BT 2003 Annual Report Download - page 34

other retail organisations and they have set target
savings for selling, general and administration costs.
Cost transformation programmes in the 2003
financial year generated savings in sales, general and
administration costs which were offset by the additional
costs associated with the Concert business. Excluding
these Concert related costs there was a reduction of
7% to £2,240 million. These savings were driven by
a reduction in people related expenses such as travel,
accommodation and communications, lower service
costs resulting from improvements in service quality,
billing initiatives and similar cost reduction
programmes. These cost savings were net of the costs
of the investment in new wave activities. BT Retail
comfortably exceeded its target of £200 million sales,
general and administration cost savings in the core
business in the 2003 financial year. In the 2002
financial year, the cost transformation programmes
produced savings of £167 million (7%) in selling,
general and administration costs, excluding goodwill
amortisation and exceptional items.
The number of employees in BT Retail at 31 March
2003 and 31 March 2002 was 50,400 and 51,200
respectively. 800 employees joined BT Retail from
the Concert global venture.
The cost savings and improved gross margins
contributed towards BT Retail’s strong EBITDA growth,
before exceptional items, in the 2003 financial year of
£434 million (36%) to £1,634 million and by
£326 million (37%) to £1,200 million in the 2002
financial year. These improvements have enabled
BT Retail to contribute an operating free cash flow
(EBITDA less capital expenditure) before exceptional
items of £1,519 million in the 2003 financial year and
£1,047 million in the 2002 financial year, representing
improvements of 45% and 48%, respectively. This
improvement also reflects the reduction in capital
expenditure to £115 million in the 2003 financial year
(2002 – £153 million, 2001 – £167 million).
In the 2002 financial year, BT Retail launched the
next generation multifunctional contact centre
programme, which rationalises the number of call
centres from 104 sites to 30 over a two year period.
The programme remains on track. The associated
exceptional costs of £68 million, and the other
exceptional costs of £43 million relating to the
impairment of payphone assets and investments,
are discussed on pages 36 and 37.
BT Wholesale 2003
£m
2002
£m
2001
£m
Group turnover 11,260 12,256 11,728
Group operating profit* 1,924 2,242 2,538
EBITDA* 3,847 4,156 4,276
Capital expenditure 1,652 1,974 2,273
Operating free cash flow* 2,195 2,182 2,003
* Before goodwill amortisation and exceptional items
The majority of BT Wholesale’s revenues are for
supplying network services to other BT lines of business
(2003 – 69%, 2002 – 68%, 2001 – 72%), mainly to
BT Retail. External turnover is derived from providing
wholesale products and solutions to other operators
interconnecting with BT’s UK fixed network, including
mmO
2
since the demerger. Internal turnover and costs
with mmO
2
for prior years have been reclassified as
external in this section to enable a meaningful year
on year comparison.
In the 2003 financial year, turnover totalled
£11,260 million, a decline of 8% following an increase
of 5% to £12,256 million in the 2002 financial year.
The results for the 2002 financial year included total
turnover of £770 million relating to the former Concert
global venture, which was re-integrated from 1 April
2002. Excluding this Concert turnover in the 2002
financial year, the underlying turnover declined by 2%
in the 2003 financial year. This reduction in the 2003
financial year is primarily due to a 7% decrease in
network unit prices and mix, and a 5% increase in
network volumes. In the 2002 financial year network
volume growth of 8% was partly offset by the effect
of price and product mix.
External turnover declined by 11% in the 2003
financial year to £3,472 million; although excluding
sales to Concert in the 2002 financial year, the
underlying external turnover increased by 3%. In the
2002 financial year, external turnover grew by 19%
to £3,911 million.
Within traditional products, the impact of price
reductions – due to flat rate price packages, Network
Charge Control (NCC) and Oftel price determinations –
coupled with unfavourable market conditions have
stemmed the rate of growth in external turnover in the
2003 financial year. Turnover from retail private
circuits at £309 million reduced by 14% in the 2003
financial year and in the 2002 financial year at
£358 million increased by 3% when compared to the
respective prior year. The decline in the 2003 financial
year is due to the migration of customers from retail
private circuits to lower priced partial private circuits,
introduced in August 2001, which showed an increase
in turnover of 89% to £106 million in the 2003
financial year. FRIACO generated turnover of
£84 million in the 2003 financial year (2002 –
£68 million, 2001 – £nil) and follows the move to flat
rate packages by internet service providers.
Conveyance and low margin transit revenues of
£2,064 million have remained virtually flat in the 2003
financial year reflecting the ongoing slow down in the
mobile market and TMT sector that began in the final
quarter of the 2002 financial year. This followed an
increase of 17% in the 2002 financial year.
New business external turnover, including
broadband and solutions products and services, at
£189 million in the 2003 financial year showed strong
growth of 85%. This continued the trend from the
2002 financial year when new business turnover, at
£102 million, was 240% higher. The increase in the
2003 financial year principally reflects the gains being
made in network facilities management and internet
connectivity products, including ADSL lines. Wholesale
ADSL lines had an installed base of 800,000 at
31 March 2003 representing growth of 380% over the
previous year. At 16 May 2003 the installed base was
936,000 and with additions since January 2003
running at a rate of well over 20,000 connections per
Financial review
BT Annual Report and Form 20-F 2003 33