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Transformation accelerates Q2 Results 2004/05. BT Group plc Sir Christopher Bland, Chairman Transformation accelerates.

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Presentation on theme: "Transformation accelerates Q2 Results 2004/05. BT Group plc Sir Christopher Bland, Chairman Transformation accelerates."— Presentation transcript:

1 Transformation accelerates Q2 Results 2004/05

2 BT Group plc Sir Christopher Bland, Chairman Transformation accelerates

3 Forward-looking statements - caution Certain statements in this presentation 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: growing dividends, improving earnings, free cash flow and continued net debt reduction; expectations regarding ICT, broadband, mobility and managed services growth; new wave revenue growth, turnover transformation and improving underlying revenue trends; the completion and expected impact of proposed global ICT transactions; investment in, and implementation of, BT's 21st Century Network; and cost savings and re-investment. 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 and the need to increase expenditures for improving the quality of service; conditions, including regulatory approvals, to completion of proposed global ICT transactions not being satisfied; 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.

4 H1 04/05 – Financial headlines *adjusted for the impact of mobile termination cut **before leaver costs, exceptional items and goodwill Group turnover £9.2bn 1.5%* Free cashflow £0.8bn £0.4bn Net debt £8.3bn £0.5bn Earnings per share** 9.4p7% Interim dividend 3.9p22%

5 H1 04/05 - Turnover transformation New wave : BT Retail and Wholesale new wave plus C&SI and Solutions revenue * adjusted for the impact of mobile termination cut + 34% - 5% * Total Revenue £bn + 1.5% * New Wave proportion for H1 04/05 03/04 Consumer 6% 3% Business 17% 12% Major Corporate 45% 38% Wholesale/Carrier 12% 7% TOTAL 21% 16% New wave Traditional

6 Earnings per share H1 EPS up 7%, pre leavers (maintained post leavers) H1 EPS more than doubled over the last 3 years EPS pre leavers, before goodwill and exceptionals

7 6.5 8.5 2.0 Dividends Interim dividend per share of 3.9p 22% increase year on year Progressive policy continues Target payout ratio is 60% for 2005/06 2.25 3.2 3.9 5.3 4.25 0p 3p 6p 9p FY 01/02FY 02/03FY 03/04H1 04/05 Final Interim

8 Three years of transformation - benefits for customers Broadband Sept ‘01 Sept ‘04 –Coverage * 6th 1st –ADSL users 89k 3.3m Product and service innovation Competitively priced services –30 minute national evening call 60p 5.5p Customer satisfaction –Dissatisfaction reduced by more than 50% 21st Century Network * OECD / BT estimate of G7 countries

9 Three years of transformation - delivering for shareholders Group turnover is growing, driven by new wave strategy Earnings are improving through financial discipline Free cash flow continues to be strong Dividends are increasing via a progressive policy Debt continues to be reduced Ongoing buyback programme augments dividend policy Delivering results while transforming the business to lead the next stage of the technology revolution

10 Q2 Results 2004/05 BT Group plc Ben Verwaayen, CEO Transformation accelerates

11 Key deliverables Build on network centric ICT capability Create convergent MOBILITY solutions Deliver on BROADBAND Defend TRADITIONAL business rigorously Drive for COST LEADERSHIP

12 Q2 - Turnover transformation + 36% - 5% * New wave Traditional Total Revenue £bn New wave : BT Retail and Wholesale new wave plus C&SI and Solutions revenue * adjusted for the impact of mobile termination cut + 2.1% *

13 Underlying* revenue trend improving 2003/04 2004/05 2002/03 * 2002/3 is adjusted to take account of Concert unwind. 2003/04 and 2004/05 adjusted for the impact of mobile termination cut

14 New Wave - dramatic growth 2003/042004/05 Rolling 12 months revenue 2002/03 £m

15 ICT / C&SI / Solutions Mobility Broadband Other - inc. Classified directories & Wholesale Managed Services Q2 - New Wave turnover £m Q2 04/05Q2 03/04 + £115m + £93m + £32m + 88%+ 59%+ 188%+ 20% + 36% £761m £1,033m

16 ICT - building for the future £m Rolling 12 month order intake* 2003/042002/032004/05 * Sales Order Value of contracts won by Solutions and C&SI quarterly In Q2 54 Solutions orders were between £1m & £5m Build ICT

17 ICT - building for the future, internationally Visa £40m, supply of managed international telecoms services Dutch Police Force €31m, 5 years, supply fixed network infrastructure Superfos (Danish HQ) €27m operation of global IT & telecoms infrastructure in 14 European countries Cyberlogitec (S. Korea) US$37m, 9 years, supply MPLS/WAN services Intentia (Sweden) €3m, 3years, manage mobile requirements Build ICT

18 ICT - building for the future - Infonet acquisition Strategic fit –Build on BT Global Services record of delivery –Extended global reach, wider customer base, specialist skills and enhanced product portfolio Acquired for £310m net of cash –Paying $2.06 per share in cash Financial implications –Cashflow neutral in year 1, thereafter positive –EPS enhancing from 2006/7 –Realise £80m of annual cash cost savings from year 3 Deal expected to complete in 1 st half of 2005 –Commitment from 97% of voting shareholders –Phased transition plan and gradual integration

19 Build ICT ICT - building for the future - exclusive Reuters negotiations Potential long-term network services contract Significant new customer to BT 18,000 extra sites on MPLS network Due diligence process underway Acquisition of Radianz –Leading provider of extranet financial services –Strengthen BT’s position in the global financial services market Completion expected in spring 2005

20 Broadband - BT Wholesale Wholesale DSL end user base Wholesale end user connections as at end Sep ‘04 - 3.3m Q2 highest ever net additions > 600,000 Deliver on Broadband

21 Broadband - BT Retail Retail DSL Q2 end user base 1.3m Retail market share of DSL 39% as at end Sep ‘04 30% of net additions in Q2, up from 29% in Q1 2003/042002/032004/05

22 Create Mobility Convergence Mobility Creating scale –Total connections up by 90k to over 300k in Q2 –Consumer subscribers up from 11k to 161k in 12 months –Business subscribers up from 59k to 145k in 12 months Post-pay subscriber growth

23 Mobility Project Bluephone Target launch Spring 2005 Fixed Mobile Converged Alliance (FMCA) members –Founders: BT, Brasil Telecom, KT, NTT, Rogers Wireless, Swisscom –New members: AT&T, Bezeq, Cegetel, KPN BT Openzone International roaming agreements –Gives customers access to >20,000 hotspots in 12 countries New offers launched –For BT’s Broadband customers £1 per month for 500 minutes access for three months, £5 per month thereafter Create Mobility Convergence

24 Defend Traditional Traditional turnover* - rate of decline slowing 2003/04 - 2.4% - 4.5% - 6.5% - 5.8% - 1.0% * adjusted for the impact of mobile termination cut - 4.9% 2004/05 - 4.6%

25 Defend Traditional Q2 -Traditional turnover £m Q2 04/05Q2 03/04 - £64m + £1m - £180m Mobile Termination Private Circuits CallsLinesOther - £3m + £17m No effect on profit + WLR + Interconnect - Payphones Adj’d Q2 03/04 next slide 0%- 16%0%+ 2% - 5% * DSL & WLR substitution offset by re- balancing DQ - £9m - 32% * adjusted for the impact of mobile termination cut £3,807m £3,743m £3,569m

26 Calls - £180m decrease year on year Defend Traditional BT estimates based on latest Ofcom data : Local, national, international and non-geographic voice minutes Rebalancing To lines and other services Market share: Business down 0.5% Consumer down 1% £50m £37m £64m Fixed voice market Volume and price reductions £30m Dial IP Broadband substitution

27 Defend Traditional BT Together Expanding the higher value customer base 2003/042004/05 Option 1 customer base now 14.3m Option 2 customer base now 1.3m Option 3 customer base now 0.5m 60% of consumer revenues contracted

28 21st Century Network Will offer: –Businesses: flexibility and competitiveness –Consumers: new services, personalisation and convergence Trials –Softswitches and IP link between metro nodes at Cambridge and Woolwich now live –Traffic from 38 local exchanges parented on these nodes to be added in coming weeks –First fibre to the home connections live - trial to serve 100 homes by January 2005 and 1,500 homes by March Local Loop Unbundling Transforming our networks

29 Underlying earnings per share* * before leaver costs, goodwill and exceptionals

30 Delivering results while transforming the business Accelerating turnover growth –Less dependent on traditional products as new wave grows Cost savings & reinvestment –Continue to extract efficiency in traditional areas –Reinvestment in new wave businesses EPS –Growth based on financial discipline generating strong free cash flow Transformation accelerates –Growing credibility as an IT services provider –Well positioned in the digital networked economy

31 Q2 Results 2004/05 BT Group plc Ian Livingston, Group Finance Director Transformation accelerates

32 Q2 04/05 – Financial headlines Group turnover + 0.7% / + 2.1%* Earnings per share ** Free cashflow £594m - post leavers + 9% - pre leavers + 7% Net debt £8.3bn Profit before tax + 4%** *adjusted for the impact of mobile termination rate cut **before exceptional items and goodwill

33 BT Retail Q2 turnover declined by 2%* year on year –Traditional down 8%* – New Wave up 33% Gross margin down 1.8 percentage points –changing revenue mix –acquisition costs associated with broadband and mobility SG&A £45m** lower –£74m reduction in Traditional partially offset by increased investment in New Wave Operating Profit down 9%** *adjusted for the impact of mobile termination rate cut **before exceptional items and goodwill

34 BT Wholesale Q2 external turnover up 17%* year on year –Traditional +9%* - driven by higher volumes –New wave +99% - driven by broadband and managed services Internal turnover down 5% year on year Network and SG&A costs reduced by £7m** EBITDA £960m** up 1% Operating profit £484m up 1%** *adjusted for the impact of mobile termination rate cut **before exceptional items and goodwill

35 BT Global Services Q2 turnover up 9% at £1,499m –Consulting & System Integration up 19% –Global Solutions up 18% EBITDA up 10%** at £129m Operating loss £13m** reduced 67% –Improvements in all business units Operating free cash flow £55m lower –Reflecting increased capex to deliver ICT contracts **before exceptional items and goodwill

36 Q2 Group P&L Turnover Cost of sales Gross margin Gross margin % SG&A Other operating income Total SG&A SG&A % EBITDA pre leavers Depreciation Total costs (pre leavers & oth. op. income) Operating Profit pre leavers Operating margin pre leavers %4,602(2,073)2,52955.0%(1,123)43(1,080)23.5%1,449(703)(3,899)74616.2%4,602(2,073)2,52955.0%(1,123)43(1,080)23.5%1,449(703)(3,899)74616.2% Q2 03/04 £m Q2 Q2 04/05 £m Q2 Better / (Worse) £m Better / (Worse) £m 34 34(98)(64)29(1)28(36)19(50)(17) (98)(64)29(1)28(36)19(50)(17)4,568(1,975)2,59356.8%(1,152)44(1,108)24.3%1,485(722)(3,849)76316.7%4,568(1,975)2,59356.8%(1,152)44(1,108)24.3%1,485(722)(3,849)76316.7% *all numbers are before exceptional items and goodwill

37 Q2 Group operating costs Cost of Sales SG&A non-pay £m £3,849m £40m £62m £19m £160m £3,899m Q2 04/05Q2 03/04 Depreciation POLOs £50m increase year on year* £69m SG&A net pay *before leaver costs and other operating income

38 Q2 Group P&L Operating Profit pre leavers Leaver costs Operating profit post leavers Associates and other Interest Profit before tax Tax Minority interest Profit attributable to shareholders Earnings per share (p) pre leavers Earnings per share (p) 746 (8) 738 18 (207) 549 (141) 1 409 4.9p 4.8p Q2 03/04 £m Q2 04/05 £m Better / (Worse) £m Better / (Worse) £m 763 (16) 747 (3) (216) 528 (148) 1 381 4.6p 4.4p (17) 8 (9) 21 9 21 7 0 28 0.3p 0.4p *all numbers are before exceptional items and goodwill

39 Q2 Group capital expenditure £m Q2 Group capex £803m, up £225m year on year More balanced phasing UK network capex up £137m to £580m in the second quarter +95% +64% +24% } Network related -28%

40 EBITDA post exceptional items Interest paid (net) Working capital, tax and other Capex and financial investments (net) Free cash flow Q2 Free cash flow generation Q2 04/05 £m 1,438 (95) (25) (724) 594 Q2 03/04 £m 1,469 (169) (195) (520) 585 Better / (Worse) £m (31) 74 170 (204) 9

41 International Accounting Standards BT timeframe/process –Accounting policy review complete –2003/4 and 2004/5 impact quantified –Embedding IFRS into reporting systems is underway –2004/5 IFRS restatement to be published in June 2005 –2005/6 first full year under IFRS Key accounting changes –IAS 32 & 39 Financial Instruments –IAS 17 Leases –IAS 19 Pensions –IFRS 2 Share Based Payments

42 Transformation accelerates Positive momentum on turnover Gross margin decline due to investment in new wave and customer acquisition Continued cost savings in traditional EPS increase Strong free cash flow Growing dividends Ongoing net debt reduction

43 Q&AQ&A

44 Thank You Transformation accelerates

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