Improving quality and long term sustainability of the business Preliminary results for the year ended 31 March 2013
Business overview Bill Halbert, Executive Chairman
Highlights Strengthening competitive position in target markets Group performance in line with expectations Strong performance in KC Progress in Kcom strategic focus areas Net debt at 1.1 times EBITDA Implementation of asset backed partnership Full year dividend of 4.44p per share, an increase of 11 per cent Commitment to grow dividend at 10 per cent per annum to 2016
One Group, four brands Brand Focus Coverage Clients Offering Fixed line telephony and broadband Fibre-based services ICT Hull and East Yorkshire Consumer, business and public sector Communications services for the SMB market SOHO broadband packages Service Capability Managed communications services for multi-site organisations UK Businesses and public sector organisations Innovation Technology Specialist application integration consultancy and implementation services
KC Highlights Continuing demand for Bundled services within consumer market Broadband and data services across business market Commenced next phase of deployment of fibre services (Lightstream) Higher than expected take-up rates, well above those seen in other parts of UK Longer term importance to both consumer and business revenue
KC Opportunity remains The market size is approx 116 million KC has approx 80 per cent market share Across region, 38,000 mobileonly households where KC network exists Parts of East Yorks Original Licensed Area Figures based on number of potential customers
KC Consumer growth driven by bundles KC started selling bundles in October 2010 This was over 5 years after the rest of the UK Overall bundle penetration (as % of existing customers) continues to grow: FY11: 7% FY12: 25% FY13: 42% Success of bundles reflected in growth in overall number of lines in FY13 Increasing broadband penetration as % of existing customers FY11: 65% FY12: 68% FY13: 72%
KC Fibre: Higher penetration than rest of market Initial deployment Penetration ahead of original expectations Consumers: 93% existing customers 98% are taking a bundled proposition (majority to entry Consumer Business Homes/Premises passed (000 s) 14.8 1.2 Sales (000 s) 3.3 0.3 Penetration 22% 25% package) 5 per month ARPU uplift Business: Differentiated product offering (including managed) New customer wins and increasing spend from existing customers Future deployment Commitment to pass 45k homes by 2015 Majority of deployment is Fibre to the Premises: Future proofing already guarantee speeds of 50, 75, 100 and 350Mbps Greater scalability Improved customer experience Ability to sell over the top services
KC Growth opportunities 60,000+ customers now on a bundled service 4,900 net broadband additions KC Talk growth in FY13 1% growth KC Business data & broadband 1. Further ARPU growth 2. Further penetration Mobile only homes Broadband 3. Increased revenue from new services (KC TV/Lightstream)
Kcom Highlights Market conditions continue to remain challenging New customer wins in key focus areas Growing reputation and market share in strategic focus areas Increasing share of wallet with existing customers Order progression in both Eclipse and Smart421 Remain focused on long term profitable contracts, backed by investment in capability
Kcom Market opportunity Opportunity Multi-site Retail Financial services Technology Professional services Distributed government Emergency services Local authority PSN Small & medium businesses Value of addressable market 1,900m 1,100m 2,100m Current share < 5% <5% <5% Customers
Kcom Why we win - breadth of capability, scale & value Consultancy, application integration Professional services Collaboration Service Contact services Hosting & data centre solutions User Centric Networking Capability Innovation Technology Connectivity & network services
Kcom Developing Public Services Market Current value of market 100 million Established early market lead Market expected to reach 1.4bn by 2014 Delivery capability demonstrated 2013 marks central government migration to PSN Our approach : focus on profitable opportunities
Kcom Growth opportunities Progress in provision of managed services Further Public Services Networks success Enhanced service management tools Growing reputation amongst SMBs Strong partnership with Amazon Web Services Increased share in key markets 1. Stronger order intake in managed services market 2. Increase PSN spend 3. Unique cross-brand capability 4. Build on growing recognition and reputation in key markets
Financial overview Paul Simpson, Chief Financial Officer
Summary financial results Mar 13 Mar 12 Movement Revenue 372.9 387.3 (4%) EBITDA 76.9 77.9 (1%) EBITDA % 21% 20% Operating profit 57.3 57.8 (1%) Adjusted basic EPS (pence) 7.79 7.41 5% Net cash inflow from operations 50.3 56.0 (10%) Net debt 88.2 75.3 ( 12.9m) Full year dividend per share (pence) 4.44 4.00 11% All amounts are before exceptional items
KC Growth in revenue and earnings Revenue Mar 13 Mar 12 Movement KC 94.3 93.8 1% Contact & Publishing 10.3 9.8 5% 104.6 103.6 1% EBITDA 54.5 53.2 2% EBITDA % 52% 51%
KC Growth in consumer Mar 13 Mar 12 1 Movement Consumer Call revenue 6.2 7.0 (11%) Subscriptions Voice & Broadband 41.6 39.7 5% Business Call revenue & rental 17.8 18.6 (4%) Broadband & data 22.5 22.3 1% Consumer & Business Other 6.2 6.2-94.3 93.8 1% 1 Mar 12 restated due to change in reporting for certain revenue components including call discounts relating to bundled services, wholesale call termination revenue
KC Subscription revenue growth Increase in fixed line numbers in FY13, reversing previous trends Consistent line revenue growth with call revenue a reducing proportion of overall total Quarterly growth in broadband numbers
Kcom Strong performance in tough market Mar 13 Mar 12 Movement Revenue Strategic focus areas 247.2 247.7 - Network build - 11.7 (100%) Other 26.2 29.9 (12%) 273.4 289.3 (5%) EBITDA 29.4 31.0 (5%) EBITDA % 11% 11%
Kcom Growth in key areas Growth in multi-year managed & connect Growth through diversified portfolio in Eclipse Mar 13 Mar 12 Movement FY13 Performance Indicators Future Growth Managed & Connect Voice Contact Centre - IN Product 111.8 46.6 20.1 23.4 201.9 109.0 49.6 21.3 24.3 204.2 3% (6%) (6%) (4%) (1%) Static backlog Delayed decisions Focus on margin Voice decline Regulatory impact 1.6m Public Sector growth + Improved capability + Workplaces + Contract Award Post Year End - Voice Decline 17.5 16.1 9% Order-intake growth of 39% Diversification from Broadband + SME focus & broader portfolio + Kcom relationship 27.8 27.4 1% Order-intake growth of 17% Partnership Amazon Web Services + Kcom relationships + Reputation 247.2 247.7 -
Movement in debt in period Reconciliation of movement in debt Mar 13 Mar 12 Net cash inflow from operations (pre-exceptional & pensions) 55.3 76.4 Exceptional items (4.4) (3.5) Pensions (0.6) (16.9) Net cash inflow from operations 50.3 56.0 Capex (28.0) (22.2) Interest (4.0) (7.4) Dividends (21.4) (19.8) Share purchases & dividend equivalents 1 (11.8) (0.4) Other 1.9 0.5 Total (13.0) 6.7 1 Includes 0.9m of dividend equivalents paid on vesting of EIP share scheme awards
Improvement in second half cash conversion H1 H2 Mar 13 EBITDA 39.1 37.8 76.9 Net cash inflow from operations (pre-exceptional & pensions) 22.0 33.3 55.3 EBITDA conversion to cash 56% 88% 72% 180% EBITDA to Operating Cash Conversion 1 160% 140% 120% 100% 80% 60% 40% Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar-13 Six Months Ended Cumulative EBITDA to Operating Cash Conversion 100% Conversion 1 EBITDA pre-exceptional. Operating cash flows pre-exceptional & pension
Investment to support sustainable growth FY12 24.4m FY13 28.7m 7.0 1.9 7.8 9.5 2.4 6.1 7.7 10.7 Customer Driven & Propositions Infrastructure, software licenses and systems Network, including NGA Other FY13 increase reflects NGA and investment in Strategic IT systems Continuation of strategic IT investment could lead to capital spend slightly higher than 30m in FY14 and FY15 Without this investment, capital spend would be closer to 25m
Pensions Asset backed partnership and funding Partnership established and transferred in Group s Freehold property assets FY14 FY15 FY16 Schemes invest in partnership at a value of 10m. Return is income stream of 1.1m rising in line with CPI over 15 years. Properties provide underlying collateral and security for Schemes investment Investment value of 10m fully allowable against FY13 tax liability and supports no deficit repair payment being due in respect of FY14 Committed Deficit Repair Payments Partnership income payments - 8.0 8.0 1.1 1.1 1.2 No impact on accounting at Group level Property asset continue to be recognised as tangible asset On-going income payments offset against IAS19 deficit Actuarial valuation due 1 April 2013. Existing deficit commitments 8.0m per annum Continue to work with Trustees on opportunities to provide further assets into the Partnership which will support longer term funding and provide further up-front tax benefit to Group
Pensions IAS19 changes Impact of change in IAS 19 Current IAS 19 Revised IAS 19 Movement Return on Assets 11.2 - (11.2) Expenses (0.5) (0.5) - Interest Cost (9.2) - 9.2 EBITDA 1.5 (0.5) (2.0) Net Interest ( 13.9m x 4.7%) - (0.7) (0.7) PBT 1.5 (1.2) (2.7) Balance sheet position and assumptions set out at Appendix Current IAS19 accounting leads to a 1.5m credit to EBITDA Revised IAS19 effective from FY14. Key changes: Return on asset and interest cost based on same discount rate applied to the opening net pension deficit Treated as financing charge The impact on FY13 s results would be reduction of 2.0m in EBITDA and 2.7m in PBT
Taxation EBITDA Interest Capital allowances Share schemes FY14 Tax Liability @ 23% Comment 17.2 Based at FY13 levels adjusted for IAS19 (1.1) Based at FY13 levels (9.1) Existing capital allowance pool of c 190m (reflected in deferred tax asset). Capital additions of 30m (0.4) 2.2 million shares vesting Estimated liability 6.6 FY13 corporation tax liability of 0.7m payable across H1 of FY14 Payments on account in respect of 50% of potential liability for FY14 due across H2 of FY14 Based on earnings consistent with FY13 and In the absence of further deductables (e.g. Pensions) liability for FY14 estimated to be in excess of 6.0m
Group Focus areas Sales order intake in Kcom segment Sales academies Consistent evaluation process Protect and grow KC base Fibre deployment Increase broadband penetration Enhanced customer delivery Development of skills groups Use of new service management tools Scalable, efficient support services Strategic IT investment programme Shared service development
Summary Improving quality and long term sustainability of business Further progress over the year Brand performance Disciplined financial management leads to positive outlook Commitment to 10 per cent increase per annum in dividend Investment in support of longer term goals
Bill Halbert, Executive Chairman
Appendices
KC Consumer Fibre Bundles Lightstream Home Our basic fibre broadband and calls bundle. Perfect for the home that wants faster broadband and evening & weekend UK calls. 50Mbps download speed faster than BT s Infinity. 5Mbps upload speed Free calls free local calls 24/7 plus free national & 0845/0870 calls free on evenings & weekends. 70GB monthly usage allowance. 120 mins of mobile calls a month make free UK mobile calls on a weekend. Free wireless N router. FREE connection 36 Plus per month Includes line rental 50Mbps Superfast Broadband Lightstream Home Plus Like our basic fibre bundle but with a bit more. Bigger usage allowance and still comes with local, evening & weekend UK calls. 50Mbps download speed faster than BT s Infinity 5Mbps upload speed Free calls free local calls 24/7 plus free national & 0845/0870 calls free on evenings & weekends. 200GB monthly usage allowance. 120 mins of mobile calls a month make free UK mobile calls on a weekend. Free wireless N router. FREE connection Plus 40 per month Includes line rental 50Mbps Superfast Broadband Lightstream Home Xtra Go faster and get more with 75Mbps speeds, enough data for the whole family and unlimited UK calls 24/7. 75Mbps download speed nearly twice as fast as BT s Infinity. 5Mbps upload speed. Free UK calls 24/7 to 01, 02, 03 and 0845/0870 numbers anytime. You ll also get 197/118288 directory enquiries free. 700GB monthly usage allowance. 180 mins of mobile calls a month after 7pm on weekday evenings & all weekend. Free wireless N route. FREE connection Plus 45 per month Includes line rental 75Mbps Superfast Broadband Lightstream Home Unlimited Our ultimate fibre bundle with lightning fast 100Mbps speeds. Download, stream and surf as much as you like with an unlimited usage allowance. Also comes with unlimited UK calls 24/7. 100Mbps download speed more than twice as fast as BT s Infinity. 10Mbps upload speed. Free UK calls 24/7 to 01, 02, 03 and 0845/0870 numbers anytime. You ll also get 197/118288 directory enquiries free. Unlimited monthly usage allowance. 180 mins of mobile calls a month after 7pm on weekday evenings & all weekend. Free wireless N router. FREE connection Plus 50 per month Includes line rental 100Mbps Superfast Broadband
Segmental Performance Revenue Mar 13 Mar 12 Movement KC 104.6 103.6 1% Kcom 273.4 289.3 (5%) PLC (5.1) (5.6) 9% 372.9 387.3 (4%) EBITDA Mar 13 Mar 12 Movement KC 54.5 53.2 2% Kcom 29.4 31.0 (5%) PLC (7.0) (6.3) (11%) 76.9 77.9 (1%)
Exceptional items Mar 13 Mar 12 Profit on sale of investment 0.9 - Restructuring costs (2.3) - Asset backed partnership costs (0.9) - Onerous leases - (1.1) Profit on Network Build - 1.1 (2.3) -
Pensions IAS19 Position Movement in IAS19 Deficit Mar 13 Mar 12 Movement Assets 193.5 185.5 8.0 Liabilities (203.3) (199.4) (3.9) Deficit (9.8) (13.9) 4.1 IAS19 costs Mar 13 Mar 12 Movement Return on assets 10.7 11.0 (0.3) Interest Cost (9.2) (9.4) 0.2 Credit 1.5 1.6 (0.1) IAS19 assumptions Mar 13 Mar 12 CPI Inflation 2.4% 2.4% Discount Rate 4.6% 4.7% Expected return on assets 5.6% 6.1%