Preliminary Results FY19 23 May 2019
Agenda 2. Financial Review Kate Ferry 1. FY19 Overview Tristia Harrison 5. 4. Outlook Q&A 3. Our Plan Tristia Harrison Tristia Harrison 1 1 TalkTalk Group PLC
FY19 Overview
Good momentum with year on year base, Fibre, revenue and EBITDA growth Strong market position Total Headline revenue (ex-Carrier & Ofg-net) up 2.2%, with On-net revenue up +3.9% Headline EBITDA growth of 16.7% to £237m Year on year growth driven by a larger average base, increased Fibre penetration and a materially lower cost base Increasing Fibre mix with 490k net adds ; 150k broadband net adds Continued momentum in FibreNation roll-out and investment partner process 3 TalkTalk Group PLC - Overview
Financial Review
Strong momentum on KPIs; acceleration of Fibre; EBITDA in line with guidance Fibre Net Adds BB Net Adds On-net Churn Total FLPP Base 152 109 146 125 1.4% 1.4% 80 1.3% 1.3% 98 1.2% 1.2% 1.2% 1.2% 89 89 1.1% 73 72 67 44 37 26 24 22 2 20 Q4’17 Q1’18 Q2’18 Q3’18 Q4’18 Q1’19 Q2’19 Q3’19 Q4’19 Q4’17 Q1’18 Q2’18 Q3’18 Q4’18 Q1’19 Q2’19 Q3’19 Q4’19 Q4’17 Q1’18 Q2’18 Q3’18 Q4’18 Q1’19 Q2’19 Q3’19 Q4’19 Revenue ex-Carrier & Ofg-net On-net ARPU Data Revenue +6.8% Growing Consumer ARPU +2.2% 44 43 43 43 396 26.0 389 387 25.1 25.2 25.2 386 42 42 42 24.9 24.7 24.7 24.7 382 375 375 367 36 Q1’18 Q2’18 Q3’18 Q4’18 Q1’19 Q2’19 Q3’19 Q4’19 Q1’18 Q2’18 Q3’18 Q4’18 Q1’19 Q2’19 Q3’19 Q4’19 Q1’18 Q2’18 Q3’18 Q4’18 Q1’19 Q2’19 Q3’19 Q4’19 5 TalkTalk Group PLC - Financial Review
Year on year revenue and EBITDA growth FY19 (£m) FY18 (£m) Revenue growth from bigger Headline revenue 1,609 1,605 base and Fibre penetration Headline revenue Gross profit improvement (excluding Carrier and Ofg-net) 1,544 1,511 driven by lower Fibre Gross profit 850 831 wholesale pricing and growth in high margin data products Margin 52.8% 51.8% Operating costs reduced Operating costs & SAC (613) (628) due to central cost savings and cost to serve Headline EBITDA 237 203 efficiencies Margin 14.7% 12.6% Underlying CPA stable Headline profit after taxation 69 (7) Headline EPS (Basic) 6.0p (0.7p) Dividend per share 2.50p 4.00p N.B. The above numbers apply IFRS 15 and 9 to both the current year and the prior year under the full retrospective approach 6 TalkTalk Group PLC - Financial Review
2.2% growth in Headline revenue excluding Carrier and Off-net Fibre penetration 3.9% Larger average base On-Net revenue Uptake of sensibly priced add-ons, i.e. call growth boosts and Wi-Fi Hub Data revenue growth from larger base and higher bandwidth product uptake 6.8% Voice usage revenue decline in Consumer Data and B2B revenue growth 7 TalkTalk Group PLC - Financial Review
Lower costs of goods sold; increasing gross profit and margin Higher average base leads to greater gross profit Gross profit of Existing Fibre base benefiting from lower £850m input costs from WLA and BTOR discounts up 2.3% Data revenue growth from larger base and higher bandwidth product uptake Voice usage revenue decline in Consumer Gross and B2B profit margin of 52.8% up 100bps 8 TalkTalk Group PLC - Financial Review
Significantly reduced cost base with lower cost to serve and management overheads FTE reduction from FY18 redesign of organisational structure Operating costs Move to self-service model has seen fewer calls and engineer £15m visits driving lower cost to serve lower than Lower outsource partner costs last year Driving down cost per Gb FibreNation costs recognised within Group structure in FY19 More Data usage increasing exponentially increasing traffic on the savings network to come Higher SAC costs associated with the exit of a previous distribution agreement 9 TalkTalk Group PLC - Financial Review
Estimated cost savings from move to one Salford campus and associated re-organisation Announcement made to employees in £25-£30m November 2018 £21-£26m We now have clear visibility of the £6m-£7m efficiencies and headcount reduction Capex £5m-£6m Many roles relocating, in particular Consumer commercial teams Significant recruitment drive has started for roles in North West, with opportunities for existing employees People & £16m-£20m £19m-£23m Employees are leaving in phased Property approach, with first cohort in March 2019, and then September and December 2019 FY20 Annualised Cash Savings 10 10 TalkTalk Group PLC - Financial Review
Cash flow in line with our expectations FY18 1 (£m) FY19 (£m) Opening Headline Net Debt 745 819 Cash generative in H2 Headline EBITDA 237 203 Working capital inflow Working Capital 11 (3) principally due to the receipt Capital Expenditure (113) (128) of supplier compensation Operating Free Cash Flow 135 72 relating to prior years and Interest & Taxation (50) (47) timing of supplier payments Free Cash Flow 85 25 Investments represent our Non-Headline items (47) (73) continued contribution to Investments (7) (8) YouView JV Dividends (28) (71) FY18 final dividend payment Share Issue - 201 of 1.5p Net Cash Flow 3 74 Closing Headline Net Debt 742 745 Debt covenant: 3.1x * Finance Leases 39 31 Closing Net Debt 781 776 1 * As calculated for the purposes of the Group borrowing facilities As part of the adoption of IFRS 15, net debt at March 2018 has been restated by £21m to reflect an inventory repurchase programme previously in place. This programme ended during FY19 and no such arrangement was in place at March 2019 . 11 11 TalkTalk Group PLC - Financial Review
Cash Capex continuing to reduce Doing fewer things, with £133m focus fully £128m on fixed £113m £105m-£115m connectivity FibreNation FibreNation £13m Other (Compliance, Consumer CPE, etc.) Systems Network & Fibre Connectivity FY17 FY18 FY19 FY20 12 12 TalkTalk Group PLC - Financial Review
Non-Headline items lower year-on-year P&L – EBITDA - HQ move and associated re-organisation (£22m), Network transformation (£15m) and MVNO operating profit (£3m) Cash - Exceeds above P&L costs due to timing of prior year mobile exit payment and Group restructure payments related to prior year activity Looking forward - Cash items will continue to exceed P&L P&L Cash P&L Cash items due to timing of final mobile exit £93m £73m £34m £47m payments in FY20 and HQ move and associated re-organisation cash payments FY18 FY19 13 13 TalkTalk Group PLC - Financial Review
Exceptional items relating to HQ move and associated re-organisation £25m-£30m People costs relate predominantly to redundancy Onerous costs payments, as well as recruitment and relocation costs Consultancy costs Dual running costs relate to salary costs during the transition period Dual Running Onerous costs from facilities contracts Indicative timing FY19 FY20 People P&L Charge £22m £3m-£8m Cash £2m £23m-£28m Exceptional Items 14 14 TalkTalk Group PLC - Financial Review
IFRS 16 IFRS 16 Leases is the new accounting standard to cover lease accounting and replaces IAS 17 For TalkTalk the main area this impacts is arrangements within our network, e.g. Backhaul circuits, Data centres Certain assets are considered outside the scope of IFRS 16, e.g. space in exchanges, last-mile IFRS 16 is effective from 1 April 2019: - Expect to recognise discounted lease liabilities of between £215m-£225m (unaudited) - EBITDA to increase - Net debt to increase as it will include lease liabilities - Treatment of leases within capex and normalised free cash flow will be unchanged Covenant calculations unaffected by IFRS 16 (continue under IAS 17) We won’t be restating FY19 under IFRS 16, and will provide numbers throughout FY20 under both IFRS 16 and IAS 17 15 15 TalkTalk Group PLC - Financial Review
Summary Good momentum on customer metrics, with accelerated Fibre take-up leading to revenue growth Regulatory pricing and commercial discount agreements saw improvements to both gross profjt and gross profjt margin year on year Lower operating costs due to FTE reduction and move to self-service model 16.7% growth in Headline EBITDA Cash generative in the year and strong in H2 16 16 TalkTalk Group PLC - Financial Review
Our Plan
Market context validates strategy There has never been such demand for reliable and A number of structural factors changing our market: affordable fixed - Rapid rise in demand for data; 30-40% year-on-year, of which 58% is video connectivity - Premium TV being replaced by growth of streaming services (e.g. Netflix and YouTube) - Businesses, as well as Consumers, using more and more data with rise of voice over internet (e.g. Skype) and cloud services - Price and fairness really matter – regulators challenging traditional telco business models built on ‘loyalty penalties’ TalkTalk well positioned to benefjt: - Scale in B2B and Consumer (barriers to entry are high) - Single minded focus on fixed connectivity, unencumbered by having to defend premium TV or mobile - Structural pricing advantage in both segments - Delta between front and back book pricing is minimal - Reducing cost base 18 18 TalkTalk Group PLC - Our Plan
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