TIDMTALK
RNS Number : 5481T
TalkTalk Telecom Group PLC
15 November 2019
15 November 2019
TalkTalk Telecom Group PLC
Results for the half year to 30 September 2019 (H1 FY20)
Strong growth in Headline EBITDA and Fibre net adds; outlook
remains unchanged
Metric H1 FY20 H1 FY20 H1 FY19
IFRS 16 (1) Pre-IFRS 16 (1) Pre-IFRS 16 (1)
Headline (2) revenue (ex-Carrier GBP764m GBP764m GBP771m
and Off-net)
------------- ----------------- -----------------
Statutory revenue GBP792m GBP792m GBP822m
------------- ----------------- -----------------
Headline (2) EBITDA GBP140m GBP115m GBP101m
------------- ----------------- -----------------
Statutory operating profit GBP29m GBP28m GBP19m
------------- ----------------- -----------------
Statutory profit before taxation GBP1m GBP4m (GBP4m)
------------- ----------------- -----------------
Net Debt (3) GBP1,041m GBP830m GBP760m
------------- ----------------- -----------------
Fibre Net Adds 292k 292k 192k
------------- ----------------- -----------------
On-net ARPU GBP24.49 GBP24.49 GBP25.01
------------- ----------------- -----------------
On-net churn 1.27% 1.27% 1.20%
------------- ----------------- -----------------
Tristia Harrison, Chief Executive of TalkTalk, commented:
"We're pleased that our clear strategy to accelerate customer
growth in Fibre broadband while also reducing costs has led to a
significant increase in profitability in the first half, with a 14%
year-on-year increase in like-for-like (4) EBITDA. We now have over
two million customers taking a Fibre product, adding nearly 300,000
customers in the half.
Fibre broadband is good news for customers and TalkTalk. It
offers a faster, more reliable service whilst also reducing churn
and comes with a materially lower cost to serve. In addition, our
soon to be completed HQ move and shift to a self-service model is
underpinning our cost reductions.
Our Headline EBITDA outlook for the year remains unchanged."
Highlights
-- Fibre net adds up 52% to 292k, including a record 174k in Q2 (Q2 FY19:
125k), accounting for 33% share of all new Openreach Fibre to the Cabinet
(FTTC) lines in Q2 (H1 FY19: 22%)
-- Headline revenue (ex-Carrier and Off-net) and On-net ARPU down 0.9%
and 2.1% respectively, largely due to lower Voice usage and call boost
revenue across Consumer and B2B. We also accelerated the re-contracting
of our remaining higher ARPU legacy Copper customers onto a Fixed Low
Price Plan (FLPP), ahead of regulatory and industry commitments on
out of contract pricing, increasing our in-contract base to 72% (Q4
FY19: 68%). Headline revenue decrease was offset in part by increased
Fibre penetration
-- Statutory revenue contracted by 3.6% mainly due to exiting MVNO operations
and declining Carrier revenue
-- Headline EBITDA (pre-IFRS 16) represents 13.9% growth with increased
Fibre penetration and HQ move efficiencies driving a materially lower
cost base
-- Statutory operating profit improvement reflects the Headline EBITDA
growth
-- Headline EBITDA outlook for the year (pre-IFRS 16) remains unchanged
-- Increase in net debt (pre-IFRS 16) driven by working capital outflows
due to a change in distribution model and accelerated Fibre growth,
the cash cost of our HQ move and continued investment in FibreNation
FibreNation
-- Ongoing advanced negotiations with interested parties regarding its
FibreNation business
(1) IFRS 16 has been applied using the modified retrospective
approach. Accordingly, the comparative information has not been
restated, with FY20 results presented both including and excluding
IFRS 16 to allow users to see how the results have moved period on
period. This alternative performance measure (APM) will be
presented for one year only until the comparatives also include the
adoption of IFRS 16. See note 2 for more information.
(2) See note 2 for an explanation of APMs and non-Headline
items. See note 7 for a reconciliation of Statutory information to
Headline information.
(3) Total net debt includes GBP211m lease liability, following
adoption of IFRS 16 (see note 2), of which GBP36m relates to
finance leases (H1 FY19: GBP40m finance leases).
(4) Like-for-like EBITDA is referring to Headline EBITDA on a
pre-IFRS 16 basis
The person responsible for arranging the release of this
announcement on behalf of the Company is Tim Morris, General
Counsel and Company Secretary.
There will be a webcast and conference call for analysts and
investors at 9.00 am.
Webcast link:
https://webcast.merchantcantoscdn.com/webcaster/dyn/4000/7464/16532/117258/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: 6647239#
Contacts:
Investor Relations: Tim Warrington +44 (0) 77 7541 4240
Media: Dafydd Wyn +44 (0) 77 9870 4841
H1 FY20 financial results (1,2)
Headline revenue (excluding Carrier and Off-net) contracted by
0.9%. Ongoing Voice decline was partly offset during the period by
a continued strong increase in Fibre penetration. Headline EBITDA
increased to GBP140m. Prior to the adoption of IFRS 16 Headline
EBITDA grew 13.9% to GBP115m (H1 FY19: GBP101m) reflecting the
continued focus on reducing the cost base of the business. Our
Statutory profit before tax of GBP1m (H1 FY19: GBP4m loss) includes
non-Headline items of GBP14m (H1 FY19: GBP10m). The Board has
recommended an interim dividend of 1.00p (H1 FY19: 1.00p) in line
with our previously stated dividend policy.
Q2 trading - increasing momentum in Fibre base growth and
penetration (1,2,5)
Q2 saw a marked acceleration in Fibre growth, with a record 174k
net adds across Consumer and B2B in the quarter (previous record
was 152k in Q4 FY19), taking 33% share of new Openreach FTTC lines
(Q2 FY19: 22%). This was a significant step up from Q1 (118k) and
was driven in part by 79% of new Consumer customers taking a Fibre
product in the period (Q2 FY19: 54%), peaking at 81% in September.
Equally encouraging is the volume of customers taking our higher
speed services, with 23% of the Consumer Fibre base now taking our
80mbps product (Q2 FY19: 17%).
Growth in Fibre net adds was not only within the Consumer
division, as our B2B arm also delivered its strongest ever quarter
of Fibre net adds, with the majority of new wholesale partner
customers taking a Fibre product, including an increasing mix of
customers taking 80mbps speeds. The trend is mirrored in our Data
business, where we added 1.1k to the Ethernet base, taking the
overall base to 39.4k (Q2 FY19: 34.9k), with 37% of Ethernet orders
now for our 1Gb lines (Q2 FY19: 18%), which come with materially
higher ARPU and lower churn.
With Copper fast becoming a legacy product, shifting our focus
to Fibre is the right thing for TalkTalk and our customers. Fibre
customers benefit from faster, more reliable connectivity, whilst
for us these customers are accretive to customer lifetime value
(CLV) with lower churn and cost to serve, as well as higher ARPU
compared to Copper customers (with the exception of some legacy
Copper customers with call and TV boosts). Our focus on Fibre and
our CLV approach to base management has seen a number of legacy
Copper customers opt to leave TalkTalk, meaning On-net churn has
risen year-on-year to 1.26% (Q2 FY19: 1.11%).
This active decision to target our remaining higher ARPU legacy
Copper customers to re-contract onto FLPPs, ahead of regulatory and
industry commitments on out of contract pricing, has led to some
further ARPU dilution in the period. This combined with overall
legacy Copper broadband base decline, and Voice usage and boost
drags in both Consumer and B2B has seen Q2 Headline revenues
excluding Carrier (GBP9m) and Off-net (GBP2m) fall year on year by
3.1% to GBP377m. Q2 On-net revenues were also down 3.1% to GBP310m,
whilst Data was flat at GBP43m and Voice was down 7.7% to GBP24m.
As a result, Q2 On-net ARPU is down 3.6% year on year to GBP24.29
(Q2 FY19: GBP25.21), with lower Voice usage and call boost take-up,
combined with legacy base re-contracting being the primary driver
of this.
However, as Fibre penetration continues to increase and our
FLPPs continue to resonate well with Consumer customers, with 72%
(Q2 FY19: 69%) of the base now in-contract, benefitting from
price-certainty for the duration of their contract, we expect to
see churn trend down and ARPU stabilise again in the second half
and beyond.
Outlook
Headline EBITDA outlook for the year (pre-IFRS 16) remains
unchanged, with increased Fibre penetration and HQ move
efficiencies driving a materially lower cost base.
(1) IFRS 16 has been applied using the modified retrospective
approach. Accordingly, the comparative information has not been
restated, with FY20 results presented both including and excluding
IFRS 16 to allow users to see how the results have moved period on
period. This alternative performance measure (APM) will be
presented for one year only until the comparatives also include the
adoption of IFRS 16. See note 2 for more information.
(2) See note 2 for an explanation of APMs and non-Headline
items. See note 7 for a reconciliation of Statutory information to
Headline information.
(5) Since EFM is a legacy product, we are no longer including
EFM connections in our Data KPIs, and instead will report Ethernet
only.
CEO review
Overview (1,2,4)
It has now been two and a half years since we set out our
strategy to be Britain's leading value provider of core fixed
connectivity. As we exit the first half of the year, our strategy
remains unchanged, with our focus on providing our customers the
best value for money connectivity, whilst radically simplifying
TalkTalk to focus on fewer priorities as a leaner, more efficient
business.
Data usage continues to increase exponentially (30% YoY), driven
by video streaming, online gaming and cloud storage services.
Consequently, the demand for affordable and reliable fixed
connectivity continues to rise, as does the consumer demand for
higher speed and more resilient broadband.
These market dynamics continue to validate our strategy to focus
on fixed connectivity and to specifically narrow our focus on
higher bandwidth Fibre broadband, as Copper fast becomes a legacy
product. Crucially, alongside this, we are continuing to right-size
our cost-base, as we remain resolutely focused on addressing our
central costs. This strategy has led to a significant increase in
profitability in the first half, with a 14% year-on-year increase
in pre-IFRS 16 Headline EBITDA to GBP115m.
In an uncertain economic climate where price really matters,
TalkTalk remains well positioned to benefit as the only scale,
value provider.
Fibre for Everyone
TalkTalk has made strong progress throughout the half in
converting standard broadband customers on legacy Copper
connections to Fibre-to-the Cabinet (FTTC). These customers benefit
from faster, more reliable connectivity, whilst for TalkTalk these
customers come with a higher lifetime value. We now have over 50%
of the total Consumer and B2B base taking a Fibre product. However,
as customers continue to demand even faster, more reliable
services, our long-term ambition is to transition all customers to
new Fibre-to-the-Premises (FTTP) networks as quickly as
possible.
Supporting this ambition, we created our 'Fibre for Everyone'
programme. This is a cross-Group initiative where we will consume
wholesale FTTP from Openreach, in an extension of our commercial
wholesale FTTC agreement, FibreNation and other alternative network
operators to provide future-proof connectivity to homes and
businesses across the UK. In the first half of the year, we have
been building the systems and capability to provide FTTP services
and we are aiming to launch Openreach FTTP before the end of the
calendar year. We are also getting ready to consume Single Order
Generic Ethernet Access (SOGEA) at scale in the next year.
We continue to be well placed to succeed in this space. With
multiple routes to market through TalkTalk Consumer, Business and
Wholesale, as well as a significant existing base, we are one of
the few scale operators able to offer significant volume
commitments to network builders and drive commercial advantage.
Consumer
Our single-minded focus on Fibre continues to bear fruit as more
customers are demanding faster, more reliable services. We saw
another meaningful shift from legacy Copper to Fibre, as we
delivered 292k Fibre net adds across the Group in the first half of
FY20, making significant year-on-year progress (H1 FY19: 192k).
Over 50% of our total base (Consumer and B2B) is now on a Fibre
product, with the Fibre base now in excess of 2 million
customers.
Our propositions continue to resonate with our Consumer base,
with an ever-increasing proportion of new customers signing-up to a
Fibre product. As we exited the half, 81% of new Consumer customers
signed up to one of our higher speed products compared to 54% at
the same stage 12 months ago. Of these new Fibre customers, 42%
took our faster, higher ARPU 80mbps product (H1 FY19: 22%) and
lower wholesale costs from Openreach means we can continue to
migrate more of our base to these faster services more
economically.
Continued investment in new, digital self-service tools has led
to significant improvements in the customer experience. Our 'My
Service Centre' tool allows customers to identify and resolve
issues online without having to speak to an agent. This tool has
now been rolled out to all of our Consumer base and combined with
other self-service methods (e.g. text messaging and live chat), we
are seeing a reduction in call volumes, fewer complaints and
increased customer satisfaction, which is leading to lower costs to
serve.
During the half, we have seen a slight increase in On-net churn
to 1.27% (H1 FY19: 1.20%) and some ARPU dilution as we actively
targeted our remaining higher ARPU legacy Copper customers to
re-contract onto FLPPs, ahead of regulatory and industry
commitments on out of contract pricing. As such, our in-contract
base increased to 72% (Q4 FY19: 68%). We also made a number of
commitments in September to improve our customers' experience,
including making it easier for new and existing customers to access
the same deals from January 2020, as well as ensuring vulnerable
customers are proactively moved to the best package for their
needs. These pre-emptive actions leave us well positioned ahead of
any further regulatory intervention on the 'loyalty penalty' paid
by existing customers.
(1) IFRS 16 has been applied using the modified retrospective
approach. Accordingly, the comparative information has not been
restated, with FY20 results presented both including and excluding
IFRS 16 to allow users to see how the results have moved period on
period. This alternative performance measure (APM) will be
presented for one year only until the comparatives also include the
adoption of IFRS 16. See note 2 for more information.
(2) See note 2 for an explanation of APMs and non-Headline
items. See note 7 for a reconciliation of Statutory information to
Headline information.
TalkTalk Business (5)
In the same way that our Consumer customers are demanding higher
speed connections, our B2B clients are consuming more data too. As
such, our strategy is consistent across both divisions, with the
upgrade of customers to higher speed Fibre and Data products being
the primary focus for both the indirect and Direct B2B business. As
in the Consumer division, the majority of new customers in our
indirect partner business are now joining on Fibre products, with
56% of gross additions taking Fibre in Q2 (Q2 FY19: 43%), leading
to the highest ever quarterly net adds number in both B2B and the
Group.
Throughout the half year we strategically locked in a number of
our key Broadband and Ethernet partners with long-term commitment
deals, adding 2.1k to the Ethernet base (H1 FY19: 2.9k), taking the
overall base to 39.4k (H1 FY19: 34.9k). Within the mix, we saw over
a third of orders for our 1Gb service (H1 FY19: 17%), so whilst
overall Ethernet base growth has slowed year-on-year, this has been
countered by a higher volume of 1Gb connections, which come with
significantly higher ARPU and lower churn.
Given the success of 'My Service Centre' in the Consumer
business, we have started to share our proprietary data with our
partners to enable them to enhance their end-customer experience.
Not only does this lead to happier, more content customers, this
also strengthens our relationship with key partners, as we work
together to provide the best possible service to customers.
To ensure we maximise the growth potential of our Direct B2B
business, we structured it as a stand-alone business division in
the prior year to ensure that it receives focus from its new
dedicated management team, as we grow the business and continue to
improve on the quality of service we provide our Direct customers.
This renewed focus, coupled with some targeted investment, has seen
the Direct business prosper, delivering record Fibre net adds.
Network and connectivity
Our strategy means that fixed connectivity remains our core
investment priority as we continue to scale our network to meet and
exceed rising demand for bandwidth (+30% YoY). Crucially, we are
doing this more efficiently by exploiting new technology and
industry changes along the way. Video streaming continues to
dominate peak bandwidth consumption, contributing to our recent
peak usage record of over 5tbps. To help manage this demand, we
have successfully continued our strategy of storing (caching)
content at the network edge to minimise buffering and optimise
required network expansion. We now serve 89% of Netflix content at
the network edge, and this combined with our continued transition
to Fibre access technologies is reflected by our strong position in
the Netflix ISP performance rankings for the UK.
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.
Our continued use of network data to proactively diagnose
connectivity issues, inform customers and recommend the right
course of action to resolve remains at the heart of our consumer
connectivity strategy and the second half of the year will see this
move into the in-home environment at scale, unlocking the confused
and often congested in-home environment through cloud-based data
analytics and clear guidance to help customers improve and enjoy
the connectivity we supply to the home.
(5) Since EFM is a legacy product, we are no longer including
EFM connections in our Data KPIs, and instead will report Ethernet
only.
Cost reduction (2)
Throughout the first half of the year we have continued our
relentless drive to make TalkTalk a simpler, lower cost business,
and this is now starting to materially feed through into the
financials. Our focus on core connectivity has seen us continue to
sell our non-core products, such as mobile and TV, in a capital
light way. This Fibre-focused strategy, aided by our wholesale
discount agreement with Openreach, has seen a big increase in the
number of customers taking Fibre, meaning that a greater proportion
of the base are benefitting from higher speed and more resilient
connections. As a result, we are seeing fewer faults, engineer
visits and calls into the call centre. In tandem with this, the
full roll-out of 'My Service Centre' has seen more and more
customers self-serving, further reducing calls to our contact
centres, meaning we have incurred significantly lower costs to
serve our customers year on year.
We have made excellent progress on the move of our HQ from
London to Salford and have delivered GBP7m savings in the first
half, with a further c.GBP10m expected in the second half,
consistent with our guidance of GBP16m-GBP20m for the full year.
Roughly half the associated non-Headline cash costs have now been
incurred (c.GBP16m), with GBP29m recognised to date in the income
statement. A small number of roles were transitioned at the end of
March 2019, with the bulk moving at the end of September 2019, and
the final tranche by the end of December 2019. As such the savings
are weighted more towards the second half of the financial year,
with the full annualised saving of GBP25m-GBP30m materialising from
FY21 onwards. We are already seeing improved collaboration and a
more agile culture, and believe there are further benefits to be
had, particularly as we continue to undertake a rigorous review of
all external spend now that the majority of the business is located
in one place.
Finally, on costs, we have transitioned to a more targeted
digital approach to marketing, which has enabled us to target
customers with the right CLV profile. We have moved away from price
comparison websites, as well as exiting a distribution agreement
with a third party, as these routes to market were effective at
driving volume, but customers came with lower CLVs and a higher
propensity to churn. Enhanced by a new distribution relationship, a
shift to digital channels has enabled us to bring down SAC and
marketing costs year on year.
People
To continue delivering for our customers, we are intent on
making sure we have the right resources and skills in place to
focus on our mission of being the UK's leading value for money
fixed connectivity provider. Over the last 12 months, we have been
working on transition plans as we move our HQ from London to
Salford. As at the end of September 2019, nearly three quarters of
our workforce (74%) are based in our Soapworks site in Salford
Quays, which is 10% more than at end of FY19. The move has been a
great success so far and increased collaboration has led to a
34-point improvement in internal engagement scores since November
2018. The transition will be completed by January 2020, at which
point the vast majority of the workforce will be situated in our
North West HQ, with a small presence maintained in a satellite
office in London.
Outlook (1,2)
Headline EBITDA outlook for the year (pre-IFRS 16) remains
unchanged, with increased Fibre penetration and HQ move
efficiencies driving a materially lower cost base.
(1) IFRS 16 has been applied using the modified retrospective
approach. Accordingly, the comparative information has not been
restated, with FY20 results presented both including and excluding
IFRS 16 to allow users to see how the results have moved period on
period. This alternative performance measure (APM) will be
presented for one year only until the comparatives also include the
adoption of IFRS 16. See note 2 for more information.
(2) See note 2 for an explanation of APMs and non-Headline
items. See note 7 for a reconciliation of Statutory information to
Headline information.
CFO Review
Financial information
Headline (1,2) Statutory (1,2)
-------------------------------------------
Six months Six months Six months Six months
Six months ended ended Six months ended ended
ended 30 September 30 September ended 30 September 30 September
30 September 2019 2018 30 September 2019 2018
2019 Unaudited Unaudited 2019 Unaudited Unaudited
Unaudited (pre-IFRS (pre-IFRS Unaudited (pre-IFRS (pre-IFRS
(IFRS 16) 16) 16) (IFRS 16) 16) 16)
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- ------------- ------------- ------------- ------------- -------------
Revenue 786 786 808 792 792 822
Cost of sales (384) (384) (383) (386) (386) (391)
-------------------- ------------- ------------- ------------- ------------- ------------- -------------
Gross profit 402 402 425 406 406 431
Operating expenses (262) (287) (324) (276) (301) (336)
EBITDA 140 115 101 130 105 95
Depreciation and
amortisation (92) (68) (67) (96) (72) (71)
Share of results of
joint
ventures (5) (5) (5) (5) (5) (5)
-------------------- ------------- ------------- ------------- ------------- ------------- -------------
Operating profit 43 42 29 29 28 19
Net finance costs (28) (24) (23) (28) (24) (23)
-------------------- ------------- ------------- ------------- ------------- ------------- -------------
Profit/(loss) before
taxation 15 18 6 1 4 (4)
Taxation (3) (3) (1) - - 1
-------------------- ------------- ------------- ------------- ------------- ------------- -------------
Profit/(loss) for
the
year attributable
to
the owners of the
Company 12 15 5 1 4 (3)
-------------------- ------------- ------------- ------------- ------------- ------------- -------------
Earnings/(loss) per
share
Basic 1.0 0.4 0.1 (0.3)
Diluted 1.0 0.4 0.1 (0.3)
-------------------- ------------- ------------- ------------- ------------- ------------- -------------
(1) IFRS 16 has been applied using the modified retrospective
approach. Accordingly, the comparative information has not been
restated, with FY20 results presented both including and excluding
IFRS 16 to allow users to see how the results have moved period on
period. This alternative performance measure (APM) will be
presented for one year only until the comparatives also include the
adoption of IFRS 16. See note 2 for more information.
(2) See note 2 for an explanation of APMs and non-Headline
items. See note 7 for a reconciliation of Statutory information to
Headline information.
Six months ended Six months ended
30 September 2019 30 September 2018
unaudited unaudited
Revenue summary GBPm GBPm
------------------
On-net 627 629
Corporate 154 172
Off-net 5 7
------------------------------------------------- ------------------ ------------------
Headline revenue 786 808
Less Carrier (17) (30)
Less Off-net (5) (7)
------------------------------------------------- ------------------ ------------------
Headline revenue (excluding Carrier and Off-net) 764 771
------------------------------------------------- ------------------ ------------------
Throughout this CFO review, alternative performance measures
(APMs) are presented as well as statutory measures and these
measures are consistent with prior periods, with the exception of
the pre-IFRS 16 results which in absence of restating the prior
periods have been provided to aid the users of the financial
statements to better understand the impact of applying the new
standard. 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 better understand the financial performance,
position and trends of the Group.
The group adopted IFRS 16 'Leases' in the current year and
elected to adopt the standard using a modified retrospective
approach, recognising the cumulative effect of initially applying
IFRS 16 as an adjustment to opening equity at the date of initial
application. More details of this adjustment are provided in Note
2.
Overview
Headline revenue (excluding Carrier and Off-net) contracted by
0.9%. Ongoing Voice decline was partly offset during the period by
a continued strong increase in Fibre penetration. Headline EBITDA
increased to GBP140m. Prior to the adoption of IFRS 16 Headline
EBITDA grew of 13.9% to GBP115m (H1 FY19: GBP101m) reflecting the
continued focus on reducing the cost base of the business. Our
Statutory profit before tax of GBP1m (H1 FY19: GBP4m loss) includes
non-Headline items of GBP14m (H1 FY19: GBP10m). The Board has
recommended an interim dividend of 1.00p (H1 FY19: 1.00p) in line
with our previously stated dividend policy.
Group revenue
Headline revenue (excluding Carrier and Off-net) of GBP764m was
0.9% lower year on year with On-net revenues down 0.3% and
Corporate revenues (excluding Carrier) 3.5% lower. The modest
contraction in On-net revenue reflects continued Voice usage
decline and lower call boost take-up in the Consumer division, as
well as the active decision to target our remaining higher ARPU
legacy Copper customers to re-contract onto FLPPs, ahead of
regulatory and industry commitments on out of contract pricing,
which has led to some ARPU dilution. This has been offset by
increased penetration of Fibre. Lower Corporate revenue (excluding
Carrier) was primarily due to B2B Voice, which was down 16.2% on
the prior year, whilst Data revenues grew by 4.3% reflecting the
continued shift in the Ethernet base to higher bandwidth
products.
The Group's total Headline revenue contracted by 2.7% to
GBP786m, primarily due to a 43.3% 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. Statutory revenue declined 3.6% due to MVNO revenues
which are down GBP8m year on year to GBP6m as we wind down this
business.
Gross margin
Headline gross margin of 51.1% was 150bps lower year on year
reflecting revenue noted above and higher costs of sales resulting
from the move to Fibre products.
Statutory gross margin of 51.3% was 110bps lower year on year
reflecting the reasons above as well as the improvement in gross
margin of our MVNO proposition.
Operating expenses
Headline operating expenses decreased by GBP62m year on year, of
which GBP25m relates to the implementation of new accounting
standards (IFRS 16), whereby lease expenses are now incurred
through depreciation and amortisation rather than operating
expenses. The remaining GBP37m improvement is due to savings coming
through from the move of our HQ from London to Salford, the benefit
of happier customers on Fibre products leading to reduced service
costs and a continued focus on right-sizing our cost base. The
Group has also moved to alternative customer acquisition and
marketing model with different partners, which has delivered
savings year-on-year.
Statutory operating expenses were down GBP60m year on year as
non-Headline items increased to GBP14m from GBP12m in the prior
year. See further information on non-Headline items below.
Headline EBITDA
Headline EBITDA increased by 38.6% to GBP140m reflecting the
adoption of IFRS 16 and the factors noted above. Prior to the
adoption of IFRS 16, Headline EBITDA was GBP115m (H1 FY19:
GBP101m), representing 13.9% like-for-like growth year-on-year.
Depreciation and amortisation
Headline depreciation and amortisation expense have increased
year on year to GBP92m (Pre-IFRS 16: GBP68m, H1 FY19 GBP67m)
largely due to the impact of adopting IFRS 16.
Share of results of joint ventures
Our share of results of joint ventures was flat year on year at
GBP5m and consists of the Group's investment in YouView.
Net finance costs
Statutory finance costs for the period were GBP28m (Pre-IFRS 16:
GBP24m, H1 FY19 GBP23m). The increase being mainly due to the
impact of adopting IFRS 16.
Taxation
The Headline tax charge for the half was GBP3m, implying an
effective Headline tax rate of 20% (H1 FY19: 17%).
Non-Headline items (2)
Six months Six months
ended ended
30 September 30 September
2019 2018
unaudited unaudited
-------------------------------
GBPm GBPm
------------------------------- -------------- --------------
MVNO closure 2 1
Network transformation (5) (7)
One Team operating model (7) -
EBITDA (10) (6)
Depreciation and amortisation (4) (4)
Taxation 3 2
Non-headline items (11) (8)
--------------
(2) See note 2 for an explanation of APMs and non-Headline
items. See note 7 for a reconciliation of Statutory information to
Headline information.
Within the Group's Statutory EBITDA there were non-Headline
items of GBP10m (H1 FY19: GBP6m) associated with the moving of our
head office to Salford and various transformation costs.
Following the Group's announcement in May 2017 to exit our MVNO
operations, trading profits of GBP2m have been recognised, compared
to GBP1m in H1 FY19.
Our significant multi-year network and IT transformation
programme continued during the year incurring costs of GBP5m (H1
FY19: GBP7m) which will fundamentally restructure the Group's
network, IT infrastructure and technology organisation. As
highlighted previously, 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 GBP7m (H1 FY19: GBPnil) in relation to
reorganisation programmes associated with the movement of our head
office to Salford. The Group expects the finalisation of this
fundamental reorganisation within 2020.
Non-Headline depreciation and amortisation largely relate to
amortisation of acquisition intangibles as well as depreciation and
amortisation associated with reorganisation programmes noted above.
For existing acquired customer bases, the Group expects the assets
to be fully amortised by the end of FY21.
Net debt and cash flow
Six months
ended Six months ended
30 September 30 September
2019 2018
unaudited unaudited
GBPm GBPm
-------------
Opening net debt (pre-leases) (1) (742) (724)
IFRS 16 / Leases opening adjustment (218) (31)
Opening net debt (post-leases) (960) (755)
Headline EBITDA (2) 140 101
Working capital (80) (14)
Capital expenditure (50) (59)
Interest and taxation (22) (21)
Non-Headline items (2) (19) (20)
Acquisitions (9) (6)
Dividends (17) (17)
Non-cash movement in leases (24) (9)
------------------------------------ ------------- ----------------
Closing net debt (post-leases) (1) (1,041) (800)
------------------------------------ ------------- ----------------
Six months
ended
30 September
2019
unaudited
GBPm
Closing net debt (As reported) (1,041)
Finance leases 36
Other leases 175
Closing net debt (Pre-leases) (830)
--------------
(1) IFRS 16 has been applied using the modified retrospective
approach. Accordingly, the comparative information has not been
restated, with FY20 results presented both including and excluding
IFRS 16 to allow users to see how the results have moved period on
period. This alternative performance measure (APM) will be
presented for one year only until the comparatives also include the
adoption of IFRS 16. See note 2 for more information.
(2) See note 2 for an explanation of APMs and non-Headline
items. See note 7 for a reconciliation of Statutory information to
Headline information.
Total net debt of GBP1,041m after the application of IFRS 16.
Before the impact of the application of IFRS 16, net debt was
GBP830m (H1 FY19: GBP760m). Committed headroom at 30 September 2019
was GBP278m (H1 FY19: GBP318m).
The Group had a net working capital outflow of GBP80m (H1 FY19:
GBP14m outflow) driven by the unwind of supplier payments as
highlighted at the year end, payments relating to a change in third
party distribution agreements and accelerated investment in
Fibre.
Capital expenditure for the period was GBP50m (H1 FY19: GBP59m),
representing 6.4% (H1 FY19: 7.3%) of Headline revenues. This
expenditure is primarily for continued investment and enhancement
of our network capability and investment in our online systems.
Non-Headline items of GBP19m (H1 FY19: GBP20m) relate to the
movement of our HQ to Salford and the ongoing network
transformation programme.
Acquisitions expenditure in the year of GBP9m (H1 FY19: GBP6m)
has broadly remained consistent from H1 FY19 and continues to
relate to the YouView joint venture and investing activity in the
FibreNation business (including the acquisition of a 20% stake in
the company Makehappen Group Limited).
Dividends
Dividends of GBP17m paid in the period (H1 FY19: GBP17m)
comprised the final dividend for FY19 of 1.50p.
The Board is committed to improving profitability, cash
generation and reducing leverage. In this context, the Board has
declared an interim dividend for FY20 of 1.00p (H1 FY19: 1.00p).
For FY20, the Board expects to declare 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 interim dividend for FY20 will be paid on 16 December 2019
for shareholders on the register on 29 November 2019 (ex-dividend
28 November 2019).
Funding and capital structure
The Group is financed through a combination of bank facilities,
Senior Notes, receivables purchase facility, 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 30
September 2019 was two years five months.
At 30 September 2019, the Group had total committed facilities,
of GBP1,115m (H1 FY19: GBP1,115m), further detail of which is given
in note 10 to the Interim financial statements. At 30 September
2019, GBP837m (H1 FY19: GBP797m) had been drawn under these
facilities, leaving GBP278m (H1 FY19: GBP318m) of undrawn
facilities.
The Group was in compliance with the terms of all its
facilities, including the financial covenants, at 30 September 2019
and throughout the year and expects to remain in compliance with
the terms going forward.
Going Concern
The Directors have acknowledged the requirements of the UK
Corporate Governance Code and the FRC guidance published in
September 2014 'Guidance on Risk Management, Internal Control and
Related Financial and Business Reporting' in relation to the going
concern basis assessment for interim financial statements.
The Group has committed credit facilities throughout the 12
month going concern assessment period of GBP1,115m comprising an
RCF of GBP640m, bond of GBP400m and a receivable purchase agreement
of GBP75m. The receivable purchase agreement was extended during
the period to September 2021. As at 30 September 2019, the Group's
headroom was GBP273m.
The Group's forecasts and projections since the March 2019
financial statements have been updated to reflect the current
position of relevant matters, so as to include possible downside
sensitivities, expected cash flow cycles of the Group, feasible
mitigating cash management/cost reduction activities and the
Group's current committed and uncommitted facilities.
Whilst the Group's forecasts and projections give consideration
to the expected disposal of our Fibre assets, this going concern
assessment also considers the Group's expected financial position
and future cash flows in a scenario where the sale did not complete
during the assessment period.
The forecasts and projections consider both a 'soft' Brexit and
a 'no deal' scenario. It is assessed the Group has limited direct
exposure to Brexit as it only provides services within the UK, has
limited non-UK suppliers and contingency plans are in place for
identified risks. Whilst a no deal Brexit would likely affect
business / consumer confidence and potentially drive customer churn
across the wider market, the Group considers demand for our
products would continue and as the largest value provider in the UK
it may further enhance our relevance to customers in such a
scenario.
The Directors are satisfied that the Group has sufficient
resources to continue in operation for the foreseeable future, a
period of not less than 12 months from the date of this report.
Accordingly, they continue to adopt the going concern basis in
preparing these condensed financial statements.
Risks and uncertainties
The Board has reconsidered the principle risks and uncertainties
published at the full year 2019 and considered these to remain
appropriate. The following risks and uncertainties are those that
the Directors believe could have the most significant impact on the
Group's business:
-- Customer trust and brand reputation
-- People capability
-- Competitive landscape
-- Changing market structure
-- Regulatory compliance
-- Data and cyber security
-- Resilience and business continuity
-- Financial liquidity and reporting developments
-- Change delivery and execution
These risks and mitigating factors are described in more detail
on pages 28 to 31 of the TalkTalk Telecom Group PLC Annual Report
2019, a copy of which is available on the Group's website.
The Group's risk management framework facilitates continuous and
ongoing discussion of risks and associated risk appetite to ensure
the appropriate focus is placed on mitigating principle risks. The
Board will continue to assess the principle risks and uncertainties
faced by the Group and will update the risk register and mitigation
plans accordingly.
Statement of Directors responsibilities
The unaudited interim condensed financial statements for the 6
months ended 30 September 2019 have been prepared in accordance
with IAS 34 'Interim Financial Reporting', as adopted by the
European Union and the Disclosure and Transparency Directive Rules
('DTR'). The interim management report herein includes a fair
review of the important events during the first 6 months and
description of principal risks and uncertainties for the remainder
of the financial period, as required by DTR 4.2.7R, and a fair
review of disclosure of related party transactions and changes
therein, as required by DTR 4.2.8R.
The Directors of TalkTalk Telecom Group PLC are listed on the
Group's website http://www.talktalkgroup.com.
On behalf of the Board
T Harrison, Chief Executive Officer
K Ferry, Chief Financial Officer
15 November 2019
Condensed consolidated income statement
For the period ended 30 September 2019
Six months ended Six months ended
30 September 2019 30 September 2018(1)
Unaudited Unaudited
----------------------------------------- -----------------------------------------
Headline(2) Non-Headline Statutory(2) Headline(2) Non-Headline Statutory(2)
Notes GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ----- ------------ ------------ ------------- ------------ ------------ -------------
Revenue 3 786 6 792 808 14 822
Cost of sales (384) (2) (386) (383) (8) (391)
----------------------- ----- ------------ ------------ ------------- ------------ ------------ -------------
Gross profit 402 4 406 425 6 431
Operating expenses (262) (14) (276) (324) (12) (336)
----------------------- ----- ------------ ------------ ------------- ------------ ------------ -------------
EBITDA(2) 140 (10) 130 101 (6) 95
----------------------- ----- ------------ ------------ ------------- ------------ ------------ -------------
Depreciation and
amortisation (92) (4) (96) (67) (4) (71)
Share of results of
associates and joint
ventures (5) - (5) (5) - (5)
----------------------- ----- ------------ ------------ ------------- ------------ ------------ -------------
Operating profit 43 (14) 29 29 (10) 19
Net finance costs 4 (28) - (28) (23) - (23)
----------------------- ----- ------------ ------------ ------------- ------------ ------------ -------------
Profit before taxation 15 (14) 1 6 (10) (4)
Taxation 5 (3) 3 - (1) 2 1
----------------------- ----- ------------ ------------ ------------- ------------ ------------ -------------
Profit for the period
attributable to the
owners of the Company 12 (11) 1 5 (8) (3)
----------------------- ----- ------------ ------------ ------------- ------------ ------------ -------------
Earnings/(loss) per
share
Basic (p) 8 0.1 (0.3)
Diluted (p) 8 0.1 (0.3)
----------------------- ----- ------------ ------------ ------------- ------------ ------------ -------------
(1) The six months ended 30 September 2018 have not been
restated for the adoption of IFRS 16 'Leases' - see note 2 for
further information.
(2) See note 2 for explanation of alternative performance
measures and note (7) (for a reconciliation of statutory
information to Headline information) (.)
There is no other comprehensive income or expenses recognised in
either period other than shown in the income statement consequently
no statement of comprehensive income has been presented.
Condensed consolidated balance sheet
As at 30 September 2019
30 September 30 September 31 March
2019 2018(1) 2019(1)
Unaudited
Unaudited (restated)(2) Audited
Notes GBPm GBPm GBPm
------------------------------------- ----- ------------ -------------- --------
Non-current assets
Goodwill 495 495 495
Other intangible assets 223 242 235
Property, plant and equipment 9 325 223 199
Investment in joint venture and
associates 2 5 2
Trade and other receivables 4 2 2
Contract costs 348 238 308
Deferred tax assets 119 90 118
------------------------------------- ----- ------------ -------------- --------
1,516 1,295 1,359
------------------------------------- ----- ------------ -------------- --------
Current assets
Inventories 28 32 34
Trade and other receivables 148 259 160
Contract assets 43 42 39
Cash and cash equivalents 12 37 67
------------------------------------- ----- ------------ -------------- --------
231 370 300
------------------------------------- ----- ------------ -------------- --------
Assets classified as held for
sale 11 58 40 47
------------------------------------- ----- ------------ -------------- --------
Total assets 1,805 1,705 1,706
------------------------------------- ----- ------------ -------------- --------
Current liabilities
Trade and other payables (426) (519) (491)
Contract liabilities (23) (17) (20)
Lease liabilities 2 (60) - -
Current income tax payable - (8) -
Borrowings 10 (5) (85) (10)
Provisions (29) (22) (35)
------------------------------------- ----- ------------ -------------- --------
(543) (651) (556)
------------------------------------- ----- ------------ -------------- --------
Liabilities classified as held
for sale 11 (7) (6) (7)
------------------------------------- ----- ------------ -------------- --------
Non-current liabilities
Trade and other payables - (6) (5)
Borrowings 10 (837) (752) (838)
Lease liabilities 2 (151) - -
Provisions (4) (26) (12)
------------------------------------- ----- ------------ -------------- --------
(992) (784) (855)
------------------------------------- ----- ------------ -------------- --------
Total liabilities (1,542) (1,441) (1,418)
------------------------------------- ----- ------------ -------------- --------
Net assets 263 264 288
------------------------------------- ----- ------------ -------------- --------
Equity
Share capital 1 1 1
Share premium 684 684 684
Translation reserve (64) (64) (64)
Demerger reserve (513) (513) (513)
Retained earnings and other reserves 155 156 180
------------------------------------- ----- ------------ -------------- --------
Total equity 263 264 288
------------------------------------- ----- ------------ -------------- --------
(1) The six months ended 30 September 2018 have not been
restated for the adoption of IFRS 16 'Leases' - see note 2 for
further information.
(2) See note 2 for further details on the restatement of
comparative information.
Condensed consolidated cash flow statement
For the period ended 30 September 2019
Six months ended Six months ended
30 September 2019 30 September 2018(1)
Unaudited
Unaudited (restated)(2)
Notes GBPm GBPm
---------------------------------------------------------------------- ----- ----------------- --------------------
Operating activities
Operating profit 29 19
Share-based payments 2 3
Depreciation of property, plant and equipment 58 35
Amortisation of other operating intangible assets 34 32
Amortisation of acquisition intangibles 4 4
Share of losses of joint ventures 5 5
Decrease in provisions (5) (11)
---------------------------------------------------------------------- ----- ----------------- --------------------
Operating cash flows before movements in working capital 127 87
Decrease/(increase) in trade and other receivables 7 (15)
Increase in contract assets (44) (32)
Decrease/(increase) in inventory 6 (3)
(Decrease)/increase in trade and other payables (61) 51
Increase/(decrease) in contract liabilities 3 (1)
Net cash flows generated from operating activities 38 87
---------------------------------------------------------------------- ----- ----------------- --------------------
Investing activities
Acquisition of subsidiaries, associates and joint ventures, net of
cash acquired 12 (6) (6)
Investment in intangible assets (36) (39)
Investment in property, plant and equipment (14) (16)
Cash flows used in investing activities (56) (61)
---------------------------------------------------------------------- ----- ----------------- --------------------
Financing activities
Settlement of Group ESOT shares - 1
Repayments of obligations in respect of leases (26) (4)
Repayments of borrowings - (21)
Drawdown of borrowings 33 30
Interest paid (25) (21)
Other finance costs (2) -
Equity dividends paid 6 (17) (17)
---------------------------------------------------------------------- ----- ----------------- --------------------
Cash flows generated used in financing activities (37) (32)
---------------------------------------------------------------------- ----- ----------------- --------------------
Net decrease in cash and cash equivalents (55) (6)
Cash and cash equivalents at the start of the period 67 43
---------------------------------------------------------------------- ----- ----------------- --------------------
Cash and cash equivalents at the end of the period 12 37
---------------------------------------------------------------------- ----- ----------------- --------------------
(1) The six months ended 30 September 2018 have not been
restated for the adoption of IFRS 16 'Leases' - see note 2 for
further information.
(2) See note 2 for further details on the restatement of
comparative information.
Condensed consolidated statement of changes in equity
For the period ended 30 September 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 2018 as previously reported 1 684 (64) (513) 104 212
----------------------------------------------- ----- -------- -------- ----------- -------- ---------- -------
Change in accounting policies in respect of
IFRS 9 and IFRS 15 (net of tax) - - - - 68 68
----------------------------------------------- ----- -------- -------- ----------- -------- ---------- -------
At 1 April 2018 (restated) 1 684 (64) (513) 172 280
----------------------------------------------- ----- -------- -------- ----------- -------- ---------- -------
Loss for the period - - - - (3) (3)
Total comprehensive expense - - - - (3) (3)
----------------------------------------------- ----- -------- -------- ----------- -------- ---------- -------
Transactions with the owners of the Company
Share-based payments - - - - 3 3
Settlement of Group ESOT shares - - - - 1 1
Equity dividends 6 - - - - (17) (17)
----------------------------------------------- ----- -------- -------- ----------- -------- ---------- -------
Total transactions with the owners of the
Company - - - - (13) (13)
----------------------------------------------- ----- -------- -------- ----------- -------- ---------- -------
At 30 September 2018 (unaudited) 1 684 (64) (513) 156 264
----------------------------------------------- ----- -------- -------- ----------- -------- ---------- -------
Retained
earnings
Share Share Translation Demerger and other Total
capital premium reserve reserve reserves equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
At 30 September 2018
(unaudited) 1 684 (64) (513) 156 264
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Profit for the period - - - - 35 35
Total comprehensive income - - - - 35 35
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Transactions with the owners of
the Company
Equity dividends - - - - (11) (11)
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Total transactions with the
owners of the Company - - - - (11) (11)
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
At 31 March 2019 1 684 (64) (513) 180 288
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Retained
earnings
Share Share Translation Demerger and other Total
capital premium reserve reserve reserves equity
Notes GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
At 31 March 2019 as previously
reported 1 684 (64) (513) 180 288
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Change in accounting policies
in respect of IFRS 16 (net of
tax) 2 - - - - (10) (10)
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
At 1 April 2019 (unaudited) 1 684 (64) (513) 170 278
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Profit for the period - - - - 1 1
Total comprehensive income - - - - 1 1
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Transactions with the owners of
the Company
Share-based payments - - - - 2 2
Taxation of items directly in
reserves - - - - (1) (1)
Equity dividends 6 - - - - (17) (17)
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Total transactions with the
owners of the Company - - - - (16) (16)
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
At 30 September 2019
(unaudited) 1 684 (64) (513) 155 263
-------------------------------- ------ -------- -------- ----------- -------- ---------- -------
Notes to the condensed consolidated financial statements
For the period ended 30 September 2019
1. General Information
The information for the year ended 31 March 2019 does not
constitute statutory accounts as defined in section 434 of the
Companies Act 2006. A copy of the statutory accounts for that year
has been delivered to the Registrar of Companies. The auditor
reported on those accounts; their report was unqualified, did not
draw attention to any matters by way of emphasis and did not
contain a statement under section 498(2) or (3) of the Companies
Act 2006.
2. Basis of preparation
The annual financial statements of TalkTalk Telecom Group plc
are prepared in accordance with IFRSs as adopted by the European
Union.
The condensed interim financial statements included in this
half-yearly financial report has been prepared in accordance with
International Accounting Standard 34 'Interim Financial Reporting',
as adopted by the European Union and Disclosure and Transparency
Rules of the United Kingdom Financial Conduct Authority.
The accounting policies adopted in the preparation of the
condensed interim financial statements are consistent with those
followed in the preparation of the consolidated annual financial
statements for the year ended 31 March 2019, except for the changes
outlined below.
This report should be read in conjunction with the consolidated
annual financial statements for the year ended 31 March 2019. Full
details of the audited consolidated financial statements for the
year ended 31 March 2019 are available at
https://www.talktalkgroup.com.
The preparation of these unaudited condensed consolidated
interim financial statements requires management to make
judgements, estimates and assumptions that affect the application
of accounting policies and the reported amounts of assets and
liabilities, income and expenses. Actual results may differ from
these estimates.
In preparing these unaudited condensed consolidated interim
financial statements, the significant judgements made by management
in applying the Group's accounting policies were consistent with
those that applied to the consolidated financial statements for the
year ended 31 March 2019, except for the below and new significant
judgements and key sources of estimation uncertainty related to the
application of IFRS 16 (outlined in changes in accounting
policies).
In applying IFRS 15 the Group is required to make certain
estimates that effect the determination of the amount and timing of
revenue and costs from contracts with customers. This includes an
estimate of the expected average duration of customer relationships
which has been determined to still be 50-120 months depending on
the product and channel for the period ended 30 September 2019.
In addition, the Group continues to recognise certain service
level related credits from suppliers to compensate the Group where
the supplier has not operated within the contractual terms of these
arrangements. At 30 September 2019, a receivable of GBP6m
(September 2018: GBP55m, March 2019: GBP3m) existed in relation to
claims where the supplier has not operated within contractual
terms, the resolution of which may give rise to an increase or
decrease in the level of receivable recognised. This is without
prejudice to the Group's legal position.
As described in the 2019 annual report following the preparation
of the unaudited condensed consolidated financial statements for
the period 30 September 2018 management concluded and finalised the
impact of the IFRS 15 for the year ended 31 March 2019. This
resulted in changes to the period over which certain contract costs
are amortised and additional costs being capitalised, which
amounted to a GBP26m increase in contract assets and retained
earnings on the balance sheet for 30 September 2018. In addition to
this an adjustment has been made to recognise stock previously
owned by a third party totalling GBP14m as the transaction was
considered to be a financing arrangement under IFRS 15. This has
resulted in a decrease of that amount to the inventory balance and
retained earnings on the balance sheet for 30 September 2018 and a
re-presentation of the cash outflow from operating activities to
financing activities of GBP21m on the condensed cash flow
statement. These changes have been restated in the comparative
information provided in this report, further details in relation to
the retrospective application of IFRS 15 can be found in the
consolidated annual financial statements for the year ended 31
March 2019. The Group has also restated its comparative information
in respect of assets and liabilities held for sale as described in
the 2019 annual report to more appropriately classify the assets
and liabilities held for sale within the Group. This has resulted
in a decrease to the liabilities held for sale of GBP5m and an
increase in trade payables of GBP5m.
Management has reviewed the potential impact of Brexit on these
interim financial statements and continue to believe the impact
will be limited, this includes any impact on the IFRS 9 expected
loss model which includes consideration of the macro economic
environment. See below for impact of Brexit in relation to the
going concern assessment. The Board also note no changes to this
assessment from a post balance sheet event perspective.
These unaudited condensed consolidated interim financial
statements were authorised for issue by the Company's Board on 15
November 2019.
Going concern
The Directors have acknowledged the requirements of the UK
Corporate Governance Code and the FRC guidance published in
September 2014 'Guidance on Risk Management, Internal Control and
Related Financial and Business Reporting' in relation to the going
concern basis assessment for interim financial statements.
The Group has committed credit facilities throughout the 12
month going concern assessment period of GBP1,115m comprising an
RCF of GBP640m, bond of GBP400m and a receivable purchase agreement
of GBP75m. The receivable purchase agreement was extended during
the period to September 2021. As at 30 September 2019, the Group's
headroom was GBP273m. Net debt drawn under these facilities
fluctuates throughout the year and can be higher than the amount
reported at 30 September 2019.
The Group's forecasts and projections since the March 2019
financial statements have been updated to reflect the current
position of relevant matters, so as to include possible downside
sensitivities, expected cash flow cycles of the Group, feasible
mitigating cash management/cost reduction activities and the
Group's current committed and uncommitted facilities.
Whilst the Group's forecasts and projections give consideration
to the expected disposal of our fibre assets, this going concern
assessment also considers the Group's expected financial position
and future cash flows in a scenario where the sale did not complete
during the assessment period.
The forecasts and projections consider both a 'soft' Brexit and
a 'no deal' scenario. It is assessed the Group has limited direct
exposure to Brexit as it only provides services within the UK, has
limited non-UK suppliers and contingency plans are in place for
identified risks. Whilst a no deal Brexit would likely affect
business / consumer confidence and potentially drive customer churn
across the wider market, the Group considers demand for our
products would continue and as the largest value provider in the UK
it may further enhance our relevance to customers in such a
scenario.
The Directors are satisfied that the Group has sufficient
resources to continue in operation for the foreseeable future, a
period of not less than 12 months from the date of this report.
Accordingly, they continue to adopt the going concern basis in
preparing these condensed financial statements.
Alternative performance measures (APMs)
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 have been applied
consistently in the period ended 30 September 2019 as defined in
the consolidated annual financial statements for the year ended 31
March 2019 except for the addition of pre-IFRS 16 values which in
absence of restating the prior periods have been provided to aid
the users of the financial statements to better understand the
impact of applying the new standard. See note 7 for reconciliation
of statutory information to headline information. This APM will be
presented until the year ended 31 March 2021 when the current and
prior year values will be prepared under the same basis.
Performance is measured based on headline EBITDA, defined as
operating profit before non-headline items, as presented to the
chief operating decision maker. EBITDA is defined as the operating
profit before depreciation, amortisation, share of results of joint
ventures and associates, net finance costs and taxation.
Other APMs used include:
-- Headline revenue - excludes non-headline items, specifically
MVNO revenue. In addition, also excludes carrier and off-net
revenues;
-- Headline basic EPS - basic EPS excluding non-headline items;
-- Net debt - total borrowings after derivatives offset by cash and cash equivalents; and
-- Pre-IFRS 16 - both headline and statutory values prepared
under IAS 17 'Leases' and therefore excluding the impact of
applying IFRS 16.
Changes in accounting policies
Aside from the adoption of IFRS 16, which is described below,
other changes to accounting standards in the current period had no
material impact. There have been no changes to accounting policies
in the period and changes to estimates in the current period are
outlined above.
IFRS 16
During the period, the Group has adopted IFRS 16 'Leases'. The
date of the initial application of IFRS 16 for the Group is 1 April
2019.
IFRS 16 introduces new or amended requirements for lease
accounting. Under IFRS 16 both lessor accounting and the Group's
accounting for existing finance leases will remain unchanged unless
where in the future a finance lease includes a residual guarantee
which will now be measured as an expected amount payable opposed to
the maximum amount payable as required under IAS 17. However, IFRS
16 introduces significant changes to accounting where the Group is
a lessee and the lease was previously classified as an operating
lease under IAS 17. It removes the requirements under IAS 17 to
initially define a lease as either an operating lease (which are
off balance sheet) or a finance lease and instead requires all
leases to be recognised on the balance sheet creating a right of
use asset and a lease liability (unless an exemption is taken for
leases that are either short term leases or leases of low value
assets).
The lease liability recognised at the inception of a lease will
represent the present value of the consideration the Group will pay
over the lease term with the right of use asset being set to an
equivalent value plus any initial directly attributable costs. The
lease liability will be discounted at the interest rate implicit in
the lease or in absence of this the Group will use a calculated
incremental borrowing rate based on the underlying asset. The right
of use assets are depreciated over the shorter period of the lease
term or the useful economic life of the underlying asset and are
then tested for impairment in accordance with IAS 36 'Impairment of
Assets' rather than the previous requirement under IAS 37 to
recognise a provision for any onerous lease contracts.
In concluding whether a contract contains a lease, management
consider whether there is an identified asset, whether the Group
has the right to obtain substantially all the economic benefits of
this asset, 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
the 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.
Following the above assessment management has concluded the
below items that were formerly classed as operating leases under
IAS 17, contain a lease and have therefore been recognised in
accordance with IFRS 16:
-- property, including offices, data centres and car parks;
-- 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 rented from third parties;
-- the Group's interconnect network, being primarily ISI circuits and ducts;
-- IT equipment leases, including printers; and
-- motor vehicles.
Management has concluded the below arrangements do not contain a
lease under IFRS 16 based upon the Group's specific network
circumstances:
-- the footprint the Group rents from Openreach 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; and
-- the copper and fibre lines the Group rents in the 'last
mile', comprising copper between the exchange and the
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 fully.
The impact of adopting IFRS 16 has been to reduce the Group's
operating expenses as lease rentals are no longer recognised
straight line under operating expenses and to increase the Group's
depreciation and finance costs as the Group depreciates the right
of use assets and unwinds the time effect of the related lease
liabilities. The overall profile of the expense recognised in the
income statement has changed as a higher level of finance costs are
recognised earlier in the lease term. The recognition of the lease
liabilities has increased the Group's net debt however the cash
position of the Group remains unchanged. The cash flows in the
consolidated cash flow statement are split between a principal
portion and a finance portion, which are both presented under
financing activities, previously under IAS 17 the operating lease
payments were presented as operating cash flows.
Details of the Group's accounting policies under IFRS 16 are
listed below:
-- Lease liabilities are initially measured at the present value
of the future lease payments discounted using the interest rate
implicit in the lease or if this cannot be readily determined using
an incremental borrowing rate calculated by the Group. Lease
payments include fixed lease payments less lease incentives,
variable lease payments that are dependent on an index or rate
measured at the index or rate at the commencement date of the
lease, the amount expected to be payable at the end of lease under
residual value guarantees, the exercise price of purchase options
if the lessee is reasonably certain to exercise the option and
payments of penalties for terminating the lease if the lease term
reflects the exercise of an option to terminate the lease. The
lease liabilities are subsequently measured by increasing the value
to reflect the unwind of interest and reducing the value to reflect
the lease payments made by the Group.
-- The Group remeasures the lease liability when either the
lease term changes, the lease payments change due to a change in an
index or rate or where the lease is modified and the modification
does not result in a separate lease. Where a lease liability is
remeasured a corresponding entry is made to the right of use
asset.
-- The right of use assets are valued initially at an equivalent
value to the lease liability with the addition of any directly
attributable costs. The value of the right of use asset is
increased and a provision is recognised for any costs to
dismantle/remove an asset or restore the asset to a condition
required under the terms of the lease when the Group incurs the
obligation. The assets are subsequently measured at cost less
accumulated depreciation and impairments.
-- The right of use assets are depreciated over the shorter of
the lease term or the useful economic life of the underlying asset.
Where the Group expects to retain the asset for a period greater
than the minimum non-cancellable period management estimates the
period it expects it will use the assets using a portfolio approach
which it will review annually. The right of use assets are
presented within the same line item as that with which the
corresponding underlying assets would be presented if they were
owned.
-- The Group has used the exemption for leases of low value
assets resulting in the expense being recognised straight line in
operating expenses. The Group has applied this exemption to tie
cables and laptops leading to an expense of GBP3m being recognised
in operating expenses.
Transition approach and practical expedients
IFRS 16 has been applied by the Group using the modified
retrospective approach resulting in the Group not restating prior
period balances and recognising a one-off cumulative debit in
opening reserves on 1 April 2019 of GBP10m including the
recognition of a GBP1m deferred tax asset. In applying the modified
retrospective approach the Group has valued right of use assets on
a lease by lease basis using either the approach that IFRS 16 had
always been applied (but using the incremental borrowing rate at
the date of the application which ranges from 4.2% to 6.8%
dependent on the term and underlying asset) or setting the asset at
an amount equal to the lease liability on transition. The Group has
included initial directly attributable costs as part of the right
of use assets on transition remeasuring at an equivalent amount as
if it had always been unwinding over the allocated IFRS 16 lease
term.
The Group has utilised the below one-off practical expedients in
applying IFRS 16 for the first time:
-- The Group has applied a single discount rate to portfolios of
leases with reasonably similar characteristics;
-- The Group has utilised hindsight in determining the lease term;
-- The Group has utilised its assessments under IAS 37 to
determine if leases are onerous immediately before the date of
initial application and adjusted the right of use assets by the
carrying amount of the onerous lease provisions at 1 April 2019
opposed to performing an impairment review under IAS 36; and
-- The Group has applied on a lease by lease basis the short
term lease exemption for those leases with less than twelve months
remaining at the date of transition. The expenses relating to these
leases amount to GBP3m for the period ended 30 September 2019 and
are recognised in other operating expenses.
The difference between the operating lease commitments disclosed
under IAS 17 in the Group's accounts for the year ending 31 March
2019 and the lease liabilities recognised on the date of transition
can be explained as follows:
Total
GBPm
-------------------------------------------------------------------- -----
Operating lease commitments disclosed under IAS 17 at 31 March 2019 116
Effect of discounting (42)
Change in contractual lease terms under IFRS 16 95
Finance leases under IAS 17 39
Other(1) 10
-------------------------------------------------------------------- -----
IFRS 16 lease liabilities recognised at 1 April 2019 218
-------------------------------------------------------------------- -----
(1) Includes other items such as assets under low value and
short term exemptions and revision of lease payments on
transition.
Key accounting judgements and estimates
The application of IFRS 16 requires the Group to make critical
judgements in determining the scope of applying IFRS 16. Management
has concluded that the determination described above that the 'last
mile' does not contain a lease is a critical accounting
judgement.
The application of IFRS 16 requires the Group to make certain
estimates that affect the amounts recognised in the consolidated
income statement and balance sheet. Management has concluded the
assessment of a five year lease term for its network assets to be a
key accounting estimate. In reaching this conclusion management has
considered historical data and it's expectation of future changes
in the network landscape and the technologies used. Sensitivities
of this estimate are shown below:
-- An increase to 6 years would impact the balance sheet by
increasing the right of use assets by GBP35m and increasing the
lease liabilities by GBP34m at 30 September 2019;
-- An increase to 6 years would impact the income statement by
decreasing depreciation by GBP5m and increasing finance costs by
GBP5m for the six months ended 30 September 2019;
-- A reduction to 4 years would impact the balance sheet by
decreasing the right of use assets by GBP26m and decreasing the
lease liabilities by GBP22m at 30 September 2019; and
-- A reduction to 4 years would impact the income statement by
increasing depreciation by GBP1m and decreasing finance costs by
GBP5m for the six months ended 30 September 2019.
Summary of financial impact on condensed consolidated financial
statements
The following tables summarise the financial impacts of adopting
IFRS 16 on the Group's consolidated income statement for the six
months ended 30 September 2019 and on the Group's consolidated
balance sheet at the date of application (1 April 2019):
Consolidated income statement and other comprehensive income
Headline Statutory
Six months ended Six months ended
30 September 2019 30 September 2019
Unaudited Unaudited
-------------------------------------- ----------------------------------------
Pre-IFRS IFRS 16 Pre-IFRS IFRS
16 adjustments As reported 16 16 adjustments As reported
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- --------- ------------- ------------ --------- --------------- ------------
Revenue 786 - 786 792 - 792
Cost of sales (384) - (384) (386) - (386)
------------------------------ --------- ------------- ------------ --------- --------------- ------------
Gross profit 402 - 402 406 - 406
Operating expenses (287) 25 (262) (301) 25 (276)
------------------------------ --------- ------------- ------------ --------- --------------- ------------
EBITDA 115 25 140 105 25 130
Depreciation and amortisation (68) (24) (92) (72) (24) (96)
Share of results of associates
and joint ventures (5) - (5) (5) - (5)
------------------------------ --------- ------------- ------------ --------- --------------- ------------
Operating profit 42 1 43 28 1 29
Net finance costs (24) (4) (28) (24) (4) (28)
------------------------------ --------- ------------- ------------ --------- --------------- ------------
Profit before taxation 18 (3) 15 4 (3) 1
Taxation (3) - (3) - - -
------------------------------ --------- ------------- ------------ ---------
Profit for the period
attributable
to the owners of the Company 15 (3) 12 4 (3) 1
------------------------------ --------- ------------- ------------ --------- --------------- ------------
Total comprehensive income 12 1
------------------------------ --------- ------------- ------------ --------- --------------- ------------
During the period ended 30 September 2019, the following charges
arising from lease arrangements were recognised in the consolidated
income statement:
Six months ended Six months ended
30 September 2019 30 September 2018
Unaudited Unaudited
GBPm GBPm
------------------------------------------------------------------ ------------------ ------------------
Depreciation 31 -
Finance costs 5 -
Operating expenses - lease expenses under the low value exemption 3 -
------------------------------------------------------------------ ------------------ ------------------
Consolidated balance sheet
As previously reported at IFRS 16 As restated at
31 March 2019 adjustments 1 April 2019
GBPm GBPm GBPm
---------------------------------------- -------------------------- ------------ ---------------
Non-current assets
Goodwill 495 - 495
Other intangible assets 235 - 235
Property, plant and equipment 199 150 349
Investment in joint venture 2 - 2
Trade and other receivables 2 3 5
Contract costs 308 - 308
Deferred tax assets 118 1 119
---------------------------------------- -------------------------- ------------ ---------------
1,359 154 1,513
---------------------------------------- -------------------------- ------------ ---------------
Current assets
Inventories 34 - 34
Trade and other receivables 160 - 160
Contract assets 39 - 39
Cash and cash equivalents 67 - 67
---------------------------------------- -------------------------- ------------ ---------------
300 - 300
---------------------------------------- -------------------------- ------------ ---------------
Assets classified as held for sale 47 - 47
---------------------------------------- -------------------------- ------------ ---------------
Total assets 1,706 154 1,860
---------------------------------------- -------------------------- ------------ ---------------
Current liabilities
Trade and other payables (491) 6 (485)
Contract liabilities (20) - (20)
Borrowings (10) 10 -
Lease liabilities - (57) (57)
Provisions (35) 2 (33)
---------------------------------------- -------------------------- ------------ ---------------
(556) (39) (595)
---------------------------------------- -------------------------- ------------ ---------------
Liabilities classified as held for sale (7) - (7)
---------------------------------------- -------------------------- ------------ ---------------
Non-current liabilities
Trade and other payables (5) - (5)
Borrowings (838) 29 (809)
Lease liabilities - (161) (161)
Provisions (12) 7 (5)
---------------------------------------- -------------------------- ------------ ---------------
(855) (125) (980)
---------------------------------------- -------------------------- ------------ ---------------
Total liabilities (1,418) (164) (1,582)
---------------------------------------- -------------------------- ------------ ---------------
Net assets 288 (10) 278
---------------------------------------- -------------------------- ------------ ---------------
Equity
Share capital 1 - 1
Share premium 684 - 684
Translation reserve (64) - (64)
Demerger reserve (513) - (513)
Retained earnings and other reserves 180 (10) 170
---------------------------------------- -------------------------- ------------ ---------------
Total equity 288 (10) 278
---------------------------------------- -------------------------- ------------ ---------------
Of the total right of use assets of GBP150m recognised at 1
April 2019, GBP52m related to leases of property and GBP98m to
leases of network equipment and computer hardware.
The Group's outstanding liability can be further analysed as
follows:
Six months ended Six months ended
30 September 2019 30 September 2018
Unaudited Unaudited
GBPm GBPm
--------------------- ------------------ ------------------
Less than 1 year 60 -
2 to 5 years 102 -
Greater than 5 years 49 -
--------------------- ------------------ ------------------
211 -
--------------------- ------------------ ------------------
3. 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.
Six months ended Six months ended
30 September 2019 30 September 2018
Unaudited Unaudited
GBPm GBPm
---------------------------------------------- ------------------ ------------------
Statutory revenue 792 822
Less MVNO revenue (6) (14)
---------------------------------------------- ------------------ ------------------
Headline revenue (1) 786 808
---------------------------------------------- ------------------ ------------------
Headline EBITDA (1) 140 101
Depreciation of property, plant and equipment (58) (35)
Amortisation of operating intangibles (34) (32)
Amortisation of acquisition intangibles (4) (4)
Share of results of joint ventures (5) (5)
Non-headline items - gross profit (1) 4 6
Non-headline items - operating expenses (1) (14) (12)
Statutory operating profit (1) 29 19
---------------------------------------------- ------------------ ------------------
Total statutory revenue can be disaggregated as below:
Six months ended Six months ended
30 September 2019 30 September 2018
Unaudited Unaudited
GBPm GBPm
---------- ------------------ ------------------
Equipment 40 28
Services 752 794
---------- ------------------ ------------------
792 822
---------- ------------------ ------------------
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.
Six months ended Six months ended
30 September 2019 30 September 2018
Unaudited Unaudited
GBPm GBPm
----------------------------------------------------- ------------------ ------------------
On-net 627 629
Corporate 154 172
Off-net 5 7
----------------------------------------------------- ------------------ ------------------
Headline revenue (1) 786 808
Less Carrier (17) (30)
Less Off-net (5) (7)
----------------------------------------------------- ------------------ ------------------
Headline revenue (excluding Carrier and Off-net) (1) 764 771
----------------------------------------------------- ------------------ ------------------
The Group has no material overseas operations; as a result, a
split of revenue and total assets by geographical location has not
been disclosed.
Corporate revenue is further analysed as:
Six months ended Six months ended
30 September 2019 30 September 2018
Unaudited Unaudited
GBPm GBPm
------------------ ------------------ ------------------
Carrier 17 30
Data 90 86
Voice 47 56
------------------ ------------------ ------------------
Corporate revenue 154 172
------------------ ------------------ ------------------
(1) see note 7 for reconciliation of statutory information to
headline information.
4. Net finance costs
Net finance costs are analysed as follows:
Six months ended Six months ended
30 September 2019 30 September 2018
Unaudited Unaudited
GBPm GBPm
------------------------------------------------- ------------------ ------------------
Interest on bank loans and overdrafts 20 20
Finance charge arising from leases under IFRS 16 5 -
Facility fees and similar charges 3 3
------------------------------------------------- ------------------ ------------------
28 23
------------------------------------------------- ------------------ ------------------
5. Tax
The Headline tax charge for the year was GBP3m implying an
effective Headline rate of 20% (2018: 17%) against a statutory rate
of 19%.
6. Dividends
The following dividends were paid by the Group to its
shareholders:
Six months ended
30 September 2019 Six months ended 30 September 2018
Unaudited Unaudited
GBPm GBPm
-------------------------------------------------------------- ------------------ ----------------------------------
Ordinary dividends
Final dividend for the year ended 31 March 2018 of 1.50p per
ordinary share - 17
Final dividend for the year ended 31 March 2019 of 1.50p per
ordinary share 17 -
-------------------------------------------------------------- ------------------ ----------------------------------
Total ordinary dividends 17 17
-------------------------------------------------------------- ------------------ ----------------------------------
The proposed interim dividend of 1.00p per ordinary share was
approved by the Board on 15 November 2019 and has not been included
as a liability as at 30 September 2019.
The Group employee share option trust (ESOT) has waived its
rights to receive dividends in the current and prior year.
7. Reconciliation of statutory information to headline information
Accounting policy - non-headline items
Headline information is provided because the Directors consider
that it provides assistance in understanding the Group's underlying
performance. The policy in relation to non-headline items has been
consistent and consistently applied in the preparation of these
unaudited condensed consolidated interim financial statements as in
the preparation of the financial statements for the year ended 31
March 2019 and these unaudited condensed consolidated interim
financial statements for period ending 30 September 2019 with the
exception of pre-IFRS 16 measures which are defined and reconciled
to statutory measures in note 2.
The following table includes details of non-headline items and
reconciles statutory information to headline information:
Profit Profit
Gross Operating before for
Period ended 30 September Revenue profit EBITDA profit taxation Taxation the period
2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- --------- ------- ------ --------- --------- -------- -----------
Statutory results 792 406 130 29 1 - 1
MVNO operating profit (a) (6) (4) (2) (2) (2) - (2)
Network transformation (b) - - 5 5 5 (1) 4
OneTeam operating model
(c) - - 7 7 7 (2) 5
Amortisation of acquisition
intangibles (d) - - - 4 4 - 4
---------------------------- --------- ------- ------ --------- --------- -------- -----------
Headline results 786 402 140 43 15 (3) 12
---------------------------- --------- ------- ------ --------- --------- -------- -----------
(Loss)/profit (Loss)/profit
Gross Operating before for
Period ended 30 September Revenue profit EBITDA profit taxation Taxation the period
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- --------- ------- ------ --------- ------------- -------- -------------
Statutory results 822 431 95 19 (4) 1 (3)
MVNO operating profit (a) (14) (6) (1) (1) (1) - (1)
Network transformation (b) - - 7 7 7 (2) 5
Amortisation of acquisition
intangibles (d) - - - 4 4 - 4
---------------------------- --------- ------- ------ --------- ------------- -------- -------------
Headline results 808 425 101 29 6 (1) 5
---------------------------- --------- ------- ------ --------- ------------- -------- -------------
During the period ended 30 September 2019, cash exceptional
items were GBP19m (2018: GBP20m).
The above table shows how all APMs are reconciled to statutory
performance measures with the exception of headline earnings per
share (note 8).
(a) MVNO operating profit
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
GBP2m (2018: profit of GBP1m) associated with the MVNO strategy
have been generated, given this one-off strategic decision,
management consider these profits 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 credit of GBPnil has been recognised on these costs
(2018: GBPnil).
(b) Network transformation
During the period ended 30 September 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 that is
expected to run until 2021.
This programme has resulted in GBP5m (2018: GBP7m) of costs
including project management, consultancy, dual running costs and
decommissioning costs.
A total taxation credit of GBP1m has been recognised on these
costs in the period ended 30 September 2019 (2018: GBP2m).
(c) OneTeam operating model
Costs of GBP7m (2018: GBPnil) have been incurred as a result of
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 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, retention payments and other consultancy costs.
The Group expects the finalisation of this fundamental
reorganisation within 2020.
A taxation credit of GBP2m has been recognised on these costs in
the period ended 30 September 2019 (2018: GBPnil).
(d) Amortisation of acquisition intangibles
An amortisation charge in respect of acquisition intangibles of
GBP4m was incurred during the period (2018: GBP4m). Management
consider amortisation of acquisitions of intangibles to be a
non-headline item due to it being inherently linked to historic
acquisitions of businesses in accordance with the Group's
non-headline accounting policy.
8. 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.
Six months ended Six months ended
30 September 2019 30 September 2018
Unaudited Unaudited
GBPm GBPm
--------------------------------------------- ------------------ ------------------
Headline earnings (note 7) 12 5
--------------------------------------------- ------------------ ------------------
Statutory profit/(loss) 1 (3)
--------------------------------------------- ------------------ ------------------
Weighted average number of shares (millions)
Shares in issue 1,146 1,146
Less weighted average holdings by Group ESOT (1) (3)
--------------------------------------------- ------------------ ------------------
For basic EPS 1,145 1,143
Dilutive effect of share options 5 13
--------------------------------------------- ------------------ ------------------
For diluted EPS 1,150 1,156
--------------------------------------------- ------------------ ------------------
Six months ended 30 September 2019 Six months ended 30 September 2018
Unaudited Unaudited
Pence Pence
----------------------------------------- ---------------------------------- ----------------------------------
Basic earnings/(loss) per ordinary share
Headline 1.0 0.4
Statutory 0.1 (0.3)
----------------------------------------- ---------------------------------- ----------------------------------
Six months ended 30 September 2019 Six months ended 30 September 2018
Unaudited Unaudited
Pence Pence
------------------------------------------- ---------------------------------- ----------------------------------
Diluted earnings/(loss) per ordinary share
Headline 1.0 0.4
Statutory 0.1 (0.3)
------------------------------------------- ---------------------------------- ----------------------------------
9. Property, plant and equipment
During the period, the Group had additions of GBP34m, of which
GBP21m were right of use assets and disposals of GBP1m.
See note 2 for further information regarding the initial
application of IFRS 16. Right of use assets are presented within
property, plant and equipment.
See note 2 for details of property, plant and equipment
purchases through leases. See note 14 for commitments in relation
to property, plant and equipment.
10. Borrowings
The Group's committed debt facilities total GBP1,115m (March
2019: GBP1,115m), which expire between 2021 and 2022. The Group's
uncommitted debt facilities total GBP70m (March 2019: GBP90m).
On 25 September 2019, the Group signed an extension to the
receivables purchasing agreement of GBP80m of which GBP75m is
committed and GBP5m uncommitted (March 2019: GBP100m, GBP75m
committed and GBP25m uncommitted). The agreement has a maturity of
September 2021 and the uncommitted element of the agreement has
been reduced from GBP25m to GBP5m.
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
pre-IFRS 16 (note 2) and adjustments are made for receivables
purchasing agreement, non-Headline items (note 7) and other
adjusting items which are deemed exceptional under the agreements.
The Group was in compliance with its covenants throughout the
current and prior periods.
11. Assets and liabilities held for sale
The Group is continuing to progress with its planned sale of
FibreNation, which provides wholesale full fibre, as required to
achieve the Fibre-to-the-Premise (FTTP) network roll out speed and
ultimate scale required. The sales process of Group assets and
liabilities associated with FTTP operations is ongoing and the sale
is expected to be completed by 31 March 2020.
The major classes of assets and liabilities classified as held
for sale are as follows:
30 September
30 September 2018
2019 Unaudited
Unaudited (restated)
GBPm GBPm
------------------------------------------------------ ------------ ------------
Assets classified as held for sale
Goodwill 2 2
Investment in joint ventures and associates (note 12) 2 -
Other non-current assets 41 23
Current assets 13 15
------------------------------------------------------ ------------ ------------
Total assets classified as held for sale 58 40
------------------------------------------------------ ------------ ------------
Liabilities associated with assets classified as held
for sale
Current payables (7) (6)
------------------------------------------------------ ------------ ------------
Total liabilities associated with assets classified
as held for sale (7) (6)
------------------------------------------------------ ------------ ------------
12. Acquisition of associate
On 2 April 2019, the Group acquired 20% of the issued share
capital of the company Makehappen Group Limited and this investment
forms part of the assets classified as held for sale as described
in note 11.
13. Financial instruments fair value disclosures
The financial instruments included on the Group balance sheet
are measured at fair value or amortised cost. The Directors
consider that the carrying value amounts of financial assets and
liabilities recorded at amortised cost in the financial statements
are approximately equal to their fair values.
The measurement of this fair value can in some cases be
subjective and can depend on the inputs used in the calculations.
The different valuation methods are called 'hierarchies' and are
described below:
-- Level 1: Fair values measured using quoted prices
(unadjusted) in active markets for identical assets or
liabilities;
-- Level 2: Fair values measured using inputs, other than quoted
prices included within Level 1, that are observable for the asset
or liability either directly or indirectly; and
-- Level 3: Fair values measured using inputs for the asset or
liability that are not based on observable market data.
The Group had no financial instruments in the current or prior
periods with fair values that are determined by reference to
significant unobservable inputs (level 3 in the fair value
hierarchy), nor have there been any transfers of assets or
liabilities between levels of fair value hierarchy. There are no
non-recurring fair value measurements.
The book value and fair value of the Group's financial assets,
liabilities and derivative financial instruments (1) , are as
follows:
30 September 2018
30 September 2019 Unaudited 31 March 2019
Unaudited (restated) Audited
GBPm GBPm GBPm
-------------------------------------------------------- ----------------- ----------------- -------------
Financial assets (level 1) (1)
Cash and cash equivalents 12 37 67
Contract assets 43 42 39
Trade and other receivables (2) 148 259 160
Non-current investments and investment in joint venture 2 5 2
Non-current trade and other receivables 4 2 2
Non-current contract assets 348 238 308
Financial assets (level 2) (1)
Derivative financial instrument - - -
Financial liabilities (level 1) (1)
Contract liabilities (23) (17) (20)
Trade and other payables (426) (519) (491)
Lease liabilities (60) - -
Current borrowings (5) (85) (10)
Non-current trade and other payables - (6) (5)
Non-current lease liabilities (151) - -
Non-current borrowings (837) (752) (838)
Financial liabilities (level 2) (1)
Derivative financial instruments (level 2) - - -
-------------------------------------------------------- ----------------- ----------------- -------------
(1) The Group has no financial instruments designated as fair
value through the profit and loss (FVTPL).
(2) Accrued and deferred income has been included within the
other receivables so as to give completeness over the Group's
future cash inflows.
Fair value measurement at Level 2 gives consideration to
interest rates, yield curves and foreign exchange rates at commonly
quoted intervals for relevant currencies. The Group has also
assessed the credit risk within its financial instruments.
14. Commitments
The Group has in the normal course of business entered into
various multi-year supply and working capital agreements for core
network, IT and customer equipment. As at 30 September 2019,
expenditure contracted but not provided for in these financial
statements amounted to GBP167m (September 2018: GBP170m, March
2019: GBP134m). Of this amount, GBP99m (September 2018: GBP91m,
March 2019: GBP82m) related to supply for core network, IT and
customer equipment and GBP68m (September 2018: GBP79m, March 2019:
GBP52m) related to capital commitments.
See note 15 for details of commitments made in relation to
related party transactions.
15. Related party transactions
Transactions between the Company and its subsidiaries, which are
related parties, have been eliminated on consolidation and are not
disclosed in this note.
During the period GBP4m was loaned to the joint venture
YouView.
A Loan Agreement in respect of a Working Capital Facility has
been signed with MakeHappen Group Limited. The parties have agreed
to working capital support of up to GBP17m. As of the balance sheet
date, the current drawdown on the facility is GBP3m.
In the year ended 31 March 2019, the freehold interest of a
property owned by a third party and which is leased to TalkTalk was
acquired by a company of which the Executive Chairman is a
controlling owner. There were no new transactions between TalkTalk
and that company and the contractual terms of the lease with
TalkTalk remain unchanged.
INDEPENDENT REVIEW REPORT TO TALKTALK TELECOM GROUP PLC
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 September 2019 which comprises the condensed
consolidated income statement, the condensed consolidated balance
sheet, the condensed consolidated statement of changes in equity,
the condensed consolidated cash flow statement and related notes 1
to 15 We have read the other information contained in the
half-yearly financial report and considered whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. Our work has been undertaken so that we might
state to the company those matters we are required to state to it
in an independent review report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company, for our review
work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the Directors. The Directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34 "Interim
Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
September 2019 is not prepared, in all material respects, in
accordance with International Accounting Standard 34 as adopted by
the European Union and the Disclosure Guidance and Transparency
Rules of the United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
London, United Kingdom
15 November 2019
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
IR GGGCWGUPBUQA
(END) Dow Jones Newswires
November 15, 2019 02:00 ET (07:00 GMT)
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