Peformance review

KCOM Group is successfully building
a platform for sustainable growth

“The Group continues to deliver growth in profits
and generate excellent cash conversion.”

Paul Simpson
Chief Financial Officer

Group overview

Group revenue declined by 2 per cent to £387.3 million (2011: £395.4 million). This is reflective of a 2.7 per cent decline in the Kcom segment and 1.1 per cent growth in KC.

Group EBITDA before exceptional items increased 2.5 per cent to £77.9 million (2011: £76.0 million) reflecting growth in strategic focus areas, a pensions credit and the continued reduction in operating costs across the Group.

Group profit before tax increased by 55.3 per cent to £51.1 million (2011: £32.9 million) driven by the increase in EBITDA together with a reduction in exceptional costs, reduced borrowing costs and lower depreciation and amortisation.

Net debt reduced to £75.3 million (2011: £82.0 million) despite the payment of an accelerated contribution of £10.0 million to the Group’s defined benefit pension schemes shortly before the year end. This reduction in net debt reflects the underlying cash-generative nature of the Group’s operations, coupled with continued strong management of working capital.

KC

The KC segment covers the performance of our KC brand which operates telephony and broadband over our Hull and East Yorkshire network and publishing services. These results were historically reported as part of the ‘KC and Eclipse’ segment. Performance of our Eclipse brand is now reported under the Kcom segment and the comparatives for 2011 have been restated to reflect this change on a like for like basis.

Our KC brand has bucked the trend of national incumbent operators, delivering a continued increase in revenue of 1.1 per cent to £103.6 million (2011 restated: £102.5 million), reflecting the increasing demand for higher bandwidth services from business customers and growth from the consumer market as a result of the continued success in the migration to bundled services and the upgrade to KC Talk packages.

This growth in revenue combined with lower operating costs resulted in EBITDA increasing by 3.1 per cent to £53.2 million (2011 restated: £51.6 million).

Our initial deployment of fibre technology, delivering 100Mbps broadband services across areas of Hull and East Yorkshire, is progressing well with early indications suggesting a higher than expected level of take up. Our initial deployment is scheduled to reach 15,000 homes by December 2012.

By our interim results in November, we expect to be in a position to provide a further update from our experience on the commercial opportunities and associated investment requirements in relation to future fibre deployment.

Kcom

Our Kcom segment covers the performance of our national business communications activities. These activities are delivered to customers through our Kcom, Eclipse and Smart421 brands. These results were previously reported as ‘Kcom and Smart’ and now incorporate the results of the Eclipse brand previously included in the ‘KC and Eclipse’ segment. This reflects the focus of our Eclipse brand towards the business market and the support capability it provides in current Kcom activity. The comparatives for 2011 have been restated to reflect this change on a like for like basis.

1. Before exceptionals.
2. Restated to reflect change in segmental reporting. See note 4 of the financial statements for more details.
3. Kcom segment includes our Kcom, Smart421 and Eclipse brands.

We continue to invest successfully in those skills, capabilities, services and systems to support the exploitation of Kcom’s growth opportunities.

The progress made has been recognised through external awards, such as the Cisco Public Sector Partner of the Year and Avaya Partner of the Year, and a developing reputation in the market place evidenced by the growth in order backlog and pipeline of new opportunities.

Revenue within Kcom’s strategic focus areas showed some early growth. Overall revenue declined by 2.7 per cent to £289.3 million (2011 restated: £297.2 million) with a reduction in lower margin premium rate services and other non-core activities offsetting that growth. Revenue of £11.7 million (2011: £13.1 million) was associated also with a specific network build contract that will not recur in future years.

The multi-year contracted order backlog has grown by 14 per cent as Kcom continues to focus on longer-term recurring revenue. This growth provides improved visibility of performance both in the near and longer term.

EBITDA before exceptional items was £31.0 million (2011 restated: £32.0 million). This represents a consistent margin to sales of 11 per cent. The reduction in amount being attributable to non-recurring items in the previous year’s EBITDA reported for the Eclipse brand.

The particular focus of Kcom’s pursuit of its growth strategy during the year included:

PLC and associated costs (‘PLC’)

This segment includes Public Company, central and share scheme expenses and the costs, excluding current and past service costs, associated with the Group’s defined benefit pension schemes. The net pre-exceptional costs incurred in the PLC segment have reduced to £6.4 million (2011: £7.7 million) as a result of a credit associated with the Group’s defined benefit schemes of £1.6 million (2011: £0.3 million cost). This credit has arisen due to lower interest costs as a result of the reduction in liabilities at 31 March 2011.

Group operating profit

Group operating profit increased to £57.8 million (2011: £40.3 million). The overall improvement in operating profit of £17.5 million is a result of:

Finance costs

Net finance costs have reduced to £6.6 million (2011: £7.4 million). The reduction mainly relates to the write off of arrangement fees in the prior year on the previous borrowing facility, following the agreement of a new facility in November 2010.

The Group anticipates a reduction in finance costs in the next financial year due to a change in fixed rate swap arrangements. From January 2012 existing hedging arrangements on £80 million of debt at a weighted average rate of 5.5 per cent expired and were replaced by fixed rate swap arrangements for £60 million of debt at a weighted average rate of 2.7 per cent.

Taxation

The taxation charge of £13.4 million (2011: £10.3 million) reflects the ongoing unwind of the deferred tax asset as the Group moves towards a tax payment position. No corporation tax liability is anticipated in respect of the current year due to the payment of an accelerated contribution of £10.0 million into the Group’s defined benefit scheme shortly before the year end. As well as reflecting the wider financial strength of the Group, making such payments in the financial year allows the Group to benefit from the credit against higher corporation tax rates of 26 per cent, compared to 24 per cent in the next financial year.

The overall effective rate of 26.2 per cent (2011: 31.3 per cent) is broadly in line with the corporation tax rate for the current year of 26 per cent.

Dividend

The Board is proposing a final dividend of 2.67 pence per share (2011: 2.50 pence per share) resulting in a total dividend for the year of 4.0 pence per share (2011: 3.60 pence per share). In addition, the Board reiterates its commitment to delivering a minimum of ten per cent per annum dividend growth over the current financial year, reflecting its confidence in the Group’s future cash generation and performance.

Subject to shareholder approval at the KCOM Group PLC Annual General Meeting on 19 July 2012, the final dividend will be payable on 27 July 2012 to shareholders registered at the close of business on 29 June 2012.

Pension scheme

Net liabilities associated with the Group’s retirement benefit obligations have increased to £13.9 million (2011: £6.9 million). The year on year increase arises as a result of an increase in scheme assets of £16.7 million offset by an increase in retirement benefit liabilities of £23.7 million.

The increase in scheme assets mainly arises due to the accelerated payment of £10.0 million to the Group’s defined benefit pension schemes shortly before the year end. This comprised a £6.9 million advance payment of previously committed deficit contributions in respect of the financial year ended 31 March 2013 and an additional one-off contribution of £3.1 million.

The increase in liabilities since the previous year end predominately arises due to a fall in corporate bond yields and the associated discount rate to 4.7 per cent from 5.5 per cent.

The Group has continued to work with the trustees throughout the year to minimise the impact of volatility in the equity market on scheme assets. As a result of this the trustees of the Kingston Communications Pension Scheme, the Group’s main defined benefit scheme, have committed to reducing the level of holding of ‘return-seeking’ scheme assets to 40 per cent compared to 60 per cent which had been historically targeted.

Cash flow and net debt

Net debt reduced to £75.3 million (2011: £82.0 million) reflecting the continued cash flow strength of the underlying business and a particularly strong working capital performance in Q4 of the financial year. Net cash inflow from operations reduced to £56.0 million (2011: £68.0 million) principally due to the accelerated payment of £10.0 million into the Group’s defined benefit schemes.

Our strong cash generation provides us with capacity to carefully increase the level of investment in support of growth. Cash outflows associated with the purchase of tangible and intangible assets have increased to £22.1 million (2011: £13.9 million), lower than the Group’s previous guidance due to timing differences on a number of larger investment programmes.

Reflecting this timing difference, the Group anticipates capital expenditure in the region of £30.0 million in respect of the next financial year.

Paul Simpson

Chief Financial Officer

31 May 2012

Back to top

In summary

The Group has delivered another year of progress:

  • business moving ahead on most metrics;
  • growth in Kcom strategic focus areas;
  • underlying financial strength provides solid foundation for further progress;
  • KC outperforming its peers with headline growth; and
  • accelerated pension scheme deficit repayment of £10 million.

 

Basic earnings per share (pence)
7.41
2010/11: 4.44


Dividend (pence)
4.00
2010/11: 3.60

 

“Working for Kcom has been a challenging experience for me. In the short time that I have been with the brand I feel I have developed myself and learned new things on a daily basis. Kcom’s culture is such that it makes it very easy to fit in.”
Alvaro
Kcom