Performance review

The Group is well positioned to deliver value-added services in our target markets, giving us the opportunity to generate profitable growth and build upon our strengthening market presence

In summary

  • Year end results in line with expectations
  • Strong second half cash performance with closing net debt of £75.0 million
  • Net debt to EBITDA ratio reduced to 1.0x (2013: 1.2x)
  • Increased final dividend of 3.25 pence, in line with commitment to increase full year dividends by 10 per cent per annum until March 2016
  • Refinancing agreed, providing capacity to consider investment in selective organic and inorganic opportunities to strengthen position in target markets

Paul Simpson

Paul Simpson

Chief Financial Officer

Growing consumer demand for fibre-based services

In KC, progress in our fibre deployment remains strong and we continue to exploit the investment in our fibre network to grow sales of broadband and related data services. Take-up remains strong and we are on target to provide 45,000 premises (c30 per cent of the addressable market) with access to superfast fibre-based services by March 2015. Our current take-up rate of 27 per cent is well ahead of the national average, and is delivering an average revenue per user (ARPU) uplift of in excess of £5 per month.

We are scoping the next phase of this investment (beyond March 2015) and will provide an update on this at the interim results in November 2014. While subsequent phases of this deployment will require additional capital investment, it will create a future-proof infrastructure capable of very high speeds, well in excess of current and forecast market requirements. We believe our decision to deploy fibre to the premise (FTTP) is the most financially attractive over the longer term, as well as being the most beneficial for our customers.

Focus on delivery of value-added services to SMB and enterprise markets

In Kcom, we are focused principally on partnering enterprise and public sector organisations for the delivery of value-added communications and IT related services.

The move away from some of our legacy carrier business is most evident in our enterprise activities rather than those in the SMB market where there is continued demand for connectivity, particularly as part of our cloud-based offerings. Typically, SMB organisations have limited internal IT resource and are looking for access to a range of communications packages with low upfront investment and full service support. Customers in this sector include RNLI, Furniture Village and the RSPB.

Within the large enterprise market, our carrier-only activity is declining due to both the commoditised nature of the products and ongoing pricing pressure from regulatory changes. However, those products will continue to be a component of our managed services offering.

Increasingly, our enterprise customers are looking for partners with the ability to offer multiple communications and IT services under one managed contract, many of which include cloud-based solutions.

We believe this market will exhibit significant growth and provides opportunities for the Group, driven by:

  • the need for organisations to make ‘catch-up’ investment post the economic crisis;
  • the complexity of managing multiple customer contact channels (web, email, live chat, contact centres);
  • the need to exploit the capability of a range of systems and platforms; and
  • a focus on increased efficiency, collaboration and productivity within organisations.

Building long-term customer relationships

Our ability to deliver bespoke solutions provides the opportunity to build long-term, quality relationships based on annuity contracts.

We provide managed and consultancy services to organisations including Morrisons, Phones4U, National Farmers Union Mutual, Admiral and University Hospitals Birmingham. During the year, we also secured contracts and renewals with British Airways, Mercedes and HM Revenue & Customs (HMRC). Under our contract with the Association of Train Operating Companies, we recently migrated all the UK’s rail ticketing and travel information and systems on to a cloudbased platform with our partner, Amazon Web Services.

Certain managed services contracts require specific customer capital investment, which is reflected in our contract pricing. Our contract with HMRC for the provision of hosted contact centre services requires capital investment of c£8 million which will be funded through cost effective finance leases allowing us to match our cash inflows and outflows over the life of the contract. This will increase net debt in the year ending 31 March 2015.

Net debt, cash flow and refinancing

Year end net debt was £75.0 million (2013: £88.2 million), representing a net debt to EBITDA ratio of 1.0x (2013: 1.2x).

The Group continues to be highly cash generative and recorded strong cash collection in the second half of the year increasing working capital inflows and leading to lower year end net debt. Net debt is likely to increase in 2015 as capital expenditure increases but we expect to maintain a net debt to EBITDA ratio of comfortably less than 1.5x. The Group’s debtor management remains strong with year end days’ sales outstanding of 30 days (2013: 30 days).

On 4 June, the Group successfully refinanced through the agreement of a £200.0 million revolving credit facility, secured on improved terms. This new arrangement, which expires on 30 June 2019, provides sufficient funding to support both organic and inorganic growth.

Dividend

The Board is proposing a final dividend of 3.25 pence per share (2013: 2.97 pence), representing a total dividend for the year of 4.88 pence per share (2013: 4.44 pence). This represents 10 per cent year-on-year growth in the total dividend, consistent with the Board’s previously stated commitment to grow full year dividends at 10 per cent per annum until the year ending 31 March 2016.

Subject to shareholder approval at the KCOM Group PLC Annual General Meeting on 29 July 2014, the final dividend will be paid on 1 August 2014 to shareholders registered on 27 June 2014. The ex-dividend date is 25 June 2014.

Pensions

The Group continues to actively manage its pension obligations and engage in positive discussions with the schemes’ Trustees. In recent years, significant progress has been made through a number of actions, including:

  • closure of all defined benefit schemes to future accrual;
  • breaking the link to final salary;
  • reduction of deferred membership through a transfer-out offer; and
  • establishment and transfer of assets into an asset-backed partnership.

During the year reported, a secured loan was transferred into the asset-backed partnership created during the year ended 31 March 2013. This second agreement provides further certainty over the Group’s cash commitments to the schemes, by creating both an improvement to the funding deficit (through an annual distribution of £1.6 million) and added security to the Trustees of the schemes.

The Group’s IAS 19 pension liability is £26.5 million (2013: £9.8 million). The year-on-year increase arises as a result of movements in assumptions, in particular a lower discount rate used to calculate the schemes’ liabilities.

The actuarial deficit at 31 March 2013 was £59.2 million (31 March 2010: £61.4 million). The Group’s cash commitments reflect post-valuation experience factors including:

  • successful completion of the second transfer into the asset-backed partnership;
  • post-valuation experience, particularly significant movements in discount factors and equity rates since March 2013; alongside
  • further strengthening of covenant and relationship with the pension scheme Trustees.

In addition to payments relating to the Group’s asset-backed partnership, the planned level of deficit repair payment (across both schemes) is £2.0 million in each of the years ending 31 March 2015 and 31 March 2016.

Group and segmental performance

Group revenue (£370.7 million) and EBITDA before exceptional items (£75.3 million) were broadly flat (2013: £372.9 million and restated £74.9 million).

The KC segment reported revenue of £105.0 million (2013: £104.6 million) representing a strong consumer performance (particularly in the take-up of fibre-based services), offset by slightly lower business revenue.

Ongoing efficient cost management resulted in EBITDA before exceptional items increasing by 3.1 per cent to £56.2 million (2013: £54.5 million).

Within our Kcom segment, revenue was £270.9 million (2013: £273.4 million) reflecting our focus on exploiting emerging market trends. EBITDA before exceptional items was £28.7 million (2013: £29.4 million). We anticipate some incremental decline in revenue in the year ending 31 March 2015, as the decline in some historic carrier based activities continue to decline.

The Group’s PLC segment includes central and share scheme expenses, and administration costs associated with the Group’s defined benefit pension schemes. These costs (before exceptional items) were £9.6 million (2013: restated £9.0 million).The income statement effect of financing the Group’s pension schemes was previously reported within EBITDA but, following the revision to IAS 19, is now included within finance costs.

The Group’s net exceptional credit was £0.6 million. This included a £2.6 million profit on contract termination offset by costs of restructuring (£1.1 million), costs associated with the Group’s second asset-backed pension funding arrangement (£0.7 million) and onerous lease costs (£0.2 million).

Capital investment

The Group’s depreciation and amortisation charge for the year was £20.3 million (2013: £19.6 million), reflecting continued investment in existing commitments. We expect this charge to increase in future years. Cash capital expenditure during the year was £27.9 million (2013: £28.0 million). Specific projects include:

  • the continued deployment of fibre;
  • IT investment to allow the Group to move towards common systems and processes; and
  • targeted customer specific investment.

The Group anticipates that capital investment levels will be approximately £35 million in the year ending 31 March 2015. This increase reflects the timing of cash outflows rather than a material change in capital investment levels.

Tax

The Group’s tax charge of £11.8 million (2013: restated £11.9 million) reflects the corporation tax charge for the year and the ongoing unwind of deferred tax balances. Deferred tax balances have been re-measured to reflect the reduction in the corporation tax rate from 23 per cent to 20 per cent for the year ending 31 March 2015.

The effective rate of 23.3 per cent is broadly in line with the prevailing rate of corporation tax as the effect of re-measuring deferred tax is offset by prior year tax items. The Group’s corporation tax liability would have been higher had it not been for the benefit arising from the Group’s second asset-backed pension funding arrangement.

Our cash tax payment in the year ended 31 March 2015 relating to the current year is c£2 million. We expect cash tax payments in the years ending 31 March 2015 and 31 March 2016 to be c£4 million and c£5 million respectively, in line with prevailing corporation tax rates.

Paul Simpson

Chief Financial Officer
18 June 2014