m, £95m from the historic Ethernet pricing determinations, cash payments of £67m from the ladder pricing decision relating to 2010/11 and 2011/12 and property rationalisation costs of £55m. Reported free cash flow, which includes the £560m tax benefit from pension deficit payments (2011/12: £215m), the purchase of our 4G licence and specific items, was £2,292m (2011/12: £2,318m). Net debt and liquidity
Net debt was £7,797m at 31 March 2013, a reduction of £1,285m in the year, reflecting the strong cash generation of the business. This reduction was despite making £325m of pension deficit payments, purchasing the 4G licence, the share buyback of £302m and dividend payments of £683m. At 31 March 2013 the group had cash and current investment balances of £1.5bn and available facilities of a further £1.5bn providing us with a strong liquidity and funding position. Out of total gross debt of £9.3bn, £1.5bn is repayable in 2013/14.Pensions
The IAS 19 net pension deficit at 31 March 2013 was £4.5bn net of tax (£5.9bn gross of tax), compared with £1.9bn (£2.4bn gross of tax) at 31 March 2012 and £4.3bn (£5.5bn gross of tax) at 31 December 2012. The increase in the deficit during the year principally reflects an exceptionally low real discount rate of 0.87%. This includes the impact of quantitative easing on the debt markets and a higher inflation assumption. The higher deficit is despite the strong investment returns and the £325m deficit payment which contributed to the BT Pension Scheme assets increasing by £3.0bn to a record high of £41.3bn. IAS 19 ‘Employee Benefits (revised)’ (IAS 19 Revised) came into effect from 1 April 2013 and will impact our pensions accounting as explained in ‘Accounting standards, interpretations and amendments not yet effective’ in Note 3 to the Annual Report & Form 20-F 2013. Had this applied to the year ended 31 March 2013, operating costs would have been around £40m higher, at around £400m, and net finance income on pensions, which is classified as a specific item, would have been £150m lower, resulting in a net finance expense of around £120m.We expect the pension operating charge in the income statement to be around £450m in 2013/14. This includes around £40m due to the adoption of IAS 19 Revised and a £50m increase mainly due to the lower discount rate and higher inflation assumptions. The net pension interest expense within specific items is expected to be around £240m. We also expect regular cash contributions to the BTPS to be around £210m in 2013/14, similar to 2012/13.All-employee share option plans
Around 20,000 of our people benefited from our all-employee share option plans this year, receiving BT shares worth over £12,000 per person on average. To counteract the dilutive effect of these share options, we acquired 131m shares as part of our buyback programme.Over the next two years around 34,500 of our people could each receive shares worth over £28,000 on average, based on the share price at 31 March 2013.Dividends
The Board is proposing a final dividend of 6.5p, up 14%, giving a full year dividend of 9.5p, up 14% (2011/12: 12%). Subject to shareholder approval, this will be paid on 2 September 2013 to shareholders on the register at 9 August 2013. The ex-dividend date is 7 August 2013. The final dividend, amounting to approximately £514m (2011/12: £453m), will be recognised as an appropriation of retained earnings in the quarter to 30 September 2013. Regulation
There were a number of regulatory decisions and outcomes of appeals that affected us during the year and will impact us in the future.The charge controls for WLR, LLU and ISDN30 products which became effective in April 2012 had a negative impact of around £120m on group revenue and EBITDA in the year. We expect a further similar impact in 2013/14. The July 2012 Court of Appeal decision against wholesale ladder termination pricing also impacted 2012/13 EBITDA growth by around £30m. In the fourth quarter Ofcom issued its final determinations on the Business Connectivity Market Review and the associated Leased Lines Charge Control. These are likely to have a net negative year on year impact of around £50m-£100m on group revenue and EBITDA in 2013/14 with a further similar impact in 2014/15.Ofcom also issued a consultation document on the Wholesale Narrowband Market Review setting out proposals for regulating the markets for the next three-year period. A new charge control has been proposed for certain services. This will start from 1 October 2013 and is expected to reduce our revenue from fixed call termination, with this partly offset by an increase in prices on call origination.We expect the Fixed Access Market Review and associated charge controls, which are due to take effect from April 2014, to be published in the next few months.Fibre and broadband
We have now passed more than 15m premises with our fibre broadband network, with an increase of around 6.2m in the year. There are now more than 1.5m homes and businesses using our fibre-based services, having more than doubled in the year with 873,000 net connections. The broadband market continued to grow with 834,000 net additions in the year. This takes the total number of broadband connections on our network to 17.6m, provided through more than 150 service providers. We added 424,000 retail broadband1 customers in the year, a 51% share, taking our customer base to around 6.7m, up 7%.Outlook
We continue to expect an improved trend in underlying revenue excluding transit in 2013/14 compared with 2012/13.We expect adjusted EBITDA to be £6.0bn−£6.1bn in 2013/14. The small decline compared with 2012/13 is despite underlying improvements in our business performance and is more than accounted for by our investment in BT Sport and the higher pension operating charge. The EBITDA performance in the first half of the year will be impacted by our upfront investment in BT Sport. We expect adjusted EBITDA to increase to £6.2bn−£6.3bn in 2014/15 and to grow further in 2015/16.We expect the next phase of our restructuring programme to reduce our cost base by around £200m per year, with this run-rate largely achieved in 2014/15, contributing to an improvement in EBITDA and capital expenditure efficiency. We expect around £400m of further specific restructuring costs, most of which will be incurred in 2013/14.We expect capital expenditure in 2013/14 and 2014/15 to be broadly level with 2012/13. We will continue to invest extensively in fibre broadband while benefiting from efficiency savings in other areas due to our cost transformation activities, including our restructuring programme.We expect higher levels of normalised free cash flow than previously, at around £2.3bn in 2013/14, around £2.6bn in 2014/15 and to grow further in 2015/16.We continue to expect to increase the dividend per share by 10%−15% per year for the next two years.We also expect to spend around £300m per year for the next two years on our share buyback programme which will partly counteract the dilutive effect of all-employee share option plans maturing over this period. As in 2012/13 we may undertake the buyback through a combination of direct market purchases and purchases by our Employee Benefit Trust.RESULTS FOR THE FOURTH QUARTER TO 31 MARCH 2013
GROUP RESULTSOperating results overview
Underlying revenue excluding transit was flat, an improvement compared with recent quarters reflecting stronger performances from BT Global Services, BT Consumer, BT Business and BT Wholesale. Adjusted revenue was 2% lower at £4,785m with transit revenue down by £81m, a £12m favourable impact from foreign exchange movements and a £2m net negative impact from acquisitions and disposals.Underlying operating costs excluding transit were down 2%. Total operating costs decreased by £140m, or 4%.Net labour costs decreased by 3% mainly reflecting improved productivity and better systems and processes offsetting the recruitment of additional engineers and insourcing of some activities. Payments to telecommunications operators were down 9% reflecting lower mobile termination rates and reduced transit and wholesale call volumes. Property and energy costs were 2% lower and network operating and IT costs were 10% lower as we rationalise our networks and systems. Other operating costs decreased by 2%.Adjusted EBITDA increased by 4% to £1,673m. Depreciation and amortisation decreased by 7% to £692m largely due to more efficient delivery of our capital investment programmes over the last four years. Net finance expense
Net finance expense was £148m, a decrease of £25m due to the lower average cost of net debt.Profit before tax
Adjusted profit before tax was £833m, up 21% reflecting the higher EBITDA, lower depreciation and amortisation and lower finance expense. Reported profit before tax (which includes specific items) was £687m, down 5%.Tax
The effective tax rate on the profit before specific items for the quarter was 22.1% (Q4 2011/12: 24.1%).Earnings per share
Adjusted EPS of 8.3p was up 22%, principally reflecting higher profit before tax. Reported EPS (which includes specific items) was 7.5p, down 7%. These are based on a weighted average number of shares in issue of 7,838m (Q4 2011/12: 7,771m). Specific items
Specific items in the quarter resulted in a net charge after tax of £58m (Q4 2011/12: £107m net credit). Restructuring charges of £151m (Q4 2011/12: £14m) were incurred as part of the next phase of our group-wide restructuring programme. Net interest income on pensions was £7m (Q4 2011/12: £48m). Capital expenditure
Capital expenditure excluding the purchases of telecommunications licences was £648m, down 7% reflecting efficiencies in our capital programmes.Free cash flow
Normalised free cash flow was an inflow of £1,301m, up 43% compared with the prior year. This increase principally reflects favourable working capital movements, lower capital expenditure, lower tax payments and growth in EBITDA.The cash cost of specific items was £147m (Q4 2011/12: £53m) comprising restructuring costs of £87m, property rationalisation costs of £9m and £51m from the historic Ethernet pricing determinations. Reported free cash flow, which includes the £79m tax benefit from pension deficit payments (Q4 2011/12: £nil), the £202m purchase of our 4G licence and specific items, was £1,031m (Q4 2011/12: £856m). BT Group plc