TalkTalk Telecom Group PLC
Annual report
2013
Our year at a glance
We are the UK’s leading
value for money provider
of fixed line broadband,
voice telephony, mobile
and television services.
In this report
Directors’ report: Overview
Financial statements
Chairman’s statement ................................................................................1
Financial highlights ...........................................................................................1
What we do ............................................................................................................2
Market overview .................................................................................................2
UK telecoms regulation .............................................................................3
Directors’ report: Performance review
Chief Executive Officer’s statement ........................................... 4
Chief Financial Officer’s statement ............................................. 8
Principal risks and uncertainties .................................................... 12
Sustainability review................................................................................... 13
People ....................................................................................................................... 15
Directors’ report: Governance
Board of Directors and advisors .................................................... 16
Corporate governance ........................................................................... 17
Directors’ Remuneration Report .................................................. 22
Other statutory information .............................................................29
Directors’ responsibilities statement ......................................30
Independent auditor’s report ......................................................... 31
Group income statement .................................................................... 32
Group statement of comprehensive income .................33
Group statement of changes in equity...................................34
Group balance sheet ................................................................................ 35
Group cash flow statement ...............................................................36
Notes to the consolidated financial statements ........ 37
Independent auditor’s report ........................................................ 67
Company balance sheet ......................................................................68
Company reconciliation of
movement in shareholders’ funds .................................... 69
Notes to the Company financial statements ...................70
Other information
Five year record (unaudited) ............................................................ 74
Glossary ................................................................................................................. 75
Financial calendar .......................................................................................76
TalkTalk Telecom Group PLC Annual report 2013
Chairman’s statement
This has been a year of significant progress for TalkTalk.
We successfully introduced value for money pay TV
to the UK mass market and in the six months since
launch have built a base of nearly a quarter of a million
subscribers. We also launched a mobile handset
proposition for existing customers that has proved
extremely popular for its range, value and simplicity.
TalkTalk Business has also had a good year, delivering
strong growth in new, competitively priced data
products such as Ethernet and EFM.
This is quite simply, TalkTalk doing what it should –
creating disruptive and value for money propositions
that make our customers’ lives better.
Most importantly, we continue to make great progress
in simplifying our business and making our processes
more efficient. The most tangible benefits of this are
happier customers and reduced churn.
As a result we delivered a substantial improvement
in underlying profitability which, despite our
investment in TV, allowed us to grow the dividend
by the 15% we committed to last year. I am pleased
to report therefore that for FY13 the Board has
declared a final dividend of 6.95p that, in addition
to our interim dividend of 3.45p, gives a total pay-out
for the year of 10.4p.
It has been another year of significant change
and challenge for our employees. The Board and
I would like to thank them for their efforts and for
their continuing commitment to TalkTalk and to
our customers.
Sir Charles Dunstone
Chairman
Financial highlights
Revenue (£m)
2013
2012
Net debt (£m)
2013
2012
Statutory profit before tax (£m)
2013
2012
–1%
1,670
1,687
+9%
393
434
–4%
122
127
Underlying EBITDA (£m)
2013
2012
+11%
352
317
Underlying earnings per share (p)
+20%
2013
2012
20.6
17.2
Dividend per share (p)
Final
Interim
3.45
Total 10.4
6.95
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1
TalkTalk Telecom Group PLC Annual report 2013
What we do
Over the past seven
years, we have built
one of the UK’s largest
broadband and voice
customer bases,
attracting those looking
for significant bill
savings. FY13 saw us
successfully implement
our quad play strategy
with the launch of
mobile handsets for
Consumer customers
and an innovative,
value for money TV
proposition, built on
the YouView platform.
At the end of
December 2012
there were 22.2 million
Consumer and SME
fixed broadband
connections in the
UK, 8.5% more than
at the same time the
previous year. It is
estimated that around
85% of UK households
now have a broadband
connection.
2
Our network gives us a strong value
for money advantage
We are able to offer our Consumer and Business
customers services at significantly lower cost than
our cable and incumbent competitors. This is because
we operate the UK’s most extensive Next Generation
Network (NGN), which is comprised of our own
advanced, highly cost effective equipment.
Our NGN now covers approximately 95% of UK homes,
operating in 2,724 exchanges. These exchanges are
connected via our own high-speed, high capacity
all-IP national network, enabling us to carry all of our
customers’ voice and data traffic efficiently and cost
effectively. Our customers benefit through optimised
broadband speeds and quality and access to our
growing range of lower cost, value add products and
services. For example, our all-IP Content Delivery
Network which runs over our NGN puts content closer
to the end user to increase the quality of experience
for our TV customers.
Services to Consumers
TalkTalk is strongly positioned as the leading value
for money phone, broadband, and TV provider for
UK homes. We are differentiated by our clear and
simple tariff structure, low prices, flexibility and
groundbreaking safety features, namely HomeSafe™,
our unique network based security service which is
available free of charge for all customers on our
network and protects the whole home from viruses
and inappropriate content.
In FY13 we successfully launched our TV proposition
for Plus customers, which included a free YouView set
top box. TalkTalk is one of seven partners behind
YouView including the BBC, ITV and BT. YouView is a
broadband based television service with differentiated
catch-up and on-demand services, and an open
platform for future application driven innovation.
Our TV offering is proving to be a powerful proposition
for mass market value seekers who want flexible
access to premium content without the need to
enter into costly long term subscriptions.
We also extended our TalkTalk Mobile offering from
SIM-only into mobile contract handsets. Available
exclusively to TalkTalk customers, TalkTalk Mobile offers
simplicity, range and some of the most competitive
prices in the market. As a result our mobile offering
has gained strong traction amongst our base.
The launch of TV and mobile handsets are key to our
aim of increasing our customers’ savings, their loyalty
to TalkTalk, and our revenue potential.
Services to Businesses
TalkTalk Business continues to drive innovation and
competitive product development that leverages
our NGN capability. We believe there is significant
opportunity to use our network to grow all our Next
Generation products within TalkTalk Business.
In January 2013, we began offering an Ethernet over
Fibre service which delivers high-speed symmetrical
services at a significantly lower price point than traditional
Ethernet technologies. We also launched an 80Mbps
fibre product with generous data allowances and
network prioritisation. The year also saw us launch
a very competitive Next Generation Voice service
for businesses requiring high performance data and
voice services, which we have made widely available
to channel partners.
Market overview
2013
2012
million
On-net base
3.870
3.755
2013
2012
95
92
%
On-net customers
There are four key players in the broadband and TV
market. BT Retail is the largest broadband service
provider, followed by BSkyB. Virgin Media, the cable
provider, is the third largest player followed by
TalkTalk. TalkTalk is the largest unbundler.
BT Retail and Virgin Media are positioned at the
premium end of the market, with significantly higher
price points. They focus on speed and reliability of
broadband connection. BSkyB’s focus is on cross
selling broadband and voice to its pay television base,
providing discounts to customers who take all three
products with them. BT Retail is also now competing
with BSkyB on pay TV content rights, specifically sports.
Within this context, TalkTalk is clearly positioned as
the leading provider for customers seeking a best value,
reliable voice, broadband and TV service. Especially in TV,
we have a unique proposition for those homes who want
flexible access to premium content without costly long
term subscriptions. We believe this reputation for value
for money puts TalkTalk in a strong position and will only
improve further as we grow our TV and mobile bases.
The areas regulated
by Ofcom that
are most material
for TalkTalk are:
TalkTalk Telecom Group PLC Annual report 2013
UK telecoms regulation
The UK telecoms market is regulated by Ofcom,
which sets the charges and other terms for wholesale
access to infrastructure and associated services
owned by BT Openreach (Openreach), where
Openreach is deemed to enjoy ‘Significant Market
Power’. Ofcom’s objective is to ensure that these
wholesale products enable effective competition
in the market, so that consumers and businesses
benefit from a choice of services and retail
service providers.
Compliance with regulation is monitored by the
Regulatory Compliance Committee as detailed
on page 20.
Next Generation Access
Openreach provides wholesale access to its NGA
infrastructure (predominantly FTTC), on an equivalent
basis to all communication providers. The current
Openreach wholesale product is GEA. TalkTalk uses
GEA to provide its fibre broadband products. At present
neither the price of GEA nor the margin between the
GEA price and the retail price are regulated. In June 2013,
Ofcom is expected to publish its Wholesale Local
Access Market Review which will include proposals for
regulation which would take effect from April 2014.
LLU Charge Control
On 7 March 2012, Ofcom made its statement regarding
the level of Openreach charges for LLU for the period
until 31 March 2014, which covers MPF, SMPF and
WLR charges. It takes account of a range of factors,
including Openreach’s cost of capital, the regulatory
valuation of local loop infrastructure, and potential
efficiency gains.
TalkTalk appealed Ofcom’s 2012 LLU Charge Control
decision (as did BT). The Competition Commission
found in favour of some of TalkTalk’s grounds and
some of Openreach’s grounds. The net adjustment
was a 78p reduction in the MPF rental charge and
a £1.47 reduction in the WLR rental charge which has
been implemented from 1 May 2013.
In June 2013, Ofcom is expected to publish its LLU
Charge Control which will include proposed charges
for the period from April 2014.
Openreach service performance
Openreach is a critical supplier to TalkTalk and we strive
to work closely with them to deliver the best service
for our customers, for example, the timely delivery of
connections. As part of the Wholesale Local Access
Market Review and LLU Charge Control, Ofcom will set
new regulations in order to provide effective incentives
for Openreach to provide a high quality service.
Ethernet dispute appeal
In December 2012, Ofcom published its
determination to resolve a dispute regarding
Openreach’s pricing for various Ethernet services
in the period from April 2006 to July 2009 which
required Openreach to repay TalkTalk for their
overcharging. Openreach have appealed that
decision to the Competition Appeal Tribunal (CAT).
TalkTalk (and others) have also appealed the
decision arguing that the determination was too
low. Further detail is provided in notes 9 and 27
to the consolidated financial statements.
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Other regulation and legislation
New Communications Bill
The Government has stated that they plan to
introduce a new Communications Bill by the end of
Parliament. The Department for Culture, Media and
Sport (DCMS) is leading a ‘Communications Review’,
looking at all the law and rules that affect the
communications industry. DCMS has stated that
they plan to publish their recommendations for
any changes in the first half of 2013.
Digital Economy Act
This Act, enacted in 2010, requires ISPs to send
notifications to customers (and log) whose
connections have been used for illegal file sharing.
Expectations are that the earliest notifications could
be sent is 2015. In parallel, TalkTalk and other ISPs are
discussing with rights holders alternative approaches.
Pursuant to various court orders, TalkTalk is required
to block access to certain sites that are used for illegal
file sharing.
Several other
areas of current or
potential legislation
are significant
for TalkTalk:
Glossary
FTTC: Fibre to the Cabinet
GEA: Generic Ethernet Access
Internet Service Provider
ISP:
LLU: Local Loop Unbundling
MPF: Full unbundling
NGA: Next Generation Access
NGN: Next Generation Network
RPI: Retail Price Index
SMPF: Partial unbundling
WLR: Wholesale Line Rental
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Government consultation on parental controls
Between June and September 2012 the Government
held a consultation into parental controls. This
followed the recommendations of an independent
Parliamentary Inquiry, chaired by Claire Perry MP, that
pornography should be blocked by default to protect
children online.
On 14 December 2012 the Government published
their response to the consultation. This concluded
that ISPs should actively encourage parents to switch
on parental controls and take measures to ensure the
person setting up the controls is over 18. TalkTalk
began offering all new customers an unavoidable
‘yes’ or ‘no’ decision about whether they wanted to
turn on the parental controls element of HomeSafe™
in March 2012 and will soon be extending this same
unavoidable active choice to existing customers
from mid 2013.
As a Board member of the UK Council for Child
Internet Safety, TalkTalk continues to engage
actively with Government about its policy for
protecting children online.
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TalkTalk Telecom Group PLC Annual report 2013
Chief Executive Officer’s statement
This has been a momentous year for TalkTalk, which
is now a fundamentally better business than it was
three years ago. In the year we have returned our
customer base to growth, successfully launched
TV and mobile handsets, grown TalkTalk Business
and returned to year-on-year revenue growth in
the final quarter. We have the UK’s fastest growing
new TV business and our customers clearly
appreciate its comprehensive content and value
for money pricing. We will continue to invest in
growth and remain confident that having more
customers who buy more products and who stay
with us longer puts us firmly on track to achieve
our medium term financial targets.
FY13 Business Review
We returned to growth in FY13 and have made strong
progress in our key strategic priorities.
Returned customer base to growth in H2
We returned our customer base to growth in the second
half of the year. Resilient demand for our value for money
proposition and reducing churn has offset the decline
in our legacy base.
We added 66,000 net new On-net customers in H2,
comprising strong growth of 133,000 in our core MPF
broadband and voice product, offset by the net loss
of 67,000 legacy SMPF broadband-only customers.
Over 81% of our broadband customers are now fully
unbundled and able to benefit from our added value
products such as Plus TV, mobile, fibre and HomeSafe™.
The Off-net broadband base, which now comprises
less than 5% of our total base, continued to decline,
with a reduction in the second half of the year of
46,000. As a result our total broadband base grew
by 20,000 during the second half of the year.
For the year as a whole, we added 115,000 net new
On-net customers, comprising growth of 229,000 in
fully unbundled phone and broadband customers and
a net loss of 114,000 broadband-only customers.
With the Off-net broadband base reducing by 118,000,
we ended the year with a total broadband base of
4.063 million customers.
We have continued to deliver significant improvements
to our customers’ experience during the year with a
14% year-on-year reduction in calls into our contact
centres, over 70% of customers now benefiting from
first time resolution of their query and a substantially
reduced number of complaints to Ofcom during the
year – down 41% year-on-year. As a result, we delivered
improvements in churn through every quarter with
monthly On-net churn in Q4 of 1.5% (Q4 FY12: 1.7%).
Strong momentum in
value for money quad play
230,000 TV customers in first six months
and strong install momentum
We launched our TV proposition for Plus customers
at the end of September 2012, featuring a free YouView
set top box and no additional monthly fee. In addition
to the excellent content on the YouView platform
(including seven day catch up and over 70 Freeview
channels including some in HD), our service features
search, pause and recording of live TV and a huge library
of the best films and shows from the US and UK. Our
proposition also offers simply priced, easy and flexible
access to bundles of over 50 premium channels including
all Sky Sports channels (1, 2 ,3, 4, 5 and Formula 1) and
all Sky Movie channels available for one month at a
time, with no costly annual subscriptions.
Since launch we have enhanced our proposition with
a wide range of transactional and on-demand content
through LoveFilm Box Office and other studios and
access to blockbuster movies, international on-demand
and subscription content, such as Star, Star+ and StarOD,
and specialist channels, such as the Digital Theatre
Channel and the Karaoke Channel.
In addition to our popular engineer install which gives
customers security and peace of mind, we launched
a self-install option in Q4, offering free and faster
installation for customers. Early feedback on the
ease of installation from those customers who have
opted to do it themselves is highly positive.
Since launch, when we focused initially on our existing
customers, the base has grown rapidly and we ended
the year with an installed base of 230,000 customers,
around 25% of whom are new to TalkTalk.
Momentum towards the end of the year benefited from
the availability of a self-install option and we exited the
year with connections running at 12,000 per week.
Targeted at mass market value-seeking customers
Our TV proposition is targeted firmly at value-seeking
customers who want a little more TV, not a lot. There
is a potentially large (c. 8 million) base of customers
who currently take Freeview or Freesat, many of whom
do not wish to enter into costly long term Pay TV
subscriptions. Our proposition is proving to be a
powerful new way of watching TV for this segment
of the market.
4
TalkTalk Telecom Group PLC Annual report 2013
Early data from our installed base is providing strong
evidence of the segmented nature of the UK TV market:
• customers who have previously been Freeview
or Freesat users comprise 72% of the people
taking our TV product;
• the majority of viewing by our customers is of
the excellent free to air and catch-up content on
YouView (c. 19.5 hours per week on average), with
the balance (c. 2.5 hours) on paid-for content; and
• 20% of our TV customers have bought one or more
paid-for boosts (mainly family and kids’ entertainment
packages and popular films) with many showing a
significant propensity to buy content beyond the
initial sign-up. We have seen particular success with
transactional video on-demand for blockbuster
movies such as The Hobbit and Life of Pi.
Positive feedback from installed base and lower churn
Survey* results from our customers reveal high levels
of satisfaction with the sign-up process, installation
and functionality of TalkTalk TV:
175,000 mobile customers with lower churn
In August 2012, we launched our TalkTalk Mobile contract
handset proposition. Available exclusively to TalkTalk
customers, TalkTalk Mobile offers simplicity, range and
great value plans. All handsets, of which there is a broad
range available, are completely free with 24 month
contract plans starting from £5 a month. Mobile handset
contracts are designed to pay back within the 24 month
contract term and are ARPU and EBITDA accretive.
Three plans are available – Small, Medium and Large with
different prices depending on the choice of handset.
Customers can buy online or over the phone, with those
buying online getting double the data allowance. This
simplicity, coupled with low running costs, means that
we can offer the most popular handsets at competitive
prices, ranging from basic feature phones to smartphones.
As a result our mobile offering has gained strong traction,
with 175,000 customers now taking advantage of our
innovative mobile-to-fixed calling offers, competitive
call rates and handsets. As with TV, the feedback from
our mobile customers is highly encouraging:
•
integrated catch-up TV on the YouView platform is
proving to be the most valuable feature for customers
from both Pay TV and Freeview backgrounds;
• mobile customers are significantly more likely to
recommend TalkTalk than dual play customers,
reporting a c. 20 point higher Net Promoter Score; and
• customers with previous experience of Pay TV cite
the wide range of paid-for content boosts and the
flexibility of purchasing without long term subscriptions
as very attractive; and
• content browsing and purchasing reflects the core
demographic of our family and value orientated
customer base, with Entertainment and Children’s
packages, and transactional video on-demand
proving the most popular.
* ICM Research, May 2013, 1,025 respondents.
As a result, these customers are significantly more
likely to recommend TalkTalk than dual play customers,
reporting a c. 20 point higher Net Promoter Score.
They are also showing more loyalty and the churn from
customers taking TV is materially lower than the churn
on our dual play base, with seven out of ten customers
who upgraded from phone and broadband saying they
were more likely to stay with TalkTalk beyond their
contract terms than they would have been before
taking TV.
Strong pipeline of product and content development
Looking ahead, in FY14, we plan to broaden our proposition
to appeal to all our customers by launching a value for
money Essentials TV product. This will enable us to
provide an even better value for money route for
Freeview upgraders. The Essentials TV product will
consist of a smaller, lower cost set top box with no
PVR and only one tuner.
We will also extend our content offering for all customers
with a range of specialist channels including foreign
language titles, education and entertainment.
• churn from customers taking TalkTalk Mobile is
materially lower than the churn on our dual play
base, with seven out of ten customers saying they
were more likely to stay with TalkTalk beyond their
contract terms than they would have been before
taking mobile.
We will continue to develop our mobile proposition with
further innovative tariff and bundle offers and see real
opportunities to build a growing and profitable scale base.
Fibre building gradually
Demand for fibre grew gradually during FY13 with
65,000 more customers choosing to take paid-for
speed uplifts (versus 8,000 in FY12), taking our base
of fibre customers to 73,000.
As expected, overall fibre demand among our
customer base remains modest. We expect this will
continue until the customer benefits of much higher
bandwidth, and the value of accessing that bandwidth,
become clearer. Nevertheless, there are certain
segments of our customer base that can derive clear
value today from upgrading to fibre, for example those
who are interested in taking TV from us and live in a
fibre-enabled area but whose copper speed is
currently lower than 3Mbps.
We remain actively engaged with Ofcom and the
Government to promote greater competition in fibre
through a tighter regulatory framework. We are pleased
to see Ofcom taking the importance of a level playing
field increasingly seriously, with the recent opening of
an investigation into BT’s pricing of fibre.
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TalkTalk Telecom Group PLC Annual report 2013
Chief Executive Officer’s statement continued
TalkTalk Business delivering
margin accretive growth
Our TalkTalk Business customers take our On-net and
Off-net basic phone and broadband products and
Corporate products and services (data, carrier and
voice products). Corporate revenue grew by 1.9%
year-on-year to £322m as strong growth in data
services (29%) and carrier (10%) offset a 5% decline
in lower margin legacy voice related revenues.
Data services, which include Ethernet, managed
networks and co-location, has built momentum rapidly
through the year, as we continued to expand our product
set and scale up our volume capability. We connected
over 6,000 Ethernet circuits during the year, taking our
total base to over 10,000. Revenues from this high
margin product family tripled during the year to over
£15m (FY12: £5m) and we expect continued strong
demand through FY14.
We made significant progress in our partner channel
as we continued to drive innovative and competitive
product development that leverages our network reach.
In May 2012, as part of a consortium led by Fujitsu, we
were awarded a contract to provide network services
for the phone and broadband customers of the Post
Office. The contract, worth over £100m over five years,
is on track for services to go live during the second half
of FY14.
In December 2012, we reached an agreement with
Virgin Media Business on a five year contract worth
over £40m to provide additional choice for its
Off-net Ethernet connectivity.
Towards the end of the year, we were awarded a six year
contract by the Iceland retail group to support their data
and voice requirements across the UK, demonstrating
our ability to provide Corporate customers with complete
data and voice solutions.
In addition to the continued growth of margin accretive
data products, we are realising opportunities to grow our
carrier revenues and next generation voice products.
Together, this is allowing us to offset the established
decline in low margin legacy voice revenues.
We also have an opportunity, with our business
customers, to simplify operations and leverage the
cost and technology advantage of our network. The
combination of gross margin expansion through data
revenue growth and generating cost savings through
simplification will contribute meaningfully to the
Group’s medium term revenue and margin targets.
Largest unbundled network in the UK
Our unbundling programme continued with 216 new
exchanges added during the year, extending the reach
of our value for money proposition to 2,724 exchanges
and approximately 95% of the UK population. We plan
to unbundle another 300 exchanges in FY14 and now
see the potential to extend the programme beyond
that as the cost of unbundling exchanges falls and
On-net customer ARPU grows, allowing us to continue
to profitably extend our geographic reach.
In conjunction with our unbundling programme, we
continue to expand the capacity of our network, which
we expect to grow by 50–100 times over the next three
to five years. The favourable economics of our network,
which allows us to lease dark fibre at very competitive
rates, means that we will be able to achieve this capacity
expansion within our long run capex guideline of 6%
of revenues.
Driving operating efficiencies
During the year we completed our Operating Efficiencies
programme which has delivered £50m of annualised
cost savings, a more efficient business and a better
experience for our customers. The financial benefit
of this programme in FY13 was a reduction in
overheads of £25m.
We see further opportunity to make TalkTalk simpler
to operate, which in turn will improve our customers’
experience and reduce our costs, through driving
process and efficiency improvements over the
medium term. These are a key component of our
medium term plan to achieve a 25% EBITDA margin.
During FY13 we began our new Making TalkTalk Simpler
programme. We expect that combined initiatives under
this programme will drive incremental savings of
£30m–£50m over the next three to five years, of which
£10m has been actioned during 2013. During this first
phase of the programme we: began the process of
restructuring the systems and processes that service
our TalkTalk Business customers to remove duplication
and better align our sales and service model with our
growth ambitions; completed the closure of our Stoke
Mandeville site; consolidated the development of our
IT systems under one partner; and continued to
improve online functionality across the business.
These initiatives have delivered £3m of savings during
the year.
6
TalkTalk Telecom Group PLC Annual report 2013
Summary
In summary, FY13 has been a momentous year for
TalkTalk. We have returned the business to growth,
successfully launched the fastest growing triple play
proposition in the UK and a mobile base with real
traction and delivered strong growth in margin accretive
data products. At the same time we have continued to
make the business simpler to operate and successfully
begun to deliver on our third cost saving programme.
FY14 Financial guidance
We have entered the new financial year with growing
revenues, a higher gross margin, lower overheads and
significant headroom to invest further in growth.
• Revenue
We expect FY14 revenues to grow by at least 2%.
• Overheads
After benefiting from some acceleration of the
savings from Making TalkTalk Simpler in FY13, we
expect overheads as a percentage of revenues
to remain broadly flat in FY14.
• SAC and Marketing
We expect total SAC as a percentage of revenues to
peak in FY14 as we invest in building a scale base of
TV subscribers, drive further penetration of mobile
and fibre into our customer base and continue to
grow TalkTalk Business. SAC per customer, both for
TV and non-TV customers, is expected to continue
to reduce through the year.
• Net debt
Capex is expected to be within our guideline of 6%
of revenue and working capital is expected to show
outflows of £15m–£20m as we grow the business.
Cash exceptional items are expected to be in line with
the incremental annualised savings benefits from
our Making TalkTalk Simpler programme of £10m.
The costs of repurchasing shares to satisfy incentive
schemes is expected to be similar to that incurred
in FY13.
We expect to begin making modest cash tax
payments during FY14.
• Dividend
We remain firmly committed to dividend growth whilst
also investing in the business. This commitment is
supported by the profitability of our core business,
underlying cash generation and overall financial
strength. While we plan to invest substantially in
growing our business during FY14, we are reiterating
our commitment to grow the dividend by a minimum
of 15%.
FY15 and beyond
We are on track to achieve our medium term targets
of 2% CAGR in revenue and 25% EBITDA margin.
We expect the components of our revenue growth
strategy (improving On-net customer mix, growing
TV and mobile penetration and growth in TalkTalk
Business) also to contribute to our profitability target,
through gross margin over the medium term.
We expect the balance of our profitability target to be
delivered through both overhead reduction (driven,
amongst other things, by our Making TalkTalk Simpler
programme) and SAC declining from its FY14 peak
(driven by reducing churn and falling costs per addition).
As a result we expect to deliver strong EBITDA growth in
FY15 and subsequent years, which we expect to support
continued dividend growth at a similar rate to FY14.
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TalkTalk Telecom Group PLC Annual report 2013
Chief Financial Officer’s statement
Overview
We have delivered another strong performance this
year, with a return to revenue growth in the final quarter
of the year and significant increases in both our
underlying profitability and cash generation.
Revenue growth in the latter half of the year has been
driven primarily by growth in ARPU, our Broadband
customer base returning to growth and the launch of
new products for both our Consumer and TalkTalk
Business customers.
In launching our new TalkTalk TV service this year we have
invested £62m incorporating both the incremental SAC
for those taking the service and one-off launch costs.
To enable year-on-year comparisons we have included
Underlying and Headline financial information
a measure of Underlying EBITDA, which shows our results
before the investment in TV.
Our gross margin has increased as more of our
customers are On-net and take both their broadband
and voice from TalkTalk. Strengthening gross margin
and delivery on our cost efficiency programmes has
increased underlying profitability. The business
continues to be strongly cash generative and has this
year generated £41m net cash flow after funding a 15.6%
growth in the divided and the additional investment in TV.
Net debt has reduced to £393m (FY12: £434m)
providing significant headroom to invest in driving
continued growth.
On-net
Off-net
Corporate
Revenue
Gross margin
%
Operating expenses excluding amortisation and depreciation
Underlying EBITDA
%
Investment in TV
Sale of freehold property
Headline EBITDA
Exceptional items
EBITDA
Depreciation and amortisation
Non-operating amortisation
Share of joint venture
Operating profit
Finance costs
Profit before tax
Tax
Profit after tax
2013
£m
1,170
178
322
1,670
919
55.0%
(567)
352
21.1%
(62)
–
290
9
299
(102)
(52)
(4)
141
(19)
122
(22)
100
2012
£m
1,084
287
316
1,687
884
52.4%
(567)
317
18.8%
–
9
326
(27)
299
(92)
(61)
(1)
145
(18)
127
11
138
Growth
8%
(38)%
2%
(1)%
4%
–
11%
(100)%
(11)%
>(100)%
–
(11)%
15%
>(100)%
(3)%
(6)%
(4)%
>(100)%
(28)%
Revenue
We returned to year-on-year revenue growth in the
year, with revenue up 1.4% in the last quarter primarily
driven by strong On-net ARPU progress; growth in
the customer base and take up of our new products.
Our full year revenue decreased 1% to £1,670m
(FY12: £1,687m), with continued growth in On-net
and Corporate offsetting the expected decline
in our legacy Off-net business.
Growth in On-net revenues, which increased to £1,170m
(FY12: £1,084m), has been driven by both the growth
in our base and the growth in our On-net ARPU, which
increased to £26.37 in Q4 (Q4 FY12: £25.47).
This has resulted from upsell activity and price inflation,
offsetting planned promotional spend and the continued
decline in voice usage.
Our Corporate revenue grew in the year to £322m
(FY12: £316m), driven by the growth of our new data
products and carrier services which more than offset
the continued decline in legacy voice services.
In line with the expected decline in our Off-net base,
Off-net revenues decreased to £178m (FY12: £287m).
Price inflation during the year partly offset the base
and usage decline.
8
TalkTalk Telecom Group PLC Annual report 2013
Gross margin
We expanded our gross margin by 260 basis points to
55.0% (FY12: 52.4%) and £919m (FY12: £884m) driven
by the improved mix of higher value On-net broadband
and voice customers, price inflation, growth in our
TalkTalk Business data services revenue, offset by the
decline in lower margin Off-net revenues.
April 2006 and July 2009, offset by the investment in
the second phase of our Operating Efficiencies
programme (£11m) and the beginning of our Making
TalkTalk Simpler programme (£7m). The exceptional
costs principally comprise redundancy, site exit and
dual running costs incurred in streamlining our IT
systems and processes and improving our Consumer
and TalkTalk Business service model.
Operating expenses
Operating expenses comprising customer service
costs, Network and IT and management overheads
have reduced to £395m (FY12: £415m) and represent
23.7% of revenues (FY12: 24.6%), reflecting the
delivery of cost savings from our Operating Efficiency
programmes, offset by the continued investment
in our network.
During the year we completed our Operating Efficiency
programmes delivering a total saving of £50m of which
£25m was realised in the year.
SAC and Marketing (excluding TV)
We successfully launched handsets with our Mobile
proposition this year, saw a gradual increase in
the number of customers taking fibre, and our
Broadband base returned to growth. TalkTalk Business
also had a year of growth driving incremental SAC. The
investment in SAC and Marketing resulted in an increase
in spend yea-on-year of £20m to £172m (FY12: £152m).
Our total operating expenses for the year were
therefore flat overall at £567m (FY12: £567m).
Underlying EBITDA
We have had strong growth in Underlying EBITDA
and our margin has increased to 21.1% (FY12: 18.8%),
resulting in an 11% increase in our full year result
to £352m (FY12: £317m). In FY12 we disposed of
a freehold property at a profit of £9m that was
excluded from Underlying EBITDA.
Investment in TV
We have made a significant investment this year to
deliver the highly successful launch of our TV service.
We have invested £62m, of which £39m is the specific,
incremental SAC cost of acquiring the TV customers,
and £23m represents the one-off, fixed costs of
launch, being the cost of the trial, the project team
employed to deliver our TV product, the cost of ramp
up of our installation engineers, the marketing spend
and content offered to support the launch and other
similar costs.
Headline EBITDA
As a result of our investment in TV, Headline EBITDA
has decreased £36m to £290m (FY12: £326m).
Exceptional items
The net exceptional credit in the year of £9m, comprised
a credit of £27m received from BT in settlement for
the overcharging of certain Ethernet circuits between
EBITDA
EBITDA after exceptional items is flat year-on-year at
£299m as savings seen in our operating costs and the
decrease in spend on exceptional items has been offset
by the increased investment in our new products, TV,
Mobile, Fibre and Ethernet.
Depreciation and amortisation
The charge for depreciation and amortisation has
increased by £10m (10.9%) to £102m (FY12: £92m)
as a result of a further year of capital investment
in both our network and our IT systems.
Amortisation of acquisition intangibles
The amortisation charged on acquisition intangibles
decreased to £52m (FY12: £61m) as the customer base
acquired with the acquisition of AOL in December 2006
became fully amortised during the year.
Profit before tax
Profit before tax decreased £5m in the year reflecting
the reduction in Headline earnings due to the
investment in TV.
EPS
Underlying earnings(1)
(£m)
Basic EPS
Diluted EPS
Headline earnings (£m)
Basic EPS
Diluted EPS
Statutory earnings (£m)
Basic EPS
Diluted EPS
2013
2012
Growth
132
152
182
17.2p
20.6p
19.4p 16.4p
159
14.9p 18.0p
17.2p
14.0p
138
100
11.3p 15.6p
10.6p 14.9p
20%
20%
18%
(17)%
(17)%
(19)%
(28)%
(28)%
(29)%
(1)
Underlying earnings for the year ended 31 March 2013 of £182m is
defined as Headline earnings excluding costs of £62m relating to the
investment in TV less an allocation of taxation of £12m based on the
Group’s Headline effective tax rate. In the year ended 31 March 2012,
Underlying earnings of £152m was defined as Headline earnings
excluding the profit on sale of a freehold property of £9m less an
allocation of taxation of £2m based on the Group’s Headline
effective tax rate.
We provide EPS on an Underlying and Headline basis
alongside our Statutory measures to allow easier
comparison year-on-year due to the impact of
exceptional items, the investment in TV and the
disposal of a freehold property in FY12. A full
reconciliation to Statutory results can be found in
note 9 to the consolidated financial statements.
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9
TalkTalk Telecom Group PLC Annual report 2013
Chief Financial Officer’s statement continued
EPS continued
Our Underlying Basic EPS, which is stated before the
investment in TV and exceptional costs, has grown
significantly year-on-year, increasing 20% to 20.6p
(FY12: 17.2p). Our Headline Basic EPS decreased
17% to 14.9p (FY12: 18.0p), with the growth in our
Underlying EBITDA offset by the investment in TV.
Statutory Basic EPS decreased 28% to 11.3p (FY12: 15.6p),
principally due to the investment in TV and a tax credit
that was recognised in the prior year.
Cash flow and net debt
Headline EBITDA
Working capital
Capex
Operating free cash flow
Exceptional items – BT credit
Exceptional items –
Operating efficiencies
Exceptional items –
Ofcom fine
Exceptional items –
One Company
Acquisitions and disposals
Dividends paid
Interest and tax
Share purchase
Net cash flow
Opening net debt
Closing net debt
2013
290
(11)
175
27
Growth
2012
(11)%
326
(14) (21)%
(1)%
(15)%
207
–
(104) (105)
(19)
(35) (46)%
–
(3) (100)%
–
(4)
(87)
(16)
(35)
41
(7) (100)%
(20) (80)%
(58)
50%
(26) (38)%
(54) (35)%
>100%
(1)%
(9)%
4
(434) (438)
(393) (434)
Capital expenditure
Capital expenditure in the year of £104m (FY12: £105m)
is broadly flat year-on-year, and represented 6.2% of
revenue (FY12: 6.2%). During the year, we have continued
to invest in our network and have rolled out a further
216 exchanges, significantly increased capacity across
the network and invested in improved resilience. We have
also continued to invest in our IT systems to support
our growing product offerings.
Working capital
Our working capital outflow of £11m was broadly in line
with the prior year (FY12: £14m), and resulted from
our return to revenue growth in H2, the decrease in
our cost base and the continued unwind of Tiscali
fair value provisions.
Acquisitions and disposals
Acquisitions in the year of £4m (FY12: £20m) represent
a £6m investment in the YouView joint venture offset by
£2m of proceeds on the sale of Southern Communications
Networks Limited, an immaterial subsidiary company,
at the end of the year.
Dividends
Our dividend policy is to return to shareholders 50%
of our basic Headline earnings per share in the form
of ordinary dividends.
In May 2012, we committed that during 2013 and 2014,
when the business will be investing in growing the
TV base, our dividend will grow by a minimum of 15%.
Dividends of £87m paid in the year (FY12: £58m),
comprised the final dividend for FY12 of 6.4p and the
interim dividend for FY13 of 3.45p, which reflects our
15% dividend growth commitment.
The Board has declared a final dividend of 6.95p per
share which will be paid on 2 August 2013, subject to
approval at the AGM on 24 July 2013 for shareholders
on the register at 5 July 2013. The total declared dividend
for the year was 10.4p, which provides dividend cover
(based on Headline earnings per share) of 1.4 times
(FY12: 2 times).
Share purchases
In September 2012 the first tranche of both the TalkTalk
Group Value Enhancement Scheme and the Carphone
Warehouse TalkTalk Group Value Enhancement
Scheme (together referred to as “the VES schemes”)
vested. Settlement took the form of purchasing the
participants’ VES shares in return for a combination
of the issue of new PLC shares and cash, resulting
in a cash outflow of £35m. In the prior year, share
repurchases totalling £54m (42 million shares) were
made by the Group ESOT in order to cover anticipated
future options exercises.
Net debt
Net debt in the year reduced by £41m (FY12: £4m) to
£393m (FY12: including loans to related parties £432m,
excluding loans to related parties £434m) as a result of
the continuing improvement in the operating cash
generation of the business and a reduction in
exceptional spend.
Taxation and treasury
Exceptional items
We had net inflow on exceptional items this year of
£8m (FY12: outflow of £45m) driven by the £27m of
cash received from BT in settlement for the overcharging
of certain Ethernet circuits between April 2006 and
July 2009. Exceptional spend of £14m was incurred in
respect of the completion of our Operating Efficiencies
programmes and £5m relating to the Making TalkTalk
Simpler programme.
Operating profit
Finance costs
Profit before tax
Tax
Profit after tax
2013
2012
Headline Statutory
184
(19)
165
(33)
132
141
(19)
122
(22)
100
Headline
233
(18)
215
(56)
159
Statutory
145
(18)
127
11
138
Headline tax rate
20%
26%
10
TalkTalk Telecom Group PLC Annual report 2013
Finance costs
Net finance costs charged to the income statement
were £19m (FY12: £18m). This comprised the blended
interest charge on debt of 3.58% (FY12: 3.17%) and a
full year of the amortisation charge in relation to the
facility fees incurred on our November 2011 debt
refinancing of £3m (FY12: £1m).
Net interest paid (including refinancing fees) in the year
decreased to £16m (FY12: £24m), principally due to
the facility fees paid in the prior financial year for the
refinancing and an overall decrease in our interest
charges as a result of lower average debt.
Taxation
Our effective Headline tax rate for the year was 20%
(FY12: 26%), representing a tax charge of £33m (FY12:
£56m). The tax charge for the year on statutory earnings
was £22m (FY12: credit of £11m). The principal difference
between the tax charge and the standard rate of
corporation tax is the recognition of deferred tax
assets in relation to acquired losses.
A reduction in the rate of corporation tax from 24%
to 23% in April 2013 has created a charge through
the income statement of £5m resulting from the
downward revaluation of our deferred tax assets.
During the prior year the Group reached agreement
with HMRC over the utilisation of brought forward
losses acquired with the Tiscali UK business in 2009,
including those of Video Networks Limited. This
resulted in the recognition of deferred tax assets
of £45m, in addition to those that were recognised
at the acquisition date.
We have made minimal corporation tax payments
during the year. Payments of £2m made in the prior
year related to the final corporation tax assessment
for our AOL Luxembourg entity prior to its liquidation.
Funding
We finance our operations with committed bank facilities,
retained profits and equity. During the year, we were
able to make use of overdrafts and uncommitted
facilities to assist with working capital management.
Our subsidiaries are funded centrally, with an emphasis
on efficient cash management.
Our total Group funding of £665m comprises £560m
revolving credit facilities, which mature in November 2015,
£30m of bilateral loan facilities that mature in March 2015
and November 2015, and a £75m term loan that matures
in March 2015. The terms of our facilities are similar and
the covenants are identical. At 31 March 2013 £400m
(FY12: £436m) had been drawn down under these facilities.
We are in compliance with the covenant conditions
on all funding facilities at the year end. It is our policy
to refinance our facilities significantly in advance
of maturity dates.
Hedging policy
We are exposed to limited cross border transactional
commitments, but where significant these are hedged
using forward currency contracts. Interest rate risk is
managed by the use of interest rate swaps. The Group
aims to fix the interest cost on a proportion of its net
debt over a weighted average period. The Group Treasury
function operates within the framework approved by
the Board, in line with best practice, to ensure effective
management of our interest and foreign exchange risk.
Capital structure
The Board reviews the capital structure of the Group
on an annual basis and, as discussed in note 19 to the
consolidated financial statements, considers that our
medium term target gearing is 75% to 100%. Gearing
at 31 March 2013 was 89% (FY12: 98%).
Accounting developments
The adoption of accounting standards in the year,
as disclosed in note 1 to the consolidated financial
statements, has had no material effect on the
consolidated financial statements.
Going concern
The Directors have acknowledged the guidance
‘Going Concern and Liquidity Risk: Guidance for
Directors of UK Companies 2009’, published by
the FRC in October 2009.
Our business activities, together with the factors likely
to affect our future development, performance and
position are set out in the Chief Executive Officer’s
statement on pages 4 to 7. Our financial position, cash
and borrowing facilities are described within this Chief
Financial Officer’s Statement. In addition, note 19 in
the financial statements describes how we manage
financial risk, including foreign exchange risk, interest
risk and liquidity risk.
Whilst the current economic climate remains uncertain,
the breadth of our base, our value for money proposition,
continuing improvements in operating efficiency and
the largest unbundled network in the UK together
with the launch of our competitive TV and Mobile
offerings means that the Directors are confident in
our ability to continue to compete effectively in the
UK telecoms sector.
We have £665m of committed credit facilities and as
at 31 March 2013 the headroom on these facilities was
£265m. Our forecasts and projections, taking into
account reasonably possible changes in trading
performance, indicate that there is sufficient
headroom to 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 when preparing the consolidated
financial statements.
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11
TalkTalk Telecom Group PLC Annual report 2013
Principal risks and uncertainties
1 Competitive environment
Potential impact: Increased competition in the UK voice,
broadband and TV market may impact financial performance.
Mitigation: We regularly monitor the product offerings
of our key competitors as well as the latest market and
consumer trends. This ensures we identify opportunities
to strengthen our competitive position by broadening
and enriching the products and services we offer and by
finding ways to deliver greater benefits for our value-seeking
customers. This financial year, TalkTalk successfully
launched both a new TV and mobile handset proposition.
These new product offerings will enable TalkTalk to
differentiate ourselves from other triple and quad play
providers in the marketplace.
2 Regulatory environment
Potential impact: Changes in regulation can significantly
impact the Group’s performance.
Mitigation: We actively participate in pricing consultations
by Ofcom, including the use of independent experts to
provide assistance and evidence as required. Current
reviews are underway of the Wholesale Local Access
Market Review, LLU Change Control and the Wholesale
Broadband Access Market Review. There is close liaison
with Ofcom to ensure that the Group’s views on the future
of regulation are well represented.
3 Regulatory compliance
Potential impact: Failure to operate effective processes
and controls across the Group may have an adverse impact
on the services we deliver to our customers, leading to
churn, and non-compliance with regulatory requirements.
Mitigation: The Group’s Regulatory Compliance Committee
convenes at least quarterly to monitor the mitigation
of operational risks which could give rise to customer
complaints and regulatory breaches. This financial year,
a new Consumer Quality & Compliance department has
been established with responsibility for the independent
monitoring of compliance for Consumer customers.
The Director of Quality & Compliance chairs a weekly
operational Compliance Committee meeting which
is attended by senior executives.
4 Change management
Potential impact: We continue to review, rationalise and
integrate our IT infrastructure and to simplify the way in
which we operate our business. Disruption to our operations
could have an adverse impact on the services we provide
to our customers and on our financial performance.
Mitigation: The Executive Committee regularly monitors
the progress of our significant change programmes and
their associated risks. TalkTalk’s Group Change Forum,
comprised of senior executives, is responsible for
establishing and monitoring adherence to the governance
framework which determines how change is managed.
5 Data security
Potential impact: Failure to prevent the loss or
exploitation of personally identifiable or commercially
sensitive information could result in loss of competitive
advantage, regulatory fines, damage to the brand and
ultimately churn.
Mitigation: We continually review the Group’s data
security, investing in and implementing new solutions,
both to prevent and detect security breaches, as they
become available. In addition, the Data Governance
Council, chaired by the Chief Technology Officer,
meets fortnightly throughout the year to review data
security risks and progress with their mitigation.
6 Network stability and reliability
Potential impact: Failure to provide a stable and reliable
service may cause customer churn.
Mitigation: We have continued to invest heavily in our
network to improve resilience and performance and to
ensure we keep pace with our customers’ growing demands.
7 Key suppliers
Potential impact: The Group has a number of critical
suppliers. Failure of any of these suppliers could significantly
affect the Group’s ability to continue operations and
to maintain its financial performance.
Mitigation: We continue to review our processes and controls
around supplier selection and in-life risk management.
This helps to reduce the likelihood and potential impact
of business interruption due to supplier failure.
8 Customer experience
Potential impact: Failure to deal with customer queries,
resolve service faults and other issues in line with our
customers’ expectations could lead to complaints,
damage to our brand and customer churn.
Mitigation: We are committed to continuously reviewing
and improving the level of customer service we provide.
In FY13 we have launched a number of initiatives to i)
reduce the likelihood of customers experiencing service
issues, ii) improve the ability of our customers to self-help
via new online tools and iii) delivering better training and
tools to our Customer Service teams so that queries and
complaints can be handled more effectively.
9 Scaling TV
Potential impact: Having successfully launched a TV
service with YouView, there is a risk that TalkTalk is unable
to maximise competitive advantage through its failure to
scale its network, operations and supply chain efficiently.
Mitigation: There are a number of areas of focus: i) YouView
continues to invest in innovation and to roll-out its strategic
product roadmap, ii) TalkTalk has recently launched a
TV self-install proposition to support our TV rollout, iii) the
Group continues to invest in the network and to plan for
future capacity requirements, iv) TalkTalk continues to
work closely with the major content providers to secure
distribution rights for the most popular content, v) the
Group and its strategic partners are focused on and have
plans in place to continually improve the resilience of the
supply chain.
In common with other
organisations, we are
affected by a number
of risks, not all of which
are in our control.
Some risks, such as
UK macroeconomic
factors, are likely to
affect the performance
of UK businesses
generally, while others
are particular to our
operations. This section
sets out the material
risks to the Group and
how we seek to mitigate
them in the day to day
running of our business.
12
TalkTalk Telecom Group PLC Annual report 2013
Sustainability review
Leading the way to a digital society, environmental
sustainability and community.
We believe that innovative digital communications
can improve our society and environment.
Our strategy is to help make our community a brighter
and more sustainable place by motivating our people,
customers and supply partners, and by creating
innovative services that empower our customers.
Our efforts this year were focused on the
following programmes:
Digital safety
Households and businesses are connecting ever
more devices to the internet, and we want to empower
customers to protect themselves from security risks
and inappropriate content.
We offer HomeSafe™, which automatically protects
every device on a home broadband connection, free with
all our Consumer broadband packages. HomeSafe™ is
built into our network and prevents users from reaching
sites in categories deemed inappropriate by the account
holder. It is also capable of automatically blocking
access to sites that are believed to harbour viruses
or other threats.
TalkTalk is the only broadband provider to offer such
a service, and nearly three quarters of a million homes
across the country have enabled HomeSafe™.
In FY13 we tailored a similar service specifically for
Business customers called WorkSafe. This service
is free with all Business broadband and Superpowered
Fibre Business broadband services.
Digital inclusion
Talk Digital Heroes Awards 2012
We continue to sponsor these awards, run in conjunction
with charity Citizens Online and The Daily Mirror. The
awards aim to reward individuals, nominated by their
communities, who use digital technology in the most
socially positive way. In FY13 we awarded over £70,000
in grants and prizes to twelve regional finalists, including
£10,000 to the 2012 TalkTalk Digital Hero.
The judges were our Chairman (Sir Charles Dunstone),
the UK Digital Champion (Baroness Lane-Fox) and the
Editor of The Daily Mirror (Lloyd Embley). They judged
the 2012 TalkTalk Digital Hero to be Clare Sutcliffe of
Code Club, an organisation aimed at giving children
the chance to learn computer programming for free.
Their mission is to give every child in the UK the chance
to learn to code, and they want a Code Club in 25% of
primary schools in the UK by 2016. The clubs are free
to both the schools and the pupils.
The new category of Young Digital Hero, open to
anyone under 18, was won by May Gabriel, founder
of ‘It’s OK’, a campaign which tackles the stigma
around depression.
TalkTalk Digital Champions
The year saw the Group launch its enhanced Give
Something Back programme that gives all our people
paid time off to volunteer and fundraise for good causes.
In FY13 our people were given the opportunity to be
trained by the Online Centres Foundation, to become
TalkTalk Digital Champions. Once trained, the Digital
Champions were matched with their local UK Online
Centre, so that they could pass on their learnings.
Go ON UK
The Group is a Founder Partner of the charity Go ON UK,
with the likes of Age UK, the BBC and Big Lottery Fund.
The charity is chaired by Baroness Lane-Fox. Together
we work with the Government to help make the UK
the world’s most digitally capable nation. Aside from
funding, we lend our online safety and digital inclusion
expertise and central London office space.
A key piece of collaborative work in 2012 was
the publication of a study – in partnership with
Booz & Company – that concluded that there is
a £63bn potential GDP uplift in the UK achieving
its full digital potential. For more visit go-on-uk.org.
Talk about autism
This year we continued our support for long term
partner Ambitious about Autism, the national charity
that makes the ordinary possible for children and
young people with autism, including Asperger’s
Syndrome. Talk about Autism is the safe, friendly,
online community where affected families can share
their experiences, get support and help others to
understand the condition. For more on autism visit
talkaboutautism.org.uk.
North Kensington Estate project
We have continued to fund the IntoWork programme
of North Kensington-based charity The ClementJames
Centre. We focus our support on IT outreach by taking
broadband to the local housing estates and community
centres. The project has been able to help individuals,
most often immigrant women, who are typically unsure
about engaging online. Next year our focus will be on
training local women as IT Ambassadors, empowering
them to run IT classes for beginners.
Brownie Computer Badge
This year we’ve worked with Girlguiding, in support
of the Brownie Computer Badge, specifically to help
ensure that girls are supported in using the internet
safely. In addition to lending our expertise in this area,
we also provided funding for the project.
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13
TalkTalk Telecom Group PLC Annual report 2013
Sustainability review continued
Environmental sustainability
CO2 emissions
This year we have continued our focus on measuring
and reducing our environmental impact. In particular:
the CO2 emissions related to our consumption of
energy – by far our biggest impact.
Our continuing strategy to reduce our CO2 emissions is
twofold. Firstly, to reduce our energy consumption and
secondly, to carefully consider the energy’s provenance.
Our NGN is one of the biggest and most advanced in
the UK. It grows in line with our customer volume and
their rapidly expanding broadband consumption habits.
We therefore measure our CO2 emissions relative
to the network’s scale, so that we stay focused on
improving our efficiency or ‘emissions intensity’.
In 2011, our Chief Executive Officer set our objective:
to reduce our CO2 emissions intensity, in tonnes of CO2
equivalent per Gigabit (tCO2e/Gb), by 25% by April 2021,
relative to 2010.
This focus on improving our emissions intensity has
produced tangible results. We participate in the
Government’s CRC Energy Efficiency Scheme, and
were 148th out of 2,097 participants (2012: 381st).
Our internal tracking also shows that our approach
is working, as despite growing the network in line with
customer usage and volume, we have improved energy
intensity for the second year running:
tCO2e/Gb
Energy(1), transport(2)
and hotels
2013
2012
2011
145
193
317
(1)
Primarily electricity, but also some natural gas and back-up generator fuel.
(2)
Includes rail, air and car travel.
100% renewable electricity
All of the units of electricity consumed by our
NGN, offices and UK call centres come from
renewable sources.
Sustainable forestry
We display FSC and PEFC certification marks on the
envelopes of our consumer direct marketing and bills,
recognising our decision to source paper from certified
sustainable sources. In fact, where possible, we replace
printed materials with an online equivalent. This Annual
Report is printed on certified 100% recycled paper.
Community investment
During the year, the Group was responsible for generating
£517,700 (2012: £357,900) of income for Registered
Charities, including £283,200 of direct cash donations
(2012: £129,600). In addition, we invested over
£75,000 in community projects that we added to our
NGN footprint. The Group did not make any political
donations in the current or prior year.
We focus primarily on providing time and money
via engagement with four key stakeholder groups:
Engaging with our supply partners
In November our Directors hosted the Night of
Ambition, our third annual fundraising auction on
behalf of Ambitious about Autism. Over 250 of our
supply partners and senior managers attended, with
many donating unique lots for the auction. A total of
£220,000 was raised for children and young people
with autism.
Engaging with our customers
We continued three customer driven cause-related
fundraising campaigns throughout the year. The first
was the continuation of our pledge to donate to
Ambitious about Autism for every call made to our
UK directory enquiries number: 118 111.
We also continued the initiative to reward customers
who return to us routers that have been diagnosed as
end-of-life. We pay for the postage, refurbish or safely
recycle the equipment and then donate £1 to charity
on their behalf.
The year also saw the introduction of a donation
to the unique charity Cool Earth, when customers
added our unique Global Minutes Boost option to their
phone package. Supported by Sir David Attenborough
and Professor Lord Stern, Cool Earth is the only charity
dedicated to protecting endangered rainforests
through engagement with indigenous communities,
one of the most effective ways to minimise CO2
reaching our atmosphere.
Engaging with our colleagues
The Group’s Give Something Back initiative includes
matched donations for our people who raise funds
for a Registered Charity. Hundreds of people took
part in fundraising over the year.
Engaging with our new communities
The year saw us bring our NGN to additional exchanges
as part of our LLU programme. Each new addition sees
our broadband and phone services become available to
thousands of families and businesses for the first time.
To celebrate our arrival in these communities, we make
an investment in something important to them, for
example, improvements to the community centre.
This year, we supported over 100 communities,
investing over £75,000.
Other achievements
in the year
We retained both our FTSE4Good Index membership and Carbon Saver Gold Standard certification
Corporate
Responsibility
Group
14
We have protected
and developed our
unique culture,
expressed in our
‘Brighter Basics’ –
Customer, Innovate,
Value, People
and Community.
TalkTalk Telecom Group PLC Annual report 2013
People
We have an ambitious and progressive approach
to engaging with our employees.
In FY13 we issued every employee with a one-off gift of
1,000 nil priced share options, created a consistent set
of employment terms and saw a significant increase in
employee engagement; all key contributors to our
success as a business.
employees, while our highly popular ‘TalkTalk Heroes’
scheme allows employees to nominate colleagues for
their outstanding contribution in a wide range of areas,
from charity work to customer engagement. TalkTalk
Heroes are publicly recognised at company events.
Harmonisation programme
During FY13, following an extensive period of consultation,
we created a simple banded job structure with
consistent terms, conditions and benefits for all our
employees. This programme is delivering consistency,
transparency and the foundation from which our
employee development programmes can operate.
It also offers a clearer proposition to help us attract
and retain the best talent.
Leadership development
We recognise that the quality of our managers is vital
to our future success and we have continued our
commitment to leadership development through our
on-going programme, ‘Leading a Brighter Business’.
550 of our managers have now been through the
first parts of the modular programme and showing
improvements in leadership capability. The programme
will continue in FY14.
Employee engagement
Our engagement survey and plan enable us to listen
and respond to our employees and help us to create and
sustain an environment where they are motivated, stay
with us and enjoy working for TalkTalk.
Following our first survey in December 2011, we
committed to specific actions that would enable
higher levels of employee engagement. The survey
was repeated in January 2013 with significantly greater
participation (89% vs. 72%) and an 11% increase in
overall engagement.
Employee performance and development
In the past twelve months, we have delivered a number
of new tools to support employee development.
TalkTalkU is our online hub for all learning and
development and includes extensive face-to-face and
eLearning options. We have also delivered interactive
tools to enable employees to chart career progression
routes through TalkTalk. Our annual performance
management process has continued to provide a
mechanism to drive performance and development
with all employees participating in a performance
related variable bonus pay scheme.
Employee recognition
Recognising employees who drive our culture by
actively demonstrating our Brighter Basics is extremely
important to us. Our ‘On-the-Spot’ award scheme
enables Senior Managers to give instant recognition to
Employee benefits and share ownership
We offer a comprehensive range of flexible employee
benefits which we are continually improving, so
employees can make choices to suit their lifestyles.
Share ownership is an important part of our culture.
In September 2012 we issued every employee, who
was not currently part of another share option plan,
with a one-off gift of 1,000 nil priced share options
through the ‘All Employee Share Option Award.’ This
is in addition to the employee share ownership already
promoted through the annual TalkTalk SAYE Scheme,
in which over 40% of our employees participate.
We believe in our employees being users of, and
advocates for, our products. In FY13, we extended
our employee offers to include free home phone,
fibre and TV, as well as half-price mobile packages.
Great Getaway
In September 2012, we held our family friendly
summer event the Great Getaway again, which
was for all employees and their families, with over
2,000 people attending.
Employee consultation – One Voice forum
One Voice, is a consultation and information forum
consisting of 80 nominated employee representatives,
management and members of our People Services
team. The forum meets regularly to discuss how the
key issues we face as a business might affect our
employees and to discuss relevant employee matters.
Employee communication
We communicate with all employees on a weekly basis
via ‘TeamTalk’, a newsletter that incorporates various
updates from across the business. We also produce
a bespoke online newsletter for our people managers,
informing them about matters that affect them or
their teams. The weekly blog from Dido Harding
continues to be popular with employees allowing
for communication and feedback on topical issues
in the Group.
Every six months, Senior Managers provide a face-to-face
update on the performance of the business to all our
employees, including those employed by our partners.
In June 2012, we brought every UK based employee
together for a one day conference, following which 87%
of attendees said that they had a better understanding
of TalkTalk’s strategic priorities. We will be repeating
the event in FY14.
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TalkTalk Telecom Group PLC Annual report 2013
Board of Directors and advisors
Chairman:
Sir Charles Dunstone
Sir Charles is the founder of Carphone Warehouse and created TalkTalk in 2002. He was appointed Chairman of TalkTalk in 2010. Sir Charles
has directed the development of TalkTalk to become one of the leading fixed line telecommunication businesses in the UK. Sir Charles is
Chairman of the Prince’s Trust, YouView TV Limited and Carphone Warehouse Group PLC.
Executives:
Dido Harding
Dido has been Chief Executive Officer of
TalkTalk since February 2010. Prior to that,
Dido was Sainsbury’s convenience Director,
having been appointed to Sainsbury’s
operating board in March 2008. Dido
joined Sainsbury’s from Tesco PLC where
she held a variety of senior roles. Dido is a
Non-Executive Director of The British Land
Company PLC and is a Trustee of Go On UK.
Non-Executives:
John Gildersleeve
John joined the Board in January 2010.
He is currently Chairman of The British
Land Company PLC and deputy Chairman
of Carphone Warehouse Group PLC.
Previously he was an Executive Director
of Tesco PLC.
Amy Stirling
Amy has been Chief Financial Officer of
TalkTalk since 2006 and was appointed
to the Board in 2010 prior to its demerger
and listing on the London Stock Exchange.
She has held a variety of senior commercial
and finance positions as the business has
developed. Amy joined TalkTalk in 2000 from
The Rank Group PLC where she held finance
and business development roles. Amy is a
chartered accountant.
Ian West
Ian joined the Board in February 2011. He
has been involved in the TMT sector for
around 25 years as a Manager, Director and
Investor. Ian held numerous roles at British
Sky Broadcasting over 11 years, ending up
as Managing Director of the Sky Digital
subscription business. Ian is also currently an
investor in a range of small and medium sized
businesses and co-founded Top Up TV in
2003. Ian is a supervisory board member of
Kabel Deutschland.
Brent Hoberman
Brent joined the board of TalkTalk in January
2010. Brent co-founded lastminute.com in
1998, and was its Chief Executive Officer until
it was sold in 2005. He has subsequently
founded and is Chairman of mydeco and
made.com, and also co-founded PROfounders
and Founders Forum. Brent is a Director
of easyCar.com and is a Non-Executive
Director of Guardian Media Group, Time Out
Group and Shazam.
Sir Howard Stringer
Sir Howard joined the Board in July 2012.
He is (until June 2013) Chairman of the
Board of Directors of Sony Corporation.
Prior to his appointment as Chairman,
Sir Howard was President and CEO of Sony
Corporation. Before Sony Corporation,
Sir Howard had a distinguished 30 year
career as a journalist, producer and
executive at CBS Inc. After seven years
as President of CBS Inc, Sir Howard was
Chairman and CEO of TELE–TV, the media
and technology company formed by
Bell Atlantic NYNEX and Pacific Telesis.
Company Secretary
Tim Morris
Advisors
Principal bankers:
Royal Bank of Scotland Group PLC
DNB Bank ASA
Barclays PLC
HSBC Bank PLC
Lloyds TSB Bank PLC
Corporate brokers:
Credit Suisse (Europe) Limited
1 Cabot Square, London E14 4QJ
Barclays Capital
5 The North Colonnade
Canary Wharf, London E14 4BB
David Goldie
David joined the Board in January 2010. David
has over 25 years’ experience in the telecoms
industry and has been instrumental in the
establishment and growth of the Group.
David holds a Non-Executive role at
The Fulwood Academy.
John Allwood
John joined the Board of TalkTalk in 2010.
He has spent his entire career in Media and
Telecoms and held a number of senior
executive positions in these sectors
including Chief Executive of Orange UK,
between 2000-2004. Prior to that John
spent eight years at Mirror Group PLC as
Finance Director and Chief Executive.
After leaving Orange he was Managing
Director of Telegraph Media Group, and
Chief Operating Officer and Finance Director
of Mecom Group PLC. John is Non-Executive
Director of Carphone Warehouse Group PLC
and a Governor of Exeter University.
James Powell
James joined the Board in July 2012.
James is Chief Technology Officer of
Thomson Reuters. In his 14 years at Reuters,
James held a number of senior leadership
positions including CTO for Enterprise; CTO
and global head of product development;
head of technology strategy and CTO for
the Reuters Financial division. He has also
held senior leadership positions at Solace
Systems, Citadel Investment Group and
TIBCO Finance Technology.
Registrars:
Equiniti Limited
Aspect House, Spencer Road
Lancing, West Sussex BN99 6DA
Auditor:
Deloitte LLP
2 New Street Square
London EC4A 3BZ
16
TalkTalk Telecom Group PLC Annual report 2013
Corporate governance
Introduction
The Board is committed to the highest standards of
corporate governance and in accordance with the
Listing Rules of the UK Listing Authority the Board
confirms that the Company has throughout the year
and as at the date of this Annual Report, complied
with the provisions set out in the UK Corporate
Governance Code (the ‘Code’).
This section of the Annual Report, together with
the Directors’ Report and Directors’ Remuneration
Report, provides details of how the Company has
applied the principles and complied with the
provisions of the Code. In particular, this section
summarises the Board’s compliance with the five
key principles of the Code, namely: leadership,
effectiveness, remuneration, accountability and
relations with shareholders.
Board balance and independence
The Board has ten members, six of whom, excluding the
Chairman, are considered independent Non-Executive
Directors. These are John Gildersleeve, the Senior
Independent Director, John Allwood, Brent Hoberman,
Ian West, Sir Howard Stringer and James Powell.
Therefore, at least half of the Board (excluding the
Chairman) are independent and, notwithstanding
the changes to the Board composition, this has
been the situation for all of FY13.
The following changes to the Board have been
announced during the year: Roger Taylor stepped down
in July 2012, and Sir Howard Stringer and James Powell
were appointed as Non-Executive Directors with effect
from the same date. On 4 March 2013, it was announced
that Stephen Makin will become an Executive Director
with effect from 31 May 2013, replacing Amy Stirling
who will step down. His biographic details will be made
available at the 2013 AGM, where he will stand for election.
The Chairman and Executive Directors have service
contracts that can be terminated by either the
Company or the Director on twelve months’ notice.
The Non-Executive Directors have three year
periods of appointment, all of which commenced
from 20 January 2010, with the following exceptions:
Ian West (8 February 2011); Sir Howard Stringer
(26 July 2012); and James Powell (26 July 2012). Once
these periods end, their appointments become
rolling until each AGM where they stand for re-election.
All the independent Directors have a three month
notice period with no compensation for loss
of office.
Leadership
How the Board operates
The Board has reserved certain matters, and delegated others, to the Group’s Executive Committee, which comprises
Dido Harding (Chief Executive Officer), Amy Stirling (Chief Financial Officer), David Goldie (Group Commercial Director)
and other senior employees drawn from across the Group. Reserved matters include approving the Group’s
strategy, annual budgets and other longer term planning.
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Number of meetings attended
Number of meetings
Director
Sir Charles Dunstone, Chairman
Dido Harding
Amy Stirling
David Goldie(1)
Roger Taylor(2)
John Gildersleeve
Ian West
John Allwood
Brent Hoberman
Sir Howard Stringer(3)
James Powell(4)
Board
6
Audit
Remuneration
Nomination
3
6
1
Board
Audit
Remuneration
Nomination
6
6
6
5
2
6
6
6
6
3
4
–
–
–
–
–
3
3
3
–
–
1
–
–
–
–
–
6
6
–
6
3
–
(1) David Goldie was unable to attend a Board meeting due to a prior business commitment.
(2) Roger Taylor stepped down as a Director on 26 July 2012.
(3) Sir Howard Stringer was appointed on 26 July 2012 and was unable to attend one Board meeting due to illness.
(4) James Powell was appointed on 26 July 2012. He was unable to attend one Audit Committee meeting due to personal reasons.
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–
–
–
1
1
1
–
–
–
–
17
TalkTalk Telecom Group PLC Annual report 2013
Corporate governance continued
Leadership continued
As well as the formal meetings during the year, the
Board met at other times appropriate for approving
certain announcements to shareholders.
It is important to the Board that Non-Executive
Directors have the ability to influence and challenge
appropriately. To this end all Non-Executive Directors
are given a thorough induction to the Group and take
priority in Board discussions. All Directors receive papers
in advance of meetings. They also receive regular reports
and members of the Group’s executive team are invited
to present at Board meetings so that the Non-Executive
Directors keep abreast of developments in the Group.
The Chairman meets regularly with just the Non-Executive
Directors prior to every other Board meeting. This ensures
that any concerns can be raised and discussed outside
of formal Board meetings. The Senior Independent
Director also attends these sessions where it is possible,
if required, to discuss any matters with the other
independent Non-Executive Directors.
The Senior Independent Director also takes responsibility
for performance evaluation of the Board; succession
planning for the Chairman; and chairing Non-Executive
Director only meetings. In addition, he is an alternative
point of contact for shareholders in the event that
normal executive channels are not appropriate. Details
of the Senior Independent Director’s role are set out on
the Group’s website (www.talktalkgroup.com).
It is important to the Group that all Directors understand
external views of the Group. To this end regular reports
are provided to the Board by the Group’s Investor
Relations Director, covering broker reports and the
output of meetings with significant shareholders.
As stated below, the Board has also delegated certain
matters to a number of Board Committees.
Effectiveness
Performance evaluation and continued development
Each Board member has been subject to an internal
performance review during the year, where the balance
of skills, knowledge and experience of each Director
was reviewed. This was undertaken by each member
of the Board completing detailed questionnaires. The
results of these were analysed by the Chairman, Senior
Independent Director and the Board as a whole against
the broad criteria of overall Board effectiveness and
individual contributions.
As part of the performance review the ability of each
Director, in particular the Non-Executive Directors,
to demonstrate the required time commitment to
the role was assessed.
As a result of this performance evaluation the
Chairman confirms that each of the Directors
seeking re-election at the AGM continues to be
effective and has demonstrated the appropriate
commitment to the role.
The Senior Independent Director also met with the other
Non-Executive Directors to assess the Chairman’s
effectiveness, taking into account the views of
Executive Directors.
In line with the Code, an external performance evaluation
of the Board will be conducted during FY14.
The Company Secretary ensures that the Board
is made aware of new laws, regulations and other
information appropriate to the Group to ensure that
all Directors continually update their skills, knowledge
and familiarity of the Group in order to fulfil their roles.
Additionally each Director has access to the advice
and services of the Company Secretary and also has
the ability to take independent external advice if required.
Board Committees
The Board has established five Committees: Audit,
Remuneration, Nomination, Regulatory Compliance
and Television; the first three are as required by the
Code, the fourth is to ensure the compliance of the
Group within the regulatory environment in which it
operates, and the fifth is to focus on the Group’s work
in relation to its television offering.
Audit Committee
The Committee currently comprises the following
independent Non-Executive Directors: John Allwood
(Chairman), John Gildersleeve, Ian West and James
Powell (with effect from July 2012). Roger Taylor
was not a member but attended the Committee by
invitation until he stepped down on 26 July 2012.
The Chairman of the Committee updates the Board
on any significant issues that may have arisen at the
Board meeting following each Committee meeting.
In addition, the Chairman of the Committee is happy
to make himself available to investors on request.
During the year, all requirements of the Code in respect
of the Committee were met. The work undertaken by
the Committee is described within the following
sections of this report.
The Group’s Chief Financial Officer as well as
representatives of the Company’s external auditor
and other senior executives from Finance, Tax and
Treasury, Legal and Business Assurance also attend
these meetings by invitation of the Committee. The
external and internal auditors have direct access to
the Committee during formal meetings and time is
set aside for them to have private discussion with the
Committee, in the absence of management attendees.
18
TalkTalk Telecom Group PLC Annual report 2013
Effectiveness continued
Board Committees continued
Audit Committee continued
John Allwood remains the member of the Committee
with relevant and recent financial experience (as
recognised by the Consultative Committee of
Accountancy bodies), although all members are
expected to be financially literate and have an
understanding of:
• the principles of, contents of and developments
in financial reporting, accounting standards and
statements of recommended practice;
• key aspects of the Company’s operations;
• matters that influence or distort the presentation
of accounts and key financial information;
• the principles of, and developments in, key
applicable company law and other legislation
relevant to the Company;
• the role of internal and external auditing and
risk management;
• the regulatory framework of the Company’s
business; and
• environmental and social responsibility best
reporting practices.
During the year, the formal calendar of items considered
at each Audit Committee meeting within each annual
cycle embraced the Code requirements to:
• monitor the integrity of the financial statements
of the Company and any formal announcements
relating to the Company’s financial performance,
including reviewing significant financial reporting
judgements contained in them;
• review the Company’s internal financial controls and
its internal control and risk management systems
and to make recommendations to the Board;
• review the Company’s arrangements by which
employees may raise concerns in confidence;
• monitor and review the effectiveness of the
Company’s internal audit function;
• make recommendations to the Board in relation to
the appointment, re-appointment and removal of the
external auditor and to approve its remunerations
and terms of engagement;
• review and monitor the external auditor’s
independence and objectivity and the
effectiveness of the audit process, taking
into consideration relevant UK professional
and regulatory requirements; and
• review the Company’s policy on the engagement of
the external auditor to supply non-audit services.
The Committee’s remit requires it to report to the
Board, identifying any matters in respect of which it
considers that action or improvement is needed and
to make recommendations as to the steps to be taken.
The actions taken by the Committee over the last
twelve months include:
• review of the financial statements in the Annual
Report 2012 and received reports from the external
auditor on the same;
• review of the non-audit work undertaken by the
external auditor during the year and the non-audit
fees paid to the auditor;
• review of the external auditor’s performance;
• receipt of reports on internal audit work undertaken,
key findings and implementation of actions and
approval of the internal audit plan for the year;
• review of the effectiveness of the Group’s internal
controls and disclosures made in the Annual Report
on this matter; and
• review of updates on Group accounting, tax and
treasury matters, including going concern, goodwill
impairment review and tax.
The Committee is responsible for the development,
implementation and monitoring of the Company’s
policy on external audit, which assigns responsibility
for monitoring the independence, objectivity and
compliance by the external auditor to the Committee.
The policy relating to the provision of non-audit
services by the external auditor specifies the types
of work from which the external auditor is excluded;
for which the external auditor can be engaged without
referral to the Committee; and for which a case by case
decision is required. In order to safeguard the auditor’s
objectivity and independence, the ratio of non-audit
fees to audit fees is monitored by the Committee.
Any work proposed in excess of 50% of the audit fee
is referred to the Committee. Amounts below this
are discussed with the Chairman of the Committee.
A statement of fees paid or accrued for services from
the external auditor during the period is set out below:
Fees payable to the Company’s
auditor for the audit of the
Company’s annual accounts
Audit of the Group and its
subsidiaries pursuant to legislation
Audit services provided
to all Group companies
Taxation and other services
Total Group auditor’s
remuneration
2013
£m
2012
£m
0.1
0.4
0.5
0.1
0.6
0.1
0.6
0.7
0.3
1.0
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19
TalkTalk Telecom Group PLC Annual report 2013
Corporate governance continued
Effectiveness continued
Board Committees continued
Audit Committee continued
In the current year, the Group incurred non-audit fees
of £53,000. Fees relating to tax services of £39,000
principally comprised technical advice associated with
relevant UK and international fiscal law and regulations.
Other fees of £14,000 mainly represented advice for
corporate restructure projects and HR consultancy.
Having undertaken a review of the non-audit related
work, the Committee has satisfied itself that the
services undertaken during the year did not prejudice
the external auditor’s independence.
At each of its meetings the Committee reviewed and
considered reports on risk and business assurance
on the status of the Group’s risk management systems,
findings from the internal audit function concerning
internal controls, and reports on the status and
recommended necessary actions for the remedying
of any significant failings or weaknesses in internal
controls identified by the internal or external auditor.
The Chairman of the Committee updates the
Board following each Committee meeting.
The Committee’s terms of reference, which are
available on request from the Company Secretary
and are published on the Group’s website
(www.talktalkgroup.com), comply with the Code.
In light of the assessments and review undertaken,
the Committee recommended to the Board that
Deloitte LLP be retained as the auditor of the Company.
This recommendation was endorsed by the Board.
Deloitte LLP has expressed its willingness to continue
in office as auditor and a resolution to re-appoint
Deloitte LLP will be proposed at the forthcoming AGM.
Remuneration
Remuneration Committee
The Committee currently comprises the following
independent Non-Executive Directors: John Gildersleeve
(Chairman), Brent Hoberman, Ian West and Sir Howard
Stringer (with effect from July 2012). Roger Taylor
was not a member but attended the Committee by
invitation until he stepped down on 26 July 2012.
Other Directors including the Chief Executive Officer,
the Company Secretary, the Group Human Resources
Director and advisors attended by invitation of the
Committee. A detailed description of the Committee’s
remit and work during the period is contained in the
Directors’ Remuneration Report on pages 22 to 28.
The Chairman of the Committee updates the Board
following each Committee meeting.
The Committee’s terms of reference, which are available
on request from the Company Secretary and are published
on the Group’s website (www.talktalkgroup.com),
comply with the Code.
Accountability
Nomination Committee
During the year the Committee comprised the following
Non-Executive Directors: John Gildersleeve (Chairman),
Roger Taylor (until 26 July 2012, when he stepped down
and was replaced by John Allwood) and Ian West.
The Committee is responsible for succession
planning at Board level, overseeing the selection
and appointment of Directors, regularly reviewing
the structure, size and composition of the Board and
making its recommendations to the Board. It assists
in evaluating the commitments of individual Directors
and the balance of skills, knowledge and experience
on the Board.
The Committee has overseen the appointment of
Sir Howard Stringer and James Powell as Non-Executive
Directors and also the appointment of Stephen Makin as
an Executive Director and Chief Financial Officer with
effect from 31 May 2013, when Amy Stirling will stand
down as an Executive Director and Chief Financial
Officer. All will stand for election at the 2013 AGM.
The Chairman of the Committee updates the Board
following each Committee meeting.
The Committee’s terms of reference, which are available
on request from the Company Secretary and are published
on the Group’s website (www.talktalkgroup.com),
comply with the Code.
Regulatory Compliance Committee
The members of this Committee are John Gildersleeve
(Chairman), Dido Harding (Chief Executive Officer),
David Goldie (Group Commercial Director) and
Tim Morris (Company Secretary).
Other senior executives of the Group attend by
invitation of the Committee.
The purpose of the Committee is to provide the Board
with visibility of how the Group remains compliant with
those regulations affecting its businesses from time
to time. Its members therefore include those senior
executives who are operationally responsible for
implementing permanent changes necessary to
ensure the Group remains compliant.
Such members are accountable to the Committee and
the Board for the successful delivery of such changes.
This Committee meets at least four times a year and
reports to the Board accordingly. The Group also
operates a weekly Compliance Committee made up of
those senior executives (including the Chief Executive
Officer) responsible for all key areas of compliance
across the Group and is chaired by the Company
Secretary. Targets set at these meetings are monitored
against a weekly scorecard.
20
TalkTalk Telecom Group PLC Annual report 2013
Accountability continued
Television Committee
The Board has established a Committee, which is delegated
with managing the Group’s television proposition. The
Board retains strategic decision making capacity in
relation to television. The Committee is chaired by Ian
West and its members are drawn from the Executive
Directors and other senior executives of the Group.
Terms of reference for the Committee are available
from the Company Secretary on request.
Risk management and internal control
The Company has established a risk management
programme that assists management throughout the
Company to identify, assess and mitigate business,
financial, operational and compliance risks. The Board
views management of risk as integral to good business
practice. The programme is designed to support
management’s decision making and to improve the
reliability of business performance.
To ensure that all parts of the Group have a good
understanding of risk, members of this team have
conducted risk workshops and reviews within each
of the main functions in the past year, culminating in
an assessment of key business risks by the Executive
Directors and key management. These risk assessments
have been wide-ranging, covering risks arising from
the regulatory environment, strategy, counterparties
and organisational change associated with major
projects. The risk management process operates
throughout the Group, being applied equally to the
main business units and corporate functions. A risk
report and update is provided at each Board meeting.
The output of each assessment is a list of key strategic,
financial, operational and compliance risks. Associated
action plans and control to mitigate identified risks are
put in place where this is possible and to the extent
considered appropriate by the Board taking account
of costs and benefits. Changes in the status of the key
risks and updates on mitigation are reported regularly
at each Board meeting.
The Directors have overall responsibility for the
Group’s system of internal controls and for reviewing
their effectiveness. The Board delegates to executive
management the responsibility for designing, operating
and monitoring these systems. The systems are based
on a process of identifying, evaluating and managing
key risks and include the risk management processes
set out above.
The systems of internal control were in place throughout
the period and up to the date of approval of the Annual
Report. The effectiveness of these systems is periodically
reviewed by the Audit Committee in accordance with
the revised guidance in the Turnbull Report. These
systems are also refined as necessary to meet changes
in the Group’s business and associated risks. The systems
of internal control are designed to manage rather than
eliminate the risk of failure to achieve business
objectives. They can only provide reasonable and not
absolute assurance against material errors, losses,
fraud or breaches of law and regulations.
The Board has conducted an annual review of the
effectiveness of the systems of risk management and
internal control in operation during the year and up to
the date of the approval of the Annual Report. This was
approved by the Audit Committee and the Board. The
Audit Committee also adopts an internal audit charter
each year in accordance with international internal
auditing standards.
This is supported by the Business Assurance and
Internal Audit function through an ongoing process
for identifying, evaluating and managing the risks
faced by the Group.
Relations with shareholders
The Board believes it is important to explain business
developments and financial results to the Company’s
shareholders and to understand any shareholder
concerns. The principal communication media used to
impart information to shareholders are news releases
(including results announcements) and Company
publications. In all such communications, care is taken
to ensure that no price sensitive information is released.
The Chief Executive Officer and Chief Financial Officer
have lead responsibility for investor relations. They are
supported by a dedicated Investor Relations Director
who, amongst other matters, organises presentations
for analysts and institutional investors. There is a full
programme of regular meetings and dialogue with
major institutional shareholders, fund managers,
analysts, retail brokers and credit investors, upon
which the Chairman ensures that the Board receives
regular updates at Board meetings. The Board also
receives periodic reports on investors’ views of the
performance of the Company. All the Non-Executive
Directors and, in particular, the Chairman and Senior
Independent Director, are available to meet with major
shareholders, if such meetings are required. The
Company plans also to communicate with shareholders
through the AGM, at which the Chairman will give an
account of the progress of the business over the last
year, and a review of current issues, and provides the
opportunity for shareholders to ask questions.
The Company’s AGM provides all shareholders
with the opportunity to vote on the resolutions put
to shareholders (whether personally or by proxy).
Information relating to votes cast will, following
the AGM, be available on the Company’s website
(www.talktalkgroup.com).
Further financial and business information is available
on the Group’s website (www.talktalkgroup.com).
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21
TalkTalk Telecom Group PLC Annual report 2013
Directors’ Remuneration Report
On behalf of the Board, I am pleased to present
the Directors’ report on remuneration for FY13.
Introduction
The Group’s Remuneration Committee continues
to be focused on its ability to attract, motivate and
retain high quality talent required for the delivery of its
strategy and ensuring that remuneration is linked to the
long term performance of the Group. The Committee
ensures that it is up to date with the ongoing evolution
of corporate governance practice and Government
guidance in the design of its remuneration policy and
framework. Over the course of the next twelve months,
the Committee will continue to plan for the forthcoming
revised remuneration reporting regulations which will be
reflected in my report for FY14.
Remuneration policy
The aim of the remuneration policy is to support
the Group in:
• aligning individual and business performance with
those of shareholders through the delivery of clear
and stretching targets;
• strengthening the link between employee output
and the delivery of shareholder value;
• supporting the Group’s overarching philosophy,
to maintain its ‘value player’ positioning in
the marketplace;
• attracting, motivating and retaining high quality talent;
• maintaining a stable, efficient cost base;
• enabling the Group’s remuneration strategy to
be tailored to its changing circumstances; and
• reflecting corporate governance best practice.
The Company firmly believes that remuneration should
be structured in a fair and competitive way, in order to
incentivise individuals to achieve the highest levels
of performance.
Packages are designed to be market competitive with
fixed remuneration set at market median levels. Variable
rewards, which are linked to challenging objectives
based on the performance of the Group, are designed
to reward exceptional performance and for the delivery
of shareholder value creation. These variable rewards
can provide individuals with significant overall levels
of remuneration.
To ensure that the interests of the Executive Directors
are closely aligned to those of its shareholders, the
Company requires Executive Directors to build and
retain a shareholding in the Company of at least 200%
of their annual salary.
Remuneration Committee
The Remuneration Committee is responsible for making
recommendations to the Board in relation to the individual
remuneration packages for the Executive Directors and
the Chairman. These recommendations comply with
the remuneration policy, which is set by the Board, and
the terms of reference of the Committee are available
on the Group’s website (www.talktalkgroup.com) or on
request from the Company Secretary. The Committee
works with the Board to determine the balance of allocation
of profits between employee incentives, shareholder
dividends and reinvestment into the Group.
Remuneration for Non-Executive Directors is set by
the Board, taking account of the commitments and
responsibilities of the role and their participation in
the various governance committees of the Company.
Except when matters concerning their own positions
are being considered, the Chief Executive Officer and
the Group Human Resources Director are normally
invited to attend the meetings of the Remuneration
Committee to assist the Committee. The Committee
may discuss any matter affecting the Chairman
without the Chairman being present.
The Committee has access to independent advisors
where it considers it appropriate. Advice from Towers
Watson was received in relation to share schemes
and executive remuneration in the course of the year.
The Committee expects its external advisors to
comply with the Remuneration Consultants Group
Code of Conduct.
Components of remuneration
The main fixed and performance related elements
of remuneration that can be awarded to Executive
Directors are as follows:
• base pay, benefits and pension contribution (fixed);
• annual performance bonus (variable); and
• share options and performance shares (variable).
Harmonisation programme
Over the course of the last twelve months, the Group
has undertaken the task of aligning the terms, conditions
and benefits of all employees, managers and executives.
The Committee has been fully consulted on this
harmonisation programme, with employees voluntarily
accepting a new single set of terms and conditions.
Following an extensive period of consultation, the Group
created a simple banded job structure with consistent
terms, conditions and benefits. This programme is
delivering consistency, transparency and the foundations
for our employee, manager and executive development
programmes to operate from. It also offers a clearer
proposition to help attract and retain high quality talent,
supporting the remuneration policy of the Group.
The current regulations
require the Company’s
auditor to report to
the members on the
‘auditable part’ of
this report (marked*)
and to state, in their
opinion, that this part
of the report has been
properly prepared in
accordance with the
Companies Act.
22
TalkTalk Telecom Group PLC Annual report 2013
Summary of reward components of Executive Directors
and other members of the Executive Committee
Component
Description
Aim
Further detail
Fixed
Base pay
To attract and retain talent
by ensuring base pay is
competitive in the market.
Paid monthly.
Reviewed annually.
Benchmarked against external
market data from external
specialists and the Company’s
approach to the all employee
salary review.
Base pay for Executive
Directors remains at market
median levels for D Goldie, but
is within the lower quartile for
both D Harding and A Stirling.
Any increase typically takes
effect from 1 July annually.
Reviewed periodically relative
to the market.
Reviewed periodically relative
to the market.
Fixed
Core benefits
Designed to be competitive
in the market.
Fixed
Voluntary
benefits
Benefits may vary dependent
on the role of the individual.
Core benefits typically include
a defined contribution pension
scheme (or cash alternative),
life assurance, income
protection, annual leave and
private medical insurance.
These include car
allowances/company car
provision, voluntary benefits
arrangements including
the purchase of additional
holiday days and the ability
to participate in all employee
share plans.
Variable
Annual
performance
bonus
Designed to focus executives
on the business priorities
for the financial year ahead
and to align an individual’s
reward with future
shareholder value creation.
The bonus scheme for FY13
was based on a ‘balanced
scorecard’ that comprised
financial, customer as well
as employee satisfaction
measures and innovation.
Annual performance bonuses
are satisfied in cash each
year on the achievement
of stretching performance
conditions set by the
Remuneration Committee.
Any payment is typically made
in June annually.
The Remuneration Committee
retains the discretion to
adjust payments up or down
in exceptional circumstances,
where it feels that this course
of action is appropriate.
Maximum awards for executives
have been reduced from 200%
to 170% of base pay for FY13.
Awards are discretionary.
Awards do not normally vest
until the third anniversary of
the date of grant and may have
a deferral element.
If employment ceases during
the vesting period, awards will
normally lapse in full.
Variable
Share-based
incentive plans
Designed to reward and
retain executives over the
longer term whilst aligning
an individual’s interests with
those of TalkTalk Telecom
Group’s shareholders.
Awards are granted over
TalkTalk Telecom Group
shares. Level of vesting is
dependent on stretching
performance conditions,
usually over a three year
performance period from
the date of grant.
No awards were made to
executives in the period.
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23
TalkTalk Telecom Group PLC Annual report 2013
Directors’ Remuneration Report continued
Annual performance bonus
For the year ended 31 March 2013, the annual
performance bonus was based on a ‘balanced
scorecard’ blend of financial measures (Underlying
Group EBITDA(1), Underlying Group operating free
cash flow(1), ARPU and revenue), customer measures
(TV launch and customer experience and churn),
employee satisfaction measures and innovation.
Executives had an incentive opportunity in the range
of 0% to 170% of base salary. Performance for the year
achieved 39.2% of the maximum bonus potential
resulting in a bonus of 66.8% of salary.
(1) Before investment in TV.
Director
D Harding
A Stirling
D Goldie
Total
2013
£000
334
250
133
717
2012
£000
400
300
260
960
Cash awards will be paid in June 2013.
Annual Performance Bonus Scheme –
executive performance measures
50
Financial
35
Customer
15
Innovation, growth and
employee satisfaction
% Weighting of FY13 performance measures
The Remuneration Committee is satisfied that this
bonus has provided an excellent link between reward
and operating performance and the creation of further
shareholder value.
Share-based incentive plans
Aggregate emoluments shown do not include any
amounts for the value of options to acquire ordinary
shares in the Company granted to or held by the
Directors. Details of the options for the Directors
who served during the year are as follows:
The TalkTalk Group Value Enhancement Scheme
The TalkTalk Group Value Enhancement Scheme
(TTG VES) was designed to enable participants to
share in the incremental value of the Group in the
excess of an opening valuation, as determined by
the Remuneration Committee and agreed with HMRC,
with the first opening valuation on 1 April 2009. Each
award entitles the participant to purchase a fixed
number of separate shares in the subsidiary company,
TalkTalk Group Limited, the holding company for
the TalkTalk business (‘Participation Shares’).
As the performance conditions are satisfied and the
award vests, the Participation shares may be purchased
by TalkTalk by the issue of TalkTalk shares or satisfied
by shares held by the Group ESOT. Participation Shares
that are purchased by participants were acquired
at market value and participants offered a loan from
TalkTalk at a commercial rate of interest in order to
fund such a purchase.
The scheme partially vested in the year as set out
on page 26. The vesting of the remaining 40% will be
determined in September 2013 as set out in note 5
to the consolidated financial statements.
TalkTalk Discretionary Shares
The TalkTalk Discretionary Share Option Plan (DSOP)
is designed to provide a long term incentive plan for
certain employees of the TalkTalk Group businesses.
It is the intention of the Committee that, generally in
any one year, participants may only receive an award
under one of such schemes.
2010 grant
The DSOP awarded in 2010 is approved by HMRC and
the exercise of the options is subject to continuing
employment and performance conditions as set out
in note 5 to the consolidated financial statements.
No employee will be granted options over 200% of
base salary, unless the TalkTalk Board determines
that exceptional circumstances exist which justify
exceeding this limit, in which case options shall not
exceed 300% of base salary. The options granted
under this award vested on 28 March 2013 and are
exercisable following the announcement of the
preliminary results on 16 May 2013.
2012 grant
The DSOP granted in February 2012, under the DSOP
rules approved by shareholders in 2010, is an unapproved
scheme and is designed to provide a long term incentive
plan for Executive Directors, senior executives and
certain employees of the TalkTalk Group businesses.
The exercise of the options is subject to continuing
employment and performance conditions as set out
in note 5 to the consolidated financial statements.
Awards are triggered within a range from 10% to 19%
for compound annual growth of TSR and EPS. 25% of
the part of an award relative to either EPS or TSR will
vest for the minimum target, rising to 40% for target
performance, 70% for stretch performance and
100% for super stretch performance.
In order to protect shareholder interests and to
ensure that participants of the DSOP are rewarded
for performance related value creation under volatile
market conditions, a ‘Cap and Collar’ mechanism has
been introduced into the scheme for the 2012 grant.
• This mechanism would address outperformance
in bear market conditions and underperformance
in bull market conditions.
• The mechanism adjusts the market cap of the Group
downwards when the FTSE 250 performance is
above the normal range cap and adjusts the market
cap upwards when the FTSE 250 performance falls
below the normal range.
• There would be no pay-out below a 5% TSR
CAGR floor.
• The normal range of the FTSE 250 has been
analysed by PricewaterhouseCoopers.
The Remuneration Committee has set
this as between +10% and -10%.
24
TalkTalk Telecom Group PLC Annual report 2013
Share-based incentive plans continued
All Employee Share Option Award
The All Employee Share Option Award was granted in
September 2012, under the DSOP rules approved by
shareholders in 2010. The award is designed to reward
all employees not currently part of another share
option plan to foster all employee share ownership.
Each qualifying employee was awarded 1,000 nil
priced share options. No awards were made to
executives or senior managers. The exercise of the
options is subject to continuing employment on the
vesting date in September 2013 and there are no
performance conditions in relation to this grant.
These options lapse on resignation of an employee.
TalkTalk SAYE Scheme
The TalkTalk SAYE Scheme is a Save-As-You-Earn
share option scheme and is approved by HMRC.
The SAYE Scheme is administrated by a duly authorised
committee of the Board. All UK Executive Directors
and employees of TalkTalk and participating companies
within the Group are eligible to participate in the SAYE
Schemes as long as they have been employed for a
qualifying period. To participate in the SAYE Scheme,
an eligible employee must enter into an SAYE contract
and agree to make monthly contributions between
£5 and £250 for a specified period of three or five years.
Options granted to acquire TalkTalk shares under the
SAYE Scheme have an option price determined by
the TalkTalk Board, which will be not less than the
higher of 80% of the middle market quotation price
or their nominal value.
Dido Harding, Amy Stirling and David Goldie each had
8,897 options available to buy shares in the Company
under the TalkTalk SAYE Scheme at 31 March 2013.
These options are exercisable from 1 July 2013 at an
exercise price of £1.02 per share. The options expire
on 1 January 2014.
Further details of the features and operations of the
TTG VES, DSOP and SAYE can be found in note 5 to the
consolidated financial statements.
Aggregate remuneration*
The total amounts of Directors’ remuneration and other benefits (excluding pension contributions) were as follows:
Director
Executive
D Harding
A Stirling
D Goldie(1)
Non-Executive
C Dunstone
R Taylor(2)
J Gildersleeve
J Allwood
B Hoberman
I West
H Stringer(3)
J Powell(3)
Aggregate emoluments
Basic
£000
500
375
200
360
25
85
60
50
73
34
34
1,796
Taxable
benefits
£000
Bonuses
£000
16
9
55
1
–
–
–
–
–
–
–
81
334
250
133
–
–
–
–
–
–
–
–
717
2013
Total
£000
850
634
388
361
25
85
60
50
73
34
34
2,594
2012
Total
£000
916
828
749
361
75
85
60
50
74
–
–
3,198
(1) D Goldie reduced his working hours to three days per week from June 2012.
(2) Stepped down on 26 July 2012.
(3) Appointed on 26 July 2012.
Total remuneration for FY13 above relates only to that paid to Directors for their role as Directors of the Company.
Pension contributions*
The schedule below sets out payments by the Group
to defined contribution money purchase pension
schemes on behalf of Executive Directors. A fixed
proportion of salary is paid by the Company together
with a fixed proportion by the Director and both
amounts are invested on behalf of the Director.
Pension benefits are then funded by the total
investment. Levels are reviewed by the Committee
annually against published market data. None of the
Directors were members of a defined benefit pension
scheme during the year. Pension entitlements are
based on basic salary only. The pension schemes
provided for other employees of the Group are set out
in note 4 to the consolidated financial statements.
Director
D Harding
A Stirling
D Goldie
Total
2013
£000
51
19
–
70
2012
£000
51
19
60
130
25
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TalkTalk Telecom Group PLC Annual report 2013
Directors’ Remuneration Report continued
External appointments
The Board supports Executive Directors holding
Non-Executive Directorships of other companies and
believes that any such appointments are part of the
continuing development of the Executive Directors
from which the Company will ultimately benefit.
The Board has reviewed all such appointments and
those appointments that the Board believes require
disclosure pursuant to the Code are set out below.
The Board has also agreed that the Directors may
retain their fees from such appointments.
Fees for external appointments
Director
D Harding British Land PLC, The Jockey Club
Organisation
2013
£000
70
Sir Charles Dunstone is also Chairman of Carphone
Warehouse Group PLC, which the Company believes
is a significant other commitment for him.
Fees for Non-Executive Directors
The Non-Executive Directors do not take part
in discussions on their remuneration. Each of the
Non-Executive Directors has a letter of appointment
substantially in the form suggested by the Code,
and each has a three month notice period with no
compensation for loss of office. The Company has
no age limit for Directors. The dates of each contract
are set out on page 28.
The fees for Non-Executive Directors are set out in the
aggregate remuneration table. The Committees that
they serve on are set out below.
Non-Executive Director
Committees
R Taylor(1)
J Gildersleeve
J Allwood
B Hoberman
I West
H Stringer(2)
J Powell(2)
Remuneration, Nomination
Audit, Remuneration,
Nomination, Compliance
Audit, Nomination(3)
Remuneration
Audit, Remuneration,
Nomination, Television
Remuneration
Audit
(1) Stepped down on 26 July 2012.
(2)
Appointed on 26 July 2012.
(3) Replaced R Taylor from 26 July 2012.
Directors’ interest in shares and dates
of service contracts*
Details of Directors’ interests in options to buy shares
in the Company are as follows:
1. TalkTalk Group schemes
a. Value Enhancement Scheme
As set out in note 5 to the consolidated financial
statements, prior to the demerger two value
enhancement schemes were introduced to provide
long term incentives to senior management. These
were called the TTG VES and the CPW TTG VES
(‘the VES schemes’).
On 17 September 2012, the Group’s Remuneration
Committee determined that the relevant performance
conditions of the VES schemes (including the 5% TSR
requirement) had been satisfied meaning the VES
participants were entitled to exercise 60% of their VES
options. The remaining 40% will vest in September 2013
subject to ongoing performance conditions being
met. Further details on the VES schemes are set out
in note 5 to the consolidated financial statements. The
participants’ options were acquired by the Company for
new ordinary shares in the Company and cash resulting
in a cash outflow of £35m. The net issue of 17 million
shares in the Company was at a price of £1.86 per share
being the average closing price of the Company’s
shares on 18 and 19 September 2012.
Vesting of the first 60% of the TTG VES resulted in the
Directors receiving the following share holdings:
Director
D Harding
A Stirling
D Goldie
2013
number of shares
2,149,688
1,464,046
1,464,046
5,077,780
The Directors had the following percentage share
of the TTG VES pool at 31 March 2013:
Director
D Harding
A Stirling
D Goldie
2013
% share
10
6
6
2012
% share
10
6
6
The remaining percentage of allocated shares in the
TTG VES pool is held by other senior management
of the Group.
The Directors have the following interest bearing loans
outstanding to the Group in relation to the TTG VES
at 31 March 2013:
Director
D Harding
A Stirling
D Goldie
2013
£000
668
180
180
1,028
2012
£000
1,606
433
433
2,472
Interest on outstanding loans was charged at 4% during
the year (2012: 4%).
26
TalkTalk Telecom Group PLC Annual report 2013
Directors’ interest in shares and dates of service contracts* continued
1. TalkTalk Group schemes
b. Discretionary Share Option Plan
Details of Executive Directors’ conditional right to receive nil priced options in the Company are shown in the
following table:
At
31 March
2012
or date of
appointment
236,220(1)
236,220(1)
1,024,590(2)
1,497,030
614,754(2)
614,754
Granted
during
the year
–
–
–
–
–
Exercised
during
the year
–
–
–
–
–
–
At
31 March
2013
Lapsed
during
the year
–
236,220
–
236,220
– 1,024,590
– 1,497,030
–
614,754
–
614,754
Exercise
price
per share
Exercisable
Expiry
£
from
date
– 01/09/2012 04/12/2020
– 01/09/2013 04/12/2020
May 2015 07/02/2022
–
–
May 2015 07/02/2022
Director
D Harding
Total for D Harding
A Stirling
Total for A Stirling
(1) Awarded in FY11
(2) Awarded in FY12
For awards made in FY11 the performance conditions are based on achieving a compound TSR of 5% over the
performance period. Full details of the scheme are disclosed in note 5 to the consolidated financial statements.
For awards made in FY12 the performance conditions are based on an equal split of achieving a compound TSR
measure and a compound EPS measure over the performance period. The awards made to Dido Harding and
Amy Stirling were equivalent to 250% and 200% of base pay respectively. Full details of the scheme are disclosed
in note 5 to the consolidated financial statements.
2. CPW legacy schemes
The performance conditions for all CPW legacy schemes have been met.
a. CSOP
Director
A Stirling
Total for A Stirling
At
31 March
2012
or date of
appointment
106,668
106,668
Granted
during
the year
–
–
Exercised
during
the year
–
–
Lapsed
during
the year
–
–
At
31 March
2013
106,668
106,668
Exercise
price
per share
£
Exercisable
Expiry
from
date
0.52 06/06/2006 06/06/2013
0.52 06/06/2006 06/06/2013
b. Performance Shares
Details of Executive Directors’ conditional right to receive nil priced options in the Company are shown in the
following table:
Director
A Stirling
Total for A Stirling
D Goldie
Total for D Goldie
At
31 March
2012
or date of
appointment
52,734
52,734
105,468
200,000
200,000
Granted
during
the year
–
–
–
–
–
Exercised
during
the year
–
–
–
–
–
Lapsed
during
the year
–
–
–
–
–
At
31 March
2013
52,734
52,734
105,468
200,000
200,000
Exercise
price
per share
Exercisable
Expiry
£
from
date
– 28/07/2007 28/07/2014
– 28/07/2008 28/07/2014
– 28/07/2008 28/07/2015
The market price was 272p as at 31 March 2013 (FY12: 137p) and the range during the year was 127p to 274p.
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27
TalkTalk Telecom Group PLC Annual report 2013
Directors’ Remuneration Report continued
Directors’ interests in shares and dates of service contracts
Both the Directors’ interests in the Group at 31 March 2013 and the effective dates of their contract are set
out below:
Director
C Dunstone
D Harding
A Stirling
D Goldie
J Gildersleeve
J Allwood
B Hoberman
I West
H Stringer
J Powell
Ordinary shares of 0.1p
31 March
2013
31 March
2012
Date of contract
294,059,396 295,209,396 20/01/2010
– 20/01/2010
536,687 20/01/2010
945,460 20/01/2010
246,000 20/01/2010
10,000 20/01/2010
– 20/01/2010
346,023 08/02/2011
– 26/07/2012
– 26/07/2012
2,149,688
2,000,733
2,409,506
246,000
10,000
12,882
346,023
–
–
Roger Taylor held 2,587,932 ordinary shares in the Group at 31 March 2012. He stepped down from the Board
on 26 July 2012.
This Remuneration Report has been prepared in accordance with the Large and Medium sized Companies
and Groups (Accounts and Reports) Regulations 2008 (‘Regulations’) issued under the Companies Act, the UK
Corporate Governance Code and the Executive Remuneration Guidelines published by the Association of British
Insurers in September 2011. The constitution and operation of the Remuneration Committee are in compliance
with the Code.
In framing its remuneration policy the Committee has given full consideration to the matters set out in Schedule A
of the Code. As required by the Regulations, a resolution to approve this report will be proposed at the AGM to be
held on 24 July 2013.
Performance graph
The graph below shows the Group’s performance compared to the TSR performance of the FTSE 250 from the
date of the Group’s listing, 29 March 2010.
The FTSE 250 was selected as it is a broad market index of which the Group is a member.
Performance Return Index
250
200
150
100
50
0
29 March
2010
31 March
2011
31 March
2012
31 March
2013
TalkTalk Telecom Group PLC
FTSE 250
J Gildersleeve
Senior Independent Non-Executive Director
15 May 2013
28
TalkTalk Telecom Group PLC Annual report 2013
Other statutory information
Suppliers payment policy
It is the Company’s policy to develop and maintain key
commercial relationships with its suppliers, one aspect
of which is payment timing to obtain mutually agreed
payment terms. The Company has commercially
agreed longer credit terms with certain suppliers.
Excluding these suppliers, the average credit period
taken on trade payables was 39 days (FY12: 32 days).
Including these suppliers, the average credit period
taken was 48 days (FY12: 32 days).
Contracts with controlling shareholders
There are no material contracts with controlling
shareholders, except as disclosed in the Directors’
Remuneration Report on pages 22 to 28. No Director
is entitled to any compensation for loss of office on
a takeover or change of control of the Company.
Details of employee share schemes are set out in
note 5 to the financial statements. Shares held
by the Group ESOT abstain from voting.
Share capital
The rights and obligations relating to the Company’s
shares are set out in the Articles of Association.
The Articles of Association can be requested
from the Company Secretary at the Company’s
registered office.
There are no restrictions on the transfer of ordinary shares
in the capital of the Company other than those which
may be imposed by law from time to time. In accordance
with the Disclosure and Transparency Rules, certain
employees are required to seek approval to deal in
the Company’s shares. The Company is not aware of
any agreements between shareholders that may result
in restrictions on the transfers of securities and/or
voting rights.
There is a general right of the Company to purchase
its own shares, as set out at Article 16 of the Company’s
Articles of Association. In addition, at the AGM in 2012,
the Directors were granted the right to acquire 91,410,825
shares. This right expires on the date of the 2013 AGM
or 28 October 2013 (whichever is the sooner).
The Articles of Association may be changed by
special resolution.
Details in the movements in authorised and issued
share capital during the period are provided in notes 21
and 22 to the financial statements.
Appointment of Directors
The rules relating to the appointment and/or removal
of Directors are contained in Section O of the Company’s
Articles of Association. The powers of the Directors are
set out in the Company’s Articles of Association.
Property, plant and equipment
Movements in property, plant and equipment are set
out in note 12 to the financial statements.
Dividends
The Company may, by resolution in a general meeting,
declare dividends in accordance with the respective
rights of the members, but no dividend can exceed
the amount recommended by the Board.
Significant shareholdings
At 15 May 2013 the Company had been notified of
the following interests in the Company’s shares:
Name
Sir Charles Dunstone
David Ross
Capital Research
Global Investors
Jupiter Asset
Management Limited
Group ESOT
Schroder Investment
Management Ltd (SIM)
Invesco Asset
Management Limited
Number of shares
294,059,396
116,160,528
Percentage of
share capital
31.58
12.47
62,933,100
42,764,602
38,728,388
29,369,033
28,158,815
6.76
4.59
4.16
3.15
3.02
The total interests of the Directors are detailed in the
Directors’ Remuneration Report on pages 22 to 28.
Going concern
On the basis of current financial projections and
facilities available, the Directors are satisfied that the
Group has adequate resources to continue in operation
for the foreseeable future and consequently the financial
statements continue to be prepared on the going
concern basis, as discussed in the Chief Financial
Officer’s Statement on page 11.
Director’s indemnities
Director’s liability insurance is provided for Directors.
In addition, there is an existing indemnity to Amy Stirling
in her capacity as a Director of CPW Support Services
(India) Private Limited.
Equal opportunities
We celebrate diversity and have an equal opportunities
policy, which ensures that everyone is provided with the
same opportunities for employment, career development,
training and promotion. As part of this policy, applications
for employment by disabled persons are fully considered,
bearing in mind the abilities of the applicant concerned.
In the event of employees becoming disabled during
employment a thorough process is followed and support
provided (including income support insurance) to try to
secure their employment.
Audit information
Each of the persons who is a Director at the date
of approval of this Annual Report confirms that:
• so far as the Director is aware, there is no relevant
audit information of which the Company’s auditor
is unaware; and
• the Director has taken all the steps that he/she ought to
have taken as a Director in order to make himself/herself
aware of any relevant audit information and to establish
that the Company’s auditor is aware of the information.
This confirmation is given and should be interpreted
in accordance with the provisions of Section 418 of
the Companies Act 2006.
By order of the Board
TalkTalk Telecom Group PLC
11 Evesham Street
London W11 4AR
TS Morris
Company Secretary
15 May 2013
29
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TalkTalk Telecom Group PLC Annual report 2013
Directors’ responsibilities statement
The Directors are responsible for preparing the Annual
Report and the financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the
Directors are required to prepare the consolidated
financial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the
European Union and Article 4 of the IAS Regulation and
have elected to prepare the Parent Company financial
statements in accordance with United Kingdom
Generally Accepted Accounting Practice (United
Kingdom Accounting Standards and applicable law).
Under company law the Directors must not approve
the accounts unless they are satisfied that they give a
true and fair view of the state of affairs of the Company
and of the profit or loss of the Company for that period.
In preparing the consolidated financial statements,
International Accounting Standard 1 requires that Directors:
• properly select and apply accounting policies;
• present information, including accounting policies,
in a manner that provides relevant, reliable,
comparable and understandable information;
• provide additional disclosures when compliance with
the specific requirements in IFRSs are insufficient to
enable users to understand the impact of particular
transactions, other events and conditions on the entity’s
financial position and financial performance; and
• make an assessment of the Company’s ability
to continue as a going concern.
In preparing the Parent Company financial statements,
the Directors are required to:
• select suitable accounting policies and then apply
them consistently;
• make judgements and accounting estimates that
are reasonable and prudent;
• state whether applicable UK Accounting
Standards have been followed, subject to any
material departures disclosed and explained
in the financial statements; and
• prepare the financial statements on the going
concern basis unless it is inappropriate to presume
that the Company will continue in business.
The Directors are responsible for keeping adequate
accounting records that are sufficient to show and
explain the Company’s transactions and disclose with
reasonable accuracy at any time the financial position
of the Company and enable them to ensure that the
financial statements comply with the Companies Act
2006. They are also responsible for safeguarding
the assets of the Company and hence for taking
reasonable steps for the prevention and detection
of fraud and other irregularities.
The Directors are responsible for the maintenance
and integrity of the corporate and financial information
included on the Company’s website. Legislation in
the United Kingdom governing the preparation and
dissemination of financial statements may differ
from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance
with the relevant financial reporting framework, give
a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company and the
undertakings included in the consolidation taken
as a whole; and
• the management report, which is incorporated
into the Directors’ Report, includes a fair review of
the development and performance of the business
and the position of the Company and the undertakings
included in the consolidation taken as a whole,
together with a description of the principal risks
and uncertainties that they face.
By order of the Board
D Harding
Chief Executive Officer
15 May 2013
A Stirling
Chief Financial Officer
15 May 2013
30
TalkTalk Telecom Group PLC Annual report 2013
Independent auditor’s report
to the members of TalkTalk Telecom Group PLC
We have audited the Group financial statements
of TalkTalk Telecom Group PLC for the year ended
31 March 2013 which comprise the Group income
statement, the Group statement of comprehensive
income, the Group statement of changes in equity, the
Group balance sheet, the Group cash flow statement
and the related notes 1 to 27. The financial reporting
framework that has been applied in their preparation
is applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union.
This report is made solely to the Company’s members,
as a body, in accordance with Chapter 3 of Part 16 of
the Companies Act 2006. Our audit work has been
undertaken so that we might state to the Company’s
members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the
fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company
and the Company’s members as a body, for our audit
work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors
and auditor
As explained more fully in the Directors’ Responsibilities
Statement, the Directors are responsible for the
preparation of the Group financial statements and
for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the
Group financial statements in accordance with applicable
law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the
Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the
financial statements
An audit involves obtaining evidence about the amounts
and disclosures in the financial statements sufficient to
give reasonable assurance that the financial statements
are free from material misstatement, whether caused
by fraud or error. This includes an assessment of:
• whether the accounting policies are appropriate
to the Group’s circumstances and have been
consistently applied and adequately disclosed;
• the reasonableness of significant accounting
estimates made by the Directors; and
• the overall presentation of the financial statements.
In addition, we read all the financial and non-financial
information in the Annual Report to identify material
inconsistencies with the audited financial statements.
If we become aware of any apparent material
misstatements or inconsistencies we consider the
implications for our report.
Opinion on financial statements
In our opinion the Group financial statements:
• give a true and fair view of the state of the Group’s
affairs as at 31 March 2013 and of its profit for the
year then ended;
• have been properly prepared in accordance with
IFRSs as adopted by the European Union; and
• have been prepared in accordance with the
requirements of the Companies Act 2006 and
Article 4 of the IAS Regulation.
Separate opinion in relation
to IFRSs as issued by the IASB
As explained in note 1 to the Group financial statements,
the Group in addition to complying with its legal obligation
to apply IFRSs as adopted by the European Union, has
also applied IFRSs as issued by the International
Accounting Standards Board (IASB).
In our opinion the Group financial statements comply
with IFRSs as issued by the IASB.
Opinion on other matter prescribed
by the Companies Act 2006
In our opinion the information given in the Directors’
Report for the financial year for which the Group
financial statements are prepared is consistent with
the Group financial statements.
Matters on which we are required
to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required
to report to you if, in our opinion:
• certain disclosures of Directors’ remuneration
specified by law are not made; or
• we have not received all the information and
explanations we require for our audit.
Under the Listing Rules we are required to review:
• the Directors’ statement, contained within
the Chief Financial Officer's review, in relation
to going concern;
• the part of the Corporate Governance Statement
relating to the Company’s compliance with the nine
provisions of the UK Corporate Governance Code
specified for our review; and
• certain elements of the report to shareholders by
the Board on Directors’ remuneration.
Other matter
We have reported separately on the Parent Company
financial statements of TalkTalk Telecom Group PLC for
the year ended 31 March 2013 and on the information in
the Directors’ Remuneration Report that is described
as having been audited.
Peter O’Donoghue BA FCA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
15 May 2013
31
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TalkTalk Telecom Group PLC Annual report 2013
Group income statement
For the year ended 31 March
Before
amortisation of
acquisition
intangibles and
exceptional
items
£m
2013
Amortisation of
acquisition
intangibles and
exceptional
items***
£m
After
amortisation of
acquisition
intangibles and
exceptional
items
£m
Before
amortisation of
acquisition
intangibles and
exceptional
items
£m
2012
Amortisation of
acquisition
intangibles and
exceptional
items***
£m
After
amortisation of
acquisition
intangibles and
exceptional
items
£m
1,670
(751)
919
(567)
352
–
(62)
290
(76)
(26)
(4)
184
(19)
165
(33)
132
–
–
–
9
9
–
–
9
–
(52)
–
(43)
–
(43)
11
(32)
1,670
(751)
919
(558)
361
–
(62)
299
(76)
(78)
(4)
141
(19)
122
(22)
100
1,687
(803)
884
(567)
317
9
–
326
(65)
(27)
(1)
233
(18)
215
(56)
159
–
–
–
(27)
(27)
–
–
(27)
–
(61)
–
(88)
–
(88)
67
(21)
132
(32)
100
159
(21)
20.6
19.4
14.9
14.0
17.2
16.4
18.0
17.2
11.3
10.6
1,687
(803)
884
(594)
290
9
–
299
(65)
(88)
(1)
145
(18)
127
11
138
138
15.6
14.9
Notes
2
3, 12
3, 11
14
3
6
7
10
10
10
10
Revenue
Cost of sales
Gross profit
Operating expenses excluding
amortisation and depreciation*
Underlying EBITDA**
Sale of freehold property
Investment in TV
Headline EBITDA
Depreciation
Amortisation
Share of results of joint venture
Operating profit
Finance costs
Profit before taxation
Taxation
Profit for the year
Attributable to the equity holders
of the Parent Company
Earnings per share
Underlying
Basic (pence)
Diluted (pence)
Headline/Statutory
Basic (pence)
Diluted (pence)
* Operating expenses excluding amortisation and depreciation also includes other exceptional income (note 9).
** Underlying EBITDA is defined as Headline EBITDA excluding any costs relating to the investment in TV (2012: excluding the profit on sale of a freehold property).
*** A reconciliation of Headline information to Statutory information is provided in note 9 to the financial statements.
The accompanying notes are an integral part of this Group income statement. All amounts relate to continuing operations.
32
TalkTalk Telecom Group PLC Annual report 2013
Group statement of comprehensive income
For the year ended 31 March
Profit for the year*
Other comprehensive income for the year
Derivative financial instruments*
Total comprehensive income for the year
Attributable to the equity holders of the Parent Company
* Recognised within retained earnings and other reserves.
The accompanying notes are an integral part of this Group statement of comprehensive income.
2013
£m
100
(2)
98
98
2012
£m
138
–
138
138
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33
TalkTalk Telecom Group PLC Annual report 2013
Group statement of changes in equity
For the year ended 31 March
At 1 April 2012
Total comprehensive income for the year
Issues of own shares*
Taxation of items recognised directly in reserves
Share-based payments reserve credit
Equity dividends
Currency translation differences
At 31 March 2013
At 1 April 2011
Total comprehensive income for the year
Net purchase of own shares
Settlement of Group ESOT shares
Share-based payments reserve credit
Share-based payments reserve debit
Equity dividends
At 31 March 2012
Notes
22
5
8
Notes
22
5
8
Share
capital
£m
Share
premium
£m
Translation
and hedging
reserve
£m
1
–
–
–
–
–
–
1
586
–
32
–
–
–
–
618
(65)
–
–
–
–
–
1
(64)
Share
capital
£m
Share
premium
£m
Translation
and hedging
reserve
£m
1
–
–
–
–
–
–
1
586
–
–
–
–
–
–
586
(65)
–
–
–
–
–
–
(65)
Demerger
reserve
£m
(513)
–
–
–
–
–
–
(513)
Demerger
reserve
£m
(513)
–
–
–
–
–
–
(513)
Retained
earnings
and other
reserves
£m
435
98
(63)
11
6
(87)
–
400
Retained
earnings
and other
reserves
£m
406
138
(54)
1
4
(2)
(58)
435
Total
£m
444
98
(31)
11
6
(87)
1
442
Total
£m
415
138
(54)
1
4
(2)
(58)
444
* On 17 September 2012, the Group’s Remuneration Committee determined that the relevant performance conditions of the VES schemes (including the 5% TSR requirement) had been
satisfied, meaning the VES participants were entitled to exercise 60% of their options as set out in note 5. The settlement of the schemes resulted in the recognition of share premium
of £32m and a £63m movement in retained earnings and other reserves.
The accompanying notes are an integral part of this Group statement of changes in equity.
34
TalkTalk Telecom Group PLC Annual report 2013
Group balance sheet
As at 31 March
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Non-current asset investments
Investment in joint venture
Deferred tax assets
Current assets
Cash and cash equivalents
Inventories
Trade and other receivables
Loans to related parties
Total assets
Current liabilities
Trade and other payables
Loans and other borrowings
Corporation tax liabilities
Provisions
Non-current liabilities
Loans and other borrowings
Provisions
Total liabilities
Net assets
Equity
Share capital
Share premium
Translation and hedging reserve
Demerger reserve
Retained earnings and other reserves
Total equity
Notes
11
11
12
13
14
7
18
15
16
16
17
18
20
18
20
21, 22
22
22
22
22
2013
£m
479
154
295
–
9
109
2012
£m
480
202
292
1
7
120
1,046
1,102
7
23
226
–
256
2
3
184
2
191
1,302
1,293
(431)
(25)
(16)
(5)
(477)
(375)
(8)
(383)
(860)
442
1
618
(64)
(513)
400
442
(379)
(26)
(16)
(8)
(429)
(410)
(10)
(420)
(849)
444
1
586
(65)
(513)
435
444
The accompanying notes are an integral part of this Group balance sheet.
These financial statements were approved by the Board on 15 May 2013. They were signed on its behalf by:
D Harding
Chief Executive Officer
15 May 2013
A Stirling
Chief Financial Officer
15 May 2013
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35
TalkTalk Telecom Group PLC Annual report 2013
Group cash flow statement
For the year ended 31 March
Operating activities
Operating profit
Adjustments for non-cash items:
Share-based payments
Depreciation
Amortisation
Share of losses of joint venture
Profit on disposal of property, plant and equipment
Profit on disposal of customer base
Profit on disposal of subsidiaries
Operating cash flows before movements in working capital
Increase in trade and other receivables
Increase in inventory
Increase in trade and other payables
Decrease in provisions
Cash generated by operations
Income taxes paid
Net cash flows generated from operating activities
Investing activities
Acquisition of subsidiaries and joint ventures, net of cash acquired
Disposal of subsidiaries and customer bases
Acquisition of operating intangible assets
Acquisition of property, plant and equipment
Disposal of property, plant and equipment
Cash flows used in investing activities
Financing activities
Settlement of Group ESOT shares
Purchase of own shares
(Repayment) drawdowns of borrowings
Refinancing fees
Interest paid
Dividends paid
Cash flows used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the start of the year
Cash and cash equivalents at the end of the year
Cash and cash equivalents for the purpose of this statement comprise:
Cash and cash equivalents
Bank overdrafts*
* Bank overdrafts are disclosed within loans and other borrowings less than one year.
The accompanying notes are an integral part of this Group cash flow statement.
36
Notes
5
3, 12
3, 11
14
13, 14
13
23
6
8
18
18
2013
£m
141
6
76
78
4
–
–
(1)
304
(37)
(20)
46
(6)
287
–
287
(6)
2
(34)
(70)
–
2012
£m
145
4
65
88
1
(9)
(3)
–
291
(20)
–
13
(29)
255
(2)
253
(20)
3
(28)
(78)
9
(108)
(114)
–
(35)
(35)
–
(16)
(87)
1
(54)
5
(7)
(17)
(58)
(173)
(130)
6
1
7
7
–
7
9
(8)
1
2
(1)
1
TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements
1. Accounting policies and basis of preparation
Basis of preparation
TalkTalk Telecom Group PLC is incorporated in England
and Wales under the Companies Act.
mobile telecommunications services. All such revenue
is recognised as the services are provided:
•
line rental is recognised in the period to which it relates;
The consolidated financial statements of the Company
have been prepared in accordance with International
Financial Reporting Standards (IFRS) as adopted for use
in the European Union (EU) and as applied in accordance
with the provisions of the Companies Act 2006. These
financial statements therefore comply with Article 4 of
the European Union International Accounting Standard
regulation. The Company elected to prepare its Parent
Company financial statements in accordance with
UK GAAP.
The financial statements have been prepared on the
historical cost basis, except for the revaluation of
certain financial instruments and investments. The
financial statements are presented in Sterling, rounded
to the nearest million, because that is the currency of
the principal economic environment in which the
Group operates.
Basis of consolidation
The consolidated financial statements incorporate the
financial statements of the Company, entities controlled
by the Company (its subsidiaries) and entities which are
joint ventures accounted for using the equity method
made up to 31 March each year. Control is achieved
where the Company has the power to govern the
financial and operating policies of an investee entity
so as to obtain benefits from its activities.
The results of subsidiaries acquired or sold during
the year are included from or to the date on which
control passed to or was relinquished by the Group.
Intercompany transactions and balances between
subsidiaries are eliminated on consolidation.
Where necessary, adjustments are made to the
financial statements of subsidiaries and the results
of joint ventures to bring accounting policies in line
with those used by the Group.
Going concern
The financial statements have been prepared on the going
concern basis. Details of the considerations undertaken
by the Directors in reaching this conclusion are set out
on page 11 within the Chief Financial Officer’s Statement.
Accounting policies
The Group’s principal accounting policies, which relate
to the financial statements as a whole are set out below.
Where an accounting policy is specific to one note, the
policy is described in the note to which it relates. This
section also shows new EU endorsed accounting
standards, amendments and interpretations, whether
these are effective in the current or later years. In both
cases it is explained how they are expected to impact
the performance of the Group.
Revenue
Revenue is stated net of VAT and other sales related
taxes and represents the gross inflow of economic
benefit generated from the provision of fixed line and
• voice and broadband subscriptions are recognised
in the period to which they relate;
• usage including voice and TV content is recognised
in the period in which the customer takes the service;
• promotional discounts are amortised on a straight line
basis over the minimum contract period subject to an
adjustment for in contract churn;
• connection charges are recognised in the period
in which the connection is made; and
• data service solutions and other service
contracts are recognised as the Group fulfils
its performance obligations.
Revenue is measured at fair value of the consideration
received or receivable. When the Group sells a number
of products within a bundled transaction, the total
consideration from the arrangement is allocated to
each element based on their relative fair values. The
amount of revenue the Group recognises for delivered
elements is limited to the cash received.
Subscriber acquisition costs
Subscriber acquisition costs, being third party costs of
recruiting and retaining new customers, are expensed
as incurred.
Investment in TV
Investment in TV includes the one-off launch costs
and incremental subscriber acquisition costs relating
to the TV proposition.
Foreign currency translation and transactions
Material transactions in foreign currencies are hedged
using forward purchases or sales of the relevant
currencies and are recognised in the financial
statements at the exchange rates thus obtained.
Unhedged transactions are recorded at the exchange
rate on the date of the transaction. Hedge accounting
as defined by IAS 39 ‘Financial Instruments: Recognition
and Measurement’ has been applied in the current and
preceding financial year by marking to market the
relevant financial instruments at the balance sheet
date and recognising the gain or loss in equity in
respect of cash flow hedges.
The principal exchange rates against UK Sterling used
in these financial statements are as follows:
Euro
United States Dollar
Average
Closing
2013
2012
2013
2012
1.23
1.58
1.16
1.60
1.19
1.52
1.20
1.60
Where a foreign operation is sold, the gain or loss
on disposal recognised in the income statement is
determined after taking into account the cumulative
currency translation differences that are attributable
to the operation.
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37
TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
1. Accounting policies and basis of preparation continued
Leases
Rental payments under operating leases are charged
to the income statement on a straight line basis over
the period of the lease. Lease incentives and rent free
periods are amortised through the income statement
over the period of the lease.
Bank overdrafts that are repayable on demand and form
an integral part of the Group’s cash management are
included as a component of cash and cash equivalents
for the purpose of the statement of cash flows.
Equity instruments
Equity instruments issued by the Group are recorded
at the proceeds received, net of direct issuance costs.
Shares in the Company held by the Group ESOT are
shown as a reduction in shareholders’ funds. Other
assets and liabilities held by the trust are consolidated
with the assets of the Group.
Derivative financial instruments and hedge accounting
The Group’s activities expose it to the financial risks
of changes in foreign exchange rates and interest
rates. The use of financial derivatives is governed by
the framework approved by the Board, which provides
written principles on the use of financial derivatives
consistent with the Group’s risk management strategy.
Changes in values of all derivatives of a financing
nature are included within investment income and
financing costs in the income statement. The Group
does not use derivative financial instruments for
speculative purposes.
Derivative financial instruments are initially measured
at fair value on the contract date and are subsequently
remeasured to fair value at each reporting date.
Hedge accounting is discontinued when the hedging
instrument expires or is sold, terminated, exercised,
or no longer qualifies for hedge accounting, or the
Company chooses to end the hedging relationship.
Cash flow hedges
The Group uses derivative instruments (primarily interest
rate swaps) to manage its interest rate risk. The Group
designates these as cash flow hedges. The effective
portion of changes in the fair value of these instruments
is recognised in other comprehensive income. The gain
or loss relating to the ineffective portion is recognised
immediately in the income statement.
Measurement
The financial instruments included on the Group’s
balance sheet are measured at fair value or amortised
cost. The measurement of this fair value can in some
cases be subjective and can depend on the inputs
used in the calculations. The different valuation methods
are called ‘hierarchies’ and are described below:
• Level 1: Fair values measured using quoted prices
(unadjusted) in active markets for identical assets
or liabilities;
• Level 2: Fair values measured using inputs, other
than quoted prices included within Level 1 that are
observable for the asset or liability either directly
or indirectly; and
• Level 3: Fair values measured using inputs for the
asset or liability that are not based on observable
market data.
Gains or losses from sale and leaseback transactions
are deferred over the life of the new lease to the extent
that the rentals are considered to be above or below
market rentals. The remaining gain or loss is recognised
within operating expenses in the year in which the sale
is completed.
Financial instruments
Financial assets and financial liabilities, in respect of
financial instruments, are recognised in the Group’s
balance sheet when the Group becomes a party to the
contractual provisions of the instrument.
Trade and other receivables
Trade receivables, loans and other receivables that
have fixed or determinable payments that are not
quoted in an active market are classified as loans and
receivables. Loans and receivables are measured at
amortised cost using the effective interest rate method,
less any impairment. Interest income is recognised by
applying the effective interest rate, except for short
term receivables when the recognition of interest
would be immaterial.
Cash and cash equivalents
Cash and cash equivalents and bank deposits consists
of cash in hand.
Trade payables
Trade payables are other financial liabilities initially
measured at fair value and subsequently measured
at amortised cost.
Financial liabilities and equity instruments
Financial liabilities and equity instruments issued by
the Group are classified according to the substance
of the contractual arrangements entered into and
the definitions of a financial liability and an equity
instrument. An equity instrument is any contract that
evidences a residual interest in the assets of the Group
after deducting all of its liabilities and includes no
obligation to deliver cash or other financial assets.
The accounting policies adopted for specific financial
liabilities and equity instruments are set out below.
Loans and other borrowings
Loans and other borrowings represent committed and
uncommitted bank loans, bank overdrafts and loans
from related parties. These are initially measured at
fair value (which is equal to cost at inception) and are
subsequently measured at amortised cost, using the
effective interest rate method.
Bank fees and legal costs associated with the securing
of external financing are capitalised and amortised
over the term of the relevant facility. All other borrowing
costs are recognised in the income statement in the
period in which they are incurred.
38
TalkTalk Telecom Group PLC Annual report 2013
1. Accounting policies and basis of preparation continued
Accounting estimates and judgements
The preparation of financial statements requires management to exercise judgement in applying the Group’s
accounting policies. Estimates and assumptions used in the preparation of the financial statements are continually
reviewed and revised as necessary. Whilst every effort is made to ensure that such estimates and assumptions
are reasonable, by their nature they are uncertain, and as such changes in estimates and assumptions may have
a material impact.
The areas involving the most sensitive estimates and assumptions that are significant to the financial statements
are set out in more detail in the related notes:
• tax (note 7);
• exceptional items (note 9);
•
impairment of goodwill (note 11);
• capitalisation and useful economic lives of assets (notes 11 and 12);
•
impairment of assets (notes 11 and 12); and
• trade receivables (note 16).
Application of significant new or amended EU endorsed accounting standards
New and revised standards and interpretations that have been endorsed for the financial year have no impact
on the Group.
Future accounting developments
At the date of authorisation of these financial statements the following significant standards and interpretations
that have not been applied in these financial statements were in issue, but not yet effective (and in some cases
had not yet been adopted by the EU):
•
•
•
•
•
•
•
•
•
•
•
•
•
IAS 1 (amended)
IFRS 1 (amended)
IFRS 7 (amended)
IFRS 9
IFRS 10
‘Presentation on Financial Statements’
‘Government Loans’
‘Disclosures – Offsetting Financial Assets and Financial Liabilities’
‘Financial Instruments’
‘Consolidated Financial Statements’
IFRS 10, IFRS 12 and IAS 27 (amended)
‘Investment Entities’
IFRS 11
IFRS 12
IFRS 13
IAS 27 (revised)
IAS 28 (revised)
IAS 32 (amended)
IAS 19 (revised)
‘Joint Arrangements’
‘Disclosure of Interests in Other Entities’
‘Fair Value Measurement’
‘Separate Financial Statements’
‘Investments in Associates and Joint Ventures’
‘Offsetting Financial Assets and Financial Liabilities’
'Employee Benefits'
The Directors do not expect that the adoption of these standards will have a material impact on the financial
statements of the Group in future periods, except as follows:
•
•
•
•
•
IFRS 7 (amended) will increase the disclosure requirements where netting arrangements are in place
for financial assets and financial liabilities.
IFRS 9 will impact the:
• measurement and disclosure of financial instruments; and
• the disclosure of interest the Group has in other entities.
IFRS 10 will impact the consolidation of the financial statements.
IFRS 12 will impact the disclosure of interests the Group has in other entities.
IFRS 13 will impact the measurement of fair value for certain assets and liabilities as well as the
associated disclosures.
Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these
standards until a detailed review has been completed.
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TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
2. Segmental reporting
Accounting policy
IFRS 8 ‘Operating Segments’ requires the segmental information presented in the financial statements to be
that used by the chief operating decision maker to evaluate the performance of the business and decide how to
allocate resources. The Group has identified the Board as its chief operating decision maker. The Board considers
the results of the business as a whole when assessing the performance of the business and making decisions
about the allocation of resources. Accordingly the Group has one operating segment.
Revenue
Underlying EBITDA
Sale of freehold property
Investment in TV
Headline EBITDA
Depreciation
Amortisation of operating intangibles
Share of results of joint ventures
Headline profit before interest and taxation (note 9)
Amortisation of acquisition intangibles and exceptional amortisation
Exceptional items (note 9)
Operating profit
2013
£m
1,670
2012
£m
1,687
352
–
(62)
290
(76)
(26)
(4)
184
(52)
9
141
317
9
–
326
(65)
(27)
(1)
233
(61)
(27)
145
The Group’s revenue is split by On-net, Off-net and Corporate products as this information is provided to the
Group’s chief operating decision maker. On-net and Off-net comprise Consumer and Business customers that
receive similar services.
On-net
Off-net
Corporate
2013
£m
1,170
178
322
1,670
2012*
£m
1,084
287
316
1,687
* As restated. During the year, the Group changed its revenue disclosure by product from Broadband, Non-broadband and Corporate to On-net,
Off-net and Corporate as the information provided to the Group's chief operating decision maker to run the business was changed.
The Group has no material overseas operations; as a result a split of revenue and total assets by geographical
location has not been disclosed.
3. Operating profit before interest and taxation
Group profit before interest and taxation is stated after charging (crediting):
Depreciation of property, plant and equipment
Amortisation of acquisition intangibles
Amortisation of other operating intangible fixed assets
Profit on disposal of property, plant and equipment
Profit on disposal of subsidiaries and customer bases
Impairment of Shared Band Limited
Impairment loss recognised on trade receivables
Staff costs
Cost of inventories recognised in expenses
Rentals under operating leases
Auditor’s remuneration*
* A breakdown of auditor’s remuneration is disclosed within the Corporate governance section on page 19.
2013
£m
76
52
26
–
(1)
1
33
133
67
79
1
2012
£m
65
61
27
(9)
(3)
–
38
141
19
73
1
40
TalkTalk Telecom Group PLC Annual report 2013
4. Employee costs
The average number of employees (including Executive Directors) was:
Administration
Sales and customer management
2013
Number
1,517
998
2,515
2012
Number
1,545
1,561
3,106
The aggregate remuneration recognised in respect of these employees in the income statement comprised:
Wages and salaries
Social security costs
Other pension costs
Share-based payments (note 5)
2013
£m
110
14
3
127
6
133
2012
£m
120
14
3
137
4
141
The Group provides various defined contribution pension schemes for the benefit of a significant number of its
employees. These are charged to the income statement as they become payable in accordance with the rules of
the schemes.
Compensation earned by Key Management Personnel is analysed below. The Key Management Personnel
comprised the TalkTalk Group Executive Board and Board of Directors.
Salaries and fees
Performance bonuses
Benefits
Pension costs
Share-based payments
Compensation for loss of office*
Other**
2013
£m
4.0
1.9
0.1
0.2
2.2
–
–
8.4
2012
£m
4.1
2.4
0.1
0.2
3.2
1.0
0.3
11.3
* Included within exceptional items (Operating efficiencies – Phase I) (note 9).
** Certain Directors had interest bearing loans to settle tax liabilities arising as a result of a share gift given in December 2008 by CPW.
These were forgiven in the year ended 31 March 2012.
5. Share-based payments
Accounting policy
The Group issues equity settled share-based payments to certain employees. Equity settled share-based
payments are measured at fair value at the date of grant and expensed over the vesting period, based on an
estimate of the number of shares that will eventually vest.
Fair value is measured by use of a dividend discount or Binomial model for share-based payments with internal,
non-market performance criteria (for example, EPS targets) and a Black Scholes or Monte Carlo model for those
with external, ‘market’ performance criteria (for example, TSR targets).
For schemes with non-market performance criteria, the number of options expected to vest is recalculated at
each balance sheet date, based on expectations of performance against target and of leavers prior to vesting.
The movement in cumulative expense since the previous balance sheet date is recognised in the income
statement, with a corresponding entry in reserves.
For schemes with market performance criteria, the number of options expected to vest is adjusted only for
expectations of leavers prior to vesting. The movement in cumulative expense since the previous balance sheet
date is recognised in the income statement, with a corresponding entry in reserves.
If a scheme is cancelled, any remaining part of the fair value of the scheme is expensed immediately. If a scheme
is forfeited, no further expense is recognised and any charges previously recognised are reversed.
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41
TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
5. Share-based payments continued
Accounting policy continued
Charges arise on loans that are provided to employees to fund the purchase of shares in the Group as part of long
term incentive plans. To the extent to which the loans are not, in certain circumstances, repayable, the cost of
such loans is expensed over the course of the relevant incentive plans. Charges are also recognised on loans
provided to employees to settle personal tax liabilities; to the extent to which the loans are not, in certain
circumstances, repayable, the cost of such loans is expensed on grant.
In accordance with IFRS 2 ‘Share-based Payment’ no cost has been recognised in respect of the options granted
before November 2002.
Group share schemes
The Group’s share schemes are the All Employee Share Option Award – 2012, the Discretionary Share Option Plan
(DSOP) and Save-As-You-Earn Scheme (SAYE).
In addition, the Group has a number of legacy CPW schemes.
In order to aid the user of the accounts, the dilutive effect on EPS of each of the Group schemes and legacy CPW
schemes has been presented. This has been calculated using an average share price for the financial year of £1.98
(2012: £1.36).
For the CPW legacy schemes, with no IFRS 2 charge in current or prior year, the disclosures are limited to the
dilutive effect on EPS and the number of options outstanding at the end of the year.
In September 2012, 60% of the TTG VES and the CPW TTG VES vested. Further information is set out in section (v).
In March 2013, the DSOP – 2010 grant vested. Further information is set out in section (iii).
Summary of share schemes
Year ended 31 March 2013
TalkTalk Telecom Group PLC schemes
All Employee Share Option Award – 2012
DSOP – 2012 grant
DSOP – 2010 grant
SAYE
Total TalkTalk Telecom Group PLC schemes
Legacy Carphone Warehouse schemes
TTG VES and CPW TTG VES*
Other employee share option schemes
Total legacy Carphone Warehouse schemes
Total
Year ended 31 March 2012
TalkTalk Telecom Group PLC schemes
DSOP – 2012 grant
DSOP – 2010 grant
SAYE
Total TalkTalk Telecom Group PLC schemes
Legacy Carphone Warehouse schemes
TTG VES and CPW TTG VES*
Performance share plan
ESOS
Other employee share option schemes
Total legacy Carphone Warehouse schemes
Total
IFRS 2
charge
£m
Dilutive
effect
millions
Options
outstanding
at end of
the year
millions
2
1
1
1
5
1
–
1
6
1
5
7
3
16
38
2
40
56
2
12
17
6
37
–
1
1
38
IFRS 2
charge
£m
Dilutive
effect
millions
Options
outstanding
at end of
the year
millions
–
2
1
3
1
–
–
–
1
4
2
–
1
3
31
4
1
1
37
40
11
20
6
37
–
2
1
1
4
41
* No options are shown as outstanding in respect of the VES schemes at the end of the year as the number of options available is not known until
the vesting date.
42
TalkTalk Telecom Group PLC Annual report 2013
5. Share-based payments continued
TalkTalk Telecom Group PLC schemes
(i) All Employee Share Option Award – 2012
The All Employee Share Option Award – 2012 was granted in September 2012 under the approved DSOP rules. The
award of 1,000 nil priced share options per qualifying employee is designed to reward all employees who are not
currently part of another share option plan and to promote all employee share ownership. The exercise of options
is subject to continuing employment on the vesting date in September 2013 and there are no performance conditions
in relation to this award. These options lapse on resignation of an employee.
Outstanding at the beginning of the year
Granted during the year
Outstanding at the end of the year
Exercisable at the end of the year
Valuation method
Share price (pence)
Exercise price (pence)
Expected volatility
Expected exercise (years)
Risk free rate
Expected dividend yield
Fair value of options granted (£m)
2013
Number
million
WAEP
£
–
2
2
–
–
–
–
–
Black Scholes
1.92
nil
15.58%
1.5
0.16%
4.69%
4.3
The weighted average remaining contractual life of the All Employee Share Option Award – 2012 is 0.9 years
(2012: nil).
The TalkTalk DSOP is designed to provide a long term incentive plan for senior employees of the Group.
(ii) DSOP – 2012 grant
Nil priced share option awards were first granted in February 2012 and are subject to absolute TSR and EPS performance
targets with a cap and collar to address volatility in the market, as detailed in the Directors’ Remuneration Report.
The options are measured over a performance period to 31 March 2015 and will vest on the publication of the
Group’s 2015 Annual Report. A total of 60% of the vested options are exercisable from the vesting date, with the
remaining 40% of options being exercisable twelve months later. Options are forfeited if an employee leaves the
Group before the options vest. Awards are triggered within a range from 10% to 19% for compound annual growth
of TSR and EPS. A total of 25% of the part of an award relative to either EPS or TSR will vest for the minimum target
rising to 40% for target performance, 70% for stretch performance and 100% for super stretch performance.
DSOP – 2012 grant
Outstanding at the beginning of the year
Granted during the year
Outstanding at the end of the year
Exercisable at the end of the year
2013
Number
million
WAEP
£
2012
Number
million
11
1
12
–
–
–
–
–
–
11
11
–
WAEP
£
–
–
–
–
During the year, the Group granted a further 523,000 options under the DSOP – 2012 grant to a number of new
senior employees. A separate fair value exercise was conducted for each grant using the Monte Carlo method,
the total fair value of the options granted totalled £105,000. Detailed assumptions are not included here for
each of the grants due to the fact that they are immaterial to the Group.
(iii) DSOP – 2010 grant
Awards made under the DSOP – 2010 grant are subject to TSR performance targets and were measured over a
performance period to 28 March 2013. Options were forfeited if an employee left the Group before the options vested.
On 28 March 2013, 16 million options vested but they are not exercisable until after the preliminary announcement
on 16 May 2013. The original date of vesting of 29 March 2013 was amended to 28 March 2013 due to a bank holiday.
43
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TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
5. Share-based payments continued
TalkTalk Telecom Group PLC schemes continued
(iii) DSOP – 2010 grant continued
DSOP – 2010 grant
Outstanding at the beginning of the year
Forfeited during the year
Outstanding at the end of the year
Exercisable at the end of the year
2013
Number
million
20
(3)
17
–
WAEP
£
1.24
1.27
1.24
–
2012
Number
million
24
(4)
20
–
WAEP
£
1.24
1.27
1.24
–
The weighted average remaining contractual life of DSOP – 2012 grant is 8.9 years (2012: 13.0 years), and the DSOP –
2010 grant is 7.0 years (2012: 7.7 years). Of the DSOP – 2010 grant, 472,000 options were nil priced, of which
236,000 vested on 1 September 2012 but have not yet been exercised.
(iv) SAYE
The scheme permits the granting of options to employees linked to a bank SAYE contract for a term of three or
five years. Contributions from UK employees range from £5 to £250 per month. Options may be exercised at the
end of the three or five year period at an exercise price determined at the invitation date. The scheme is available
for a period each year for employees to join.
Exercise prices for the schemes are set out below:
2012 grant
2011 grant
2010 grant
123p per share
119p per share
102p per share
Outstanding at the beginning of the year
Granted during the year
Forfeited during the year
Outstanding at the end of the year
Exercisable at the end of the year
Valuation method
Share price (pence)
Exercise price (pence)
Expected volatility
Expected exercise (years)
Risk free rate
Expected dividend yield
Fair value of options granted (£m)
2013
Number
million
6
1
(1)
6
–
WAEP
£
1.05
1.23
1.11
1.08
–
2012
Number
million
7
1
(2)
6
–
WAEP
£
1.02
1.19
1.03
1.05
–
SAYE – 2012 grant
Black Scholes
1.91
1.23
13.17%
3.8
0.75%
4.72%
0.6
The weighted average remaining contractual life of SAYE options is 1.6 years (2012: 2.2 years). No options were
exercisable either during the year or at the year end.
(v) TTG VES and CPW TTG VES
The TTG VES enables participants to share in up to 7% of any increase in the value of the Group over an opening
valuation representing invested capital at 1 April 2009, adjusted as relevant for changes in invested capital since
that date. The incremental value is measured after a minimum annual rate of return of 7% on this invested capital.
The Group advanced loans to participants to enable them to purchase A shares in TalkTalk Group Limited, the
holding company of the Group’s operating business. The CPW TTG VES enables participants to share in 2.24%
of any increase in the value of the Group over an opening valuation representing invested capital at 1 April 2009,
adjusted for the change in the Group’s opening share price since 1 April 2009. In line with the TTG VES, the invested
capital is adjusted for changes in invested capital since 1 April 2009 and the incremental value is measured after a
minimum annual rate of return of 7%. For the vesting in September 2013, this is capped at the September 2012 amount.
The Group’s opening share price for this purpose represents an allocation of the share price of CPW at that rate,
based on the market capitalisation of the Group and Carphone Warehouse Group PLC in the five days following
demerger. CPW advanced loans to participants to enable them to purchase C shares in TalkTalk Group Limited,
the holding company of the Group’s operating businesses.
44
TalkTalk Telecom Group PLC Annual report 2013
5. Share-based payments continued
TalkTalk Telecom Group PLC schemes continued
(v) TTG VES and CPW TTG VES continued
The Group has an obligation to acquire the A and C shares if performance conditions are met, to provide to
participants the share of value described above.
The fair value of the schemes, which has performance targets based on the growth of the market capitalisation
of the Group, was estimated at the date of grant using a Monte Carlo model to initially value the A shares and then
a Black Scholes model to calculate the option value. The model combines the valuation price of a share at the
date of grant with the probability of meeting performance criteria, based on the expected value of the Group
at the date of grant discounted for the lack of marketability of the shares.
On 17 September 2012, the Group’s Remuneration Committee determined that the relevant performance conditions
of these VES schemes (including the 5% TSR requirement) had been satisfied, meaning the VES participants were
entitled to exercise 60% of their VES options. The remaining 40% will vest in September 2013 subject to ongoing
performance conditions being met. The participants’ options were acquired by the Company for new ordinary
shares in the Company and cash resulting in a cash outflow of £35m. The net issue of 17 million shares in the
Company was at a price of £1.86 per share being the average closing price of the Company’s shares on 18 and
19 September 2012. The settlement of the schemes resulted in a net movement in reserves of £31m, being the
recognition of share premium of £32m and a £63m debit in retained earnings and other reserves. The £63m debit
to reserves represents a total cash outflow of £35m and the value of new PLC shares issued of £32m net of the
repayment of the associated VES loans, interest and a reduction in the Group’s liability to settle the schemes.
6. Finance costs
Finance costs are analysed as follows:
Interest on bank loans and overdrafts
Facility fees and similar charges
Unwinding of discount on provisions
2013
£m
14
4
1
19
2012
£m
14
3
1
18
During the prior year the Group refinanced its revolving credit facility and paid £7m in respect of facility fees. This
is being amortised over the expected life of the loan and is included within facility fees and similar charges above.
7. Taxation
Accounting policy
Current tax, including UK corporation tax and overseas tax, is provided at amounts expected to be paid or recovered
using the tax rates and laws that have been enacted or substantively enacted at the balance sheet date.
Deferred tax is provided on temporary differences between the carrying amount of an asset or liability in the
balance sheet and its tax base.
Deferred tax liabilities represent tax payable in future periods in respect of taxable temporary differences. Deferred
tax assets represent tax recoverable in future periods in respect of deductible temporary differences, and the
carry-forward of unused tax losses and credits. Deferred tax is determined using the tax rates that have been
enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax
asset is realised or the deferred tax liability is settled.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available
against which the asset can be utilised. Current and deferred tax is recognised in the income statement except
where it relates to an item recognised directly in reserves, in which case it is recognised directly in reserves.
Deferred tax assets and liabilities are offset where there is a legal right to do so in the relevant jurisdictions.
Critical judgements in applying the Group’s accounting policy
The extent to which tax losses can be utilised depends on the extent to which taxable profits are generated in the
relevant jurisdictions for the foreseeable future, on the tax legislation then in force, and as such the value of associated
deferred tax assets is uncertain.
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45
TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
7. Taxation continued
Tax – income statement
The tax charge comprises:
Current tax
UK Corporation tax
Adjustments in respect of prior years:
UK Corporation tax
Total current tax charge (credit)
Deferred tax
Origination and reversal of timing differences
Effect of change in tax rate
Adjustments in respect of prior years – deferred tax recognised
Total deferred tax charge (credit)
Total tax charge (credit)
2013
£m
2012
£m
–
–
–
18
5
(1)
22
22
–
(4)
(4)
(13)
10
(4)
(7)
(11)
The tax charge on Headline earnings for the year ended 31 March 2013 is £33m (2012: £56m) representing an
effective tax rate on pre-tax profits of 20% (2012: 26%). The tax charge on Statutory earnings for the year ended
31 March 2013 is £22m (2012: £11m credit). The reconciliation between the Headline and Statutory tax charge is
shown in note 9.
The principal differences between the tax charge and the amount calculated by applying the standard rate
of UK corporation tax of 24% (2012: 26%) to the profit before tax are as follows:
Profit before tax
Tax at 24% (2012: 26%)
Items attracting no tax relief or liability
Effect of change in tax rate
Adjustments in respect of prior years
Movement in unrecognised tax losses during the year
Recognition of additional Tiscali losses
Total tax charge (credit) through income statement
Tax – retained earnings and other reserves
Total tax charge (credit) through income statement
Deferred tax (credit) charge recognised directly in retained earnings and other reserves
Total tax charge (credit) through retained earnings and other reserves
2013
£m
122
29
1
5
(1)
(12)
–
22
2013
£m
22
(11)
11
2012
£m
127
33
(2)
10
(4)
(3)
(45)
(11)
2012
£m
(11)
–
(11)
The deferred tax credit recognised directly in retained earnings and other reserves for the year ended 31 March 2013
relates to share-based payments.
46
TalkTalk Telecom Group PLC Annual report 2013
7. Taxation continued
Tax – balance sheet
The deferred tax assets recognised by the Group and movements thereon during the year are as follows:
Share-based
payments
£m
Timing
differences on
capitalised
costs
£m
Timing
differences on
acquisition
intangibles
£m
Tax losses
£m
Other timing
differences
£m
At 1 April 2012
(Charge) credit to the income statement
Credit to reserves
At 31 March 2013
1
–
11
12
71
(9)
–
62
56
(16)
–
40
(11)
5
–
(6)
3
(2)
–
1
Share-based
payments
£m
Timing
differences on
capitalised
costs
£m
Timing
differences on
acquisition
intangibles
£m
Tax losses
£m
Other timing
differences
£m
At 1 April 2011
(Charge) credit to the income statement
Acquisition of subsidiaries
At 31 March 2012
3
(2)
–
1
76
(5)
–
71
45
11
–
56
(12)
3
(2)
(11)
4
(1)
–
3
Total
£m
120
(22)
11
109
Total
£m
116
6
(2)
120
No deferred tax assets and liabilities have been offset in either year, except where there is a legal right to do so in
the relevant jurisdictions. On 3 July 2012 a reduction in the UK Statutory rate of Corporation tax was substantively
enacted, bringing the tax rate down from 24% to 23% with effect from 1 April 2013. Accordingly the tax assets and
liabilities recognised at 31 March 2013 take account of this change. This has resulted in a tax charge to the income
statement as the value of the Group’s tax assets have been reduced.
The Government intends to enact further reductions in the main tax rate, down to 21% effective from 1 April 2014
and to 20% from 1 April 2015. As these tax rates were not substantially enacted at the balance sheet date, the rate
reduction is not reflected in these financial statements.
The asset also reflects the annual recognition of a further tranche of the tax losses acquired with Tiscali UK
Limited, including Video Networks Limited, based on the Group’s rolling forecast. This is in line with the Group's
agreement with HMRC, reached in the previous year, following which the immediate increase in the deferred tax
asset of £45m was recognised as an exceptional credit (note 9).
At 31 March 2013, the Group had unused tax losses of £759m (2012: £873m) available for offset against future
taxable profits. A deferred tax asset of £40m (2012: £56m) has been recognised in respect of £172m (2012: £232m)
of such losses, based on expectations of recovery in the foreseeable future.
No deferred tax asset has been recognised in respect of the remaining £587m (2012: £641m) as there is
insufficient evidence that there will be suitable taxable profits against which these losses can be recovered.
All losses may be carried forward indefinitely.
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TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
8. Dividends
Accounting policy
Dividend income is recognised when payment has been received. Final dividend distributions are recognised as
a liability in the financial statements in the year in which they are approved by the relevant shareholders. Interim
dividends are recognised in the year in which they are paid.
The following dividends were paid by the Group to its shareholders:
Ordinary dividends
Final dividend for the year ended 31 March 2011 of 3.9p per ordinary share
Interim dividend for the year ended 31 March 2012 of 2.6p per ordinary share
Final dividend for the year ended 31 March 2012 of 6.4p per ordinary share
Interim dividend for the year ended 31 March 2013 of 3.45p per ordinary share
Total ordinary dividends
2013
£m
2012
£m
–
–
56
31
87
35
23
–
–
58
The proposed final dividend for the year ended 31 March 2013 is 6.95p per ordinary share on approximately
892 million shares (£62m), which was approved by the Board on 15 May 2013 and has not been included as a
liability as at 31 March 2013.
The Group ESOT has waived its rights to receive dividends in the current and prior year and this is reflected in the
analysis above.
9. Reconciliation of Headline information to Statutory information
Accounting policy
Headline results are stated before the amortisation of acquisition intangibles and exceptional items. Exceptional
items are those that are considered to be one-off, non-recurring in nature and so material that the Directors
believe that they require separate disclosure to avoid distortion of underlying performance and should be
separately presented on the face of the income statement.
Year ended 31 March 2013
Headline results
Exceptional items – (a)
Exceptional items – (b)
Exceptional items – (d)
Amortisation of acquisition intangibles – (f)
Statutory results
Year ended 31 March 2012
Headline results
Exceptional items – (b)
Exceptional items – (c)
Exceptional items – (e)
Amortisation of acquisition intangibles – (f)
Exceptional items – (g)
Statutory results
Profit
before interest
and tax
£m
Profit
before tax
£m
Profit for
the year
£m
184
(7)
(11)
27
(52)
141
165
(7)
(11)
27
(52)
122
132
(5)
(8)
21
(40)
100
Profit
before interest
and tax
£m
Profit
before tax
£m
Profit for
the year
£m
233
(14)
(11)
(2)
(61)
–
145
215
(14)
(11)
(2)
(61)
–
127
159
(11)
(8)
(2)
(45)
45
138
EBITDA
£m
290
(7)
(11)
27
–
299
EBITDA
£m
326
(14)
(11)
(2)
–
–
299
Headline information is provided because the Directors consider that it provides assistance in understanding the
Group’s underlying performance.
48
TalkTalk Telecom Group PLC Annual report 2013
9. Reconciliation of Headline information to Statutory information continued
Accounting policy continued
a) Operating efficiencies – Phase III (Making TalkTalk Simpler)
During the year ended 31 March 2013, the Group has continued a review of operating structure to drive process
and efficiency improvements over the medium term. The initiatives that form part of the Group’s Making TalkTalk
Simpler programme implemented in the year were: a restructuring of the systems and processes in TalkTalk
Business to remove duplication and better align the sales and service model for future growth; and a review and
consolidation of the outsourcing partners and rebalancing of the Group’s on-shore footprint. This has resulted
in redundancy, dual running, property and project management costs. The total charge incurred in the year
ended 31 March 2013 was £7m (2012: £nil).
A total taxation credit of £2m in respect of this item has been recognised in the year ended 31 March 2013 (2012: £nil).
b) Operating efficiencies – Phase II (Consumer contact centre rationalisation)
On 24 April 2012, the Group announced the second stage of its contact centre rationalisation. This resulted in
consolidating and outsourcing operations in Preston and Northampton. Costs were incurred in respect of redundancy,
dual running and consultancy. The total charge incurred in the year ended 31 March 2013 was £11m (2012: £nil).
On 7 September 2011, the Group announced the closure of the Group’s contact centre in Waterford, Ireland,
which resulted in redundancy, consultancy and onerous property lease costs. The total charge incurred in
the year ended 31 March 2012 was £14m.
A total taxation credit of £3m in respect of this item has been recognised in the year ended 31 March 2013 (2012: £3m).
c) Operating efficiencies – Phase I (Back office restructuring)
On 26 January 2011 a major restructure of the Group was announced to integrate technology and IT capabilities
and consolidate back office functions. The reorganisation principally resulted in a reduction in headcount and
required project management and consulting costs to deliver these benefits. The programme also resulted in
onerous contract and dual running costs relating to a number of technology contracts where services previously
provided externally are now being provided in-house. The total charge incurred in the year ended 31 March 2013
was £nil (2012: £11m).
A total taxation credit of £nil in respect of this item has been recognised in the year ended 31 March 2013 (2012: £3m).
d) Wholesale Ethernet services overcharges
In December 2012, Ofcom determined that BT had overcharged the Group for certain wholesale Ethernet services.
Accordingly, BT was required to make repayments to the Group for these overcharges. A total of £27m has been
recognised as an exceptional credit in the year ended 31 March 2013 (note 27).
A total taxation charge in respect of this item of £6m has been recognised in the year ended 31 March 2013 (2012: £nil).
e) Other
In April 2013, Ofcom fined the Group £750,000 as a result of a contravention of certain provisions of
The Communication Act 2003 relating to abandoned and silent calls. The full amount has been recouped
from the call centres that made the calls with a net impact of £nil on the Group’s results. This has been accounted
for in the year ended 31 March 2013 in accordance with IAS 10 ‘Events After the Reporting Period’. No tax credit
was recognised in respect of this fine.
During the prior year Ofcom fined the Group £3m as a result of a contravention of General Condition 11 under
Section 94 of The Communication Act 2003. No tax credit was recognised in respect of this fine. In addition a
credit of £1m was recognised in the year ended 31 March 2012 in respect of a provision release for costs no longer
anticipated to be incurred.
49
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TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
9. Reconciliation of Headline information to Statutory information continued
Accounting policy continued
f) Amortisation of acquisition intangibles
An amortisation charge in respect of acquisition intangibles of £52m was incurred in the year ended 31 March 2013
(2012: £61m).
A total tax credit of £12m has been recognised in the year ended 31 March 2013 (2012: £16m).
g) Exceptional items – taxation
During the year ended 31 March 2012, the Group reached agreement with HMRC over the utilisation of brought
forward tax losses acquired with the Tiscali UK business in 2009, including those of Video Networks Limited. This
resulted in the recognition of deferred tax assets of £45m, in addition to those recognised at the acquisition date.
10. Earnings per share
Earnings per share is shown on an Underlying, Headline and Statutory basis to assist in the understanding of the
performance of the Group.
Underlying earnings*
Headline earnings (note 9)
Statutory earnings
Weighted average number of shares (millions):
Shares in issue
Less weighted average holdings by Group ESOT
For basic EPS
Dilutive effect of share options
For diluted EPS
Basic earnings per share
Underlying
Headline
Statutory
Diluted earnings per share
Underlying
Headline
Statutory
2013
£m
182
132
100
924
(40)
884
56
940
2013
pence
20.6
14.9
11.3
2013
pence
19.4
14.0
10.6
2012
£m
152
159
138
914
(29)
885
40
925
2012
pence
17.2
18.0
15.6
2012
pence
16.4
17.2
14.9
* Underlying earnings for the year ended 31 March 2013 of £182m is defined as Headline earnings excluding costs of £62m relating to the investment
in TV less an allocation of taxation of £12m based on the Group’s Headline effective tax rate. In the year ended 31 March 2012, Underlying earnings
of £152m was defined as Headline earnings excluding the profit on sale of a freehold property of £9m less an allocation of taxation of £2m based
on the Group’s Headline effective tax rate.
The number of shares that could be issued but are not considered to be dilutive at 31 March 2013 is 5 million
(2012: 20 million).
50
TalkTalk Telecom Group PLC Annual report 2013
11. Goodwill and other intangible assets
(a) Goodwill
Accounting policy
Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing the excess of the fair
value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is recognised
initially as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.
On disposal of a subsidiary undertaking, the relevant goodwill is included in the calculation of the profit or
loss on disposal.
Critical judgements in applying the Group’s accounting policy
The Group has two Cash Generating Units (CGUs) – Consumer and TalkTalk Business. For the purpose of impairment
testing, at the acquisition date, goodwill is allocated to each of the CGUs expected to benefit from the synergies
of the acquisition. The Group’s shared costs and assets relating mainly to infrastructure and central overheads
are allocated across the two CGUs based on the relative future cash flows that those shared costs support.
Determining whether goodwill is impaired requires estimation of the recoverable amount which is determined
by estimating the value in use of the CGUs to which the goodwill has been allocated.
Impairment of goodwill
Goodwill is not subject to amortisation but is tested for impairment annually or whenever there is an indication
that the asset may be impaired; this review is performed at a CGU level.
The recoverable amount is determined by assessing the future cash flows of the CGU to which the goodwill
relates. The future cash flows of the Group are taken from the Board or Management approved five year plan and
extrapolated out to 20 years based on the UK’s long term growth rate. This is discounted by the CGU’s weighted
average cost of capital pre-tax to give the net present value of that CGU. Where the net present value of future
cash flows is less than the carrying value of the unit, the impairment loss is allocated first to reduce the carrying
amount of any goodwill allocated to the CGU and then to the other assets of the CGU pro-rata on the basis of the
carrying amount of each asset in the unit. Any impairment loss is recognised in the income statement and is not
subsequently reversed.
Sensitivity analysis is performed using reasonably possible changes in the key assumptions.
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Opening cost and net book value
Acquisition of subsidiaries (note 13)
Disposal (note 13)
Closing cost and net book value
2013
£m
480
–
(1)
479
The goodwill acquired in business combinations is allocated at acquisition to the CGUs that are expected
to benefit from that business combination. The allocation of goodwill across the CGUs is as follows:
Consumer
TalkTalk Business
2013
£m
337
142
479
2012
£m
471
9
–
480
2012
£m
337
143
480
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TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
11. Goodwill and other intangible assets continued
(b) Other intangible assets
Impairment of goodwill continued
Impairment review
The key assumptions used in the Group’s goodwill impairment review are as follows:
• Long term growth rates
Long term revenue growth rates applied are based on the growth rate for the UK per the OECD. The rate applied
in the current year was 1.1% (2012: 1.8%).
• Discount rate
The underlying discount rate for each CGU is based on the UK ten year gilt rate adjusted for an equity risk
premium and the systematic risk of the CGU. The average pre-tax rate for both CGUs used to discount the
forecast cash flows is 8.1% (2012: 8.2%). The assumptions used in the calculation of the CGU’s discount rate
are benchmarked to externally available data. The same discount rate has been applied to both CGUs due
to the similarity of risk factors and geographical location.
• Capital expenditure
Forecast capital expenditure is based on senior management expectations of future required support of the
network and current run rate of expenditure.
• Customer factors
The key assumptions for the forecast cash flows of each of the CGUs are based on expected customer growth
rates, ARPU, direct costs, including acquisition costs and change in product mix. The value assigned to each
of these assumptions has been determined based on the extrapolation of historical trends in the Group and
external information on expected trends of future market developments.
Sensitivity analysis has been performed for each key assumption and the Directors have not identified any
reasonably possible material changes in the key assumptions that would cause the carrying value of goodwill
to exceed the recoverable amount.
Accounting policy
Operating intangibles
Operating intangibles include internal infrastructure and design costs incurred in the development of software
for internal use. Internally generated software is recognised as an intangible asset only if it can be separately
identified, it is probable that the asset will generate future economic benefits, and the development cost can
be measured reliably. Where these conditions are not met, development expenditure is recognised as an expense
in the year in which it is incurred. Operating intangibles are amortised on a straight line basis over their estimated
useful economic lives of up to eight years.
Acquisition intangibles
Acquired intangible assets such as customer bases and other intangible assets acquired through a business
combination are capitalised separately from goodwill and amortised over their expected useful lives of up to
six years on a straight line basis. The value attributed to such assets is based on the future economic benefit
that is expected to be derived from them, calculated as the present value of future cash flows after a deduction
for contributory assets.
Critical judgements in applying the Group’s accounting policy
Impairment
At the acquisition date, acquisition intangibles are allocated to each of the CGUs expected to benefit from the
synergies of the combination. The Group’s shared costs and assets relating mainly to infrastructure and central
overheads are allocated across the two CGUs based on the relative future cash flows.
Determining whether the carrying amount of operating and acquisition intangibles have any indication of
impairment requires judgement. If an indication of impairment is identified, further judgement is required
to assess whether the carrying amount can be supported by the value in use of the CGU that the asset is
allocated to.
The value in use calculation involves estimation of both the future cash flows of the CGUs and the selection
of appropriate discount rates, to use to calculate present values.
Useful economic lives
The assessment of the useful economic lives of these operating and acquisition intangibles requires judgement.
Amortisation is charged to the income statement based on the useful economic life selected. This assessment
requires estimation of the period over which the Group will benefit from the assets.
52
TalkTalk Telecom Group PLC Annual report 2013
11. Goodwill and other intangible assets continued
(b) Other intangible assets continued
Impairment of assets
The Group reviews the carrying amounts of its intangible assets to determine whether there is any indication that
those assets have suffered an impairment loss at each reporting date. Where an indicator of impairment exists,
the Group makes a formal estimate of the asset’s recoverable amount and the extent of any impairment loss.
The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. In assessing
value in use, the estimated cash flows are discounted to their present value using a pre-tax discount rate that
reflects the current market assessments of the time value of money and the risks specific to the asset for which
the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset is estimated to be less than the carrying amount, the carrying amount of the
asset or CGU is reduced to its recoverable amount.
Other intangible assets are analysed as follows:
Opening balance at 1 April 2012
Additions
Amortisation
Closing balance at 31 March 2013
Cost (gross carrying amount)
Accumulated amortisation
Closing balance at 31 March 2013
Opening balance at 1 April 2011
Additions
Amortisation
Closing balance at 31 March 2012
Cost (gross carrying amount)
Accumulated amortisation
Closing balance at 31 March 2012
Operating
intangibles
£m
Acquisition
intangibles
£m
Total other
intangibles
£m
123
30
(26)
127
260
(133)
127
79
–
(52)
27
326
(299)
27
202
30
(78)
154
586
(432)
154
Operating
intangibles
£m
Acquisition
intangibles
£m
Total other
intangibles
£m
124
26
(27)
123
230
(107)
123
131
9
(61)
79
326
(247)
79
255
35
(88)
202
556
(354)
202
Operating intangibles include internally generated assets of net book value £31m (2012: £26m), which are
amortised over a period of up to eight years. This includes additions of £10m (2012: £7m) and an amortisation
charge of £5m (2012: £6m) in the year ended 31 March 2013.
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53
TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
11. Goodwill and other intangible assets continued
(b) Other intangible assets continued
Impairment of assets continued
Included within operating intangibles is the following asset which is material to the Group:
• TRIO, the customer billing system, which has a net book value of £86m (2012: £90m). TRIO is amortised over
a period of up to eight years depending on the release date of the relevant component. The weighted average
remaining useful economic life of the components of TRIO is five years (2012: five years).
Acquisition intangibles are removed from cost in the analysis in the year after they are fully amortised.
All acquisition intangibles relate to customer bases.
The customer bases relate primarily to the AOL UK internet access business which was acquired in December 2006
and the Tiscali UK internet access business which was acquired in July 2009. The valuation of customer bases is
derived from the discounted future cash flows expected from them, after a deduction for contributory assets.
The following customer base is material to the Group at 31 March 2013:
• Tiscali customer base which has a net book value of £23m (2012: £41m) and a remaining useful economic life
of 15 months (2012: 27 months).
In addition, the following customer base was material to the Group at 31 March 2012:
• AOL broadband customer base which had net book value of £32m and a remaining useful economic life of
ten months.
12. Property, plant and equipment
Accounting policy
Property, plant and equipment are stated at cost, net of depreciation and any provision for impairment.
Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost, less
estimated residual value, of each asset on a straight line basis over its expected useful life from the date it is
brought into use, as follows:
Short leasehold costs
Network equipment and computer hardware
Fixtures and fittings
10% or the lease term if less than ten years
12.5–50% per annum
20–25% per annum
Critical judgements in applying the Group’s accounting policy
The assessment of the useful economic lives of these assets requires judgement. Depreciation is charged to the
income statement based on the useful economic life selected. This assessment requires estimation of the period
over which the Group will benefit from the assets.
Determining whether the carrying amount of these assets has any indication of impairment also requires judgement.
If an indication of impairment is identified, further judgement is required to assess whether the carrying amount
can be supported by the value in use of the CGU that the asset is allocated to. The value in use calculation involves
estimation of both the future cash flows of the CGUs and the selection of appropriate discount rates, to use to
calculate present values (note 11).
54
TalkTalk Telecom Group PLC Annual report 2013
12. Property, plant and equipment continued
Impairment of assets
Property, plant and equipment
The Group reviews the carrying amounts of its fixed assets to determine whether there is any indication that those
assets have suffered an impairment loss at each reporting date. The Group uses the same methodology as set out
in note 11 for operating and acquisition intangibles.
Opening balance at 1 April 2012
Additions
Depreciation
Closing balance at 31 March 2013
Cost (gross carrying amount)
Accumulated depreciation and impairment charges
Closing balance at 31 March 2013
Leasehold
improvements
£m
Network
equipment
and computer
hardware
£m
Fixtures
and fittings
£m
6
–
(1)
5
6
(1)
5
286
79
(75)
290
584
(294)
290
–
–
–
–
6
(6)
–
Total
£m
292
79
(76)
295
596
(301)
295
Assets are removed from cost and depreciation in the above analysis once they are fully depreciated and are no
longer in use.
Opening balance at 1 April 2011
Additions
Disposals
Depreciation
Closing balance at 31 March 2012
Cost (gross carrying amount)
Accumulated depreciation and impairment charges
Closing balance at 31 March 2012
Leasehold
improvements
£m
Network
equipment
and computer
hardware
£m
Fixtures
and fittings
£m
6
–
–
–
6
6
–
6
283
68
(1)
(64)
286
509
(223)
286
1
–
–
(1)
–
6
(6)
–
Total
£m
290
68
(1)
(65)
292
521
(229)
292
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13. Non-current asset investments
Accounting policy
Investments, other than subsidiaries, are initially recognised at cost, being the fair value of the consideration
given plus any transaction costs associated with the acquisition.
Investments are categorised as available for sale and are then recorded at fair value. Changes in fair value,
together with any related taxation, are taken directly to equity and recycled to the income statement when
the investment is sold or determined to be impaired.
Cost and net book value at 31 March 2012
Impairment
Cost and net book value at 31 March 2013
£m
1
(1)
–
Non-current asset investments at 31 March 2013 related to an 8.4% (2012: 8.4%) interest in Shared Band Limited,
a telecommunications technology provider. During the year the Group impaired its investment to £nil.
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TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
13. Non-current asset investments continued
Accounting policy continued
(a) Principal investments
The Parent Company has investments in the following subsidiary undertakings, which principally affected the
profits or losses or net assets of the Group. To avoid a statement of excessive length, details of investments that
are not significant have been omitted. All holdings are in equity share capital and give the Group an effective
holding of 100% on consolidation.
Name
Country of incorporation or registration
Nature of business
TalkTalk Group Limited
TalkTalk Telecom Holdings Limited*
TalkTalk Communications Limited
TalkTalk Telecom Limited
CPW Network Services Limited
* Directly held by the Company.
(b) Acquisitions and disposals
(i) Acquisitions
During the prior year, the Group:
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Holding company
Holding company
Telecommunications
Telecommunications
Telecommunications
• acquired Executel Limited and Greystone Telecom Limited for cash consideration net of cash acquired of £15m,
which resulted in acquisition intangibles of £8m, goodwill of £9m and the corresponding deferred tax liability
of £2m. The impact of these acquisitions on the results of the Group for the year ended 31 March 2012 had the
business been acquired on 31 March 2011 is immaterial. The goodwill of £9m was recognised relating to the
future opportunities arising from the nature of the businesses and fit with the Group’s existing operations; and
• paid cash consideration of £1m in respect of deferred consideration for TalkTalk Business (2CCH) Limited
and Southern Communications Networks Limited and dealer buyouts. The acquisition of dealer buyouts
resulted in acquisition intangibles of £1m.
(ii) Disposals
On 28 March 2013, the Group disposed of its investment in Southern Communications Networks Limited for cash
consideration of £2m. Associated goodwill of £1m was written off resulting in a £1m profit on disposal. There was
no associated acquisition intangible remaining in respect of this business.
In the prior year, the Group disposed of its ValueCall operations for cash consideration of £3m. There was no
associated goodwill or acquisition intangible in respect of this business resulting in a £3m profit on disposal.
14. Interest in joint venture
Accounting policy
Interests in joint ventures are accounted for using the equity method. The Group income statement includes the
Group’s share of the post-tax profits or losses of the joint ventures based on their financial statements for the
year. In the Group balance sheet, the Group’s interest in joint ventures are shown as a non-current asset in the
balance sheet, representing the Group’s investment in the share capital of the joint ventures, as adjusted by
post-acquisition changes in the Group’s share of the net assets or liabilities less provision for any impairment.
When a joint venture has net liabilities, any loans advanced to the venture are included in the Group’s equity
accounted investment in it. When a venture has net assets, any loans advanced to it are shown separately in
the balance sheet, as a receivable to the Group.
The Group holds 14.3% of the ordinary share capital of YouView TV Limited, a joint venture with The British
Broadcasting Corporation, ITV Broadcasting Limited, British Telecom PLC, Channel Four Television Corporation,
Arqiva Limited and Channel 5 Broadcasting Limited. The joint venture was set up in order to develop a free-to-air
internet connected TV service to UK homes. The table below sets out the net additions in the year.
Opening balance at 1 April
Additions
Share of results
Closing balance at 31 March
2013
£m
7
6
(4)
9
2012
£m
4
4
(1)
7
The Group has renewed the carrying value of YouView and has concluded that there is no indication of impairment.
56
TalkTalk Telecom Group PLC Annual report 2013
14. Interest in joint venture continued
Accounting policy continued
The Group’s share of the results, assets and liabilities of its joint ventures are as follows:
Group share of results of joint ventures
Expenses
Loss before taxation
Taxation
Loss after taxation
Group share of net assets of joint ventures
Non-current assets
Net assets
2013
£m
(4)
(4)
–
(4)
2013
£m
9
9
2012
£m
(1)
(1)
–
(1)
2012
£m
7
7
At 31 March 2013 the Group had committed to pay £5m (2012: £13m) to YouView TV Limited, payable over the
period to 31 March 2014.
15. Inventories
Accounting policy
Inventories are stated at the lower of cost and net realisable value, valued on a FIFO basis, and consist predominantly
of set top boxes, handsets and routers. Net realisable value is based on estimated selling price, less costs expected
to be incurred. A provision is made for obsolete items where appropriate.
Goods for resale
2013
£m
23
2012
£m
3
16. Trade and other receivables
Critical judgements in applying the Group’s accounting policy
Judgement is required in order to evaluate the likelihood of collection of customer debt after revenue has been
recognised and hence the value of the bad and doubtful debt. These provisions are based on historical trends
in the percentage of debts which are not recovered.
Trade and other receivables comprise:
Current – trade and other receivables
Trade receivables – gross
Less provision for impairment
Trade receivables – net
Other receivables
Prepayments and accrued income
Trade and other receivables
Loans to related parties (note 26)
2013
£m
156
(33)
123
41
62
226
–
226
2012
£m
133
(29)
104
31
49
184
2
186
The Directors estimate that the carrying amount of trade receivables approximates to their fair value.
The average credit period taken on trade receivables, calculated by reference to the amount owed at the year end
as a proportion of total revenue in the year, was 28 days (2012: 24 days).
The Group’s trade receivables are denominated in the following currencies:
UK Sterling
Other
2013
£m
123
33
156
2012
£m
111
22
133
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TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
16. Trade and other receivables continued
Critical judgements in applying the Group’s accounting policy continued
The ageing of gross trade receivables is as follows:
Not yet due
0 to 2 months overdue
2 to 4 months overdue
Over 4 months overdue
The ageing of the provision for impairment of trade receivables is as follows:
Not yet due
0 to 2 months overdue
2 to 4 months overdue
Over 4 months overdue
Movements in the provisions for impairment of trade receivables are as follows:
Opening balance
Charged to the income statement
Receivables written off as irrecoverable
2013
£m
94
18
19
25
156
2013
£m
(3)
(3)
(7)
(20)
(33)
2013
£m
(29)
(33)
29
(33)
2012
£m
80
21
14
18
133
2012
£m
(3)
(5)
(8)
(13)
(29)
2012
£m
(31)
(38)
40
(29)
Trade receivables of £32m (2012: £27m) were past due but not impaired. These balances primarily relate to
Consumer and Corporate fixed line customers. The Group has made provisions based on historical rates of
recoverability and all unprovided amounts are considered to be recoverable. The ageing analysis of these trade
receivables is as follows:
0 to 2 months
2 to 4 months
Over 4 months
17. Trade and other payables
Trade payables
Other taxes and social security costs
Other payables
Accruals and deferred income
2013
£m
15
12
5
32
2013
£m
210
10
21
190
431
2012
£m
16
6
5
27
2012
£m
135
21
26
197
379
The Company has commercially agreed longer credit terms with certain suppliers. Excluding these suppliers the
underlying average credit period taken on trade payables was 39 days (2012: 32 days). Including these suppliers,
the average credit period taken was 48 days (2012: 32 days).
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
58
TalkTalk Telecom Group PLC Annual report 2013
18. Cash and cash equivalents, loans and other borrowings
(a) Cash and cash equivalents are as follows:
Cash at bank and in hand
The effective interest rate on bank deposits and money market funds was 0.7% (2012: 0.5%).
(b) Loans and other borrowings comprise:
Current
Bank overdrafts
Term loan
Non-current
Term loan
Bilateral loan
£560m revolving credit facility
Maturity
2014, 2015
2015
2015
2013
£m
7
2013
£m
–
25
25
2013
£m
50
30
295
375
2012
£m
2
2012
£m
1
25
26
2012
£m
75
30
305
410
Details of the current and non-current borrowing facilities of the Group for the year are set out below.
Bank overdrafts
Overdraft facilities are used to assist in short term cash management; these uncommitted facilities bear interest
at a margin over the Bank of England base rate.
£75m Term loan
The Group has a committed Term loan of £75m (2012: £100m), of which a further £25m matures in March 2014
and the remainder matures in March 2015. The interest rate payable in respect of drawings under this facility is at a
margin over Sterling LIBOR for the relevant currency and for the appropriate period. The actual margin applicable
to any drawing depends on the ratio of net debt to EBITDA calculated in respect of the most recent accounting
period. Covenants included in this facility restrict the ratio of net debt to EBITDA and require minimum levels of
interest cover and fixed charges (interest and operating lease expenditure) cover.
£560m revolving credit facility (RCF) and £30m bilateral agreement
The Group has a £560m RCF which matures in November 2015. The interest rate payable in respect of drawings
under this facility is at a margin over Sterling LIBOR and for the appropriate period. The actual margin applicable
to any drawing depends on the ratio of net debt to EBITDA calculated in respect of the most recent accounting
period. Covenants included in this facility restrict the ratio of net debt to EBITDA and require minimum levels
of interest cover and fixed charges (interest and operating lease expenditure) cover. In addition to the RCF the
Group also has £30m of bilateral agreements which mature in March 2015.
The Group’s facilities total £665m. The Group was in compliance with its covenants throughout the current and
prior year.
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TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
18. Cash and cash equivalents, loans and other borrowings continued
(b) Loans and other borrowings comprise continued:
Borrowing facilities
The Group had undrawn committed borrowing facilities at the end of the year, in respect of which all conditions
precedent had been met, as follows:
Undrawn available committed facilities
Maturity
2015
2013
£m
265
2012
£m
255
The book value and fair value of the Group’s loans and other borrowings, all of which are in Sterling, are as follows:
Less than 1 year
1 to 2 years
2 to 3 years
3 to 4 years
2013
£m
25
80
295
–
400
2012
£m
26
25
80
305
436
Securities and guarantees
Committed borrowings are guaranteed by Group companies which make up 75% EBITDA and 75% of gross assets
excluding internal transactions.
19. Financial risk management and derivative financial instruments
The book value and fair value of the Group’s financial assets, liabilities and derivative financial instruments,
excluding the Group’s loans and other borrowings shown in note 18, are as follows:
Cash and cash equivalents
Trade and other receivables
Non-current investments and investment in joint venture
Trade and other payables*
Derivative financial instruments**
Loans to related parties
Book and fair value
2013
£m
7
226
9
(428)
(3)
–
(189)
2012
£m
2
184
8
(379)
–
2
(183)
* Deferred income has been included within the financial liabilities above so as to give completeness over the Group’s contractual commitments on
future cash outflows.
** Derivative financial instruments are included with other payables in note 17.
(a) Financial instruments
The Group’s activities exposed it to a variety of financial risks including market risk (such as currency risk and interest
rate risk), credit risk and liquidity risk. The Group Treasury function used certain financial instruments to mitigate
potential adverse effects on the Group’s financial performance from these risks. These financial instruments
primarily consisted of bank loans and interest rate swaps. Other products, such as currency options, can also
be used depending on the risks to be covered but have not been used in the current or preceding financial year.
The Group does not trade or speculate in any financial instruments.
The Group has cash flow hedges in place that swap the interest rate risk on the RCF from floating to fixed. These
hedges have been fully effective from inception. The fair value measurement is classified as Level 2, derived from
other observable market data; this means that their fair value is based upon the mark to market valuation at the
balance sheet date. The fair value of these instruments at 31 March 2013 is £3m (2012: £nil). An expense of £2m
(2012: £nil) has been recognised in other comprehensive income in the year ended 31 March 2013. As the hedges
were fully effective there has been no income statement impact.
60
TalkTalk Telecom Group PLC Annual report 2013
19. Financial risk management and derivative financial instruments continued
(b) Embedded derivatives
No contracts with embedded derivatives have been identified and accordingly no such derivatives have been
accounted for separately.
(c) Foreign exchange risk
The Group uses spot and forward foreign exchange trading to hedge transactional exposures, which arise mainly
through cost of sales and operating expenses, and are primarily denominated in Euro and US Dollar. In the prior
year the Group also used short term currency swaps for liquidity management. At 31 March 2013, the Sterling value
of outstanding currency contracts was £17m (2012: £2m).
Borrowings and foreign exchange contracts are sensitive to movements in foreign exchange rates; this sensitivity
can be analysed in comparison to year end rates (adjusted for funding to related parties and assuming all other
variables remain constant). There was no material impact of a 10% movement in the UK Sterling/Euro exchange rate
on either the income statement or other equity as non-Sterling debtors are broadly offset by non-Sterling creditors.
The effect of foreign exchange derivatives on borrowings at the year end was as follows:
2013
Borrowings before derivatives
Derivatives
2012
Borrowings before derivatives
Derivatives
UK Sterling
£m
400
(17)
383
UK Sterling
£m
436
(2)
434
Euro
£m
–
19
19
Euro
£m
–
2
2
Other
£m
–
(2)
(2)
Other
£m
–
–
–
Total
£m
400
–
400
Total
£m
436
–
436
During the year the Group used derivatives for management of foreign currency cash balances held by overseas
subsidiaries, which were inherited from CPW on demerger, and foreign currency trading balances.
(d) Interest rate risk
The Group’s interest rate risk arises primarily from cash, cash equivalents and borrowings, all of which are at
floating rates of interest and thus expose the Group to cash flow interest rate risk. These floating rates are linked
to LIBOR and other interest rate bases as appropriate to the instrument and currency. Future cash flows arising
from these financial instruments depend on interest rates and periods for each loan or rollover. As detailed in
section (a) the Group has cash flow hedges in place to mitigate its interest rate risk on its borrowings.
Cash and borrowings, as well as some foreign exchange products, are sensitive to movements in interest rates and
such movements have been analysed in the table below by calculating the effect on the income statement and
equity of one percentage point movement in the interest rate for the currencies in which most Group cash and
borrowings are denominated. Funding to related parties has been offset against gross borrowings in calculating
these sensitivities. This annualised analysis has been prepared on the assumption that the year end positions
prevail throughout the year and therefore may not be representative of fluctuations in levels of borrowings.
1% movement in the UK Sterling interest rate
Income statement movement
Other equity movement
2013
£m
2
–
2012
£m
2
–
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TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
19. Financial risk management and derivative financial instruments continued
(e) Liquidity risk
The Group manages its exposure to liquidity risk by regularly reviewing the long and short term cash flow projections
for the business against facilities and other resources available to it. Headroom is assessed based on historical
experience as well as by assessing current business risks, including foreign exchange movements. Existing
facilities do not expire until March 2015 and November 2015; it is Group policy to refinance debt maturities
significantly ahead of maturity dates.
The table below analyses the Group’s financial liabilities into relevant maturity groupings. The amounts disclosed
in the table are the contractual undiscounted cash flows assuming year end interest rates remain constant and
that borrowings are paid in full in the year of maturity.
2013
Loans and other borrowings
Derivative financial instruments – payable
Derivative financial instruments – receivable
Trade and other payables
2012
Loans and other borrowings
Derivative financial instruments – payable
Derivative financial instruments – receivable
Trade and other payables
Less than
1 year
£m
1 to 2 years
£m
2 to 3 years
£m
3 to 4 years
£m
4 to 5 years
£m
More than
5 years
£m
Total
£m
(25)
(17)
17
(431)
(80)
–
–
–
(295)
–
–
–
(456)
(80)
(295)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(400)
(17)
17
(431)
(831)
Less than
1 year
£m
(26)
(2)
2
(379)
(405)
1 to 2 years
£m
2 to 3 years
£m
3 to 4 years
£m
4 to 5 years
£m
More than
5 years
£m
Total
£m
(25)
–
–
–
(25)
(80)
–
–
–
(305)
–
–
–
(80)
(305)
–
–
–
–
–
–
–
–
–
–
(436)
(2)
2
(379)
(815)
(f) Credit risk
The Group’s exposure to credit risk is regularly monitored. Debt, investments, foreign exchange and derivative
transactions are all spread amongst a number of banks all of which have short or long term credit ratings appropriate
to the Group’s exposures. Trade receivables primarily comprise balances due from Consumer and TalkTalk
Business fixed line customers, and provision is made for any receivables that are considered to be irrecoverable.
(g) Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while
maximising the return to stakeholders through the optimisation of the debt and equity balance. Further detail is
provided in the Chief Financial Officer’s Statement on page 11.
The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 18, cash and
cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and
retained earnings as disclosed in notes 21 to 22.
The Group’s Board reviews the capital structure on an annual basis. As part of this review, the Board considers the
cost of capital and the risks associated with each class of capital. The Group has a medium term target gearing ratio
of 75% to 100% determined as a proportion of net debt to equity. The gearing ratio at 31 March 2013 of 89% (2012: 98%)
was within the stated medium term target.
The gearing ratio at the year end is as follows:
Debt
Cash and cash equivalents
Net debt
Equity
Net debt to equity ratio
62
2013
£m
(400)
7
(393)
442
89%
2012
£m
(436)
2
(434)
444
98%
TalkTalk Telecom Group PLC Annual report 2013
20. Provisions
Accounting policy
Provisions are recognised when a legal or constructive obligation exists as a result of past events and it is probable
that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation. Provisions are discounted where the time value of money is considered to be material.
Provisions are categorised as follows:
Operating efficiencies
Operating efficiencies provisions relate principally to redundancy costs and are only recognised where plans are
demonstrably committed and where appropriate communication to those affected has been undertaken at the
balance sheet date. These provisions are expected to be utilised over the next twelve months.
One Company integration
These provisions relate principally to redundancy costs and are only recognised where plans are demonstrably
committed and where appropriate communication to those affected has been undertaken at the balance
sheet date, and onerous contract costs where a commitment has been made to exit a contract as part of the
One Company reorganisation. These provisions are expected to be utilised over the next twelve to 24 months.
Property
Property provisions relate to dilapidations and similar property costs, and costs associated with onerous property
contracts. All such provisions are assessed by reference to the terms and conditions of the contract and market
conditions at the balance sheet date. Onerous property contracts are expected to be utilised over the next six years.
Dilapidation provisions are expected to be utilised as and when properties are exited.
Contract and other
Contract and other provisions relate to onerous contracts and contracts with unfavourable terms arising on the
acquisition of businesses and anticipated costs of unresolved legal disputes. All such provisions are assessed by
reference to the best available information at the balance sheet date. Contract and other provisions were utilised
in the year ended 31 March 2013.
The below tables analyse the Group’s provisions:
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Non-current
2013
Opening balance
Charged to income statement
Utilised in the year
Unwinding of discount
2012
Opening balance
Charged to income statement
Utilised in the year
Released in the year
Unwinding of discount
2013
£m
5
8
13
Operating
efficiencies
£m
One Company
integration
£m
Property
£m
Contract
and other
£m
1
2
(1)
–
2
2
–
(1)
1
2
9
1
(1)
–
9
6
–
(6)
–
–
Operating
efficiencies
£m
One Company
integration
£m
Property
£m
Contract
and other
£m
12
10
(21)
–
–
1
10
–
(7)
(1)
–
2
9
1
(1)
–
–
9
15
–
(8)
(2)
1
6
2012
£m
8
10
18
Total
£m
18
3
(9)
1
13
Total
£m
46
11
(37)
(3)
1
18
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TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
21. Share capital
Allotted, called-up and fully paid
Ordinary shares of 0.1p each
2013
million
931
2012
million
914
2013
£m
1
2012
£m
1
On 21 September 2012 the Company issued a further 17,135,825 ordinary shares of 0.1p each to settle the VES
schemes (note 5).
22. Reserves
Share
capital
£m
Share
premium
£m
Notes
Translation
and hedging
reserve
£m
Demerger
reserve
£m
Retained
earnings
and other
reserves
£m
At 1 April 2012
Total comprehensive income
for the year
Issues of own shares*
Taxation of items recognised
directly in reserves
Share-based payments reserve credit
Equity dividends
Currency translation differences
At 31 March 2013
5
8
1
–
–
–
–
–
–
1
586
(65)
(513)
435
–
32
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
98
(63)
11
6
(87)
–
618
(64)
(513)
400
442
Share
capital
£m
Share
premium
£m
Notes
Translation
and hedging
reserve
£m
Demerger
reserve
£m
Retained
earnings
and other
reserves
£m
At 1 April 2011
Total comprehensive income
for the year
Net purchase of own shares
Settlement of Group ESOT shares
Share-based payments reserve credit
Share-based payments reserve debit
Equity dividends
At 31 March 2012
5
8
1
–
–
–
–
–
–
1
586
(65)
(513)
406
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
138
(54)
1
4
(2)
(58)
586
(65)
(513)
435
444
Total
£m
444
98
(31)
11
6
(87)
1
Total
£m
415
138
(54)
1
4
(2)
(58)
* On 17 September 2012, the Group’s Remuneration Committee determined that the relevant performance conditions of the VES schemes (including
the 5% TSR requirement) had been satisfied meaning the VES participants were entitled to exercise 60% of their options as set out in note 5. The
settlement of the schemes resulted in the recognition of share premium of £32m and a £63m movement in retained earnings and other reserves.
The £63m debit to reserves represents a total cash outflow of £35m and the value of the new PLC shares issued of £32m net of the repayment of the
associated VES loans, interest and a reduction in the Group’s liability to settle the schemes.
Group ESOT
The Group ESOT held 39 million shares at 31 March 2013 (2012: 41 million) in the Company for the benefit of
employees and former CPW employees. The Group ESOT has waived its rights to receive dividends and none
of its shares have been allocated to specific schemes. At 31 March 2013 the shares had a market value of £107m
(2012: £56m).
During the prior year the Group ESOT purchased 42 million shares at a cost of £54m.
Demerger reserve
The demerger reserve primarily reflects the profits or losses arising on the transfer of investments and net assets
of CPW on demerger.
Translation and hedging reserve
The results of overseas operations are translated at the average foreign exchange rates for the year, and their
balance sheets are translated at the rates prevailing at the balance sheet date. Exchange differences arising on
the translation of opening net assets and results of overseas operations are recognised in the translation and
hedging reserve. All other exchange differences are included in the income statement.
64
TalkTalk Telecom Group PLC Annual report 2013
23. Analysis of changes in net debt
2013
Cash and cash equivalents
Bank overdrafts
Current loans and other borrowings
Non-current loans and other borrowings
Total net debt
Loans to related parties
Total net debt including loans to related parties
2012
Cash and cash equivalents
Bank overdrafts
Current loans and other borrowings
Non-current loans and other borrowings
Total net debt
Loans to related parties
Total net debt including loans to related parties
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Closing
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(434)
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7
–
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(375)
(400)
(393)
–
(393)
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Net cash flow
£m
Closing
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(9)
(8)
(35)
(395)
(430)
(438)
2
(436)
1
8
9
10
(15)
(5)
4
–
4
2
(1)
1
(25)
(410)
(435)
(434)
2
(432)
24. Commitments under operating leases
The Group leases network infrastructure and offices under non-cancellable operating leases. The leases have
varying terms, purchase options, escalation clauses and renewal rights. There were no leases which were
individually significant to the Group.
As at 31 March 2013 the Group had outstanding commitments for future minimum payments due as follows:
Less than 1 year
2 to 5 years
Greater than 5 years
2013
£m
37
69
68
174
2012
£m
37
73
75
185
25. Capital commitments
The Group had entered into the following amount of contractual commitments for the acquisition of property,
plant and equipment at the year end:
Expenditure contracted, but not provided for in the financial statements
2013
£m
21
2012
£m
21
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65
TalkTalk Telecom Group PLC Annual report 2013
Notes to the consolidated financial statements continued
26. Related party transactions
The Group’s related party transactions are made on terms equivalent to those that prevail in arm's length transactions.
During the year, the Group had the following disclosable transactions:
2013
Loans owed to the Group
2012
Loans owed to the Group
Other
related
parties
£m
–
2
Other related parties comprised a loan to Future Office Communications Limited, an associated undertaking
of the Group at 31 March 2012.
The remuneration of the Directors, who are some of the Key Management Personnel of the Group, is set out in the
Directors’ Remuneration Report on pages 22 to 28. The remuneration of all Key Management Personnel is
disclosed in note 4.
27. Contingent liabilities
Included within the Group’s results for the year is a credit of £29m relating to an Ofcom determination that BT had
overcharged for certain wholesale Ethernet services. The full amount has been paid to the Group by 31 March 2013.
BT has appealed Ofcom’s determination in the Competition Appeal Tribunal (CAT). However, the Group and other
parties have also appealed the decision arguing that the original Ofcom determination was too low.
66
TalkTalk Telecom Group PLC Annual report 2013
Independent auditor’s report
to the members of TalkTalk Telecom Group PLC
We have audited the Parent Company financial
statements of TalkTalk Telecom Group PLC for the year
ended 31 March 2013 which comprise the Company
balance sheet, the Company reconciliation of
movements in shareholders’ funds and the related
notes 1 to 10. The financial reporting framework that
has been applied in their preparation is applicable law
and United Kingdom Accounting Standards (United
Kingdom Generally Accepted Accounting Practice).
This report is made solely to the Company’s members,
as a body, in accordance with Chapter 3 of Part 16 of
the Companies Act 2006. Our audit work has been
undertaken so that we might state to the Company’s
members those matters we are required to state to
them in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than
the Company and the Company’s members as a body
for our audit work, for this report, or for the opinions we
have formed.
Respective responsibilities of Directors
and auditor
As explained more fully in the Directors’ Responsibilities
Statement, the Directors are responsible for the
preparation of the Parent Company financial statements
and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on
the Parent Company financial statements in accordance
with applicable law and International Standards on
Auditing (UK and Ireland). Those standards require us
to comply with the Auditing Practices Board’s Ethical
Standards for Auditors.
Scope of the audit of the
financial statements
An audit involves obtaining evidence about the amounts
and disclosures in the financial statements sufficient
to give reasonable assurance that the financial
statements are free from material misstatement,
whether caused by fraud or error. This includes an
assessment of:
• whether the accounting policies are appropriate to
the Parent Company’s circumstances and have
been consistently applied and adequately disclosed;
• the reasonableness of significant accounting
estimates made by the Directors; and
• the overall presentation of the financial statements.
In addition, we read all the financial and non-financial
information in the Annual Report to identify material
inconsistencies with the audited financial statements.
If we become aware of any apparent material
misstatements or inconsistencies we consider the
implications for our report.
Opinion on financial statements
In our opinion the Parent Company financial statements:
• give a true and fair view of the state of the
Company’s affairs as at 31 March 2013;
• have been properly prepared in accordance with
United Kingdom Generally Accepted Accounting
Practice; and
• have been prepared in accordance with the
requirements of the Companies Act 2006.
Opinion on other matters prescribed by the
Companies Act 2006
In our opinion:
• the part of the Directors’ Remuneration Report to be
audited has been properly prepared in accordance
with the Companies Act 2006; and
• the information given in the Directors’ Report for the
financial year for which the financial statements are
prepared is consistent with the Parent Company
financial statements.
Matters on which we are required to report
by exception
We have nothing to report in respect of the following
matters where the Companies Act 2006 requires us
to report to you if, in our opinion:
• adequate accounting records have not been kept
by the Parent Company, or returns adequate for
our audit have not been received from branches
not visited by us; or
• the Parent Company financial statements and the
part of the Directors’ Remuneration Report to be
audited are not in agreement with the accounting
records and returns; or
• certain disclosures of Directors’ remuneration
specified by law are not made; or
• we have not received all the information and
explanations we require for our audit.
Other matter
We have reported separately on the Group financial
statements of TalkTalk Telecom Group PLC for the year.
Peter O’Donoghue BA FCA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
15 May 2013
67
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TalkTalk Telecom Group PLC Annual report 2013
TalkTalk Telecom Group PLC Annual report 2013
Company balance sheet
As at 31 March
Fixed assets
Fixed asset investments
Current assets
Debtors: amounts due within one year
Total assets
Current liabilities
Creditors: amounts due within one year
Loans
Non-current liabilities
Loans
Total liabilities
Net assets
Equity
Share capital
Share premium
Retained earnings and other reserves
Equity shareholders’ funds
Notes
2013
£m
2012
£m
4
5
6
7
7
8, 9
9
9
1,082
1,082
303
303
1,004
1,004
505
505
1,385
1,509
(81)
(25)
(106)
(375)
(375)
(481)
904
1
618
285
904
(128)
(25)
(153)
(410)
(410)
(563)
946
1
586
359
946
The accompanying notes are an integral part of this Company balance sheet.
These financial statements were approved by the Board of Directors on 15 May 2013. They were signed on its behalf by:
D Harding
Chief Executive Officer
15 May 2013
A Stirling
Chief Financial Officer
15 May 2013
Company number: 07105891
68
68
TalkTalk Telecom Group PLC Annual report 2013
Company reconciliation of movement
in shareholders’ funds
For the year ended 31 March
Profit for the period (note 2)
Equity dividends (note 3)
Retained loss for the year
Issue of own shares*
Share-based payments reserve credit
Share-based payments reserve debit*
Derivative financial instruments
Net movement in shareholders’ funds
Opening shareholders’ funds
Closing shareholders’ funds
* These amounts arose as a result of settlement of the Group’s VES schemes; further detail is set out in note 9.
2013
£m
12
(87)
(75)
32
6
(3)
(2)
(42)
946
904
2012
£m
34
(58)
(24)
–
4
–
–
(20)
966
946
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69
TalkTalk Telecom Group PLC Annual report 2013
TalkTalk Telecom Group PLC Annual report 2013
Notes to the Company financial statements
1. Accounting policies
Basis of preparation
The separate financial statements of the Company are
presented as required by the Companies Act 2006.
They have been prepared under the historical cost
convention and in accordance with applicable United
Kingdom Accounting Standards and law.
The financial statements have been prepared on the
going concern basis. Details of the considerations
undertaken by the Directors in reaching this conclusion
are set out on page 11 within the Chief Financial
Officer’s Statement.
Accounting policies
The Company’s principal accounting policies, which
relate to the financial statements as a whole, are set
out below. Where an accounting policy is specific to
one note, the policy is described in the note to which
it relates.
Financial liabilities and equity instruments
Financial liabilities and equity instruments are
classified according to the substance of the
contractual arrangements entered into. An equity
instrument is any contract that evidences a residual
interest in the assets of the Company after deducting
all of its liabilities. The accounting policies adopted
for specific financial liabilities and equity instruments
are set out below.
Loans and other borrowings
Loans and other borrowings represent committed
and uncommitted bank loans, and bank overdrafts.
These are initially measured at fair value (which is equal
to cost at inception) and are subsequently measured
at amortised cost, using the effective interest rate
method, except where they are identified as a hedged
item in a fair value hedge. Any difference between the
proceeds net of transaction costs and the settlement
or redemption of borrowings is recognised over the
term of the borrowing.
Bank fees and legal costs associated with the securing
of external financing are capitalised and amortised
over the term of the relevant facility. All other
borrowing costs are recognised in the income
statement in the period in which they are incurred.
Equity instruments
Equity instruments issued by the Company are
recorded at the proceeds received, net of direct
issuance costs.
Share-based payments
The Company issues equity settled share-based
payments to certain employees. Share-based payments
issued by the Company to its subsidiary undertakings
are treated as additions to investments based on the
fair value of the grant, spread over the relevant vesting
period, with corresponding credit to reserves. Where
the Company recharges the cost of share-based
payments to its subsidiary undertaking the investment
is reduced accordingly.
Further details are provided in note 5 to the
consolidated financial statements.
Taxation
Current tax is provided at amounts expected to be
paid or recovered using the tax rates and laws that
have been enacted or substantively enacted at the
balance sheet date.
Deferred tax is recognised in respect of all timing
differences that have originated but not reversed at
the balance sheet date where transactions or events
that result in an obligation to pay more, or a right to pay
less tax in the future have occurred at the balance
sheet date, with the following exception:
Deferred tax assets are recognised only to the extent
that the Directors consider that it is more likely than
not that there will be suitable taxable profits from
which the future reversal of the underlying timing
differences can be deducted.
Deferred tax is measured on a non-discounted basis
with the tax rates that are expected to apply in the
periods in which the timing differences reverse, based
on tax rates and laws enacted or substantively enacted
at the balance sheet date.
The taxation liabilities of certain Group companies are
reduced wholly or in part by the surrender of losses by
fellow Group companies.
Exemptions
The Company has taken advantage of the exemption
under FRS 8 ‘Related Party Disclosures’ not to provide
details of related party transactions with other Group
companies, as the Company financial statements
are presented together with the consolidated
financial statements.
The Company has applied the exemption under FRS 29
‘Financial Instruments: Disclosures’ so as not to
disclose details of financial instruments held by the
Company. Full disclosure of the Group’s financial
instruments recognised under FRS 29 (IFRS 7)
‘Financial Instruments: Disclosures’ and IAS 39
‘Financial Instruments: Recognition and Measurement’
is provided in notes 1 and 19 to the consolidated
financial statements.
70
70
TalkTalk Telecom Group PLC Annual report 2013
2. Profit for the year
As permitted by Section 408 of the Companies Act 2006, the Company has elected not to present its own
profit and loss account for the year. The Company reported a profit of £12m for the year ended 31 March 2013
(2012: £34m profit).
The auditor’s remuneration for audit and other services is disclosed in the Corporate Governance Report
on page 19.
Detailed disclosures of the Directors’ remuneration and share-based payments are given in the audited section
of the Directors’ Remuneration Report on pages 22 to 28 and should be regarded as an integral part of this note.
In the prior year the Directors’ remuneration was borne by another Group company and not recharged.
The Company has no employees other than Directors.
3. Dividends
Accounting policy
Dividends receivable from the Company’s subsidiaries and joint venture investments are recognised only when
they are approved or paid by shareholders.
Final dividend distributions to the Company’s shareholders are recognised as a liability in the financial statements
in the period in which they are approved by the Company’s shareholders. Interim dividends are recognised in the
period in which they are paid.
Final dividend for the year ended 31 March 2011 of 3.9p per ordinary share
Interim dividend for the year ended 31 March 2012 of 2.6p per ordinary share
Final dividend for the year ended 31 March 2012 of 6.4p per ordinary share
Interim dividend for the year ended 31 March 2013 of 3.45p per ordinary share
Total ordinary dividends
2013
£m
–
–
56
31
87
2012
£m
35
23
–
–
58
The proposed final dividend for the year ended 31 March 2013 is 6.95p per ordinary share on approximately 892 million
shares (£62m), which was approved by the Board on 15 May 2013 and has not been included as a liability as at
31 March 2013.
The expected cost of this dividend reflects the fact that the Group ESOT has agreed to waive its rights to
receive dividends.
4. Fixed asset investments
Accounting policy
Fixed asset investments in subsidiaries and joint ventures are recorded at cost, being the fair value of consideration,
acquisition charges associated with the investment and capital contributions by way of share-based payments,
less any provision for impairment.
Subsidiaries
Joint venture
Opening net book value
Additions
Closing net book value
2013
£m
1,067
15
1,082
2013
£m
1,004
78
1,082
2012
£m
995
9
1,004
2012
£m
996
8
1,004
Joint ventures
The Company holds 14.3% of the ordinary share capital of YouView TV Limited, incorporated in England and Wales,
a joint venture with The British Broadcasting Corporation, ITV Broadcasting Limited, British Telecom PLC, Channel
Four Television Corporation, Arqiva Limited and Channel 5 Broadcasting Limited. Further details relating to the
joint venture are disclosed within note 14 to the consolidated financial statements.
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71
TalkTalk Telecom Group PLC Annual report 2013
TalkTalk Telecom Group PLC Annual report 2013
Notes to the Company financial statements continued
4. Fixed asset investments continued
Principal Group investments
The Company’s significant investments in subsidiary undertakings are set out within note 13 to the consolidated
financial statements.
Additions
The additions in the year comprises:
• £68m relating to the settlement of the VES schemes (note 9);
• £4m relating to share-based payment schemes issued by the Company; and
• £6m relating to the YouView TV Limited.
5. Debtors: amounts due within one year
Amounts owed by Group undertakings
Other debtors
2013
£m
299
4
303
2012
£m
496
9
505
Interest on intercompany funding is calculated at the Bank of England base rate plus 2%; intercompany deposits
receive interest at the Bank of England base rate with no margin. Interest is either paid or capitalised monthly as
appropriate. Where they exist, currency balances are calculated at similar rates.
Interest is not charged on balances arising between Group companies as a result of intercompany trading; such
balances are settled regularly in line with agreed terms of trade within 30 to 60 days.
6. Creditors: amounts due within one year
Amounts owed to Group undertakings
Other creditors
2013
£m
78
3
81
2012
£m
127
1
128
Interest on intercompany funding is calculated at the Bank of England base rate plus 2%; intercompany deposits
receive interest at the Bank of England base rate with no margin. Interest is either paid or capitalised monthly as
appropriate. Where they exist, currency balances are calculated at similar rates.
Interest is not charged on balances arising between Group companies as a result of intercompany trading; such
balances are settled regularly in line with agreed terms of trade within 30 to 60 days.
7. Loans
Current
Loans
Non-current
Loans
2013
£m
25
375
400
The details of the loans are disclosed within note 18 to the consolidated financial statements and should be
regarded as an integral part of these financial statements.
8. Share capital
Allotted, called-up and fully paid
Ordinary shares of 0.1p each
2013
million
931
2012
million
914
2013
£m
1
On 21 September 2012 the Company issued a further 17,135,825 ordinary shares of 0.1p each to settle the
VES schemes (note 9).
2012
£m
25
410
435
2012
£m
1
72
72
TalkTalk Telecom Group PLC Annual report 2013
9. Reserves
At 1 April 2012
Profit for the period
Issue of own shares*
Share-based payment credit
Share-based payment debit*
Derivative financial instruments
Equity dividends
At 31 March 2013
At 1 April 2011
Profit for the period
Net cost of share-based payments
Equity dividends
At 31 March 2012
Share
capital
£m
Share
premium
£m
Profit and loss
and other
reserves
£m
1
–
–
–
–
–
–
1
586
–
32
–
–
–
–
618
359
12
–
6
(3)
(2)
(87)
285
Share
capital
£m
Share
premium
£m
Profit and loss
and other
reserves
£m
1
–
–
–
1
586
–
–
–
586
379
34
4
(58)
359
Total
£m
946
12
32
6
(3)
(2)
(87)
904
Total
£m
966
34
4
(58)
946
* On 17 September 2012, the Group’s Remuneration Committee determined that the relevant performance conditions of the VES schemes (including
the 5% TSR requirement) had been satisfied, meaning the VES participants were entitled to exercise 60% of their options as set out in note 5 to the
consolidated financial statements. The settlement of the scheme resulted in a net increase of £68m in investments (note 4), the recognition of
share premium of £32m and a decrease in the net cost of share-based payments previously recognised in reserves of £3m.
10. Audit exemption
The Company’s subsidiaries are entitled to an exemption from audit for its subsidiaries under Section 479A of the
Companies Act 2006 for the year ending 31 March 2013.
The Directors have applied this exemption for the following subsidiaries:
Company name
Onetel Telecommunications Limited
TalkTalk Direct Limited
TalkTalk UK Communication Services Limited
Opal Business Solutions Limited
Opal Connect Limited
UK Telco (GB) Limited
V Networks Limited
Company number
04226697
05303195
05714293
05990928
05727462
04341230
05475260
The Directors acknowledge their responsibility for complying with the requirements of the Companies Act 2006
with respect to accounting records and the preparation of accounts.
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73
TalkTalk Telecom Group PLC Annual report 2013
Five year record (unaudited)
Headline results
Revenue
Net profit for the year
Net assets employed
Non-current assets
Net current liabilities before provisions
Provisions
Non-current liabilities
Net assets employed
Underlying earnings per share
Basic
Diluted
Headline earnings per share
Basic
Diluted
Statutory earnings per share
Basic
Diluted
2013
£m
2012
£m
2011
£m
2010
£m
2009
£m
1,670
132
1,687
159
1,765
122
1,686
106
1,385
95
1,046
(216)
(13)
(375)
442
1,102
(230)
(18)
(410)
444
1,137
(281)
(46)
(395)
415
1,204
(275)
(47)
(490)
392
1,319
(184)
(8)
(425)
702
20.6
19.4
14.9
14.0
11.3
10.6
17.2
16.4
18.0
17.2
15.6
14.9
13.5
12.8
13.5
12.8
3.9
3.7
11.8
11.2
11.8
11.2
10.7
10.4
10.7
10.4
(0.3)
(0.3)
(4.1)
(4.1)
Underlying earnings for the year ended 31 March 2013 is defined as Headline earnings excluding costs relating
to investment in TV less an allocation of taxation based on the Group's Headline effective tax rate. Underlying
earnings for the year ended 31 March 2012 is defined as Headline earnings excluding the profit on sale at a
freehold property less an allocation of taxation based on the Group's Headline effective tax rate.
There was no difference between Underlying and Headline earnings for the years ended 31 March 2011, 31 March 2010
and 31 March 2009.
Headline earnings represents the Group's income statement stated before the amortisation of acquisition
intangibles and exceptional items.
On 26 March 2010 CPW demerged into Carphone Warehouse Group PLC and the Group. The Company
and Carphone Warehouse Group PLC were separately listed on the London Stock Exchange.
The consolidated financial information of the Group for the years ended 31 March 2010 and 31 March 2009 have
been prepared with the objective of presenting the results, net assets and cash flows of the Group in the form that
arose on completion of the demerger, as if it had been a standalone business during those periods.
74
TalkTalk Telecom Group PLC Annual report 2013
Glossary
ADSL
ARPU
CAGR
CGU
Churn
Asymmetric Digital Subscriber Line technology enables data transmission over existing
copper wiring at data rates several hundred times faster than analogue modems,
providing for simultaneous delivery of voice, video and data
Average Revenue Per User on a monthly basis
Compound Annual Growth Rate
Cash generating unit
A measure of the number of subscribers moving into or out of a product or service over
a specific period of time
The Company
TalkTalk Telecom Group PLC
Companies Act
Companies Act 2006
CPW
CRM
Demerger
EBIT
EBITDA
EFM
EPS
Ethernet
FRC
Gb
GPS
The Group
Group ESOT
The Carphone Warehouse Group PLC, its subsidiary companies, joint ventures and
investments
Customer Relationship Management
The demerger of the The Carphone Warehouse Group PLC into TalkTalk Telecom
Group PLC and Carphone Warehouse Group PLC effective on 26 March 2010
Earnings Before Interest and Taxation
Earnings Before Interest, Taxation, Depreciation and Amortisation
Ethernet in the First Mile
Earnings Per Share
Ethernet is a protocol that controls data transmission over a communications
network often referred to as a family of frame-based computers
Financial Reporting Council
Gigabits per second
Global Positioning System
The Company, its subsidiaries and entities which are joint ventures
TalkTalk Telecoms Holdings Employee Share Option Trust
Headline information Headline information represents the Group’s income statement, stated before the
amortisation of acquisition intangibles and exceptional items that are considered to
be one-off, non-recurring in nature and so material that the Directors believe that they
require separate disclosure to avoid distortion of underlying performance and should
be separately presented on the face of the income statement
HD
IP
ISP
LLU
High Definition
Internet Protocol is the packet data protocol used for routing and carriage of messages
across the internet and similar networks. IP performs the addressing function and
contains some control information to allow packets to be routed through networks
Internet Service Provider
Local Loop Unbundling
Mbit/s/Mbps
Unit of data transfer rate equal to 1,000,000 bits per second
MPF
MVNO
Metallic Path Facility provides both broadband and telephony services to customers
from TalkTalk Group exchange infrastructure
Mobile Virtual Network Operator
Narrowband
Telecommunication service that carries voice information in a narrowband of frequencies
Net debt
NGN
On-net
Borrowings net of cash held on deposit at financial institutions
Next Generation Network
The Group’s unbundled network
Operating free
cash flow
Cash generated from operations before exceptional items, interest, taxation, dividend
payments and investments
Operating profit
Profit before finance costs and taxation
Quad play
A customer that takes voice, broadband, TV and MVNO services from the Group
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75
TalkTalk Telecom Group PLC Annual report 2013
Glossary continued
RCF
Revolving Credit Facility
SMPF or partial
unbundling
Shared Metallic Path Facility provides broadband services to customers from
TalkTalk Group exchange infrastructure
SME
Triple play
UK Corporate
Governance Code
Unbundling
VoIP
WAEP
Wi-Fi
Small and Medium sized Enterprises
A customer that takes voice, broadband and TV services from the Group
UK Corporate Governance Code published by the FRC in May 2011
Process by which BT makes available its local network to third party broadband
service providers
Voice over Internet Protocol
Weighted Average Exercise Price
Trademark of the Wi-Fi Alliance often used as a general term for wireless networking
technology that uses radio waves to provide wireless high-speed internet and
network connections
Financial calendar
AGM
Ex-dividend date
Record date
Dividend payment date
24 July 2013
3 July 2013
5 July 2013
2 August 2013
76
About this report
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The material used in this report is Amadeus 100 Offset, which comprises
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TalkTalk Telecom Group PLC
Registered in England and Wales No. 7105891
11 Evesham Street, London W11 4AR