BT Reports Q4, Full Year

Full year results in line with or ahead of our outlook for the year

Revenue of £20bn in line with our outlook, underlying revenue excluding transit down 3% in the year

Operating cost savings of £1.1bn in the year, ahead of our outlook of around £900m

Net debt reduced to £8.8bn, in line with our outlook, after pension deficit payments of £1.0bn in the year

Free cash flow of £2.2bn, ahead of our outlook and nearly trebled from two years ago

Proposed final dividend of 5.0p, up 9%, giving a full year dividend of 7.4p, up 7%

BT Global Services operating cash flow positive a year ahead of plan at £119m

IAS 19 pension deficit of £1.4bn (net of tax), down £4.3bn in the year

DSL broadband net additions of 252,000 in the quarter, of which BT’s retail market share was 64%

Outlook:
We expect

Underlying revenue excluding transit to be in the range of down 2% to flat in 2012 and to grow by up to 2% in 2013

Adjusted EBITDA to grow in 2012 and to be above £6.0bn in 2013

Adjusted free cash flow to be above 2011 level in both 2012 and 2013

RESULTS FOR THE YEAR TO 31 MARCH 2011

GROUP RESULTS

Operating results overview

Revenue of £20,076m was in line with our outlook of around £20bn for the year. Foreign exchange movements had a negative impact of £44m and low-margin transit revenue reduced by £214m (including mobile termination rate reductions of £82m). Transit revenue was £1,518m in the year (2010: £1,758m). Underlying revenue excluding transit was down 3%.

Adjusted EBITDA increased by 4% to £5,886m, ahead of our outlook of around £5.8bn for the year. Foreign exchange movements had no significant impact on EBITDA in the year.

Total group operating costs decreased by £1,147m, or 6%, to £17,542m. Depreciation and amortisation decreased by 2% to £2,979m reflecting the lower levels of capital expenditure in the last two years partly offset by higher expenditure on shorter lived assets. Excluding depreciation and amortisation, group operating costs reduced by £1,087m, or 7%, ahead of our outlook of around £900m for the year.

Total labour costs decreased by 5% to £5,845m. Indirect labour costs reduced by 18% as we continue to reduce agency and contractor resource and redeploy existing permanent staff. Direct labour costs remained broadly flat at £4,830m with the reduction in labour resource being offset by pay inflation and increased pension costs. Leaver costs more than halved to £57m (2010: £142m). Payments to telecommunications operators were down 8%, reflecting lower mobile termination rates and reduced transit and wholesale call volumes. Property and energy costs and network maintenance and IT costs were 11% and 10% lower, respectively, as the group continues to drive efficiency improvements. Other operating costs decreased by 5%.

Capital expenditure was £2,590m, in line with our capital expenditure expectations of around £2.6bn for the year.

Net finance expense
Net finance expense was £845m, a decrease of £45m, due to the reduction in net debt and the repayment of higher coupon debt in the second half of the year.

Tax
The effective tax rate on the profit before specific items for the year was 21.7% (2010: 22.9%), reflecting the utilisation of tax losses and continued focus on tax efficiency within the group.

Specific items
Specific items in the year resulted in a net charge after tax of £127m (2010: £308m), the principal components of which are described below.

BT Global Services restructuring charges of £192m have been recognised in the year (2010: £301m) principally comprising network, people and property costs. Further charges of around £50m are expected to be incurred in 2012 in relation to the costs associated with BT Global Services network rationalisation programme. Specific operating costs also include property rationalisation charges of £88m (2010: £121m) and intangible asset impairment charges of £49m (2010: £nil).

Net interest expense on pensions was £79m (2010: £279m). In addition, there was a profit of £42m from disposing of a 6.5% interest in our associate Tech Mahindra during the year, reducing our holding to 23.5%.

The tax credit in respect of the above specific items was £72m (2010: £190m). A specific tax credit of £172m (2010: £nil) has been recognised for the re-measurement of deferred tax balances due to the change in the UK statutory corporation tax rate to 26%, effective from 1 April 2011. In addition, a specific tax charge of £5m (2010: £230m credit) was recognised relating to the settlement of outstanding tax matters from prior years.

Earnings per share
Adjusted EPS was 21.0p, up 21%, principally reflecting the higher operating profit and lower finance expense. Reported EPS was 19.4p, up 46%. This is based on average shares in issue of 7,750m (2010: 7,740m). A reconciliation of reported EPS to adjusted EPS is provided in Note 10.

BT Group plc (NYSE: BT; London: BTA)