LONDON -- BT Group plc (BT.L) today announced its results for the first quarter to 30 June 2016.
Gavin Patterson, Chief Executive, commenting on the results, said:
“We’ve made a good start to the year, with growth in revenue and strong cash flow. We’re on track to deliver our full year outlook. “Our integration of EE is progressing well, alongside our business reorganisation that took effect on 1 April. EE performed strongly, both financially and commercially, and our customers are seeing the initial benefits of our acquisition with BT Sport now available to EE pay monthly customers. We remain focused on improving customer experience and 100% of EE pay monthly calls are now handled in UK and Ireland contact centres. We’ve reduced engineer missed appointments by more than a third since last quarter and Openreach is again ahead on all 60 minimum service levels set by Ofcom.
“Fibre broadband is available to well over 25m premises and take-up remains strong. At a retail level, we performed well achieving a 79% share of broadband net adds in the quarter. We were pleased to renew our FA Cup rights during the quarter and we look forward to showing more games from the Premier League at a much better time slot, starting in two weeks. Our customers can also look forward to all the exclusive live action from the UEFA Champions League and UEFA Europa League once again this year.
“Our investment plans remain central to our future and so we will be rolling out further fibre in the coming months, as well as 4G through the Emergency Services Network contract. Our aim is to make these services as universally available as we can, whilst also deploying a new generation of ultrafast broadband. Such investment requires regulatory clarity, particularly in these uncertain times.
“Having listened to Ofcom and industry, we have set out our proposals for greater independence and transparency for Openreach. Our proposals can form the basis for a fair, proportionate and sustainable regulatory settlement and we believe they can also enable Ofcom to bring its Digital Communications Review to a speedier conclusion. We will continue to engage with Ofcom over the coming months.”
Key points for the quarter:
Table 1: Group Results For The First Quarter To 30 June 2016
|- change in underlying revenue excluding transit on a pro forma basis||0.4|
|Profit before tax|
|Earnings per share|
|Normalised free cash flow||448||106||£342m|
Our key measure of the group’s revenue trend, underlying revenue1 excluding transit on a pro forma basis, was up 0.4%. Consumer revenue was up 9%, with broadband and TV revenue up 21%. Global Services revenue was up 5% reflecting the benefit of foreign exchange movements, while on an underlying pro forma basis revenue excluding transit was flat. Business and Public Sector underlying revenue1 excluding transit on a pro forma basis was down 4%, due to the completion of several public sector contracts. Openreach revenue was flat, with a continued strong performance in fibre offsetting the impact of regulatory price changes. Wholesale and Ventures underlying revenue excluding transit on a pro forma basis was down 6%, largely reflecting the benefit last year of around £15m of revenue related to ladder pricing. And we’re pleased with the financial performance of EE in its first full quarter since we acquired it in January 2016, with revenues of £1,243m.
Underlying operating costs1,2 excluding transit on a pro forma basis were up 2%, reflecting additional UEFA rights costs and the launch of BT Mobile handsets. Excluding these, underlying operating costs1,2 excluding transit on a pro forma basis were down 1%. Adjusted EBITDA grew 25% as a result of the acquisition of EE. Underlying EBITDA1 on a pro forma basis was down 2%, with growth in Global Services and EE more than offset by declines in Business and Public Sector, Consumer, Wholesale and Ventures, and Openreach. We’re continuing to make good progress on our integration of EE.
At a group level our mobile base was 30.3m. We added 244,000 postpaid mobile customers in the quarter, taking the postpaid customer base to 16.2m. The number of prepaid customers reduced by 291,000, in line with industry trends, taking the base to 8.0m. The 4G customer base reached 16.7m. Monthly mobile ARPUs3 were £27.2 for postpaid customers, and £4.1 for prepaid customers. Churn was a record low at 1.0% for EE postpaid customers reflecting high customer loyalty.
We continue our strategy to reach 95% 4G geographic coverage by the end of 2020. By the end of June we reached more than two-thirds UK geographic coverage (97% 4G population coverage), the largest of any UK operator, providing a major boost for rural communities. We remain on track to help bring fibre broadband to 95% of the country by the end of 2017, with plans to go even further. And we are committed to investing further in ultrafast broadband, with our ambition to bring speeds of above 300Mbps to 12m premises by the end of 2020.
We’ve passed well over 25m premises with our superfast fibre broadband network. Openreach achieved 333,000 fibre broadband net connections. This brings the number of homes and businesses connected to around 6.2m, 24% of those passed. We have 4.3m retail fibre broadband customers, having added 181,000 this quarter. And the UK broadband market4 grew by 95,000, of which our share was 76,000 or 79%.
The UK’s exit from the EU
While we can’t predict what the longer-term impact of the UK’s exit from the EU will be, and the weakening of Sterling does impact our financial results, the Board does not expect the results of the EU referendum to have a significant impact on our outlook, which remains unchanged.
Both reported and adjusted revenue were £5,775m, up 32% and 35% respectively, mainly as a result of the acquisition of EE. We had a £47m favourable impact from foreign exchange movements, and a £14m reduction in transit revenue. Underlying revenue1 excluding transit on a pro forma basis was up 0.4%.
Adjusted operating costs2 increased by £1,355m to £4,812m. Net labour costs of £1,229m were up 17%, reflecting the additional EE employees that joined the group and leaver costs of £40m. Payments to telecommunications operators of £635m were up 28% driven primarily by EE.
Property, energy, network operating and IT costs were up 18%. BT Sport programme rights charges were £163m (Q1 2015/16: £86m) mainly as a result of UEFA rights. Other costs were up £668m or 82%, reflecting EE.
Adjusted EBITDA of £1,818m was up 25%. Underlying EBITDA1 on a pro forma basis was down 2%. Depreciation and amortisation of £855m was up 36% largely due to the impact of EE. Adjusted net finance expense was £154m, up £22m primarily due to higher average net debt as a result of our acquisition of EE.
Adjusted profit before tax was £802m, up 16%. Reported profit before tax (which includes specific items) was £717m, up 13%. The effective tax rate on profit before specific items was 18.0% (Q1 2015/16: 19.0%).
Adjusted EPS of 6.6p was down 1%. Reported EPS (which includes specific items) was 5.9p, down 3%. These are based on a weighted average number of shares in issue of 9,933m (Q1 2015/16: 8,330m), up 19% mainly reflecting the additional shares we issued as part of our acquisition of EE.
Specific items resulted in a net charge after tax of £70m (Q1 2015/16: £51m). This mainly reflects EE integration costs of £28m (Q1 2015/16: £7m), property rationalisation costs of £5m (Q1 2015/16: £nil) and the net interest expense on pensions of £52m (Q1 2015/16: £55m). Last year we recognised £82m of both transit revenue and costs, with no EBITDA impact, being the effect of ladder pricing agreements relating to previous years. The tax credit on specific items was £15m (Q1 2015/16: £11m).
Capital expenditure was £777m (Q1 2015/16: £658m). This consists of gross expenditure of £804m (Q1 2015/16: £661m) which has been reduced by net grant funding of £27m (Q1 2015/16: £3m) mainly relating to our activity on the Broadband Delivery UK (BDUK) programme.
Our base-case assumption for take-up in BDUK areas remains at 33%. Under the terms of the BDUK programme, we have a potential obligation to either re-invest or repay grant funding depending on factors including the level of customer take-up achieved. While we have recognised gross grant funding of £39m (Q1 2015/16: £103m) in line with network build in the quarter, we have also deferred £12m of the total grant funding to reflect higher take-up levels on a number of contracts. In the first quarter last year we deferred £100m of the total grant funding owing to the step-up in our base-case take up assumption. Without the impact of the deferral, our capital expenditure would have been £765m (Q1 2015/16: £558m) with the increase reflecting the impact of EE.
Free cash flow
Normalised free cash flow2 was up £342m at £448m. The increase primarily reflects growth in EBITDA and favourable working capital movements due to phasing.
The net cash cost of specific items was £52m (Q1 2015/16: £52m). This includes payments of £19m (Q1 2015/16: £51m) related to restructuring in prior years and EE acquisition and integration related payments of £18m (Q1 2015/16: £16m). We also made £5m of pension deficit payments in relation to the EE pension scheme. Last year also included payments relating to historical Ethernet pricing of £16m (following a 2012 Ofcom determination) and receipts of £40m relating to ladder pricing revenue. After specific items and a £44m (Q1 2015/16: £69m) cash tax benefit from pension deficit payments, reported free cash flow was an inflow of £440m (Q1 2015/16: £123m).
Net debt and liquidity
Net debt was £9,579m at 30 June 2016, a decrease of £266m since 31 March 2016 and £3,760m higher than at 30 June 2015. In the quarter we spent £176m on our share buyback programme ahead of some all-employee share options maturing this summer. We continue to expect to spend around £200m on the programme for the year as a whole.
At 30 June 2016 the group held cash and current investment balances of £2.9bn. We increased our committed facility from £1.5bn to £2.1bn on 30 June, which remains undrawn, and cancelled the EE revolving committed facility of £0.4bn. During the quarter we also repaid bonds of £0.4bn and in July we repaid the £0.2bn outstanding balance on the EE acquisition facility. Term debt of £1.4bn is repayable during the remainder of 2016/17. Short term borrowings also include £0.2bn as the remaining portion of the drawn acquisition facility and £0.6bn collateral for open mark to market positions.
On 9 June 2016, Moody’s upgraded our credit rating from Baa2 to Baa1 and on 5 July 2016 S&P upgraded our rating from BBB to BBB+ Stable.
The IAS 19 net pension position at 30 June 2016 was a deficit of £6.2bn net of tax (£7.6bn gross of tax), compared with £5.2bn (£6.4bn gross of tax) at 31 March 2016. The increase in the deficit primarily reflects the significant fall in the real discount rate which during the quarter reduced from 0.44% to negative 0.05%, its lowest reported level. This was partly offset by asset growth.
On 28 April 2016 Ofcom published its Final Statement on its Business Connectivity Market Review (BCMR), Leased Lines Charge Control and Cost Attribution Review. This broadly confirmed Ofcom’s proposals set out in its Draft Statement published in March, including:
- the charge controls that apply from 1 May 2016 until 31 March 2019;
- the introduction of minimum service levels for Openreach relating to the installation and repair of Ethernet services; and
- a requirement on Openreach to provide access to its fibre network for providers of high speed services to businesses (‘dark fibre’) from 1 October 2017.
We disagree with some aspects of Ofcom’s BCMR statement and have appealed these points to the Competition Appeals Tribunal (CAT).
We expect Ofcom’s Cost Attribution Review assessment also to have an effect on future price controls, including Wholesale Local Access and Narrowband.
In May 2015, BT made an appeal to the CAT on Ofcom’s decision to introduce the VULA margin squeeze test. In March 2016 the CAT found that Ofcom was entitled to impose a regulatory margin squeeze test. In June 2016 the Competition and Markets Authority (CMA) published its determination on the remaining pricing grounds. It agreed with BT that Ofcom had made an error in setting the relevant compliance period and determined that this should be extended to six months from the current one month. It dismissed BT’s other grounds. On 25 July 2016 the CAT completed its appeals process by issuing directions to Ofcom to amend the VULA margin squeeze test in line with the CMA determination.
In July, following extensive discussions with Ofcom over many months, we confirmed that BT has volunteered significant governance changes to further increase the independence and transparency of Openreach. The main governance changes include: the creation of an Openreach Board as a board committee of BT plc, with an independent Chair and a majority of independent members; the greater delegation of strategic, operational and budgetary responsibilities; and an enhanced consultation process with industry on future investment plans.
On 26 July 2016, Ofcom published for consultation its own proposals for strengthening Openreach’s strategic and operational independence. We welcome Ofcom's recognition in their consultation that structural separation would be a disproportionate move. We believe our proposals provide Ofcom with every benefit they're seeking but avoid the extensive, disproportionate costs that would be incurred if, for example, assets had to be transferred into a newly incorporated subsidiary company. Our proposals will also ensure that Openreach continues to benefit from being part of the larger BT group, which helps to reduce the risk it faces when investing in new products.
Openreach is also committed to delivering better service, broader coverage and faster speeds and these changes will enable it to do that.
Our proposals can form the basis for a fair and sustainable regulatory settlement and we believe they can also enable Ofcom to bring its review to a speedier conclusion. We have called on Ofcom to support these proposals as the best way forward for the country and as the foundation for the competition and investment in digital networks that the UK needs. We will continue to engage with Ofcom over the coming months.
Our outlook is unchanged.
We continue to expect growth in underlying revenue1 excluding transit on a pro forma basis in 2016/17. Adjusted EBITDA is expected to be around £7.9bn, after a net investment of around £100m in launching handset offerings to BT mobile customers. Normalised free cash flow is expected to be £3.1bn–£3.2bn. This is after up to £300m of upfront capital expenditure in the Emergency Services Network (ESN) contract, as well as around £100m of EE integration capital expenditure.
For 2017/18, we expect growth in underlying revenue excluding transit and adjusted EBITDA. We also expect to incur capital expenditure of around £100m on the ESN contract and around £100m again on integration. We are confident in our cash flow generation, as a result of the investments we are currently making, the ability of our business to respond to a dynamic industry environment, and ongoing cost transformation and synergy realisation opportunities. As such, we expect to generate normalised free cash flow of more than £3.6bn in 2017/18.
We expect to grow our dividend per share by at least 10% in both 2016/17 and 2017/18. We expect to buy back around £200m of shares in 2016/17 to help counteract the dilutive effect of all-employee share option plans maturing in the year. This is below the £315m buyback we completed in 2015/16 reflecting the lower number of shares that are expected to be required for our share option plans.
BT Group plc (NYSE: BT; London: BTA)