Preliminary Results FY18 24 May 2018
Agenda FY18 Review Tristia Harrison Financial Review Kate Ferry Tristia Harrison Strategy & Outlook Q&A All 01
Full Year 2018 Review
Performance is on track; good growth and financials in line with guidance Reminder of FY18 Strategy Never been a better time to be the value provider of fixed connectivity Value propositions in Consumer and B2B are working Fixed Low Price Plans (“FLPP”) have resonance Performance on track − Good base growth in Consumer and B2B − Strong Q4 performance − EBITDA in line with revised guidance Ruthlessly prioritise our core strengths Less capital intensive priorities 03
Simplification in B2B; Full fibre (“FTTP”) plans on track Sale of Direct B2B business FTTP − TalkTalk plan to sell its direct B2B business to Daisy for £175m − FTTP plans are progressing well − Appointment of Chair, Paul Reynolds − Transaction will impact Group EBITDA by c.£15m in FY19 − Appointment of CEO, Charles Bligh − Direct business contains c.80,000 customers (c.17% of revenue) − York roll out continues well − Underpins strategy to focus on our core, high-growth partner and wholesale B2B channels where we are Britain’s largest provider of wholesale broadband and have the fastest growing Ethernet base − These customers will be served by Daisy but will remain on TalkTalk’s network via a new wholesale agreement − The proposed sale will further strengthen the balance sheet and support continued investment in growth and FTTP 04
Financial Review
FY18 performance in line with guidance Item Guidance Actual Net Adds 150k-160k 192k EBITDA £230m-£245m £233m Net Debt/EBITDA 3.0x 3.0x Revenue (excluding Off-Net and Carrier) Growth +1% Capex 6%-7% 7.7% 06
Strong momentum on KPIs BB Net Adds On Net Churn Total FLPP Base 109 37 26 22 20 1,272 1,621 1,843 2,029 1.7% 1.5% 1.5% 1.4% 1.3% 1.2% 993 (42) 602 (9) (20) Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 H1'16 H2'16 H1'17 H2'17 H1'18 H2'18 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 EFM & Ethernet Base Fibre Net Adds Fifth consecutive quarter of growth Churn at lowest ever levels Nearly 70% of the Consumer base on fixed price plans 98 51 89 89 47 43 74 73 39 Strong momentum in fibre 72 35 31 40 36 Continued growth in Ethernet circuits in B2B Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 H1'16 H2'16 H1'17 H2'17 H1'18 H2'18 07
EBITDA in line with guidance; reflecting investment in growth FY18 FY17 * £’m £’m Headline revenue 1,658 1,720 Headline revenue (excluding Carrier and Off-net) 1,564 1,555 Gross profit 884 953 Margin 53.3% 55.4% Operating costs & SAC (651) (592) Headline EBITDA 233 361 Margin 14.1% 21.0% Headline profit after taxation 18 154 Headline EPS (Basic) 1.8p 16.2p Dividend per share 4.00p 10.29p * PY revenue has been adjusted to exclude MVNO revenue of £63m and PY EBITDA has been adjusted to exclude MVNO losses of £28m and restatement of £29m claims from non-Headline items to Headline 08
Radical simplification gives rise to one-off transformational costs P&L £97m − Exit mobile strategy - £33m − MVNO operating loss - £13m − Group organisational structure - £34m £73m − Network transformation - £17m Cash P&L − Relates to above P&L costs, as well as timing of final Making TalkTalk Simpler (“MTTS”) payments Cash − Deemed consent receipt not included Looking forward − Non-headline items, both P&L and cash, expected to FY18 be lower year on year 09
Costs / Supplier compensation Costs incurred in Headline P&L Removal of MVNO losses from Headline Settlement claims booked in Headline P&L numbers: +£28m impact to FY17 reported number (+£13m in FY18) Settlement claims previously booked in Exceptional items Matching supplier compensation and related costs in Headline numbers: +£29m impact to FY17 reported number FY17 FY14 FY15 FY16 FY18 10
1% revenue growth year on year FLPP ARPU dilution and lower average Consumer base, offset by Fibre penetration and legacy base price rises. £14m Strong growth in Ethernet circuits (+8.3k) driving data revenue growth £16m £11m Base growth in IP Voice £1,564m £1,555m FY17 On Net Data Voice FY18 11
FLPP resonating with customers; short term ARPU dilution Dilution effect of FLPP Growth in Fibre base and uptake of TV Boosts £0.50 £0.29 £0.35 Continued decline in Voice usage £0.37 Higher mix of wholesale customers in the base £26.84 ARPU will stabilise in FY19 £26.03 FY17 FLPP Fibre & TV Voice Consumer FY18 Dilution Boosts Usage / B2B Mix 12
Simplified disclosure and FLPP take up effect year on year gross margin Reduction in disputed network credits FLPP ARPU dilution impact Growth in high margin Ethernet base 1.3% accretive to margin Reduction in low margin Carrier revenue year on year 55.4% 1.2% 0.3% 0.2% 0.3% 53.3% FY17 Supplier FLPP Dilution Declining Off- Data Growth Carrier FY18 compensation net 13
Investment in growth resulting in higher SAC & Marketing costs as anticipated Planned investment in base growth − Investment in volume £651m − CPAs continue to come down £592m SAC Increased cost to serve SAC £203m £155m Network investment Opex Opex £448m £437m FY17 FY18 14
3.0x Net Debt/EBITDA in line with guidance FY18 FY17 £’m £’m Cash inflow of £58m for FY18 Opening Headline Net Debt (782) (679) ARPU dilution and planned investment in growth Headline EBITDA 233 361 has seen lower cash generation Working Capital (50) (56) Higher rate of interest on bond issued late in FY17 Capital Expenditure (128) (133) Operating Free Cash Flow 55 172 Dividend: Final FY17 dividend (5.00p) and interim Interest & Taxation (46) (33) FY18 dividend (2.50p) Free Cash Flow 9 139 Share issue raised £201m (net of expenses) Non-Headline items (73) (75) Acquisitions (8) (18) Dividends (71) (150) Share Issue 201 1 Net Cash Flow 58 (103) Closing Headline Net Debt (724) (782) Net Debt / EBITDA* 3.0x 2.2x 15 * As calculated for the purposes of the Group’s borrowings
Illustrative FY19 Cash Flow FY19 cash inflow Lower year on year non-Headline 3.0x items from simplifying the business Direct B2B sale proceeds: £175m FY19 net debt/EBITDA comfortably within all covenants Balance sheet strengthened – supporting continued investment in growth and FTTP FY18 Net 15% EBITDA Capex £110m Dividend Other * Non-Headline FY19 Net Direct B2B Direct B2B Adjusted Net Debt Growth £30m Items Debt Sale Proceeds EBITDA Debt * Other includes working capital, interest and taxation and acquisitions 16
IFRS 15 and 16 Results and guidance published today are pre-IFRS 15 and 16 adjustments We are making good progress on implementing IFRS 15 Finalising an automated system solution to enable opening balance sheet adjustment and ongoing reporting We expect IFRS 15 to have a minimal impact on EBITDA (guidance unchanged) Q1 results will be under IFRS 15 IFRS 16 will be implemented in FY20 – the group continues to monitor the practical implications within the Telco industry 17
Exit the year with good momentum and a firm foundation for growth Growth KPIs are encouraging Significantly lower P&L and cash non-Headline items in FY19 Focus on cash Stronger balance sheet Confidence in FY19 outlook: 15% EBITDA growth − Revenue growth from stabilising ARPU and larger average base − WLA savings contributing to margin improvement − Other significant cost reductions EBITDA impact of removing Direct B2B business from FY19 is c.£15m 18
Our Plan
Our plan remains unchanged 20
Clear space for value challenger of fixed connectivity Opportunity for a value provider of fixed Core Simple, affordable No price rises connectivity as large today as ever Products and reliable fixed for the length of Broadband your plan Customers consuming exponential data – with growth in OTT content viewing such as Amazon, YouTube and Netflix Reliability of connection is therefore critical £18.95 a month £25 a month for 24 months, includes line rental for 24 months, includes line rental Incumbents protecting premium bases – driving up industry ARPU’s Add-ons Clear space for value challenger Voice TV Mobile 21
Price certainty is working with customers; early re-contracting behaviour is encouraging Focus on core, fixed connectivity has real momentum We have invested in equalising the front and back-book Short-term dilution impact on ARPU but higher proportion of base now in contract contributing to lowest ever churn Early signs on out of contract behaviour are positive − Number of customers re-contracting is encouraging − Customer churn has been positive and below our expectation − ARPU’s for those that re -contract are 2-3% higher 22
Stabilising ARPU Further FLPP dilution (remaining out of contract base to recontract Legacy out of contract base price rise and new acquisitions contracting at competitive prices) Consumer : B2B base mix End of FLPP contract price rise Re-contracts and new acquisition Fibre penetration and TV, Mobile at higher price point and Call Boosts 23
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