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TMCNet:  BT GROUP PLC-RESULTS FOR THE FIRST QUARTER TO 30 JUNE 2013

[July 26, 2013]

BT GROUP PLC-RESULTS FOR THE FIRST QUARTER TO 30 JUNE 2013

(ENP Newswire Via Acquire Media NewsEdge) ENP Newswire - 26 July 2013 Release date- 25072013 - BT Group plc (BT.L) today announced its results for the first quarter to 30 June 2013.

Ian Livingston, Chief Executive, commenting on the results, said: 'BT continues to make good progress, delivering another quarter of solid growth in underlying profit before tax. This is despite the impact of regulation and the significant investments we are making for the future.

'It is early days but we are very pleased with the strong start in BT Sport. More than half a million households have now ordered BT Sport and that's before the channels have even launched.

'Our consumer line loss is at its lowest level in five years and we took a 50% share of the broadband4 market net additions. Our SME business grew revenues by 1%, the best performance in more than four years, and our BT Global Services order intake was up almost 50%.

'Fibre remains at the heart of our plans and take-up is strong. Our fibre network now passes more than 16 million premises with more than 1.7 million connected.

'I am immensely proud to have led BT over the last five years. The foundations are in place for an exciting future and I'm confident that BT will make even more progress under Gavin's leadership and our talented team.' 1 Results for the first quarter to 30 June 2012 have been restated, see Note 1 to the condensed consolidated financial statements 2 Before specific items 3 Before specific items, purchases of telecommunications licences, pension deficit payments and the cash tax benefit of pension deficit payments 4 DSL and fibre, excluding cable RESULTS FOR THE FIRST QUARTER TO 30 JUNE 2013 Group results Line business results2 1 Restated, see Note 1 to the condensed consolidated financial statements 2 Before specific items. Specific items are defined below 3 Before specific items, purchases of telecommunications licences, pension deficit payments and the cash tax benefit of pension deficit payments n/m = not meaningful Notes: a. Unless otherwise stated, revenue, operating costs, earnings before interest, tax, depreciation and amortisation (EBITDA), operating profit, profit before tax, net finance expense, earnings per share (EPS) and normalised free cash flow are measured before specific items. The commentary focuses on the trading results on an adjusted basis being before specific items. This is consistent with the way that financial performance is measured by management and is reported to the Board and the Operating Committee and assists in providing a meaningful analysis of the trading results of the group. The directors believe that presentation of the group's results in this way is relevant to the understanding of the group's financial performance as specific items are those that in management's judgement need to be disclosed by virtue of their size, nature or incidence. In determining whether an event or transaction is specific, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. Specific items may not be comparable to similarly titled measures used by other companies. Reported revenue, reported operating costs, reported EBITDA, reported operating profit, reported profit before tax, reported net finance expense, reported EPS and reported free cash flow are the equivalent unadjusted or statutory measures.

b. Underlying revenue, underlying costs and underlying EBITDA are measures which seek to reflect the underlying performance of the group that will contribute to long-term profitable growth and as such exclude the impact of acquisitions and disposals, foreign exchange movements and any specific items. We focus on the trends in underlying revenue excluding transit revenue as transit traffic is low-margin and is significantly affected by reductions in mobile termination rates.

BT Group plc RESULTS FOR THE FIRST QUARTER TO 30 JUNE 2013 Group results Operating results overview Our key measure of the group's revenue trend, underlying revenue excluding transit, was down 1% reflecting the anticipated impact of regulatory price reductions. Reported revenue was also down 1% at GBP4,449m with a GBP51m reduction in transit revenue (including mobile termination rate reductions of GBP29m), a GBP32m positive impact from foreign exchange movements and an GBP8m positive net impact from acquisitions and disposals.

Underlying operating costs1 excluding transit were down 1% with our efficiency programmes being partly offset by around GBP40m of pre-launch costs for BT Sport and a GBP13m increase in the non-cash pension operating charge. Operating costs1 also decreased by 1%, or by 3% on an underlying basis and excluding the higher pension charge.

Net labour costs decreased by 3%. Payments to telecommunications operators were down 7%, reflecting lower mobile termination rates and reduced transit and wholesale call volumes. Other costs were up 8% mainly due to BT Sport.

Adjusted EBITDA decreased by 1% to GBP1,440m. Excluding a GBP10m positive impact from foreign exchange movements and a GBP2m positive net impact from acquisitions and disposals, underlying EBITDA decreased by 2%.

Depreciation and amortisation of GBP697m was down 4% reflecting the more efficient delivery of our capital expenditure programmes over the last few years.

Net finance expense Net finance expense of GBP146m was down 14% mainly due to lower net debt and a lower average interest rate.

Profit before tax Adjusted profit before tax of GBP595m was up 5%, reflecting the lower depreciation and amortisation and net finance expense. Reported profit before tax (which includes specific items) was GBP449m, down 16%.

Tax The effective tax rate on the profit before specific items was 22.6% (Q1 2012/13: 22.8%2).

Earnings per share Adjusted EPS was 5.9p, up 5%, and reported EPS (which includes specific items) was 4.4p, down 17%. These are based on a weighted average number of shares in issue of 7,839m (Q1 2012/13: 7,788m).

Specific items Specific items resulted in a net charge after tax of GBP114m (Q1 2012/13: GBP23m2). Specific items include group-wide restructuring charges of GBP84m and net interest expense on pensions of GBP59m (Q1 2012/13: GBP28m2).

Free cash flow Normalised free cash flow was an outflow of GBP60m. This was an improvement of GBP64m compared with the prior year reflecting lower tax and capital expenditure, partly offset by movements in working capital.

After the GBP134m cash cost of specific items (Q1 2012/13: GBP33m), principally comprising restructuring costs of GBP106m and property rationalisation costs of GBP12m, and the cash tax benefit from pension deficit payments of GBP20m (Q1 2012/13: GBP162m), reported free cash flow was an outflow of GBP174m (Q1 2012/13: GBP5m inflow).

Net debt and liquidity Net debt was GBP8,058m at 30 June 2013, an increase of GBP261m compared with 31 March 2013 but GBP1,084m below the prior year. The increase in the quarter mainly reflects the reported free cash outflow of GBP174m and the purchase of 25m shares for GBP75m as part of our share buyback programme of around GBP300m this year.

In the quarter we issued a US$600m three-year bond swapped into Sterling of GBP390m, with an average effective interest rate of 1.96%.

At 30 June 2013 we had cash and current investment balances of GBP1.3bn and available facilities of GBP1.5bn, in line with our strategy of maintaining a conservative liquidity and funding position. During the rest of 2013/14 GBP0.3bn of term debt matures and GBP0.6bn of short-term borrowing is repayable.

Pensions The IAS 19 net pension position at 30 June 2013 was a deficit of GBP4.0bn net of tax (GBP5.2bn gross of tax), compared with GBP4.5bn (GBP5.9bn gross of tax) at 31 March 2013. The IAS 19 accounting position and key assumptions are: Regulation As expected, the charge controls for WLR, LLU and ISDN30 products impacted revenue in the quarter. We continue to expect these to have a negative impact of around GBP120m on group revenue and EBITDA in the year. In addition, the Leased Lines Charge Control came into effect from 1 April 2013 and we expect an annual negative impact of around GBP50m-GBP100m on group revenue and EBITDA this year and next.

Ofcom has recently published consultation documents on the Fixed Access and Wholesale Broadband Access markets. These include proposals for the continuation of price controls in these markets for the three year period from 1 April 2014.

Ofcom is expected to complete its review of the Wholesale Narrowband market in the next few months.

Fibre and broadband We have now passed more than 16m premises with our fibre broadband network. There are now more than 1.7m homes and businesses using our fibre-based services with 265,000 net connections in the quarter. We added 197,000 retail fibre broadband customers, up around 30%, and the customer base currently stands at around 1.5m.

The broadband market3 grew by 189,000 in the quarter, around 20% more than in the first quarter last year, of which our retail share was 50%.

2013/14 outlook Our first quarter results position us well for the full year, for which our outlook is unchanged. As previously reported, we expect EBITDA in the first half of the year to be impacted by our upfront investment in BT Sport. In the second quarter we expect this to impact BT Retail EBITDA by around GBP100m including programme content costs which we will start to recognise.

In BT Global Services we expect a smaller year on year benefit from contract milestones in the second quarter, with this reversing to give a larger year on year benefit in the third quarter. Partially offsetting this in the second quarter, BT Wholesale's year on year performance will benefit from the charge relating to ladder pricing in the prior year.

1 Before depreciation and amortisation 2 Restated, see Note 1 to the condensed consolidated financial statements 3 DSL and fibre, excluding cable OPERATING REVIEW BT Global Services Revenue Underlying revenue excluding transit decreased by 3%, continuing the improved trend seen over the last few quarters. Double-digit revenue growth in the high-growth regions of Asia Pacific, Latin America, Turkey, the Middle East and Africa was more than offset by declines in UK, continental Europe and the US.

Reported revenue was down 2% including a GBP9m decline in transit revenue and a GBP27m positive impact from foreign exchange movements.

Total order intake was up 49% to GBP1.7bn including a seven-year renewal with Credit Suisse for global network outsourcing services. We also signed contracts with: Phoenix Group, for network services in 23 countries; Nexans, for network services across 40 countries; Arla Foods, to connect around 130 sites across North and South America, Europe and Asia; Western Power, for a multimedia contact centre in Australia; and Lombardia Informatica, for the social health information network of the Lombardy region in Italy.

Operating results Underlying operating costs excluding transit declined by 4%, reflecting our cost transformation programmes and the impact of lower revenue. Operating costs decreased by 3%.

During the quarter we accelerated our field services transformation, improving internal and external third-party processes to provide a better service and reduce costs. We continued to optimise our network to enhance availability and reliability for customers and reduce third-party costs.

EBITDA in the quarter increased by 6%, or 1% on an underlying basis. Depreciation and amortisation reduced by 3% and operating profit more than doubled to GBP31m.

Capital expenditure decreased by 13% due to the phasing of expenditure in the prior year. This contributed to EBITDA less capital expenditure increasing by GBP28m to GBP71m. Operating cash flow was an outflow of GBP280m reflecting the usual seasonal phasing of working capital.

BT Retail Revenue Revenue and underlying revenue excluding transit were both flat.

Consumer2 revenue decreased by 1%, with a 5% decline in calls and lines revenue being partially offset by 9% growth in broadband and TV revenue.

Consumer2 line losses of 130,000 were at their lowest level for five years and 36% better than last year. We added 95,000 retail broadband customers, up 12%, representing 50% of the DSL and fibre broadband market net additions. We added 197,000 retail fibre broadband customers, up around 30%, and now have around 1.5m customers. We launched the new slim-line BT Hub 4 which offers market-leading wireless reliability. Our TV net additions were 23,000 taking the customer base to 833,000.

It is early days but we are very pleased that more than 500,000 households have now ordered BT Sport. As expected, most of these are existing customers who have re-contracted their broadband service. We expect the proportion of new customers to increase after we launch the channels on 1 August.

Business revenue increased by 1%, the best performance in more than four years, with 9% growth in IT services. Following our successful dual-brand strategy in Consumer, we launched the Plusnet Business brand, which offers small and medium-sized enterprises a range of broadband and phone packages.

BT Enterprises underlying revenue increased by 3%. BT Ireland underlying revenue excluding transit increased by 2%, with growth in both Northern Ireland and the Republic of Ireland. We announced a deal with Setanta to add the BT Sport 1, BT Sport 2 and ESPN channels to the Setanta Sports pack which means that BT Sport will be available in the Republic of Ireland from August.

Operating results Operating costs were flat as the benefits of our cost transformation programmes were offset by around GBP40m of pre-launch costs for BT Sport. EBITDA was up 1% or flat on an underlying basis. Depreciation and amortisation decreased by 10% and operating profit was up 4%.

Capital expenditure decreased by 11%, despite our investment in BT Sport, reflecting the additional broadband-related investment in the prior year. This contributed to a 5% increase in operating cash flow.

2 Includes customers in Northern Ireland BT Wholesale Revenue Underlying revenue excluding transit was flat, or up 2% excluding revenue from ladder pricing which we stopped recognising in the second quarter of the prior year. The increase was primarily due to 23% growth in managed solutions revenue and 12% growth in IP services. This was partly offset by a 13% decline, excluding ladder pricing, in traditional calls and lines revenue and a 16% decline in broadband revenue (as lines migrate to LLU).

Revenue decreased by 6%, or 2% excluding ladder pricing, mainly due to a GBP39m decline in transit revenue driven by mobile termination rate reductions and lower volumes.

Total order intake was GBP509m (Q1 2012/13: GBP501m) covering a broad range of products and services mainly in broadband, Ethernet and IP Exchange.

Operating results Operating costs excluding transit increased by 1% reflecting the higher cost of sales associated with the growth in revenue excluding transit and ladder pricing. Operating costs decreased by 7% reflecting the decline in transit revenue.

EBITDA decreased by 4%, but increased by 3% excluding ladder pricing. With depreciation and amortisation flat, operating profit declined by 6%.

Capital expenditure decreased by 11% due to lower spend on Wholesale Broadband Connect as our footprint expansion nears completion. Operating cash flow was an outflow of GBP31m due to the timing of customer receipts.

Openreach Revenue Revenue declined by 2% as a result of regulatory price changes on WLR, LLU, ISDN30 and Ethernet products which reduced revenue by around GBP60m, or the equivalent of around 5%. This was partially offset by growth in fibre broadband revenue, which more than doubled, and a 5% increase in Ethernet revenue, driven by higher volumes.

The physical line base grew by 12,000 compared with a 44,000 decline in the first quarter last year. Over the past 12 months, our physical line base has increased by 110,000.

We have now passed more than 16m premises with our fibre broadband network. We achieved 265,000 net fibre connections, an increase of 56%. Other service providers are now more engaged in marketing and selling fibre and their net additions in the quarter have more than trebled. More than 1.7m homes and businesses are now connected.

We won a further nine Broadband Delivery UK (BDUK) regional bids to deploy fibre broadband including Cheshire, Durham, Coventry, Solihull & Warwickshire and West Sussex. We have now won a total of 29 regional bids. The programme will have a long payback but, unlike other companies, we have committed the capital and are focused on helping the UK achieve its short-term goal of more than 90% fibre availability. The UK is seen in many countries around the world as an exemplar of what can be achieved by government and private sector working together.

Operating results Despite the additional engineering resource that we recruited last year and the effect of wage inflation, cost efficiencies resulted in operating costs remaining flat. EBITDA was down by 4% due to the lower revenue. With depreciation and amortisation increasing 3%, reflecting the investment in fibre broadband and Ethernet, operating profit was down 14%.

Capital expenditure decreased by 2%. Operating cash flow decreased by 7% due to the lower EBITDA.

A conference call for analysts and investors will be held at 9.00am today and a simultaneous webcast will be available at www.bt.com/results The second quarter and half year results for 2013/14 are expected to be announced on Thursday 31 October 2013.

[Editorial queries for this story should be sent to newswire@enpublishing.co.uk] ((Comments on this story may be sent to info@enpublishing.co.uk)) (c) 2013 Electronic News Publishing -

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