INTERIM RESULTS FY20 - TalkTalk Group · TalkTalk Group PLC –Interim Results FY20, 15th November 2019 21 • Over 43k homes passed as at end of September 2019 - All York –whilst

TalkTalk Group PLC – Interim Results FY20, 15th November 2019 1

15 November 2019

INTERIM RESULTS FY20


Agenda

FY20 H1 Overview Financial Review Our Plan Outlook Q&A

TristiaHarrison

Kate Ferry

TristiaHarrison

TristiaHarrison


Tristia Harrison

FY20 H1 OVERVIEW


• H1 Fibre net adds up 52% YoY to 292k

- Record 174k in Q2

• Over 2 million Fibre customers across Consumer and B2B

- 74% of new Consumer customers took Fibre in H1, peaking at 81% in September

- 33% share of new Openreach FTTC lines in Q2 (Q2 FY19: 22%)

• Excellent progress on cost savings

• 14% growth in like-for-like Headline EBITDA (pre-IFRS 16) to £115m

• Headline EBITDA outlook for the year (pre-IFRS 16) remains unchanged

Strong growth in Headline EBITDA and Fibre net adds; outlook remains unchanged


Kate Ferry

FINANCIAL REVIEW


• IFRS 16 ‘Leases’ replaces IAS 17, changing the treatment of leases

• TalkTalk must now recognise additional discounted lease liabilities on the balance sheet, which effectively increases net debt and finance costs

• EBITDA increases with lease expense being taken through depreciation and amortisation rather than operating expenses

• These leases predominantly relate to arrangements within our network, e.g. backhaul circuits and data centres

• There is no cash impact on the business, it is purely an accounting treatment

• Covenant calculations are unaffected by IFRS 16 (continue under IAS 17)

IFRS 16 – impact on TalkTalk

TalkTalk have not restated FY19 under IFRS 16, and will provide numbers throughout FY20 both pre and post IFRS 16

H1 FY20 Pre-IFRS 16IFRS 16 impact

As reported

Operatingcosts

(£287m) £25m (£262m)

EBITDA £115m £25m £140m

Depreciation & amortisation

(£68m) (£24m) (£92m)

Finance costs (£24m) (£4m) (£28m)

Net debt (£830m) (£211m) (£1,041m)


FY20 H1 As reported (£m)

FY20 H1 Pre-IFRS (£m)

FY19 H1 Pre-IFRS (£m)

Headline revenue 786 786 808

Headline revenue (excluding carrier and off-net)

764 764 771

Gross profit 402 402 425

Margin 51.1% 51.1% 52.6%

Operating costs & SAC

(262) (287) (324)

Headline EBITDA 140 115 101

Margin 17.8% 14.6% 12.5%

Headline profit after taxation

12 14 5

Headline EPS (Basic) 1.0p 1.3p 0.4p

Dividend per share 1.00p 1.00p 1.00p

NB The above numbers apply IFRS 16 to the current year, but not the prior year under the modified retrospective approach

Year on year Headline EBITDA growth driven by significantly lower cost base

• Revenue impacted by voice usage and boost drags in Consumer and B2B

• Gross profit lower due to revenue drag, and increased Fibre penetration (albeit with lower Wholesale pricing)

• Significantly lower operating costs driven by HQ move savings and Fibre mix improvements to cost to serve

• Lower SAC & Marketing due to change in distribution model and more digital marketing

• EBITDA (pre-IFRS 16) up 14% YoY


Revenue and ARPU impacted by voice decline and legacy re-contracting, offset by Fibre penetration

£771m£764m

Consumer & B2B Voice Legacy Re-contracting Fibre Mix Data

H1 FY19 H1 FY20


• Lower revenue impacting gross profit

• Increasing Fibre mix benefitting cost to serve with fewer faults and calls

• Move to self-service model has seen fewer calls and engineer visits driving lower cost to serve

• Lower outsource partner costs

• FTE reduction and property savings from HQ move and associated re-organisation

• Shift to digital marketing channels

• Data usage exponentially increasing traffic on the network offset by driving down our cost per Gb

EBITDA up 14% year on year; with Fibre mix driving significantly reduced cost base

Fibre mix driving materially lower

costs to serve

More efficient SAC & Marketing contributing to

year on year savings


HQ move efficiencies remain on track

• Announcement made to employees in November 2018

• A small number of roles were transitioned at the end of March 2019, with the bulk moving at the end of September 2019, and the final tranche by the end of December 2019

• Significant progress made filling roles

• Nearly three quarters of our workforce based in our Soapworkssite as at the end of September

• Delivered £7m savings in the first half, with a further c.£10m expected in the second half, consistent with our guidance of £16m-£20m for the full year

• £25m-£30m annualised cash savings remain on track

CapexPeople & Property

FY20 Original Guidance

Annualised Cash Savings

H1 FY20

£7m

£16m-£20m

£19m-£23m

£6m-£7m

£5m-£6m

£2m

£25m-£30m

£21m-£26m

£9m


Cash flow and net debt

IFRS 16H1 FY20 (£m)

Pre-IFRS 16H1 FY19 (£m)

Opening Net Debt (pre-leases) (742) (724)

IFRS 16 / leases opening adjustment (218) (31)

Opening Net Debt (post-leases) (960) (755)

Headline EBITDA 140 101

Working Capital (80) (14)

Capital Expenditure (50) (59)

Operating Free Cash Flow 10 28

Interest & Taxation (22) (21)

Free Cash Flow (12) 7

Non-Headline Items (19) (20)

Investments (9) (6)

Dividends (17) (17)

Non-cash movement in leases (24) (9)

Movement in Net Debt (81) (45)

Closing Net Debt (post-leases) (1,041) (800)

Finance Leases 36 40

Other Leases 175 -

Closing Net Debt (pre-leases) (830) (760)

• Investments represent our continued contribution to YouView JV, as well as investing activity in the FibreNation business

• FY19 final dividend payment of 1.5p


Timing of payment reversals

• Benefitted at the year end with some payments falling into FY20 from FY19

Change in distribution model

• Payment related to exiting previous distribution agreement

• Upfront costs relating to new distribution agreement with main agency based in our office in Salford

Working capital

Working capital outflow driven by change in distribution model and timing of payment reversal

£20m-£25mTiming of

Payments Reversal

£40m-£50mChange in distribution

model


H1 FY20 Capex • Lower YoY due to doing fewer things, with focus fully on fixed connectivity

• Continue to spend the bulk of Capex investment on Network and Fibre Connectivity

• FibreNation spend amounted to £8m, in line with expectations

Continuing to reduce cash Capex

£50m

£8m FibreNation

Other (Compliance, etc.)

Systems

Network & Fibre Connectivity


Non-Headline items higher year on year mainly due to HQ move phasing

P&L – EBITDA• HQ move and associated re-organisation (£7m),

Network transformation (£5m) and MVNO operating profit (+£2m)

Cash• Above P&L costs due to timing of Group restructure

payments related to prior year activity

Looking forward• Cash items will continue to exceed P&L items due to

timing of final mobile exit payments in FY20 and remaining HQ move and associated re-organisation cash payments

• Cash items come down significantly in FY21, in line with P&L items, relating only to the tail end of the network transformation project

Cash H1’19 H1’20 FY19FY20

OutlookFY21

Outlook

MVNO closure (£13m) £2m (£18m) (£13m) £2m

Network transformation (£7m) (£7m) (£16m) (£14m) (£7m)

HQ move - (£14m) (£2m) (£28m) -

PY Property rationalisation - - (£4m) - -

PY Group re-organisation - - (£7m) - -

Total (£20m) (£19m) (£47m) (£55m) (£5m)


• Good momentum in Fibre, with cost to serve benefits starting to come through

• Excellent progress on cost savings, with HQ move benefits on track

• 14% growth in like-for-like Headline EBITDA (pre-IFRS 16)

• Headline EBITDA outlook for the year (pre-IFRS 16) remains unchanged

Summary


Tristia HarrisonOUR PLAN


Medium term shape; acceleration in higher speed and bandwidth products, structural price advantage, ongoing cost reductions

FY19 £m Over the medium term Drivers

Revenue 1,609 Revenue Modest growth

Fibre penetrationSensibly priced add-ons, offsetting Voice drag and acceleration of re-contracting legacy customers

Costs of Sales (759) Costs of Sales Modest increaseIncreased Fibre mix offset by lower wholesale pricing

Gross Margin 850 / 52.8% margin Gross margin % Stable

Operating Expenses (613) Operating expenses Significantly lower

Cost to serve Lower Fibre penetration and self-service

Management overheads Lower HQ move and organisational structure

Network & IT FlatIncreased usage offset by reduced cost per Gb

SAC & Marketing Lower Shift to digital marketing

EBITDA 237 / 14.7% margin EBITDA Ongoing growth

Underpinned by vast majority of customers on Fibre and Ethernet products


Our Priorities

1.

Fibre for Everyone

2.

Consumer

3.

B2B

4.

Network & Connectivity

5.

Cost Reduction

6.

People


Fibre for Everyone - Today

• Driving scale adoption of part Fibre products –over 50% of base now on Fibre

• Over a third of Openreach Fibre net adds

• WLA and commercial deal has reduced wholesale FTTC prices

• Underpins lower churn, lower cost to serve, growing ARPU and EBITDA growth

• We are already selling G.Fast and we are getting ready to consume Single Order Generic Ethernet Access (SOGEA) at scale in the next year

• FTTP trials underway

• Selling FTTP at scale with FibreNation


Our long-term ambition is to transition all customers to new Fibre-to-the-Premises (FTTP) networks as quickly as possible

• Openreach’s scale rollout is only viable if it can secure high, fast take-up from companies such as TalkTalk

• Subject to fair, sensible pricing, we will provide scale volume commitments to Openreach, in an extension of our commercial wholesale FTTC agreement, and to other alternative network providers

• We have working hard on building the systems and capability to provide FTTP services and we aim to launch Openreach FTTP before the end of 2019

Fibre for Everyone – Looking forward


• Over 43k homes passed as at end of September 2019

- All York – whilst construction has started in Dewsbury and Harrogate

• Penetration in phase 1 (initial 14k homes) is 37%

• In phase 2 cabinet areas where we’ve been selling for 12+ months, penetration is 18%

• Expect to complete phase 2 (40k homes) in York by the end of March, of which 12k will be pole connected

- We see homes passed by poles being at least 30% cheaper than trenching

• Expect we will have released a few thousand homes passed in both Dewsbury and Harrogate by end of March also

• Looking forwards – continued acceleration of roll out in Yorkshire and the North East

Fibre for Everyone – FibreNation operational roll out

CSAT: 87%with very satisfied

being 52%

NPS:+34


• Acceleration of Fibre mix; three quarters of new Consumer customers took Fibre in H1, peaking at 81% in September, with a greater proportion taking the faster 80mbps product

• Unique FLPP continues to resonate well with customers, offering 10-15% price delta vs competitors over the life of contract

• Commitment to fairer deals for consumers; welcome Ofcom fairness drive

• Well positioned in competitive market, e.g. Amazon Prime offer

• Sensibly priced add-ons, offering consumers access to great value bundles

• Continued improvement in customer service; complaints down and full roll-out of ‘My Service Centre’

Consumer: Structural price advantage, accelerating Fibre mix and reducing cost to save


Acceleration of speed and bandwidth; underpinning reduction in costs and churn

Legacy Products

Fibre customers double the

lifetime value with a c.50%

lower CTS and lower churn

2019 2025Future proofed products

VOICE

COPPER

FIBRE 40

FIBRE 80

G.Fast/FTTP 150

G.Fast/FTTP 300

FTTP 1Gb


1. Customers get a fair deal, which is right for their needs

• Offers available to existing and new customers

2. Customers get the support they need when their circumstances make them vulnerable.

• Vulnerable customer review and proactive move to best package (Jan 2020)

• Full training for all customer agents on identification and supporting vulnerable customers

3. Customers are supported to make well-informed decisions with clear information about their options before, during, and at the end of their contract

• Clear pricing online and customer comms – sales journey guides customer to select most suitable package

• Informing customers when their contact is coming to an end and encouraging new offers

A fair deal for all customers, underpinning our existing pricing strategy

Price and fairness really matter -Regulators continue to challenge telco business models built on ‘loyalty penalties’


The shape of our business; structurally well positioned on pricing

Split of the Consumer base Front Book Back Book Delta Out of contract

Average price for customer joining in the last 12 months

Average existingin-contract

customer price

Average Front Book vs Back Book

Standard out of contract pricing

FLPP CopperProportion of base 30%

£19-£20 £20-£22 £2-£3 £30In contract % 76%

FLPP FibreProportion of base 55%

£22-£23 £25-£26 £2-£3 £36In contract % 90%

Legacy (majority Copper)

Proportion of base 15%

N/A N/A N/A £27-£45*In contract % 0%

* Legacy packages often include call and TV boosts


Sensibly priced add-ons enable great value for money bundles


Improved repair process enhances customer experience; brings down cost to serve

50k

Customers per week using‘My Service

Centre’ -21%reduction

in number of call centre agents

-61%

Reduction in customer complaints

53%

Tech help customers now

‘Self-Serve’

-21%

Reduction in ‘Escalation’

rates


Improving customer metrics

Trust Pilot CSAT OfcomComplaints

Highest ranked UK Telco 10% improvement

YoY

Lowest ever total and share of complaints


• Single minded focus on B2B data and connectivity

• Simple strategy consistent across Direct and Wholesale

• Locked in a number of key Broadband and Ethernet partners with long-term deals

• Acceleration to higher speed Ethernet products

• Renewed focus in Direct, delivering record Fibre net adds in H1

• Remain Britain’s largest provider of wholesale broadband, with over 50% market share

TalkTalk Business overview

1Gb represents 1/3 of Ethernet

orders in Q2

60%of Partner gross

adds took a Fibre product

in Q2


Move to higher bandwidth products

Product upgradesShift to higher bandwidth products

Contribution to Data Access Margin

FTTC incSOGEA

ADSL ADSL

<1GB Ethernet

<1GB Ethernet

FTTC incSOGEA

Ethernet=>1GB

G.Fast & FTTP

Strong ARPU and margin growth | Reducing costs to serve | Continued base growth

B2B2C Business Grade FY19 FY20

AD

SL

FTTC

/So

GEA

G.F

ast

FTTP

EFM

EoFT

TC

Eth

ern

et

Nex

t G

en E

ther

net

FTTP

Ethernet=>1GB

Contribution to Broadband Access Margin


B2B; a wide range of customers

Partners and Carriers Direct

Plus SOHO, SME & Corporate

We work with some of the leading partners, carriers and Direct customers in the country


Data growth • 30% increase in data usage year-on-year

• Customers are upgrading to our higher speed products in both Consumer and Business

Optimising our Network, exponential data usage

37% Browsing

63% Video

0

2

4

6

8

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Peak Traffic

Proportion of Video Traffic

Pea

k Tr

affi

c Tb

/s

Unlimited data products for businesses and consumers continue to drive network usage to new record peaks within our Network

Recognised with our partner ASSIA, Inc. as the Best In-Home Wi-Fi Product 2019 by Wi-Fi NOW


Driving down the cost per Gb • We have enhanced our customers’ video experience by caching 98% of Netflix content within the network (89% at network edge)

Cost per Gb

2% Not cached

98% Cached

FY17 FY18 FY19 FY20 FY21 FY22

Co

st p

er G

bp

s p

eak

traf

fic

(£)

We are meeting data usage demands whilst reducing our cost per Gb by evolving our network


• Making good progress resetting TalkTalk as a simpler, lower cost business

• Now deliver non-core products (TV and mobile) in capital light way

• Fibre focus, aided by our wholesale discount agreement with Openreach bringing down Fibre input costs, benefitting cost to serve

• Self-service model, with new digital tools such as ‘My Service Centre’ benefitting both Consumer business and now Wholesale partners too

• Central costs materially lower due to HQ move – smaller, lower cost operating model

• External spend review – ensure cost base aligns with smaller set of priorities

• Move to new distribution model and digital marketing approach has seen SAC & Marketing efficiencies

Simpler, leaner cost base – optimisation continues

Operating costs

11.4% *lower YoY

HQ move nearing

completion

* On a like-for-like basis prior to the application of IFRS 16


New HQ located in the heart of the Northern Powerhouse

• Modern look and feel

• Designed to drive improved ways of working, greater productivity, increased collaboration and togetherness –‘real community and identity’

• Launched a number of ‘TalkTalk Together’ events for new starters and existing staff

London exit

• London exit going to plan – exited leases and service contracts

• Rationalised from 5 floors to 1 in London, where only c.30 people will remain post-April 2020

• Will retain a satellite office in London

HQ move


Some great talent joining us this year

Sian Doyle

Managing Director, Consumer

Jonathan Kini

Managing Director, TalkTalk Business


Our people

400

Leavers

As at end September 2019

38%Internal moves

+8 Employee NPS

26pt improvement in employee NPS

360+External recruits


Tristia Harrison

OUTLOOK & SUMMARY


• Our outlook remains unchanged

• Our plan is on track

• We expect to see strong full year growth in Headline EBITDA

Outlook and summary


Q&A

Documents

INTERIM RESULTS FY20 - TalkTalk Group · TalkTalk Group PLC –Interim Results FY20, 15th November 2019 21 • Over 43k homes passed as at end of September 2019 - All York –whilst