Final Results
BT Group PLC
18 May 2006
May 18, 2006
PRELIMINARY RESULTS - YEAR TO MARCH 31, 2006
FOURTH QUARTER HIGHLIGHTS
• Revenue of £5,134 million, up 7 per cent (5 per cent excluding acquisitions)
• New wave revenue of £1,851 million, up 28 per cent, represents 36 per cent of
total revenue
• EBITDA before specific items1 and leaver costs of £1,498 million, up 1 per
cent
• Profit before taxation, specific items1 and leaver costs of £629 million, up
4 per cent
• Earnings per share before specific items1 and leaver costs of 5.7 pence, up 8
per cent, the sixteenth consecutive quarter of year on year growth
• Broadband net additions2 of 0.8 million, of which BT Retail's share was 31 per
cent
FULL YEAR HIGHLIGHTS
• Revenue of £19,514 million, up 6 per cent (3 per cent excluding the impact of
reductions to mobile termination rates and acquisitions)
• New wave revenue of £6,282 million, up 38 per cent, represents 32 per cent of
total revenue
• Profit before taxation and specific items1 of £2,177 million, up 5 per cent
• Earnings per share before specific items1 of 19.5 pence, up 8 per cent
• Free cash flow of £1,612 million and net debt reduced to £7.5 billion
• Full year dividend of 11.9 pence per share, up 14 per cent
• Broadband end users2 of 7.9 million, at 31 March 2006, up 58 per cent
The income statement, cash flow statement and balance sheet, drawn up in
accordance with IFRS, from which this information is extracted are set out on
pages 16 to 22.
1Specific items are material one off or unusual items as defined in note 4 on
page 26.
2Includes DSL and LLU connections.
Chairman's statement
Sir Christopher Bland, Chairman, commenting on the full year results, said:
"This is an excellent set of full year results delivered in a competitive and
fast-changing environment. Revenues for the full year have grown by 6 per cent;
new wave revenues, which grew by 38 per cent to £6.3 billion, now represent
around one third of the group's business. We have continued to transform the
business at a fast pace whilst growing our earnings per share before specific
items by 8 per cent to 19.5 pence.
"I am pleased to announce a full year dividend of 11.9 pence per share, 14 per
cent higher than last year. We are confident in our ability to improve
shareholder returns and accelerate the strategic transformation of the
business."
Chief Executive's statement
Ben Verwaayen, Chief Executive, commenting on the fourth quarter results, said:
"This quarter's results are a terrific set of numbers. They show BT firing on
all cylinders, with EBITDA*, revenue and earnings per share* all growing. These
results provide further evidence that our strategy of embracing change is
working. We have now delivered sixteen consecutive quarters of growth in
earnings per share*.
"BT is now a truly global company, delivering services to more than 170
countries with more than 20 per cent of our networked IT services contract wins
outside the UK. BT lines now carry 8 million broadband connections and we have
started rolling out speeds of up to 8 Mbit/s.
"BT has changed very significantly from 4 years ago, and the transformation is
accelerating."
* before specific items and leaver costs
RESULTS FOR THE FOURTH QUARTER AND YEAR ENDED
MARCH 31, 2006
Fourth quarter Year
2006 2005 Better 2006 2005 Better
(worse) (worse)
£m £m % £m £m %
Revenue 5,134 4,820 7 19,514 18,429 6
EBITDA
- before specific
items and leaver
costs 1,498 1,484 1 5,650 5,703 (1)
- before specific
items 1,431 1,440 (1) 5,517 5,537 -
Profit before taxation
- before specific
items and leaver
costs 629 604 4 2,310 2,246 3
- before specific
items 562 560 - 2,177 2,080 5
- after specific
items 507 577 (12) 2,040 2,354 (13)
Earnings per share
- before specific
items and leaver
costs 5.7p 5.3p 8 20.6p 19.4p 6
- before specific
items 5.1p 4.9p 4 19.5p 18.1p 8
- after specific
items 4.7p 5.2p (10) 18.4p 21.5p (14)
Capital expenditure 973 744 (31) 3,142 3,011 (4)
Free cash flow 1,097 1,144 (4) 1,612 2,282(i) (29)
Net debt 7,534 7,893 5
(i) Includes disposal proceeds of £537 million mainly from the sale of the
Eutelsat, Intelsat and Starhub investments.
The commentary on the fourth quarter results focuses on the results before
specific items and leaver costs. This is consistent with the way that financial
performance is measured by management and we believe allows a meaningful
analysis to be made of the trading results of the group. Specific items are
defined in note 4 on page 26.
The comparative results have been restated to reflect the requirements of IFRS
which the group has adopted (see note 1).
The income statement, cash flow statement and balance sheet are provided on
pages 16 to 22. A reconciliation of EBITDA before specific items to group
operating profit is provided on page 30. A definition and reconciliation of free
cash flow and net debt are provided on pages 27 to 29.
GROUP RESULTS
Fourth quarter ended March 31, 2006
Revenue was 7 per cent higher at £5,134 million in the quarter with the
continued strong growth of new wave revenue more than offsetting the decline in
traditional revenue. Underlying revenue, adjusted for the acquisitions of
Albacom and Infonet, was 5 per cent higher than last year. EBITDA before
specific items and leaver costs showed growth of 0.9 per cent, compared to the
decline of 0.6 per cent last quarter. This is the first quarter in the last
eleven that has shown positive year on year growth and continues the improving
trend of recent quarters. Earnings per share before specific items and leaver
costs increased by 8 per cent to 5.7 pence, the sixteenth consecutive quarter of
year on year growth.
The strong growth in new wave business has continued and at £1,851 million new
wave revenue was 28 per cent higher than last year. New wave revenue is mainly
generated from networked IT services, broadband and mobility. Networked IT
services revenue grew by 22 per cent to £1,214 million, broadband revenue
increased by 44 per cent to £421 million and mobility revenue increased by 41
per cent to £82 million. Excluding Albacom and Infonet, the organic growth in
new wave revenue was 23 per cent.
Networked IT services contract wins were £1.1 billion in the fourth quarter and
the value of total orders achieved over the last twelve months was £5.4 billion.
Of this total more than 20 per cent of the order value was achieved outside the
UK.
BT had 7.9 million wholesale broadband connections at March 31, 2006, including
356,000 local loop unbundled lines, an increase of 2.9 million connections year
on year, with these connections available at up to 2Mbit/s. Continuing BT's
commitment to delivering higher speed broadband, DSL Max, which offers speeds of
up to 8Mbit/s across the UK, was launched on 31 March. BT is offering its
wholesale customers DSL Max at no extra cost to the existing 2Mbit/s service. In
upgrading more than 5,300 exchanges to support this service, BT is providing the
UK market with the highest stable speed broadband service across the widest
national footprint in the world.
Revenue from the group's traditional businesses declined by 3 per cent,
continuing recent trends. This reflects regulatory intervention, competition,
price reductions and also technological changes that we are using to drive
customers from traditional services to new wave services.
Major corporate (UK and international) revenue showed continued strong growth of
14 per cent, with growth in new wave revenue of 24 per cent more than offsetting
the decline in traditional services. Excluding the impact of Albacom and
Infonet, revenue grew by 9 per cent. There is a continued migration from
traditional voice only services to networked IT services and an increase in
mobility and broadband revenue. New wave revenue now represents 63 per cent of
major corporate revenues.
Revenue from smaller and medium sized (SME) UK businesses declined by 2 per
cent. New wave revenue grew by 12 per cent driven by continued growth in
broadband and networked IT services. The number of BT Business Plan locations
increased by 15 per cent to 513,000 by March 31, 2006. BT Business Plan now
covers over 57 per cent of SME call revenues.
Consumer revenue in the fourth quarter was 4 per cent lower, although
traditional consumer revenue declined by 10 per cent year on year. This
demonstrates a strategic shift towards new wave products with an increase in
revenue of 45 per cent in the quarter. New wave revenue now represents 15 per
cent of the total.
The underlying 12 month rolling average revenue per consumer household (net of
mobile termination charges) of £251 increased by £1 compared to last quarter,
with increased broadband volumes more than offsetting lower call revenues.
Contracted revenues were 67 per cent of the total, which is 4 percentage points
higher than last year.
Wholesale (UK and Global Carrier) revenue increased by 14 per cent. UK Wholesale
new wave revenue increased by 44 per cent to £298 million, mainly driven by
broadband and managed services.
Group operating costs before specific items increased by 9 per cent year on year
to £4,554 million, including the costs from Albacom and Infonet. Net staff costs
before leaver costs, and net of own work capitalised, increased by £6 million to
£986 million, reflecting higher capital expenditure in the quarter. Leaver costs
were £67 million in the quarter (£44 million last year). Payments to other
telecommunication operators increased by 14 per cent year on year at
£1,015 million mainly due to the impact of Albacom and Infonet. Other operating
costs before specific items increased by £211 million mainly due to increased
costs of sales from both organic and inorganic growth in networked IT services,
partly offset by cost savings from our efficiency programmes. Depreciation and
amortisation increased by 4 per cent year on year to £773 million.
EBITDA before specific items and leaver costs increased by 0.9 per cent,
compared to the decline of 0.6 per cent last quarter, continuing the improving
trend seen during the year. Group operating profit before specific items and
leaver costs decreased by 2 per cent to £725 million mainly as a result of the
higher depreciation and amortisation.
Net finance costs were £101 million, an improvement of £40 million against last
year. The net finance income associated with the group's defined benefit pension
obligation of £63 million was £14 million higher than last year, which along
with the reduction in the level of net debt and the lower implied interest rate
as a result of the bond repayments in December and February have all contributed
to the decrease in net finance costs.
Profit before taxation, specific items and leaver costs increased by 4 per cent
to £629 million with the reduction in net finance costs and an increase in the
share of profits of associates and joint ventures offsetting the reduction in
group operating profit.
The effective tax rate on the profit before specific items was 23.3 per cent
(25.9 per cent last year). The effective tax rate reflects the continued focus
on tax efficiency within the group.
Specific items
Specific items are defined in note 4 on page 26. There was a net charge before
taxation of £55 million in the quarter (£17 million credit last year). Costs of
£56 million relating to the rationalisation of the group's provincial office
portfolio were incurred in the quarter (£29 million last year). This
rationalisation programme is expected to continue throughout the next financial
year giving rise to additional rationalisation costs. Also included in prior
year specific items was a £46 million profit on disposal of the non current
asset investment in Intelsat.
Specific items in the full year were a net charge before taxation of £137
million (£274 million net credit last year). This includes a £70 million
provision relating to the incremental and directly attributable costs to create
the new line of business, Openreach, required under the Undertakings agreed with
Ofcom. Openreach will be reported as a separate line of business from the first
quarter of next year. Property rationalisation costs for the full year were £68
million (£59 million last year). Also included in prior year specific items was
a £358 million profit on disposal, mainly in respect of the sale of the non
current asset investments in Eutelsat, Starhub and Intelsat.
Earnings per share after specific items were 4.7 pence in the quarter (5.2 pence
last year) and 18.4 pence for the full year (21.5 pence last year)
Full year ended March 31, 2006
Revenue increased by 6 per cent in the year to £19,514 million (up 3 per cent
excluding the impact of reductions in mobile termination rates and the
acquisitions of Albacom and Infonet). The strong growth in new wave business has
continued and at £6,282 million new wave revenue was 38 per cent higher than
last year. This strong growth more than offset the decline in traditional
revenue of 5 per cent.
We remain focused on financial discipline and our cost efficiency programmes
achieved savings of over £400 million in the full year. This has enabled us to
invest in further growing our new wave activities. We aim to deliver savings of
at least £400 million in each of the next three years.
EBITDA before specific items was £5,517 million, which was flat compared to the
prior year. Group operating profit before specific items at £2,633 million was 2
per cent lower than the prior year as a result of higher depreciation and
amortisation.
Our share of profits of associates and joint ventures before specific items was
£16 million (£14 million of losses last year).
Net finance costs were £472 million, an improvement of £127 million against last
year. The net finance income associated with the group's defined benefit pension
obligation of £254 million was £56 million higher than last year. Also included
in the current year is a £27 million net gain arising from the fair value
movements in, and realised gain arising from the early redemption of the US
dollar 2008 LG Telecom convertible bond. The reduction in the level of debt
compared to the prior year has also contributed to the decrease in net finance
costs.
The group achieved a profit before taxation and specific items of £2,177
million, a 5 per cent increase, reflecting lower net finance costs and an
increased share of profits from joint ventures and associates.
Earnings per share before specific items increased by 4 per cent to 5.1 pence.
The taxation charge for the year was £533 million on the profit before specific
items, an effective tax rate of 24.5 per cent (26.0 per cent last year).
Earnings per share before specific items were 8 per cent higher at 19.5 pence
for the year.
Cash flow and net debt
Net cash from operating activities in the fourth quarter amounted to
£2,065 million, an increase of £146 million primarily as a result of a strong
working capital performance and lower tax payments in the quarter. Free cash
flow was a net inflow of £1,097 million in the fourth quarter compared to £1,144
million last year which included disposal proceeds of £62 million relating to
the sale of the non current asset investment in Intelsat. The free cash flow for
the full year amounted to £1,612 million compared to £2,282 million last year
which included £537 million proceeds from the disposal of investments, mainly
being Eutelsat, Intelsat and Starhub. Working capital improved by a further £120
million in the year following last year's strong performance.
Cash flows from investing activities were a net cash inflow of £105 million in
the fourth quarter compared to an outflow of £387 million last year. Net cash
outflow relating to the acquisition of subsidiaries in the quarter was £55
million principally relating to the acquisition of Atlanet. This compares to an
outflow of £418 million in the prior year which included the acquisitions of
Infonet and Albacom. Interest received was £220 million lower principally due to
the impact of swap restructuring in the prior year. The net proceeds of £933
million arising on the sale of investments was used to fund partly the repayment
of maturing debt and the interim dividend. The net cash outflow from capital
expenditure, net of disposal proceeds, amounted to £792 million in the quarter
compared to £735 million last year.
Cash flows from financing activities were a net outflow of £1,399 million in the
fourth quarter compared to £856 million last year. Interest paid was £147
million lower than last year due to the impact of swap restructuring in the
prior year. In addition there was an increase of £619 million in net repayments
of borrowings compared to the prior year. This is due to the repayment of
maturing debt offset by the issue of an additional £1 billion of debt in the
quarter.
The share buyback programme continued with the repurchase of 53 million shares
in the quarter, taking the total value of shares repurchased in the year to £348
million. Net debt was £7,534 million at March 31, 2006, a reduction of £579
million in the quarter. Free cash flow and net debt are defined and reconciled
in notes 7 and 8 on pages 27 to 29.
Dividends
The board recommends a final dividend of 7.6 pence per share to shareholders,
amounting to £632 million. This will be paid, subject to shareholder approval,
on September 11, 2006 to shareholders on the register on August 18, 2006. The
ex-dividend date is August 16, 2006.
The full year proposed dividend has increased by 14 per cent to 11.9 pence per
share, compared to 10.4 pence last year. This year's dividend pay out ratio is
61 per cent of earnings before specific items, compared to 57 per cent last
year.
We continue with our progressive dividend policy. We expect our payout ratio to
rise to around two thirds of underlying earnings in 2007/08.
Pensions
The IAS 19 net pension obligation at March 31, 2006 was a deficit of £1.8
billion, net of tax, being half the level at March 31, 2005. This reflects
strong asset growth offset by the impact of longer life expectancy and lower
discount rates. The BT Pension Scheme had assets of £36 billion at March 31,
2006. Detailed IAS 19 disclosures are provided in note 13 on pages 32 to 36.
The triennial funding valuation at December 31, 2005 is currently being
performed and reviewed in the context of recent regulatory developments and the
impact of the Crown Guarantee granted on privatisation in 1984.
21st Century Network
Contracts have been signed with the eight 21CN preferred suppliers and the first
equipment orders have been placed against these contracts.
Building on the successful conclusion to the second phase of 21CN voice
transformation trials on strategic equipment in December 2005, the next phase,
the trial of telephone services over the IP network is scheduled to start before
the end of May 2006.
Operational planning to migrate customers to the 21CN in Cardiff, which will see
the first live operation of 21CN in November 2006, is well advanced. Following
successful implementation in Cardiff, and following a comprehensive industry
review, BT will proceed to a national migration programme. Through the
communication forum Consult 21, BT, in close consultation with industry and
Ofcom, is agreeing detailed migration plans for the entirety of the migration
period.
Line of business results
We reviewed our internal trading arrangements and with effect from April 1, 2005
have made changes to simplify our internal trading and drive synergies. We have
restated the comparative line of business results to assist readers in
understanding the year on year performance. There is no change to the overall
group reported results.
The main changes are the transfer of BT's UK Major Business operations into BT
Global Services from BT Retail and Field Services being moved from BT Retail to
BT Wholesale, in anticipation of the creation of Openreach.
Openreach
Openreach was launched on January 21, 2006. We will have completed the
separation, configuration and implementation of financial reporting and
operational systems to facilitate the reporting of the results of Openreach by
the first quarter of the year ending March 31, 2007. This is in accordance with
the timetable specified by the Undertakings.
On May 31, 2006 the Equality of Access Board, a board committee established by
BT as required by the undertakings to Ofcom, will publish its first annual
report on BT's compliance with and delivery of its Undertakings.
Outlook
Our performance underpins our confidence that we can continue to grow revenue,
EBITDA, earnings per share and dividends over the coming year. Revenue growth
will continue to be fuelled by new wave services; the EBITDA improvement will be
driven by the continued growth in BT Retail's profitability and an acceleration
through the year of the EBITDA growth in BT Global Services.
We are confident in our ability to improve shareholder returns and accelerate
the strategic transformation of the business.
_________________________________________________________________
The Annual Report and Form 20-F is expected to be published on May 31, 2006. The
Annual General Meeting of BT Group plc will be held at Barbican Centre, London
on July 12, 2006.
BT Retail
Fourth quarter ended March 31 Year ended
March 31
--------------------------- ------------
2006 2005* Better (worse) 2006 2005*
£m £m £m % £m £m
Revenue 2,123 2,149 (26) (1) 8,452 8,698
Gross margin 613 597 16 3 2,354 2,354
SG&A before 391 385 (6) (2) 1,541 1,576
leaver costs
EBITDA before 222 212 10 5 813 778
leaver costs
Leaver costs 9 15 6 40 22 24
EBITDA 213 197 16 8 791 754
Depreciation
and 38 38 - - 147 147
amortisation
Operating 175 159 16 10 644 607
profit
Capital 53 54 1 2 153 170
expenditure
*Restated to reflect changes in intra-group trading arrangements.
BT Retail's EBITDA before leaver costs was 5 per cent higher than last year. For
the third consecutive quarter EBITDA has grown and the rate of revenue decline
has slowed. Gross margins increased by 1.1 percentage points compared to the
prior year due to improved margin management. This more than compensated for the
1 per cent decline in revenues. Combined with lower leaver costs, the improved
performance has led to an increase in operating profit of 10 per cent to
£175 million. Traditional revenue declined by 6 per cent whilst new wave revenue
grew by 31 per cent, driven primarily by broadband and mobility. New wave
revenue was 19 per cent of total revenue in the quarter, up from 14 per cent
last year.
Broadband revenue grew by 35 per cent to £202 million with BT Retail connections
at 31 March growing to 2,584,000, an increase of 11 per cent in the quarter. We
achieved a 31 per cent market share of broadband net additions (DSL plus LLU) in
the fourth quarter following the re-launch of the simplified broadband tariffs
and updated advertising campaigns in October 2005. Consumer broadband net
additions were 227,000 for the quarter, and we have seen a growing shift in the
proportion of customers opting for higher value packages over the quarter.
Revenue from mobility services increased by 18 per cent to £39 million. BT
Fusion, is still the only intelligent mobile service that switches calls
seamlessly to a broadband line when the user is at home or in the office,
offering customers the convenience of mobile in combination with the cost and
quality advantages of a fixed-line phone. BT Fusion connections continue to rise
following the launch of the market leading V3B (Motorola RAZR) handset and the
launch of a BT Fusion proposition for the business market in February 2006. BT
Fusion has now attracted over 30,000 connections since the launch.
We have had success with new value-added initiatives to our customer
propositions. BT Privacy has more than 3.7 million registered customers, an
increase of 30 per cent from last quarter. Following its launch in October 2005,
more than one million customers have registered to have their Friends & Family
calling circle automatically updated to ensure that the numbers they dial most
frequently attract maximum discounts. BT Text service on fixed lines, with Tom
Baker as the distinctive voice of BT Text until the end of April, has increased
the volume of text messages sent by an impressive 530 per cent compared to the
prior year. As at 31 March 2006, 268,000 BT customers were registered for the
service and around 1.2 million text messages were being sent to landlines every
week, a year on year increase of 145 per cent.
We are playing a lead role in the development of internet telephony or Voice
over IP (VoIP), having a rich product offering including: BT Communicator, which
enables customers to make voice calls over the internet using a PC or laptop;
and Broadband Talk, enabling customers to make and receive broadband calls on a
second line, using an ordinary touch-tone telephone.
We will shortly be introducing a range of converged next generation services to
help make life simpler and better for our customers. At the heart of this will
be the BT Hub, which will enable wireless networking for all the family's PCs
and laptops, voice calls over broadband, video telephony, high definition voice,
monitoring services and remote diagnostics. Work also continues on BT Vision,
which is due to launch in the autumn.
BT Openzone is one of the leading providers of Wi-Fi services in the UK and
Ireland. Recently awarded the Brainheart European Wi-Fi award in recognition of
its contribution to the growth of the European Wi-Fi industry, we operate our
own network of high quality sites and offer more wholesale and roaming
connections than any other UK Wi-Fi network operator. We have already built the
Openzone network in Westminster and Cardiff and have announced plans to Wi-Fi
enable twelve further cities by the end of 2006. Our customers currently have
access to more than 8,400 hotspots throughout the UK and Ireland and more than
30,000 globally.
BT Wholesale
Fourth quarter ended March 31 Year
ended March 31
--------------------------- -------------
2006 2005* Better (worse) 2006 2005*
£m £m £m % £m £m
External 1,111 973 138 14 4,226 3,820
revenue
Internal 1,233 1,314 (81) (6) 5,006 5,275
revenue
Revenue 2,344 2,287 57 2 9,232 9,095
Variable cost 567 509 (58) (11) 2,201 2,162
of sales
Gross 1,777 1,778 (1) - 7,031 6,933
variable
profit
Network and
SG&A before 788 791 3 - 3,103 3,007
leaver costs
EBITDA before 989 987 2 - 3,928 3,926
leaver costs
Leaver costs 26 3 (23) n/m 34 62
EBITDA 963 984 (21) (2) 3,894 3,864
Depreciation 516 485 (31) (6) 1,902 1,914
and
amortisation
Operating 447 499 (52) (10) 1,992 1,950
profit
Capital 591 442 (149) (34) 2,013 1,981
expenditure
============= ======= ======= ======= ========= ======= ========
*Restated to reflect changes in intra-group trading arrangements.
BT Wholesale revenue in the fourth quarter of £2,344 million increased by 2 per
cent, driven by external revenue growth of 14 per cent, reflecting strong
revenue growth in broadband, wholesale line rental and managed network services.
External revenue from new wave services increased by 44 per cent to £298 million
and now accounts for 27 per cent of external revenue compared to 21 per cent
last year.
Internal revenue declined by 6 per cent to £1,233 million due to the impact of
lower volumes of calls and lines and lower regulatory prices being reflected in
internal charges partially offset by strong growth from internal broadband
revenue.
Gross variable profit at £1,777 million was flat, largely as a result of the
change in sales mix and decline in traditional products. Cost savings have been
more than offset by the significantly increased levels of activity in the
network due to growth in broadband and local loop unbundling. Overall, this has
delivered a £2 million increase in EBITDA before leaver costs. Increased leaver
payments and higher depreciation as a result of the increased capital
expenditure to prepare for the 21CN, have resulted in a 10 per cent decline in
operating profit.
Capital expenditure in the quarter was 34 per cent higher than last year
reflecting the increased investment in the 21CN and expenditure on new systems
to ensure compliance with the Undertakings agreed with Ofcom for the creation of
Openreach. Investment in legacy network technologies continues to be lower than
last year.
Following successful end user trials, BT Movio, a wholesale service providing
mobile operators with TV and radio channels to mobile handsets, is set for
commercial launch later this year. BT Movio will provide consumers with a simple
to use and reliable digital TV and radio service. In February we announced that
Virgin will be the first mobile operator to offer the service to its customers.
BT Global Services
Fourth quarter ended March 31 Year ended
March 31
--------------------------- -------------
2006 2005* Better (worse) 2006 2005*
£m £m £m % £m £m
Revenue 2,369 2,160 209 10 8,632 7,488
EBITDA before
leaver 332 316 16 5 1,050 1,020
costs
Leaver costs 21 15 (6) (40) 49 59
EBITDA 311 301 10 3 1,001 961
Depreciation
and 168 148 (20) (14) 638 550
amortisation
Operating 143 153 (10) (7) 363 411
profit
Capital 220 159 (61) (38) 702 605
expenditure
============= ======= ======= ======= ========= ======= =======
*Restated to reflect changes in intra-group trading arrangements.
BT Global Services generated strong revenue growth in the fourth quarter,
increasing by 10 per cent to £2,369 million. Underlying growth, excluding
acquisitions, was 5 per cent, driven by the continued expansion of networked IT
services both in the UK and globally whilst traditional revenues continue to
decline. Multi Protocol Label Switching (MPLS) grew 43 per cent year on year.
Order intake remained healthy with networked IT services contract orders of £1.1
billion, resulting in orders of £5.4 billion over the last twelve months of
which more than 20 per cent was generated outside the UK.
EBITDA before leaver costs increased year on year by £16 million. Further growth
in new wave profitability, including the effect of the Infonet and Albacom
acquisitions, more than offset the decline in EBITDA experienced in UK
traditional products, including migration to IPVPNs sold to UK corporates and
further reductions in dial IP due to broadband substitution. Higher depreciation
costs, partly due to the acquisitions, together with higher leaver costs,
resulted in a fall in operating profit of £10 million.
Capital expenditure in the quarter at £220 million rose by £61 million due to
extra network investment outside the UK, including expenditure in Infonet and
Albacom.
BT is playing a critical role in the transformation of patient care within the
NHS. At the Royal Cornwall Hospitals NHS Trust in Truro, it introduced the first
system of its kind in a UK hospital that allows staff to contact each other
instantly anywhere in the hospital through a voice-activated, wearable badge.
BT continues to build on its successes with its contracts for NHS National
Programme for Information Technology. On N3, the NHS broadband network, BT had
installed more than 14,000 connections at March 31, 2006 and is ahead of
schedule to hit its target of 18,000 connections by March 2007.
Spine, the world's largest transactional database which facilitates the
effective storage and management of electronic care records, had around 200,000
registered users at March 31, 2006.
As the London local service provider, BT has already delivered its first major
acute patient administration system at Queen Mary's Hospital Sidcup, as well as
community health systems to two primary care trusts. It has also completed 50
per cent of its roll out of Picture Archiving and Communications Systems -
systems which enable X-rays and scans to be stored, displayed, transmitted and
archived electronically, rather than being printed onto film - and has delivered
43 GP systems, two pharmacy stock control systems and two pathology systems.
GROUP INCOME STATEMENT
for the three months ended March 31, 2006
Before specific Specific Total
items items
(note 4)
(unaudited) Notes £m £m £m
------------------------- ------ ---------- ----------- ---------
Revenue 2 5,134 - 5,134
Other operating income 78 - 78
Operating costs 3 (4,554) (56) (4,610)
Operating profit 2 658 (56) 602
Finance costs (640) - (640)
Finance income 539 - 539
Net finance costs 5 (101) - (101)
Share of post tax profits
of associates and joint
ventures 5 - 5
Profit on disposal of
joint venture - 1 1
Profit before taxation 562 (55) 507
Taxation (131) 16 (115)
Profit for the period
attributable to equity
shareholders 431 (39) 392
Attributable to:
Equity shareholders 430 (39) 391
Minority interests 1 - 1
Earnings per share 6
- basic 5.1p 4.7p
- diluted 5.1p 4.6p
------------------------- ------ ---------- ----------- ---------
GROUP INCOME STATEMENT
for the three months ended March 31, 2005
Before specific Specific Total
items items
(note 4)
(unaudited) Notes £m £m £m
------------------------- ------ ---------- ----------- ---------
Revenue 2 4,820 - 4,820
Other operating income 39 46 85
Operating costs 3 (4,164) (29) (4,193)
Operating profit 2 695 17 712
Finance costs (689) - (689)
Finance income 548 - 548
Net finance costs 5 (141) - (141)
Share of post tax profits
of associates and joint
ventures 6 - 6
Profit before taxation 560 17 577
Taxation (145) 8 (137)
Profit for the period
attributable to equity
shareholders 415 25 440
Earnings per share 6
- basic 4.9p 5.2p
- diluted 4.8p 5.1p
------------------------- ------ ---------- ----------- ---------
GROUP INCOME STATEMENT
for the year ended March 31, 2006
Before specific Specific Total
items items
(note 4)
Notes £m £m £m
------------------------ ------ ----------- ---------- ---------
Revenue 2 19,514 - 19,514
Other operating income 227 - 227
Operating costs 3 (17,108) (138) (17,246)
Operating profit 2 2,633 (138) 2,495
Finance costs (2,740) - (2,740)
Finance income 2,268 - 2,268
Net finance costs 5 (472) - (472)
Share of post tax profits
of associates and joint
ventures 16 - 16
Profit on disposal of
joint venture - 1 1
Profit before taxation 2,177 (137) 2,040
Taxation (533) 41 (492)
Profit for the year 1,644 (96) 1,548
Attributable to:
Equity shareholders 1,643 (96) 1,547
Minority interests 1 - 1
Earnings per share 6
- basic 19.5p 18.4p
- diluted 19.2p 18.1p
------------------------ ------ ----------- ---------- ---------
GROUP INCOME STATEMENT
for the year ended March 31, 2005
Before specific items Specific items Total
(note 4)
Notes £m £m £m
------------------------ ------ ---------- ----------- ---------
Revenue 2 18,429 - 18,429
Other operating income 193 358 551
Operating costs 3 (15,929) (59) (15,988)
Operating profit 2 2,693 299 2,992
Finance costs (2,773) - (2,773)
Finance income 2,174 - 2,174
Net finance costs 5 (599) - (599)
Share of post tax losses
of associates and joint
ventures (14) (25) (39)
Profit before taxation 2,080 274 2,354
Taxation (541) 16 (525)
Profit for the year 1,539 290 1,829
Attributable to:
Equity shareholders 1,540 290 1,830
Minority interests (1) - (1)
Earnings per share 6
- basic 18.1p 21.5p
- diluted 17.9p 21.3p
------------------------ ------ ---------- ----------- ---------
GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE
for the year ended March 31, 2006
Year ended March 31
2006 2005
£m £m
Profit for the year 1,548 1,829
Actuarial gains on defined benefit pension 2,122 294
obligations
Net movement on cash flow hedges (200) -
Exchange differences on translation of foreign
operations 24 27
Tax on items taken directly to equity (588) (79)
Net gains recognised directly in equity 1,358 242
Total recognised income for the year 2,906 2,071
Attributable to:
Equity shareholders 2,905 2,072
Minority interests 1 (1)
2,906 2,071
The group has adopted IAS 32 and IAS 39, with effect from April 1, 2005. The
adoption of IAS 32 and IAS 39 has resulted in a decrease in equity at April 1,
2005 of £209 million (net of deferred tax), of which £nil was attributable to
minority interests.
GROUP CASH FLOW STATEMENT
for the three months and year ended March 31, 2006
Fourth quarter Year
ended March 31 ended March 31
2006 2005 2006 2005
(unaudited)
£m £m £m £m
Cash flow from operating
activities
Cash generated from
operations 2,138 2,076 5,777 5,906
(note 7 (a))
Income taxes paid (73) (157) (390) (332)
Net cash inflow from
operating 2,065 1,919 5,387 5,574
activities
Cash flow from investing
activities
Net acquisition of
subsidiaries, associates (55) (418) (167) (418)
and
joint ventures
Net purchase of property,
plant, equipment (792) (735) (2,874) (2,945)
and software
Interest received 19 239 185 374
Net sale of short term
investments and non 933 527 3,221 1,249
current asset investments
Net cash received (used)
in 105 (387) 365 (1,740)
investing activities
Cash flows from financing
activities
Repurchase of ordinary
share (106) (63) (339) (193)
capital
Net repayments of
borrowings (740) (121) (2,946) (1,292)
and derivatives
Interest paid (195) (342) (1,086) (1,260)
Equity dividends paid (358) (330) (907) (784)
Net cash used in financing
activities (1,399) (856) (5,278) (3,529)
Effects of exchange rate
changes - 20 - -
Net increase in cash and
cash 771 696 474 305
equivalents
Cash and cash equivalents
at 1,013 614 1,310 1,005
beginning of
period
Cash and cash equivalents,
net
of bank overdrafts, at end 1,784 1,310 1,784 1,310
of period (note 7 (c))
Free cash flow (note 7 1,097 1,144 1,612 2,282
(b))
Decrease in net debt from
cash 578 333 199 887
flows (note 8 (b))
GROUP BALANCE SHEET
at March 31, 2006
March 31 2006 March 31 2005
£m £m
Non current assets
Goodwill and other intangible assets 1,641 1,254
Property, plant and equipment 15,489 15,391
Other non current assets 84 133
Deferred tax assets 764 1,434
17,978 18,212
Current assets
Inventories 124 106
Trade and other receivables 4,199 4,269
Other financial assets 434 3,634
Cash and cash equivalents 1,965 1,312
6,722 9,321
Total assets 24,700 27,533
Current liabilities
Loans and other borrowings 1,940 4,261
Trade and other payables 6,540 6,763
Other current liabilities 1,000 1,080
9,480 12,104
Total assets less current liabilities 15,220 15,429
Non current liabilities
Loans and other borrowings 7,995 7,744
Deferred tax liabilities 1,505 1,715
Retirement benefit obligations 2,547 4,807
Other non current liabilities 1,566 1,068
13,613 15,334
Capital and reserves
Called up share capital 432 432
Reserves 1,123 (387)
Total equity shareholders' funds 1,555 45
Minority interests 52 50
Total equity 1,607 95
15,220 15,429
NOTES
1 Basis of preparation
The preliminary results for the year ended March 31, 2006 have been extracted
from the audited consolidated financial statements which have not yet been
delivered to the Registrar of Companies but are expected to be published on May
31, 2006.
The financial information set out in this announcement does not constitute
statutory accounts for the year ended March 31, 2006 or 2005. The financial
information for the year ended March 31, 2006 is derived from the statutory
accounts for that year and the comparative financial information has been
restated as a result of the adoption of International Financial Reporting
Standards (IFRS) as described below. The report of the auditors on the statutory
accounts for the year ended March 31, 2006 was unqualified and did not contain a
statement under section 237 of the Companies Act 1985.
BT Group plc (the group) is required to prepare its consolidated financial
statements in accordance with International Financial Reporting Standards as
adopted for use by the European Union, with effect from April 1, 2005. On July
28, 2005 the group issued its first quarter results which also included
appendices presenting and explaining the consolidated results of the group
restated from UK GAAP onto an IFRS basis. It also includes details of the
group's principal accounting policies under IFRS and the financial information
set out in these preliminary results has been prepared in accordance with those
accounting policies. The directors have applied those policies in the
preparation of the consolidated financial statements for the year ended March
31, 2006. We have changed to a net basis of presentation for revenue arising
from calls to certain of our premium rate services, further details of which are
provided in note 12. The group has adopted IAS 39 and IAS 32 prospectively from
April 1, 2005. The adoption of IAS 32 and IAS 39 has resulted in a decrease in
equity at April 1, 2005 of £209 million, net of deferred tax.
2 Results of businesses
(a) Operating results - primary reporting segments
External Internal Group EBITDA Operating
revenue revenue revenue (ii) profit (loss) (ii)
£m £m £m £m £m
Fourth quarter ended
March 31, 2006
BT Retail 2,032 91 2,123 213 175
BT Wholesale 1,111 1,233 2,344 963 447
BT Global Services 1,986 383 2,369 311 143
Other 5 - 5 (56) (107)
Intra-group items (i) - (1,707) (1,707) - -
Total 5,134 - 5,134 1,431 658
Fourth quarter ended
March 31, 2005
(restated - see below)
BT Retail 2,066 83 2,149 197 159
BT Wholesale 973 1,314 2,287 984 499
BT Global Services 1,775 385 2,160 301 153
Other 6 - 6 (42) (116)
Intra-group items (i) - (1,782) (1,782) - -
Total 4,820 - 4,820 1,440 695
Year ended
March 31, 2006
BT Retail 8,119 333 8,452 791 644
BT Wholesale 4,226 5,006 9,232 3,894 1,992
BT Global Services 7,151 1,481 8,632 1,001 363
Other 18 - 18 (169) (366)
Intra-group items (i) - (6,820) (6,820) - -
Total 19,514 - 19,514 5,517 2,633
Year ended
March 31, 2005
(restated - see below)
BT Retail 8,430 268 8,698 754 607
BT Wholesale 3,820 5,275 9,095 3,864 1,950
BT Global Services 6,154 1,334 7,488 961 411
Other 25 - 25 (42) (275)
Intra-group items (i) - (6,877) (6,877) - -
Total 18,429 - 18,429 5,537 2,693
(i) Elimination of intra-group revenue between businesses,
which is included in the total revenue of the originating business.
(ii) Before specific items.
We have reviewed our internal trading arrangements and with effect from April 1,
2005 have made changes to simplify our internal trading and drive synergies. We
have restated the comparative line of business results to assist readers in
understanding the year on year performance. There is no change to the overall
group reported results.
2 Results of businesses continued
(b) Revenue analysis
------------------------ -------------
Fourth quarter ended Year ended
March 31 March 31
------------------------ -------------
2006 2005 Better (worse) 2006 2005
£m £m £m % £m £m
Traditional 3,283 3,374 (91) (3) 13,232 13,879
New wave 1,851 1,446 405 28 6,282 4,550
5,134 4,820 314 7 19,514 18,429
Major Corporate 1,922 1,693 229 14 6,880 5,936
Business 587 601 (14) (2) 2,324 2,442
Consumer 1,312 1,373 (61) (4) 5,296 5,599
Wholesale/Carrier 1,308 1,147 161 14 4,996 4,427
Other 5 6 (1) (17) 18 25
5,134 4,820 314 7 19,514 18,429
(c) New wave revenue analysis
------------------------ -------------
Fourth quarter ended Year ended March 31
March 31
------------------------ -------------
2006 2005 Better (worse) 2006 2005
£m £m £m % £m £m
Networked IT services 1,214 995 219 22 4,065 3,066
Broadband 421 292 129 44 1,459 930
Mobility 82 58 24 41 292 205
Other 134 101 33 33 466 349
1,851 1,446 405 28 6,282 4,550
(d) Capital expenditure(1) on property, plant, equipment, software
and motor vehicles:
------------------------ -------------
Fourth quarter ended Year ended March 31
March 31
------------------------ -------------
2006 2005 Better (worse) 2006 2005
£m £m £m % £m £m
BT Retail 53 54 1 2 153 170
BT Wholesale
Access 227 225 (2) (1) 950 1,036
Switch 5 14 9 64 32 100
Transmission 43 62 19 31 186 230
Products/systems support 316 141 (175) (124) 845 615
591 442 (149) (34) 2,013 1,981
BT Global Services 220 159 (61) (38) 702 605
Other (including fleet
vehicles and property) 109 89 (20) (22) 274 255
Total 973 744 (229) (31) 3,142 3,011
(1)Capital expenditure, which is recognised on an accruals basis, includes
computer software which is classified within intangible assets.
3 Operating costs
Fourth quarter Year ended
ended
March 31 March 31
2006 2005 2006 2005
£m £m £m £m
Net staff costs1 before leaver costs 986 980 3,933 3,666
Leaver costs 67 44 133 166
Net staff costs 1,053 1,024 4,066 3,832
Depreciation and amortisation 773 745 2,884 2,844
Payments to telecommunication 1,015 893 4,045 3,725
operators
Other operating costs 1,713 1,502 6,113 5,528
Total before specific items 4,554 4,164 17,108 15,929
Specific items (note 4) 56 29 138 59
Total 4,610 4,193 17,246 15,988
1Net staff costs comprise gross staff costs less own work capitalised.
4 Specific items
BT will continue to separately identify and disclose any material one off or
unusual items (termed "specific items"). This is consistent with the way that
financial performance is measured by management and we believe assists in
providing a meaningful analysis of the trading results of the group. "Specific
items" may not be comparable to similarly titled measures used by other
companies. Items which have been considered material one off or unusual in
nature include disposals of businesses and investments, business restructuring
and property rationalisation programmes. Specific items were previously referred
to as exceptional items under UK GAAP.
Fourth quarter ended Year ended
March 31 March 31
2006 2005 2006 2005
£m £m £m £m
Operating costs (income)
Creation of Openreach - - 70 -
Property rationalisation costs 56 29 68 59
Profit on sale of non current asset
investments - (46) - (358)
Specific net operating costs (income) 56 (17) 138 (299)
Impairment of assets in joint ventures - - - 25
Profit on sale of joint ventures (1) - (1) -
Total specific items before tax 55 (17) 137 (274)
5 Net finance costs
Fourth quarter Year ended
ended
March 31 March 31
2006 2005 2006 2005
£m £m £m £m
Finance costs1 before pension 186 259 924 1,053
interest
Interest on pension scheme 454 430 1,816 1,720
liabilities
Finance costs 640 689 2,740 2,773
Finance income2 before pension income (22) (69) (198) (256)
Expected return on pension scheme
assets (517) (479) (2,070) (1,918)
Finance income (539) (548) (2,268) (2,174)
Net finance costs 101 141 472 599
1Finance costs in the fourth quarter and year ended March 31, 2006 include a £4
million net credit and £8 million net charge, respectively, arising from the
re-measurement of financial instruments which are not in hedging relationships
on a fair value basis.
2Finance income for the year ended March 31, 2006 includes the fair value
movement in, and realised gain arising from, the early redemption of the US
dollar 2008 LG Telecom convertible bond amounting to £27 million.
6 Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to
shareholders by the average number of shares in issue after deducting the
company's shares held by employee share ownership trusts and treasury shares. In
calculating the diluted earnings per share, share options outstanding and other
potential ordinary shares have been taken into account. The average number of
shares in the periods were:
Fourth quarter Year ended
ended March 31 March 31
2006 2005 2006 2005
Millions of shares Millions of shares
Basic 8,354 8,493 8,422 8,524
Diluted 8,473 8,576 8,537 8,581
7 (a) Reconciliation of profit to cash generated from operations
Fourth quarter Year ended
ended March 31 March 31
2006 2005 2006 2005
£m £m £m £m
Profit before tax 507 577 2,040 2,354
Depreciation and amortisation 773 745 2,884 2,844
Associates and joint ventures (5) (6) (16) 39
Net finance costs 101 141 472 599
Profit on disposal of property
assets and non - (24) - (358)
current asset investments
Changes in working capital 705 620 120 253
Provisions movements, pensions
and other 57 23 277 175
Cash generated from operations 2,138 2,076 5,777 5,906
7 (b) Free cash flow
Fourth quarter Year ended
ended March 31 March 31
2006 2005 2006 2005
£m £m £m £m
Cash generated from operations 2,138 2,076 5,777 5,906
Income taxes paid (73) (157) (390) (332)
Net cash inflow from operating
activities 2,065 1,919 5,387 5,574
Included in cash flows from investing
activities
Net purchase of property, plant,
equipment (792) (735) (2,874) (2,945)
and software
Net sale (purchase) of non current
asset investments - 62 (1) 537
Dividends received from associates - 1 1 2
Interest received 19 239 185 374
Included in cash flows from financing
activities
Interest paid (195) (342) (1,086) (1,260)
Free cash flow 1,097 1,144 1,612 2,282
Free cash flow is defined as the net increase in cash and cash equivalents less
cash flows from financing activities (except interest paid) and less the
acquisition or disposal of group undertakings. It is not a measure recognised
under IFRS but is a key indicator used by management in order to assess
operational performance.
(c) Cash and cash equivalents
At March 31
2006 2005
£m £m
Cash at bank and in hand 511 206
Short term deposits 1,454 1,106
Cash and cash equivalents 1,965 1,312
Bank overdrafts (181) (2)
1,784 1,310
8 Net debt
Net debt at March 31, 2006 was £7,534 million (March 31, 2005 - £7,893 million)
Net debt consists of borrowings less financial assets and cash and cash
equivalents. Borrowings are measured as the net proceeds raised, adjusted to
amortise any discount over the term of the debt. Financial assets and cash and
cash equivalents are measured at the lower of cost and net realisable value.
Currency denominated balances within net debt are translated to sterling at
swapped rates where hedged.
This definition of net debt measures balances at the future cash flows due to
arise on maturity of financial instruments and removes the balance sheet
adjustments made from the re-measurement of hedged risks under fair value hedges
and the use of the amortised cost method that is required by IAS 39. In
addition, the gross balances are adjusted to take account of netting
arrangements. It is not a measure recognised under IFRS but is used by
management in order to assess operational performance.
(a) Analysis
At March 31
2006 2005
£m £m
Loans and other borrowings 9,935 12,005
Cash and cash equivalents (1,965) (1,312)
Other current financial assets1 (365) (3,491)
7,605 7,202
Adjustments:
To retranslate currency denominated balances at swapped
rates where hedged 121 691
To recognise investments and borrowings at net proceeds and
unamortised discount (192) -
Net debt 7,534 7,893
After allocating the element of the adjustments which impact loans and other
borrowings, gross debt at March 31, 2006 was £9,686 million (March 31, 2005 -
£12,696 million).
1Excluding derivative financial instruments of £69 million and £143 million at
March 31, 2006 and March 31, 2005, respectively.
(b) Reconciliation of net cash flow to movement in net debt
Fourth quarter ended Year ended
March 31 March 31
2006 2005 2006 2005
£m £m £m £m
Net debt at beginning of period 8,113 8,046 7,893 8,530
Decrease in net debt resulting from
cash flows (578) (333) (199) (887)
Net debt assumed or issued on
acquisitions (1) 159 - 159
Currency movements (10) (18) (75) 2
Other non-cash movements 10 39 (85) 89
Net debt at end of period 7,534 7,893 7,534 7,893
9 Changes in equity
Year ended
March 31
2006 2005
£m £m
Shareholders' funds (deficit) 45 (1,085)
Minority interests 50 46
95 (1,039)
Effect of adoption of IAS 32 and IAS 39 (net of deferred tax) (209) -
Deficit at beginning of year (114) (1,039)
Total recognised income for the year 2,906 2,071
Share based payments 65 20
Issues of shares 4 1
Net purchase of treasury shares (344) (176)
Dividends on ordinary shares (912) (786)
Movement in minority interest 2 4
Net changes in equity for the financial year 1,721 1,134
Equity at end of year
Shareholders' funds 1,555 45
Minority interests 52 50
Total equity 1,607 95
10 Earnings before interest, taxation, depreciation and amortisation (EBITDA)
Fourth quarter ended Year ended March 31
March 31
2006 2005 2006 2005
£m £m £m £m
Operating profit 602 712 2,495 2,992
Specific items (note 4) 56 (17) 138 (299)
Depreciation and amortisation
(note 3) 773 745 2,884 2,844
EBITDA before specific items 1,431 1,440 5,517 5,537
Earnings before interest, taxation, depreciation and amortisation (EBITDA)
before specific items is not a measure recognised under IFRS, but it is a key
indicator used by management in order to assess operational performance.
11 Dividends
The directors recommend a final dividend of 7.6 pence per share (6.5 pence
last year). This will be paid, subject to shareholder approval, on September 11,
2006 to shareholders who were on the register at August 18, 2006. This final
dividend, amounting to £632 million (£551 million last year) has not been
included as a liability as at March 31, 2006. It will be recognised as an
appropriation of retained earnings within shareholders' equity in the quarter
ended September 30, 2006. This takes the total proposed dividend in relation
to the year to 11.9 pence per share (10.4 pence last year).
12 Change in presentation
The group has historically recognised all revenue arising from calls to our
premium rate numbers on a gross basis, with amounts paid to the service
providers recorded separately within operating costs. In light of the transition
to IFRS and changing market practice we have reviewed the presentation of these
arrangements. We have changed our presentation to a net basis for those calls
where we provide basic transmission and connectivity services only. For calls
where we add value by providing interactivity and a more significant and
valuable part of the service, the associated revenue will continue to be
reported on a gross basis.
Whilst reducing revenue and operating costs this change has had no impact on
reported profit, cash flows or the balance sheet. The impact on revenue and
operating costs was £64 million for the quarter and £235 million for the year
ended March 31, 2006. The impact on revenue and operating costs was £50 million
and £194 million for the fourth quarter and year ended March 31, 2005,
respectively, as shown below.
Re-presentation of revenue for the fourth quarter and year ended March 31, 2005
Fourth quarter ended Year ended
March 31, 2005 March 31, 2005
As previously As As previously As
reported Adjusted reported Adjusted
£m £m £m £m
Revenue by line of business
BT Retail 2,080 2,066 8,490 8,430
BT Wholesale 973 973 3,820 3,820
BT Global Services 1,811 1,775 6,288 6,154
Other 6 6 25 25
4,870 4,820 18,623 18,429
Revenue by product
Traditional 3,424 3,374 14,073 13,879
New wave 1,446 1,446 4,550 4,550
4,870 4,820 18,623 18,429
Revenue by line of business
Consumer 1,382 1,373 5,637 5,599
Business 606 601 2,464 2,442
Major corporate 1,728 1,693 6,069 5,936
Wholesale/carrier 1,148 1,147 4,428 4,427
Other 6 6 25 25
4,870 4,820 18,623 18,429
13 Pensions
The group offers retirement plans to its employees. The group's main scheme, the
BT Pension Scheme (BTPS), is a defined benefit scheme where the benefits are
based on employees' length of service and final pensionable pay. The BTPS is
funded through a legally separate trustee administered fund. This scheme has
been closed to new entrants since 31 March 2001 and replaced by a defined
contribution scheme. Under this defined contribution scheme the income statement
charge represents the contribution payable by the group based upon a fixed
percentage of employees' pay. The total pension costs of the group in the year,
included within the staff costs, in the year was £603 million (2005: £540
million), of which £552 million (2005: £507 million) related to the group's main
defined benefit pension scheme, the BTPS.
The increase in the pension cost in the year principally reflects the
introduction part way through the last year of Smart Pensions, a salary
sacrifice scheme under which employees elect to stop making employee
contributions and for the company to make additional contributions in return for
a reduction in gross contractual pay.
The pension cost applicable to the group's main defined contribution scheme in
the year ended 31 March 2006 was £19 million (2005: £11 million) and £2 million
(2005: £1 million) of contributions to the scheme were outstanding at 31 March
2006.
The group occupies two properties owned by the BTPS scheme on which an annual
rental of £2 million is payable. The BTPS assets are invested in UK and overseas
equities, UK and overseas properties, fixed interest and index linked
securities, deposits and short-term investments. At 31 March 2006, the UK
equities included 15 million (2005: 17 million) ordinary shares of the company
with a market value of £33 million (2005: £36 million).
IAS 19 accounting valuation
In accordance with the amendments to IAS 19 'Employee Benefits' the disclosures
below are provided prospectively from last year. BT has applied the accounting
requirements of IAS 19 as follows:
- scheme assets are measured at market value at the balance sheet date
- scheme liabilities are measured using a projected unit credit method and
discounted at the current rate of return on high quality corporate bonds of
equivalent term to the liability
- actuarial gains and losses are recognised in full in the period in which they
occur, outside of the income statement, in retained earnings and presented in
the statement of recognised income and expense.
The financial assumptions used for the purpose of the actuarial accounting
valuations of the BTPS under IAS 19 at March 31, 2006 are:
Real rates Nominal rates
(per annum) (per annum)
2006 2005 2006 2005
% % % %
Rate used to discount liabilities 2.19 2.63 5.00 5.40
Average future increases in wages and 0.75* 1.00 3.52 3.73
salaries
Average increase in pensions in payment and
deferred pensions - - 2.75 2.70
Inflation - average increase in retail price
index - - 2.75 2.70
* There is a short term reduction in the real salary growth assumption to 0.5%
for the first three years.
The net pension obligation is set out below:
At March 31, 2006 At March 31, 2005
Assets Present Deficit Assets Present Deficit
value of value of
liabilities liabilities
£m £m £m £m £m £m
BTPS 35,550 38,005 2,455 29,550 34,270 4,720
Other schemes 90 182 92 78 165 87
35,640 38,187 2,547 29,628 34,435 4,807
Deferred tax
asset at 30% (764) (1,434)
Net pension
obligation 1,783 3,373
Amounts recognised in the income statement on the basis of the above assumptions
in respect of the defined benefit pension obligations are as follows:
Year ended
March 31
2006 2005
£m £m
Current service cost 603 540
Total operating charge 603 540
Expected return on pension scheme assets (2,070) (1,918)
Interest on pension scheme liabilities 1,816 1,720
Net finance income (254) (198)
Total amount charged to the income statement 349 342
Actuarial gains and losses have been recognised in the statement of recognised
income and expense and the cumulative gain recognised is £2,416 million at March
31, 2006 (2005: £294 million). The actual return on plan assets was
£6,925 million (2005: £3,582 million).
Changes in the present value of the defined benefit pension obligation are as
follows:
At March 31
2006 2005
£m £m
Opening defined benefit pension obligation (34,435) (32,125)
Service cost (568) (507)
Interest cost (1,816) (1,720)
Contributions by employees (21) (50)
Actuarial losses (2,733) (1,370)
Obligation on acquisition of subsidiaries - (25)
Benefits paid 1,385 1,364
Exchange differences 1 (2)
Closing defined benefit pension obligation (38,187) (34,435)
The present value of the obligation is derived from long term cash flow
projections and is thus inherently uncertain.
Changes in the fair value of plan assets are as follows:
At March 31
2006 2005
£m £m
Opening fair value of plan assets 29,628 26,963
Expected return 2,070 1,918
Actuarial gains 4,855 1,664
Contributions by employer 452 382
Contributions by employees 21 50
Assets on acquisition of subsidiaries - 15
Benefits paid (1,385) (1,364)
Exchange differences (1) -
Closing fair value of plan assets 35,640 29,628
The expected long term rate of return and fair values of the assets of the BTPS
at 31 March were:
At March 31, 2006 At March 31, 2005
Expected Asset fair Expected Asset fair
long-term rate value long-term rate value
of return of return
(per annum) (per annum)
% £bn % % £bn %
UK equities 7.4 9.9 28 8.0 9.6 32
Non-UK 7.4 12.5 35 8.0 9.0 30
equities
Fixed-interest
securities 4.9 5.6 16 5.4 4.6 16
Index-linked
securities 4.1 3.2 9 4.4 2.8 10
Property 5.8 4.4 12 6.8 3.6 12
Cash and other 4.0 - - 4.0 - -
6.5 35.6 100 7.1 29.6 100
The assumption for the expected return in scheme assets is a weighted average
based on the assumed expected return for each asset class and the proportions
held of each asset class at the beginning of the year. The expected returns on
fixed interest and interest linked securities are based on the gross redemption
yields at the start of the year. Expected returns on equities and property are
based on a combination of an estimate of the risk premium above, yields on
government bonds and consensus economic forecasts of future returns. The
long-term expected rate of return on investment does not affect the level of the
deficit but does affect the expected return on pension scheme assets within the
net finance income.
The history of experience gains and losses are as follows:
At March 31
2006 2005
£m £m
Present value of defined benefit obligation 38,187 34,435
Less fair value of plan assets 35,640 29,628
Net pension obligation 2,547 4,807
Experience adjustment on defined benefit obligation (527) (437)
Percentage of the present value of the defined benefit
obligation 1.4% 1.3%
Experience adjustment on plan assets 4,855 1,664
Percentage of the plan assets 13.6% 5.6%
The group expects to contribute approximately £630 million to BTPS, including
£232 million of deficiency contributions, in the year ending March 31, 2007.
The mortality assumption has been updated to reflect experience and expected
future improvements in life expectancy after retirement at 60 years of age. The
average life expectancy assumptions are as follows:
2006 2005
Number of years Number of years
Male 23.8 23.3
Female 25.4 25.0
Future improvement every 10 years 1.0 0.5
The assumed discount rate, salary increases and mortality all have a significant
effect on the IAS 19 accounting valuation. The following table shows the
sensitivity of the valuation to changes in these assumptions.
Impact on deficit
Increase (decrease)
£bn
0.25 percentage point increase to:
- discount rate (1.4)
- salary increases 0.3
Additional 1.0 year increase to life expectancy 1.5
14 United States Generally Accepted Accounting Principles (US GAAP)
The results set out above have been prepared in accordance with the basis of
preparation as set out in note 1. The table below sets out the results
calculated in accordance with US GAAP.
Fourth quarter ended Year ended
March 31 March 31
2006 2005 2006 2005
Net income attributable to 227 314 1,063 1,297
shareholders (£m)
Earnings per ADS (£)
- basic 0.27 0.37 1.26 1.52
- diluted 0.27 0.37 1.25 1.51
Each American Depositary Share (ADS) represents 10 ordinary shares of BT Group
plc.
Shareholders' equity, calculated in accordance with US GAAP, is a £158 million
deficit at March 31, 2006 (March 31, 2005 - £584 million deficit).
15 Reconciliation of UK GAAP to IFRS for comparative periods
On July 28, 2005 the group issued its first quarter results which also included
appendices presenting and explaining the consolidated results of the group
restated from UK GAAP onto an IFRS basis for the year ended March 31, 2005, the
three months ended June 30, 2004 and the balance sheet as at April 1, 2004 and
June 30, 2004. The group has adopted IAS 39 and IAS 32 prospectively from April
1, 2005 and a reconciliation of the group's IFRS balance sheet from March 31,
2005 to April 1, 2005 was also included in the IFRS information presented with
the first quarter results. The first quarter results are available on the
group's website at www.btplc.com/Sharesandperformance
Reconciliations of the group's results from UK GAAP to IFRS as at, and for the
periods ended June 30, September 30 and December 31, 2004 were included in the
first, second and third quarter results that were issued on July 28, 2005,
November 10, 2005 and February 9, 2006, respectively, and are also available on
the group's website at www.btplc.com/Sharesandperformance.
In this preliminary announcement the group is also presenting a reconciliation
from UK GAAP to IFRS of the profit for the comparable financial period (the
quarter ended March 31, 2005) together with the equity at the end of the
comparable period (March 31, 2005).
(a) Reconciliation of profit between UK GAAP and IFRS
Notes Fourth quarter
ended March 31
2005
£m
Profit attributable to shareholders
under UK GAAP 435
Effect of transition to IFRS (net of deferred
tax)
Pensions i 22
Goodwill ii 4
Share based payments iii (6)
Leases iv (18)
Other 3
Profit attributable to shareholders
under IFRS 440
(b) Reconciliation of equity between UK GAAP and IFRS
Notes At March 31
2005
£m
Total equity under UK GAAP 3,901
Effect of transition to IFRS (net of deferred tax)
Pensions i (4,092)
Goodwill ii 16
Share based payments iii 7
Leases iv (288)
Dividends v 551
Total equity under IFRS 95
i Pensions
Cumulative actuarial gains and losses in respect of the group's defined benefit
pension schemes have been recognised in full on transition to IFRS (April 1,
2004). Actuarial gains and losses arising from the transition date are being
recognised immediately in reserves, in accordance with the amended version of
IAS 19 "Employee Benefits". The income statement charge is split between an
operating charge and a net finance charge. The charge to operating costs in
respect of pensions has increased by £17 million for the fourth quarter ended
March 31, 2005 and net finance income has increased by £49 million for the
fourth quarter ended March 31, 2005, giving rise to an overall increase in
earnings of £32 million for the quarter ended March 31, 2005. The associated
deferred tax benefit recognised in the income statement for the quarter ended
March 31, 2005 was £10 million. A pension liability was recognised at March 31,
2005 of £4,807 million and associated deferred tax asset of £1,434 million. This
was offset by the reversal of provisions and other creditors of £44 million. The
pension prepayment of £1,118 million on the UK GAAP balance sheet has also been
reversed including the associated deferred tax liability of £329 million. The
net effect has been a reduction in shareholders' funds of £4,092 million.
ii Goodwill
The group has used the exemption available under IFRS 1 for not restating
business combinations. IFRS 3 "Business Combinations" requires that goodwill
arising from business combinations should not be amortised. Accordingly, the UK
GAAP goodwill amortisation charge of £4 million for the quarter ended March 31,
2005 has been reversed. There is no tax impact.
iii Share based payments
Under IFRS 2 "Share based payment", an expense must be recognised in the income
statement for all share based payments. This expense is based on the fair value
at the date of the award, using an option pricing model, and is charged to the
income statement over the related performance period. This has resulted in an
increased operating charge for the quarter ended March 31, 2005 of £8 million.
The credit entry for the share based payments is recognised directly in reserves
as the awards are equity settled, therefore there is no overall impact on
shareholders' equity. The associated deferred tax benefit recognised in the
income statement for the quarter ended March 31, 2005 was £2 million.
iv Leases
Under IAS 17 "Leases" the buildings element of a small number of properties have
been reclassified from operating leases under UK GAAP to finance leases under
IFRS, and lease rentals under the group's sale and operating leaseback
transactions are recognised on a straight line basis. For those properties
reclassified as finance leases, profit before tax for the quarter ended March
31, 2005 has been reduced by £3 million as a result of the recognition of
depreciation and finance lease interest expense and the removal of the UK GAAP
operating lease charges. Recognising the operating lease charges on a straight
line basis has further reduced profit before tax for the quarter ended March 31,
2005 by £22 million. The associated deferred tax benefit recognised in the
income statement for the quarter ended March 31, 2005 was £7 million.
Those properties reclassified as finance leases have been capitalised and are
included within property, plant and equipment at the lower of the present value
of the minimum lease payments or the fair value of the lease asset, which was
£90 million at March 31, 2005. The associated finance lease obligation has also
been recognised, being £107 million at March 31, 2005. The excess of the sales
proceeds over the previous carrying value has deferred, and will be recognised
in the income statement over the lease term. The deferred gain recognised in
deferred income at March 31, 2005 was £42 million. Where the operating lease
rentals are recognised on a straight line basis, the difference between the
amounts recognised in the income statement and the lease payments is recognised
other payables, and amounted to £352 million at March 31, 2005. A deferred tax
liability of £123 million at March 31, 2005 has been recognised. The net effect
of the above has been a reduction in equity of £288 million at March 31, 2005.
v Dividends
Under UK GAAP the dividend charge was recognised in the profit and loss account
in the period to which it related. Under IFRS, dividends are not recognised in
the income statement but directly within reserves. The final dividend is
recognised only when it has been declared and approved by the company in a
general meeting. Therefore the final dividend liability of £551 million has been
reversed because it was paid after March 31, 2005.
Forward-looking statements - caution advised
Certain statements in this results release are forward-looking and are made in
reliance on the safe harbour provisions of the US Private Securities Litigation
Reform Act of 1995. These statements include, without limitation, those
concerning: continued growth in earnings per share and dividends; growth in new
wave revenue, mainly from networked IT services, broadband and mobility growth;
EBITDA improvement, and acceleration of EBITDA growth in BT Global Services;
implementation of BT's 21st Century Network and the national migration
programme; expectations regarding progressive dividend policy, dividend payout
ratio and cost savings; improving shareholder returns; and accelerating
transformation of the business.
Although BT believes that the expectations reflected in these forward-looking
statements are reasonable, it can give no assurance that these expectations will
prove to have been correct. Because these statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by these forward-looking statements.
Factors that could cause differences between actual results and those implied by
the forward-looking statements include, but are not limited to: material adverse
changes in economic conditions in the markets served by BT; future regulatory
actions and conditions in BT's operating areas, including competition from
others; selection by BT and its lines of business of the appropriate trading and
marketing models for its products and services; fluctuations in foreign currency
exchange rates and interest rates; technological innovations, including the cost
of developing new products, networks and solutions and the need to increase
expenditures for improving the quality of service; prolonged adverse weather
conditions resulting in a material increase in overtime, staff or other costs;
developments in the convergence of technologies; the anticipated benefits and
advantages of new technologies, products and services, including broadband and
other new wave initiatives, not being realised; and general financial market
conditions affecting BT's performance. BT undertakes no obligation to update any
forward-looking statements whether as a result of new information, future events
or otherwise.
This information is provided by RNS
The company news service from the London Stock Exchange
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