Q4 trading - Return to Retail net adds growth as planned

We saw continuing strong and greater than expected demand for our new Fixed Low Price Plans ("FLPP") in Q4, both from existing customers wishing to re-contract and from new customers, which took the total FLPP base to 993k and the proportion of in-contract customers at the year end to 59% (FY16: 53%).  Combined with continuing improvements to customer service from operational initiatives, this momentum helped reduce churn during the quarter to 1.40% (Q3FY17: 1.64%), and drive net adds growth of 22k, with the Retail base returning to growth.

Demand for fibre remained strong, with nearly 30% of new customers choosing to take fibre and within that, more than twice as many customers as a year ago choosing the 76Mbps product.  As a result, we added 73k new fibre customers during the quarter, taking the total base to 927k (25.5% of the on-net base).  We also saw improving demand for TV which helped drive a turnaround in the momentum of the base with net adds of -14k (Q3FY16: -31k).  Mobile net adds of 45k were in line with our plan.  We delivered another strong quarter of Ethernet growth with 2.3k net adds, taking the year-end base of installed lines to over 26k.

Group headline revenues^* (ex-Carrier) declined by 2.5% year on year, driven primarily by the impact of a lower average base, higher mix of Wholesale customers and ARPU dilution from re-contracting activity on On-net revenues (-3%).  Corporate revenues (ex-Carrier), grew by 9.1% driven by Data revenues (+19.4%) and a significantly lower decline in Legacy Voice revenues (-3.3%; Q3FY16: -19.4%) from growing traction in our Next Generation voice product.

We made good progress in diversifying our sources of finance and extending the maturity of our facilities: we refinanced £400m of our short dated bank debt through the successful issue of a debut 5 year public bond, and post year end, refinanced our banking facilities for a further five years.

Looking forward

Our priorities in FY18 are to sustain the momentum built during Q4FY17 to deliver growth in the on-net base and on-net revenues; sustain strong growth in TalkTalk Business ("TTB"); continue our fixed network investment; focus on customer service improvements and operational efficiency; improve headline cash flow*; and reduce net debt.

We expect continuing lower costs per add and reducing churn to support more economically attractive gross additions during FY18, however incremental volume growth will require higher SAC & Marketing investment. As a result we expect to deliver headline EBITDA^* of £270m-£300m, year on year growth in headline revenues, and improved headline cash flow allowing us to reduce net debt.  Beyond FY18 we expect the growing on-net base, comprising higher quality lower churning customers, to support a return to headline EBITDA* growth.

We have reorganised the business under our new leadership team to focus on fewer, clearer priorities that are focused on investment in our core fixed network.  As part of our review of how we allocate capital and our clear focus on investing in fixed connectivity we have reassessed our mobile strategy.  While we remain committed to offering all our customers a compelling mobile proposition, we have decided not to pursue an inside-out mobile network strategy, and instead we will continue to work closely with Telefónica UK on the right platform and customer offering. We expect to have more information to update on this in due course.

Dividend

The Board is committed to returning the business to revenue and customer base growth, improving cash generation and reducing leverage, and in this context has declared a Final dividend for FY17 of 5.0p (FY16: 10.58p), taking the total dividend for the year to 10.29p (FY16: 15.87p).  For FY18 the Board expect to declare an Interim cash dividend of 2.5p (FY17: 5.29p) and a Final cash dividend of 5.0p (FY17: 5.0p) taking the total cash dividend for the year to 7.5p (FY17: 10.29p). Looking beyond FY18, the Board expects to resume dividend growth once the business returns to earnings growth and has reduced leverage towards Net Debt/Headline EBITDA^* of 2.0x.

^{*Headline measures are defined in Note 1 to the financial Statements and reconciled to statutory measures in Note 7.}

FY17 Business Review

Summary: 17% growth in headline EBITDA^*; strong foundations in place for future growth

We made solid progress in establishing the operational foundations for future growth with clear improvements in customer experience metrics, tangible network enhancements, the relaunch of our brand and Retail propositions, and excellent growth in TTB.  As a result we exited the year with stronger than expected re-contracting and gross additions activity driving growth in the broadband base, lower churn and a higher proportion of the base in contract.

Group headline* revenues fell by 3.0% with On-net revenues down 4.1%, Corporate +3.4% and Off-net (2.5% of total; FY16: 3.0%) declining by 20%.  The decline in On-net revenues reflects the c.3% lower average base during the year (as a result of churn and lower connections activity), and on-net ARPU which was 1.3% lower year on year at £28.16, reflecting the higher proportion of Wholesale customers on the base (24%, FY16: 21%), and during H2, the dilutive impact of FLPP offset in part by increased fibre penetration and price increases.

Corporate revenue growth of 3.4% was driven by Data revenues (+31%) which benefited from c8k net adds to our Ethernet and EFM base.  Growth in Data and Next Generation Voice (+20%) offset Legacy Voice (-17.9%), with Carrier revenues broadly flat year on year.

FY Headline EBITDA^* of £304m (FY16: £260m) grew by 17% (statutory operating profit grew by 150% year on year as a result of the higher, cyber related exceptional costs in FY16), driven by a significant improvement in subscriber acquisition costs (SAC) and marketing, and £34m of savings from our transformation programme Making TalkTalk Simpler (MTTS).  In SAC, we benefited from the extension of our agreement with a major distribution partner for a 5 year period, to provide the Group with a lower cost outsourced solution for the management of fixed line customer acquisitions. During the year this enabled us to accelerate gross additions, whilst deferring a proportion of the upfront SAC cost, which contributed £24m, net of expensed hardware costs of £17m.  By delivering a growing and higher quality base, at a lower cost per add, we expect to see both revenues and gross profit expand in future years.

Net debt at 31 March 2017 was £782m (30 September 2016: £847m), with headline^* leverage falling from 2.82x to 2.57x and committed headroom, reflecting the issuance of the Group's debut bond, at 31 March of £412m. 

1.   Over 1m customers now on Fixed Low Price Plans and 59% of on-net base in-contract

During FY17 we built upon the substantial operational and customer service improvements delivered by Making TalkTalk Simpler, and extensive customer research, to launch a comprehensive brand refresh and our simpler, fairer, Fixed Low Price Plans.

We launched FLPP at the beginning of October 2016, ahead of the wider industry's move to all-in pricing.  Existing and new customers responded extremely well to the new plans through H2, with the 24 month plans introduced in Q4 showing particularly strong demand.  As a result we now have over 1m customers on the new plans. Many more customers chose to take fibre than expected; and attachment rates for calling boosts and TV have also been stronger than we had expected reflecting both the attractiveness of our simple and clear pricing, and the much improved online experience that we have delivered through MTTS.  The heightened churn that we experienced during the first quarter of the launch, from the re-pricing of legacy propositions, reduced sharply in the final quarter of the year to 1.40%.

^{*Headline measures are defined in Note 1 to the financial Statements and reconciled to statutory measures in Note 7.}

2.   Delivered lasting operational and customer service benefits

We made significant progress during FY17 across all our customer experience improvement programmes, which have driven materially better outcomes for customers, and as a result, £34m of gross P&L savings.  Key areas in which we made strong progress include:

·      New technical support and repair processes introduced for front-line service representatives, built on technology deployed in FY16, reducing customer effort and increasing first-time fix rates, with fewer customers with a broadband issue calling back within 7 days.

·      More than 600,000 customers enrolled on TalkSafe, TalkTalk's innovative, secure and low-effort new voice biometric verification system.

·      Tailored Next Best Action technology deployed across online and phone channels, increasing Net Promoter Scores (NPS) and upsell.

·      Introduced a redesigned simpler, more informative and transparent online bill.

·      Re-platformed the highest traffic parts of our websites to optimise for mobile as well as desktop devices and improve performance.

With all the initiatives that comprised MTTS now fully embedded within the business, the programme is now substantially complete, with cumulative financial benefits of £87m delivered.

3.   Ongoing network investment has improved customer experience

In addition to improving customer experience through MTTS, we continued to invest in our network across four major areas:

·      Backhaul and core network enhancement to ensure the best outcome for customers at peak time.  As a result we are ranked best with samknows for peak time throughput.

·      We replaced our Dynamic Line Management (DLM) system for improving speed and line stability and rolled out a new secure Domain Name System (DNS) to improve resilience, security, and responsiveness.

·      We completed software upgrades to the collector nodes and began our major access network upgrade to 10gb+ capacity, with over 100 exchanges fully migrated to date.

·      We deployed more Netflix caches at the edge of our network to improve streaming experience by pushing content closer to the customer.  For customers taking sports boosts, we engineered a substantial uplift in video quality, which combined with the DLM improvements has translated into an improved viewing experience.

We have made excellent progress with our Fibre-To-The-Premise (FTTP) trial in York.  The initial roll out to over 14,000 homes, was completed in March 2017, with penetration of serviceable homes at c27% (c2,500 of whom are TalkTalk customers).  Build costs were under our £500 per home target, with take-up and customer satisfaction also ahead of targets.  Following the success of this first phase, work has now begun on the planning work to extend the network to a further 40,000 premises across the rest of York.

4.   Improving customer satisfaction, churn and a return to base growth

The combined effect of MTTS, our network quality improvements and the launch of FLPP, helped deliver substantial improvements in customer satisfaction, churn and base growth during FY17. 

Churn across the year fell to 1.45% (FY16: 1.60%) with year-on-year improvements in both H1 (1.40%; H1FY16: 1.48%) and H2 (1.51%; H2FY16: 1.72%), despite elevated levels of churn in Q3 from the planned tariff rationalisation and re-pricing of legacy propositions when we launched FLPP.

Customer satisfaction with our service agents and complaints to Ofcom which are drivers of churn, also improved during the year.  Critically, these improvements, combined with falling costs per add as a result of more efficient distribution channels through our extended outsourcing arrangement with DCP, allowed us also to increase new acquisition activity in the final quarter of the year.  The resulting gross additions exceeded our expectations and coupled with lower churn, enabled a return to Retail base growth.  As a result we exited the year with 3.947m on-net customers (FY16: 3.996m).  Within this, the Retail base declined by 178k during the year, while the Wholesale base continued to grow robustly (+129k).

5.   Growth in triple and quad play penetration

In line with our strategy of growing fibre, triple and quad play penetration, we saw strong take-up of fibre (+223k) and mobile (+214k).  There were 927k customers taking fibre at the year-end (25.5% of the on-net base), with H2 net adds nearly double the level in H1 as customers responded to our pricing initiatives and easier on-line upsell journeys. 

In Mobile, we ended the year with 913k SIM and handset contracts, again with H2 net adds stronger than H1 as we introduced an upgraded SIM as part of our launch of FLPP.  

While the TV base contracted during the year by 101k, we saw an inflection in the rate of decline during Q4 (-14k) as customers responded positively to the improving functionality and performance of our next generation YouView interface, and our multi-device TV App.

At the end of the year our on-net base comprised c42% dual-play customers (taking voice and broadband), c39% triple-play customers (taking voice, broadband and either TV or mobile), and c12% quad-play customers (taking all four products), with strong fibre penetration across all three.

6.   Continuing strong growth at TTB: Corporate (+4.2%) and Data (+30.8%)

TTB delivered another year of strong performance in Corporate.  Revenues (ex-Carrier) grew by 4.2%, with an acceleration in H2 to +6.1% from +2.3% in H1.  Data revenues grew 30.8% year-on-year with the number of Ethernet and EFM lines up by 8k during the year.  Legacy voice revenues declined (-17.9%) in line with the established trend but we saw strong take-up of our new next generation voice product, with revenue growth during the year of 20%.  As planned, Carrier revenues were broadly flat year-on-year (+1.7%).

Following our acquisition of tIPicall in April 2015, our next generation voice portfolio continued to gain good momentum. 116 Partners have signed up to sell this new service and the total base of SIP channels on the platform, including acquired base, increased by 7,340 channels (+65%) during the year.  The acquisition has continued our diversification into next generation telephony services, further demonstrated by our hosted telephony platform which saw the user base grow by 43%.

PRIORITIES FOR FY18

We have a clear and defined strategy of driving profitable growth by leveraging our extensive network assets, improving the customer experience, and driving operational efficiency.  Under our new leadership team and operational structure we will now focus on delivering growth in the on-net base and on-net revenues, sustaining strong growth in TTB; continuing to improve and future-proof our network, driving a step change in customer experience, and realising further efficiencies.

1.   Returning the Retail base to profitable growth

There is compelling evidence that our new propositions are delivering not only reduced churn but happier more satisfied customers; the vast majority of whom are signing up to 24 month contracts, wanting certainty in pricing and service: early life churn on the FLPP base is less than 1%; FLPP customers reported Net Promoter Score is significantly higher than for non-FLPP customers; and TalkTalk brand satisfaction has grown in each of the last four months.

This coupled with simpler, better value propositions for new customers, materially improving customer service, and reducing costs per add underpins our confidence in driving profitable subscriber growth in our retail base through gross adds activity. 

As outlined above our TV business has seen significant improvements in service and customer satisfaction and our aggregator approach to free and pay TV across multiple devices is paying off  - our investments in TV continue to lead to broadband churn reduction. 

In mobile, while we remain committed to offering all our customers a compelling proposition, we have decided not to pursue an inside-out mobile network strategy, and instead we will continue to work closely with Telefónica UK on the right platform and customer offering. We expect to have more information to update on this in due course.

2.   Sustaining momentum in TTB

Our market share of Ethernet circuits (c10%) offers significant further opportunities for growth, supported by the pricing optionality from favourable Ethernet and dark fibre regulation.  We are seeing increasing demand in the future pipeline from small businesses looking to use our high speed Ethernet products as they transition to hosted voice products.  We are also growing the pipeline with large corporates looking to take advantage of our new managed network connectivity products. 

Having expanded our portfolio of data products to offer a complete portfolio of FTTC and Ethernet products, we expect to see strong demand from both our partners and direct customers. The number of partners wholesaling FTTC from us has grown in the last year and we expect continued growth in this area.

3.   Delivering a step change in customer experience

Having delivered progressive improvements in customer experience from MTTS, our focus over the next twelve months and beyond will be on consolidating these achievements to drive a step change in three key areas: consistency of service across all channels, joining and repair processes, and in-home connectivity/experience.  The investments we have already made in simplifying and upgrading our customer-facing systems and processes have begun to deliver measurable returns in the form of higher customer satisfaction, lower complaints volumes and improved churn.  Our overall focus from here on will be to continue to put the customer at the heart of the service experience to make sure whichever channel they choose (online, social to call centre) we give a consistent experience and advice which increases loyalty to the brand. This also includes our B2B customers where we have good customer satisfaction with both direct and wholesale customers and we have plans to improve this to industry leading levels. These improvements will require modest incremental investment that will be covered within our overall commitment of capex/revenues of 6%-7%.

4.   Network investment

Continuing investment in the network over the next two years (within our 6%-7% capex/revenue commitment) will deliver a fully upgraded access layer (switches and backhaul) with over 1,000 exchanges equipped with 10Gig backhaul circuits, to support growing FTTC penetration and data usage. We also plan to scale dark fibre deployment across the entire network, helped by a more favourable regulatory pricing environment. This will allow us to support the expected increase in capacity utilisation at reduced unit costs, and significantly mitigate future network operating costs that otherwise, would grow substantially as we expand our Ethernet, FTTC & FTTP base.

Following this network investment programme, we expect the entire data network to be at the latest switching and network technology. It will be simplified, more resilient, using the latest Tier 1 networking technologies (both software and hardware), and will future-proof the network for the expected needs of consumers and businesses.

5.   Operational excellence

Delivering better quality at a reduced cost of operation is fundamental to our growth expectations. Our new operating structure will allow us to further simplify our service footprint and customer insight systems; reduce the costs of failure; and better leverage our procurement and cost assurance processes. Over the medium term, this will result in a fundamentally higher quality of operation, and reduce our cost / revenue ratio whilst also allowing us to reinvest efficiencies into further customer experience improvements.

Finance Review

The Group uses Headline measures that exclude items which are non-trading or non-recurring to monitor the performance of the Group. Headline measures are used to partly determine the variable element of remuneration of senior Management throughout the Group and are also in alignment with performance measures used by certain external stakeholders in the context of the telecoms sector. In particular, EBITDA and Free Cashflow are commonly used across the telecoms industry to aid stakeholders in making comparisons between the performance of the Group and its peers. Unless stated otherwise, the discussion of the Group's financial performance below, is on a Headline basis. Headline measures are defined in Note 1 and reconciled to statutory measures in Note 7.

(1) Includes exceptional items of £3m (FY16: Nil)

(2) Includes and exceptional credit of £7m for interest receivable on settlement of a dispute

Overview

FY Headline revenue declined by 3% to £1,783m (FY16: £1,838m), however the Group delivered a 17% increase in Headline EBITDA to £304m (FY16: £260m) and with an increase in statutory profit before taxation of £70m (FY16: £14m).  The Board has recommended a Final dividend of 5.0p taking the total dividend for the year to 10.29p (FY16: 15.87p).  Net debt/Headline EBITDA fell from 2.82x in H1 to 2.57x (FY16: 2.61x) as some of the H1 Headline working capital outflow reversed in H2 and net debt fell from its usual seasonal peak of £847m at the half year, to £782m at year end. The Group's medium term leverage target remains 2.0x. Committed headroom at 31 March 2017 was £412m (FY16: £162m), reflecting the issuance of the Group's debut bond in Q4.

Headline Revenue

Headline group revenue of £1,783m was 3% lower year on year with On-net revenues 4% lower, Corporate revenues 3% higher and Off-net revenues (2% of total) 20% lower.  The decline in On-net revenues reflects the c3% lower average base (as a result of churn and lower connections activity), and the dilutive impact of FLPP launched in October 2016, offset in part by the increased penetration of Fibre, and re-pricing of legacy propositions following the launch of FLPP.  Corporate revenue growth was largely driven by Data revenues (+31%) which benefited from c8k new connections to our Ethernet and EFM base.  The strong growth in Data revenues and 20% growth in Next Generation Voice from tIPcall offset the now established decline in Legacy Voice (-18%).  As expected, Carrier revenues were broadly flat year on year (+2%).

On-net ARPU for the year of £28.16, was 1.3% lower year on year, reflecting the higher Wholesale mix of the on-net base (24%, FY16: 21%), with price increases in Q3 offsetting the mix effect and dilution from re-contracting on FLPP.

Headline Gross margin

Headline gross margin of 53.2% was 80bps lower year on year but saw a significant improvement in H2 rising to 54.5% from 52.0% in H1, driven by a reduction in carrier trading volumes, the impact of price increases at the beginning of the half, growth in data revenues and the settlement of supplier claims, which together offset the impact on margins of lower ARPU FLPP, a higher mix of Wholesale customers in the On-net base, and higher Fibre volumes.

Headline Operating costs, SAC and Marketing

Group operating costs declined by £14m year on year (and by £93m on a statutory basis, as a result of higher cyber related costs in FY16), with the benefits of MTTS, lower levels of bad debt provisioning linked to the benefit of FLPP on churn and property reorganisation offsetting investment in network and IT infrastructure.  In total the MTTS programme delivered savings of £34m across the P&L in the year and since inception in 2013 has yielded cumulative savings of £87m. 

MTTS reached substantial completion during FY17 and continued to deliver various improvements to the customer experience, namely repairing voice, broadband and diagnostics flows, simplicity of bill redesign, introduction of the Premium Address Source to improve leakage, and improvements in Homemove and Online.  The delivery of the new agent desk top interface for Collections and Tech agents was rolled out in Q4 to improve handling times. 

Operating costs saw further reductions from our revised property footprint with the adoption of revised ways of working enabling us to rationalise our London property footprint and the realisation of a £2m profit on the sale and leaseback of our data centre site in Milton Keynes.

Network operating costs grew modestly with investment in new backhaul investment, access network technology, IT systems, security and maintenance offsetting rate savings, and lower exchange costs. 

SAC & Marketing costs fell by 28% year on year, with the growth in SAC within TTB up 10% as a result of higher Ethernet volumes being more than offset by lower retail connection volumes, and a year on year increase in the settlement of service related disputes. In SAC, we benefited from the extension of our agreement with a major distribution partner for a 5 year period, to provide the Group with a lower cost outsourced solution for the management of fixed line customer acquisitions. During the year this enabled us to accelerate gross additions, whilst deferring a proportion of the upfront SAC cost, which contributed £24m, net of expensed hardware costs of £17m.  By delivering a growing and higher quality base, at a lower cost per add, we expect to see both revenues and gross profit expand in future years.

Headline EBITDA

Headline EBITDA grew by 17% to £304m (FY16: £260m).  The margin for the year grew from 14.1% to 17.0%, with the H2 margin of 19.8% improving over H1 (14.4%) and FY16 H2 of 18.4%.  In addition to the revenue, gross margin, opex and SAC movements identified above, Headline EBITDA was impacted by a number of additional items including rebates from suppliers (£13m offsetting £13m associated costs), incremental income regarding service level disputes (£10m) and a reassessment of management estimates related to the recoverability of certain trading receivables (£5m). Further details are contained in Note 3.

Exceptional items

The net exceptional charge in the year amounted to £57m (FY16: £83m) and includes one-off costs relating to the delivering of the MTTS programme, which has now been substantially completed. £31m of exceptional costs were incurred across the MTTS programme as a result of continued improvement to the customer experience, systems and processes and implementing changes to the Group's organisational structure, including costs associated with our move to a new single North West location in the Soapworks, Salford in June 17.

During the year ended 31 March 2017, the Group began to reorganise the business under the new leadership team focusing on fewer, clearer priorities and less capital intensive projects that are focused on investment in growing the Group's core fixed line connectivity business. As part of the review the Group reassessed its mobile go to market strategy and whilst remaining committed to offering mobile to its customers, has concluded not to pursue a femto enabled, inside out network strategy and instead to work closely with Telefonica UK on an alternative customer offering.  This has given rise to exceptional costs of £49m (£9m cash) comprising impairment charges and onerous lease costs in relation to technology equipment that has no further economic benefit. Further costs may be incurred during FY18 as the Group works with its MNO partners on developing an alternative mobile distribution strategy.

In addition, £8m has been incurred relating to one-off costs in our technology estate, as we change our underlying network structure for efficiency and scalability over the next two years.  These costs have been offset by an exceptional credit of £29m in relation to various prior year disputed network charges. 

Cash exceptionals of £46m (FY16: £88m) include the costs incurred during FY17 in relation to the delivery of MTTS and transforming our network together with the timing impact of prior year provisions and working capital movements, most notably the timing of cyber-attack related technology cash costs of £12m. Looking forward to FY18, the Group expects cash exceptional costs to fall to c£10m-£20m as it reaches settlement of the disputed network balances taken to exceptional income in the current year and delivers on its plans to transform its technology estate, pursue alternative mobile offerings for all its customers, complete its property relocations and incurs further reorganisation costs following the transition to a new management structure.

Depreciation and amortisation

Depreciation and amortisation expense increased from £131m to £141m and included exceptional costs amounting to £3m in relation to network transformation. Non-operating amortisation was flat year on year at £10m.

Share of results of joint ventures

Share of costs of joint ventures increased to £11m (FY16: £8m) mainly due to the Group's investment in Youview.

Net finance costs

Headline net finance costs for the year were £32m (FY16: £24m) comprising of a blended interest rate of 3.6% (FY16: 3.1%) and including £2m of amortisation of bank fees (FY16: £1m).  On a cash basis, interest was £35m, including £8m of fees related to the execution of the Group's debut bond issue in January 2017, debtor securitisation and new bank facilities arranged during the year. In addition, following an Ofcom determination, the Group recognised an exceptional credit of £7m in relation to interest on a BT dispute settled in FY14 for the overcharging of certain wholesale Ethernet services. The average cash finance cost in FY18 is expected to be c4.4%.

Taxation

The headline tax charge for the year was £33m implying an effective headline tax rate of 25% (FY16: 26%) against a statutory rate of 20%, mainly driven by the impact of a reduction in the statutory tax rate on our deferred tax assets.  The statutory tax charge of £12m, is net of the release of a provision following the settlement of a legacy demerger issue with HMRC during H2.  There were no cash tax payments in the year and in H1, the Group recovered from HMRC £2m in relation to the accounting period ended 31 March 2015. We exited the year with recognised carried forward tax losses of £339m (FY16: £299m) and continue to apply a 10 year time horizon from a recognition perspective. 

Profit before taxation

Headline PBT, before exceptional items, was £133m up 24% year on year, with statutory PBT of £70m up £56m on FY16.

Earnings per share

EPS on a headline basis is provided alongside our statutory measures to allow easier comparison year on year, due to the impact of non-operating amortisation and exceptional items.  A full reconciliation to Statutory results can be found in note 6 to the financial statements.

Basic headline EPS was 10.5p (FY16: 8.4p) and on a statutory basis it was 6.1p (FY16: 0.2p). Fully diluted headline EPS was 10.4p (FY16: 8.3p) and on a statutory basis it was 6.0p (FY16: 0.2p).

Net debt and cashflow

Net debt decreased from £847m in H1 to £782m at the year end (FY16: £679m), with headline leverage falling from 2.82x to 2.57x (FY16: 2.61x). Committed headroom at 31 March 2017 was £412m (FY16: £162m), reflecting the issuance of the Group's debut bond in Q4.

Net cash-flow for the year represented an outflow of £103m, with the inflow from £304m Headline EBITDA offset by a combination of the dividend (£150m), capital expenditure (£133m), interest costs (£35m), exceptional items (£46m) and working capital (£28m).

Capital expenditure for the year was £133m, representing c7.5% (FY16: 9%) of revenues and includes income from the sale and leaseback of the Milton Keynes facility of £15m. This expenditure represents continued investment and enhancement of our network capability, additional costs in relation to our MTTS programme, spend on our online systems to support the launch of our new propositions, and investment in our TV platform.  We expect capital expenditure in FY18 to be within our capex/revenue target of 6%-7%.

During the first half of the year the Group invested £59m in working capital to finance a combination of stock delivered towards the end of the last financial year, supplier payments related to the extended distribution arrangement and the prepayment of marketing costs ahead of the launch of FLPP in the Autumn. Approximately £30m of this working capital investment reversed in the second half, with the impact of lower stock balances being broadly offset by a reduction in trade payables.  Debtors increased during the period by £28m, reflecting a combination of amounts due in respect of supplier claims and a higher level of prepayments in respect of financing, fees network and IT costs and property related expenses linked to our move to the Soapworks.

Acquisitions expenditure in the year of £18m (FY16: £12m) represents £10m (FY16: £8m) in respect of the YouView joint venture and £8m in respect of contingent consideration for prior period acquisitions of tiPicall, the Virgin Media off-net broadband base and the Tesco broadband base.

Dividends

Dividends of £150m paid in the year (FY16: £135m) comprised the final dividend for FY16 10.58p and the interim dividend for FY17 of 5.29p.

The Board is committed to returning the business to revenue and customer base growth, improving cash generation and reducing leverage, and in this context has declared a Final dividend for FY17 of 5.0p (FY16: 10.58p), taking the total dividend for the year to 10.29p (FY16: 15.87p).  For FY18 the Board expect to declare an Interim cash dividend of 2.5p (FY17: 5.29p) and a Final cash dividend of 5.0p (FY17: 5.0p) taking the total cash dividend for the year to 7.5p (FY17: 10.29p). Looking beyond FY18, the Board expects to resume dividend growth once the business returns to earnings growth and has reduced leverage towards the Group's Net Debt/Headline EBITDA target of 2.0x.

The Final dividend for FY17 will be paid on 4^th August 2017, subject to approval at the AGM on 19^th July 2017 for shareholders on the register 7^th July 2017 (ex-dividend 6^th July 2017). 

Funding and capital structure

The group is financed through a combination of bank facilities, US Private Placement notes, Senior notes, debtor securitisation, retained profits and equity.

The Group continues to review its funding and capital structure with the objectives of diversifying  sources and managing both the average tenor and interest cost. During the year the Group made significant progress on these objectives with the introduction of a £75m debtor securitisation facility in September 2016 and in January 2017, following the publication of credit ratings from both Fitch (BB- stable outlook) and Standard & Poor's (BB- positive outlook), the successful launch of our debut public bond offering. On 15 January 2017, the Group raised £400m of Senior notes at a coupon rate of 5.375%, enabling it to retire £150m of shorter dated bank facilities. The Senior notes have been listed on the Channel Island exchange.

At 31 March 2017, the Group had total facilities, including the Senior notes and US Private Placement notes, of £1,244m (FY16: £944m), further detail of which is given in the notes. At 31 March 2017 £832m (FY16: £689m) had been drawn under these facilities, leaving £412m (FY16: £255m) of undrawn facilities.

Subsequent to the year end, the group has completed the refinancing of its banking facilities for a further 5 years and as such, at 9 May 2017, the Group's debt facilities consisted on the £400m Senior notes, $185m US Private Placement notes, £75m debtor securitisation facility and £640m committed bank facility. The average term of our debt at 31 March 2017 was 3 years 11 months which has increased to 4 years 10 months from 8 May 2017.

The Group was in compliance with the terms of all its facilities, including the financial covenants, at 31 March 2017 and throughout the year and expects to remain in compliance with the terms going forward.

Going concern

The Directors have acknowledged the guidance 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting', published by the FRC in September 2014.

Our business activities, together with the factors likely to affect our future development, performance and position are set out in the Business Review. Our financial position, cash and borrowing facilities are described within this Finance review.

The breadth of our base, our value for money proposition, continuing improvements in operating efficiency and the largest unbundled network in the UK means that the Directors are confident in our ability to continue to compete effectively in the UK telecoms sector.

We have £1,244m (FY16: £944m) of committed credit facilities and as at 31 March 2017 the headroom on these facilities was £412m (FY16: £255m). Our forecasts and projections, taking into account reasonably possible changes in trading performance, indicate that there is sufficient cash and covenant headroom on our facilities and that this, together with our market positioning, means that we are well placed to manage our business risks successfully and have adequate resources to continue in operational existence for the foreseeable future. The Directors have therefore adopted the going concern basis of accounting preparing the financial statements.