Key points:
- Revenue up 1%, down 3% excluding foreign exchange movements and acquisitions
- EBITDA2 decline of 3% due to BT Global Services
- Rest of the group continues to perform well with EBITDA2 growth of 6%
- Sequential improvement in BT Global Services with EBITDA2 almost double the previous quarter
- Reduction of £357m in underlying operating costs and capital expenditure
- Free cash flow improvement of £612m compared with the prior year, including a tax repayment of £210m
- BT's retail share of DSL and LLU net additions was 46% in the quarter
Ian Livingston, Chief Executive, commenting on the first quarter results, said:
"We have made a solid start to the year against a background of challenging trading conditions. BT Global Services is making progress although there is still much to do. The rest of the group continues to perform well generating EBITDA2 growth of 6%.
"We are on track to deliver reductions in operating costs and capital expenditure of well over £1bn and to generate group free cash flow3 of over £1bn this year."
GROUP RESULTS
Operating results overview
Revenue was up 1% to £5,235m including favourable foreign exchange movements of £169m and the impact of acquisitions of £27m. Excluding the impact of these, underlying revenue decreased by 3%. Adjusted EBITDA decreased by 3% to £1,371m, held back by BT Global Services. The rest of the group has performed well with adjusted EBITDA increasing by 6% driven by growth in both BT Retail and Openreach and an improved performance in BT Wholesale. This continued good performance in three out of four of our lines of business is primarily due to the effective delivery of cost savings and the effect of a one-off revenue and EBITDA benefit in BT Retail. Foreign exchange movements and the impact of acquisitions had no overall effect on EBITDA.
With effect from this quarter, the group has adopted a new measure of adjusted profit before tax and adjusted EPS, which is before specific items, leaver costs and also net interest on pensions. This is due to the volatile nature of the non-cash pensions accounting under IAS 19. The notional net interest on our defined benefit pension scheme in the quarter was an expense of £69m compared with income of £78m last year, an adverse movement of £147m. Adjusted EPS decreased by 18% to 4.2p as a result of the year on year decline in BT Global Services results. A reconciliation of reported EPS to adjusted EPS is provided in Note 7(b) on page 17 of the attachments.
Other operating income decreased by £11m to £79m, largely due to some one-off items in the prior year. Group operating costs increased by 2% to £4,726m, due to the impact of foreign exchange movements of £169m and acquisitions of £27m. Underlying group operating costs reduced by 3% to £3,747m. Excluding BT Global Services, underlying group operating costs reduced by 6%. Leaver costs were £45m (Q1 2008/09: £73m).
Our direct staff costs, on an underlying basis, decreased by 12% to £1,216m largely due to the impact of staff reductions and lower pension charges. The reduction in pension charges is a result of the implementation of the pensions review changes from 1 April 2009. The direct staff cost reductions were offset by an increase in other operating costs which increased by 7% to £1,703m, on an underlying basis, mainly due to lower contract costs being capitalised in BT Global Services.
In total, underlying operating costs and underlying capital expenditure reduced by £357m to £4,295m, a reduction of 8% compared with the prior year.
Depreciation and amortisation increased by 7% to £738m reflecting the impact of Ethernet and ADSL2+ assets being brought into use.
Free cash flow was an outflow of £122m in the quarter, an improvement of £612m year on year largely due to improved working capital performance, lower capital expenditure and a tax repayment of £210m.
Outlook
Our outlook as stated in our full year 2008/09 results announcement remains unchanged. We continue to expect a decline in revenue of 4% to 5%, a reduction in capital expenditure and operating costs of well over £1bn and to generate group free cash flow (before pension deficit payments and after the cash costs of BT Global Services restructuring) of over £1bn in 2009/10.
Restatements
As described in Note 1, we have adopted the amendment to IFRS 2 'Share-based Payment - vesting conditions and cancellations' resulting in a change in the group's accounting policy for share-based payments. Our prior period comparatives have been restated resulting in a reduction of £16m in EBITDA for Q1 2008/09 and £110m for FY 2008/09, which is reflected in the 'Other' segment.
We have also restated our 2008/09 line of business comparatives as a result of customer account moves and internal trading model changes effective from 1 April 2009 which have no impact on the total group results. The impact of these restatements on prior period line of business results are provided in Note 14.
Line of business results
With effect from this quarter we have included operating cashflow and capital expenditure measures in our line of business commentaries. Operating cash flow is defined as EBITDA less direct and allocated capital expenditure (net of capital accruals), working capital movements and movements in provisions and other non-cash items. Capital expenditure includes both direct expenditure and allocated shared infrastructure expenditure.
OPERATING REVIEW
BT Global Services
Revenue
BT Global Services revenue increased by 4% to £2,079m with foreign exchange movements contributing £154m and acquisitions £8m. Excluding the impact of these, underlying revenue decreased by 4%. The underlying decline is largely due to the impact of mobile termination rate reductions and lower call volumes in continental Europe and the continued decline in our UK calls and lines business.
Total order intake in the quarter was £1.4bn leading to a rolling 12 month order intake of £7.5bn. As previously stated, the market trend towards lower value and shorter contracts and longer sales lead times as customers delay decisions in the current economic climate are expected to result in a lower order intake for this financial year.
In the quarter we were awarded a five year contract by the UK Ministry of Defence worth more than £99m to support communications across 197 military bases, and the Fiat Group renewed its global outsourcing contract, worth €325m over the next five years. We were also awarded a new two year inbound services contract by Lloyds Banking Group.
Operating results
We have made progress with our cost saving initiatives. Excluding foreign exchange movements of £166m and acquisitions of £8m, underlying operating costs of £1,853m for the quarter increased by only 1% representing continued improvement in the sequential trend from the previous two quarters. Total labour resource was reduced by around 2,300 in the quarter. Operating costs were adversely impacted year on year by lower contract costs being capitalised in the quarter. Net operating costs increased by 11% to £2,017m.
As a result of our progress in addressing the cost base, EBITDA increased to £62m compared with £32m3 in the fourth quarter and £7m3 in the third quarter of last year. Depreciation and amortisation increased by 3% to £186m due mainly to the adverse impact of foreign exchange movements.
Capital expenditure was reduced by 47% as a result of improved procurement efficiencies and more stringent investment return criteria. Operating cash outflow was £178m better due to improved working capital performance and reduced capital expenditure more than offsetting the lower EBITDA.
BT Retail
Revenue
BT Retail revenue declined by 2% to £2,110m due largely to a reduction in calls and lines revenue. Revenue for the quarter includes a one-off benefit of £38m relating to prior periods, which also flowed through to benefit EBITDA. Underlying revenue, excluding the one-off benefit, declined by 6%. Consumer revenue declined by 1% and BT Business revenue declined by 8% as small businesses are impacted by the economic downturn.
In the maturing broadband market, BT remains the largest provider with a retail market share of the DSL and LLU installed base of 35% at 30 June 2009. Net additions were 78,000 in the quarter and total customers remained at 4.8m. BT's retail share of net additions was 46%. During the quarter we announced the launch of ADSL2+ to consumer and business markets, more than doubling the broadband speed at no extra cost.
BT Vision net additions were 38,000 in the quarter before adjusting for inactive customers. After these adjustments, the customer base was 433,000 at 30 June 2009.
Operating results
The decline in revenue and focus on cost control has driven an 8% reduction in net operating costs to £1,634m, delivered through cost transformation programmes focused on labour productivity, systems rationalisation and supplier management. Underlying operating costs decreased by 10% to £1,620m.
EBITDA increased 26% to £476m, although on an underlying basis (excluding the one-off benefit) the increase was 15%. This reflects the timing of price initiatives which will not continue to flow through at a similar level in this financial year. As a result, we expect the increase in the EBITDA growth rate to return to mid single digits for the rest of the financial year.
Depreciation and amortisation increased by 17% to £117m. Overall this resulted in an operating profit of £359m, an increase of 30%.
Capital expenditure was £46m lower largely due to lower central infrastructure expenditure. Operating cash flow was £194m higher due to the EBITDA growth, improved cash collections from customers and lower capital expenditure
BT Wholesale
Revenue
BT Wholesale revenue declined by 1% to £1,142m, which was better than anticipated as the decline in transit did not materialise as expected. The revenue movement reflects reductions in low margin transit of £27m, conveyance of £21m, circuits of £18m and broadband of £12m as a result of continued migrations to LLU. These declines were largely offset by continued strong growth in managed network solutions which more than doubled to £167m. We still expect a decline in transit revenue during this financial year, primarily from the price impact of mobile termination rate reductions and also as operators continue to interconnect directly.
We continue to win major new contracts, including a 10 year managed network solutions agreement with KCOM Group to outsource the management of KCOM's UK network operations. We will manage, maintain and enhance network operations, network management and vendor management on KCOM's behalf.
Operating results
The decline in revenue and continued focus on cost control including initiatives to reduce total labour resource has reduced net operating costs by 1% to £822m. EBITDA decreased by 1% to £320m, continuing the improvement in the rate of decline over recent quarters. Depreciation and amortisation increased by 1% to £171m and as a result operating profit declined by 3% to £149m.
Capital expenditure was £49m lower due to improved procurement, process efficiencies and more stringent investment return criteria. Operating cash flow was £63m higher primarily due to lower capital expenditure and improved working capital performance as a result of the timing of receipts from customers.
Openreach
Revenue Total revenue remained flat at £1,306m. Revenue from other BT lines of business decreased by 4% primarily due to Ethernet price reductions, the impact of the continued migration to external communication providers (CPs) and lower connections, as a result of external factors such as lower activity in the housing market. This was partially offset by a one-off internal billing to ensure compliance with the Undertakings. External revenue increased by 18% due to continued growth in the WLR and LLU rental base with external CPs.
Operating results Net operating costs reduced by 1% to £803m, helped by our continued investment in the quality of our network, driving the number of customer reported faults down by 30%. Continued process improvements and efficiencies, together with the lower levels of connection and migration activity, have contributed to a reduction in total labour costs. This has been achieved through reducing overtime, minimising the use of third party resource, natural attrition and leavers.
Despite flat revenues, cost reduction activities have delivered a 2% increase in EBITDA. Depreciation and amortisation increased by 9% due to the significant investment in prior periods on high value software assets, provisioning activity and improving the health of the network. As a result, operating profit decreased by 2% to £302m.
Capital expenditure reduced by 11% to £203m due to lower connection activity in the housing market and our efficiency initiatives. This has been partially offset by increased investment in our fibre network programme to provide super-fast broadband services to at least 40% of UK households by 2012. We plan to accelerate the rollout of these services and aim to provide speeds of up to 40Mbps to 1.5m homes and businesses by summer 2010. 1m of these homes and businesses will have access by March 2010 which represents a doubling of our original plans.
Operating cash flow reduced by 7% to £237m. Increases in EBITDA and a reduction in capital expenditure were more than offset by lower cash receipts from customers primarily due to higher one-off collections in the prior year.
OTHER GROUP ITEMS
Net finance expense Net finance expense before specific items was £283m, an increase of £153m, principally due to the notional non-cash pension interest expense under IAS 19. The increase in the notional pension net interest of £147m is largely due to the reduction in asset values during the 2008/09 financial year.
Tax
The effective tax rate on the profit before specific items was 22.2% (23.5% last year) compared with the UK statutory rate of 28%, reflecting the continued focus on tax efficiency within the group.
Specific items
Specific items are defined in Note 5. Specific items in the quarter were a charge before tax of £41m (Q1 2008/09: £27m) and a net charge after tax of £30m (Q1 2008/09: £19m). Specific items before tax comprise BT Global Services restructuring charges which relate to people and transformation costs. Specific items recognised in the prior year comprised costs of £27m relating to the group's transformation and reorganisation activities.
Earnings per share
Adjusted EPS (before specific items, leaver costs and net interest on pensions) was 4.2p (Q1 2008/09: 5.1p). This is based on average shares in issue of 7,735m (Q1 2008/09: 7,731m). EPS before specific items and leaver costs was 3.6p (Q1 2008/09: 5.9p). Reported EPS was 2.8p (Q1 2008/09: 4.9p). A reconciliation from reported EPS to adjusted EPS is provided in Note 7(b) on page 17 of the attachments.
Cash flow and liquidity
Net cash inflow from our operating activities in the first quarter was £839m (Q1 2008/09: £387m) largely due to improved working capital and a tax repayment of £210m relating to the prior year. Free cash flow was an outflow of £122m, being an improvement of £612m. The significant improvement in free cash flow reflects the impact of lower working capital outflows, lower capital expenditure and the tax repayment. Free cash flow is defined and reconciled in Note 8(b).
Net cash outflow for the purchase of property, plant and equipment and software was £678m (Q1 2008/09: £836m). The net cash outflow on acquisition of subsidiaries in the quarter was £12m (Q1 2008/09: £94m) principally comprising deferred consideration relating to a previous acquisition.
During the quarter we raised new long term borrowings of £520m at an average annualised interest rate of 6.8% for which there was a strong demand and the issue was oversubscribed. Our undrawn committed facilities of £2.4bn provide us with a strong liquidity and funding position and the group has no significant debt maturities until December 2010. Cash collections from our customers remain strong, in spite of the difficult economic conditions.
Net debt
Net debt was £10,517m at 30 June 2009 (31 March 2009: £10,361m, 30 June 2008: £10,581m). Net debt is defined and reconciled in Note 9.
Capital expenditure
Capital expenditure reduced by 30% to £559m and we remain on track for our full year capital expenditure target of around £2.7bn. The reduction in the quarter reflects improved procurement, better process efficiency within our engineering workforce and more stringent investment return criteria.
Pensions
The IAS 19 net pension position at 30 June 2009 was a deficit of £5.8bn net of tax (£8.0bn gross of tax), compared with a deficit of £2.9bn at 31 March 2009 (£4.0bn gross of tax). The market value of the BT Pension Scheme assets was £30.4bn at 30 June 2009 (31 March 2009: £29.3bn). The value of the BT Pension Scheme liabilities was £38.3bn (31 March 2009: £33.1bn). The IAS19 liability valuation position is based on an AA bond rate of 6.2% (31 March 2009: 6.85%) and an inflation rate of 3.25% (31 March 2009: 2.90%). The deterioration in the position since 31 March 2009 is due to the reducing discount rate and increasing inflation rate, more than offsetting the asset value increase of £1.1bn.
The IAS 19 deficit pension position at 30 June 2009 has resulted in an overall net balance sheet liability position of £3.2bn. This does not affect the distributable reserves and dividend paying capacity of BT Group plc, the parent company.
- Revenue up 1%, down 3% excluding foreign exchange movements and acquisitions
- EBITDA2 decline of 3% due to BT Global Services
- Rest of the group continues to perform well with EBITDA2 growth of 6%
- Sequential improvement in BT Global Services with EBITDA2 almost double the previous quarter
- Reduction of £357m in underlying operating costs and capital expenditure
- Free cash flow improvement of £612m compared with the prior year, including a tax repayment of £210m
- BT's retail share of DSL and LLU net additions was 46% in the quarter
Ian Livingston, Chief Executive, commenting on the first quarter results, said:
"We have made a solid start to the year against a background of challenging trading conditions. BT Global Services is making progress although there is still much to do. The rest of the group continues to perform well generating EBITDA2 growth of 6%.
"We are on track to deliver reductions in operating costs and capital expenditure of well over £1bn and to generate group free cash flow3 of over £1bn this year."
GROUP RESULTS
Operating results overview
Revenue was up 1% to £5,235m including favourable foreign exchange movements of £169m and the impact of acquisitions of £27m. Excluding the impact of these, underlying revenue decreased by 3%. Adjusted EBITDA decreased by 3% to £1,371m, held back by BT Global Services. The rest of the group has performed well with adjusted EBITDA increasing by 6% driven by growth in both BT Retail and Openreach and an improved performance in BT Wholesale. This continued good performance in three out of four of our lines of business is primarily due to the effective delivery of cost savings and the effect of a one-off revenue and EBITDA benefit in BT Retail. Foreign exchange movements and the impact of acquisitions had no overall effect on EBITDA.
With effect from this quarter, the group has adopted a new measure of adjusted profit before tax and adjusted EPS, which is before specific items, leaver costs and also net interest on pensions. This is due to the volatile nature of the non-cash pensions accounting under IAS 19. The notional net interest on our defined benefit pension scheme in the quarter was an expense of £69m compared with income of £78m last year, an adverse movement of £147m. Adjusted EPS decreased by 18% to 4.2p as a result of the year on year decline in BT Global Services results. A reconciliation of reported EPS to adjusted EPS is provided in Note 7(b) on page 17 of the attachments.
Other operating income decreased by £11m to £79m, largely due to some one-off items in the prior year. Group operating costs increased by 2% to £4,726m, due to the impact of foreign exchange movements of £169m and acquisitions of £27m. Underlying group operating costs reduced by 3% to £3,747m. Excluding BT Global Services, underlying group operating costs reduced by 6%. Leaver costs were £45m (Q1 2008/09: £73m).
Our direct staff costs, on an underlying basis, decreased by 12% to £1,216m largely due to the impact of staff reductions and lower pension charges. The reduction in pension charges is a result of the implementation of the pensions review changes from 1 April 2009. The direct staff cost reductions were offset by an increase in other operating costs which increased by 7% to £1,703m, on an underlying basis, mainly due to lower contract costs being capitalised in BT Global Services.
In total, underlying operating costs and underlying capital expenditure reduced by £357m to £4,295m, a reduction of 8% compared with the prior year.
Depreciation and amortisation increased by 7% to £738m reflecting the impact of Ethernet and ADSL2+ assets being brought into use.
Free cash flow was an outflow of £122m in the quarter, an improvement of £612m year on year largely due to improved working capital performance, lower capital expenditure and a tax repayment of £210m.
Outlook
Our outlook as stated in our full year 2008/09 results announcement remains unchanged. We continue to expect a decline in revenue of 4% to 5%, a reduction in capital expenditure and operating costs of well over £1bn and to generate group free cash flow (before pension deficit payments and after the cash costs of BT Global Services restructuring) of over £1bn in 2009/10.
Restatements
As described in Note 1, we have adopted the amendment to IFRS 2 'Share-based Payment - vesting conditions and cancellations' resulting in a change in the group's accounting policy for share-based payments. Our prior period comparatives have been restated resulting in a reduction of £16m in EBITDA for Q1 2008/09 and £110m for FY 2008/09, which is reflected in the 'Other' segment.
We have also restated our 2008/09 line of business comparatives as a result of customer account moves and internal trading model changes effective from 1 April 2009 which have no impact on the total group results. The impact of these restatements on prior period line of business results are provided in Note 14.
Line of business results
With effect from this quarter we have included operating cashflow and capital expenditure measures in our line of business commentaries. Operating cash flow is defined as EBITDA less direct and allocated capital expenditure (net of capital accruals), working capital movements and movements in provisions and other non-cash items. Capital expenditure includes both direct expenditure and allocated shared infrastructure expenditure.
OPERATING REVIEW
BT Global Services
Revenue
BT Global Services revenue increased by 4% to £2,079m with foreign exchange movements contributing £154m and acquisitions £8m. Excluding the impact of these, underlying revenue decreased by 4%. The underlying decline is largely due to the impact of mobile termination rate reductions and lower call volumes in continental Europe and the continued decline in our UK calls and lines business.
Total order intake in the quarter was £1.4bn leading to a rolling 12 month order intake of £7.5bn. As previously stated, the market trend towards lower value and shorter contracts and longer sales lead times as customers delay decisions in the current economic climate are expected to result in a lower order intake for this financial year.
In the quarter we were awarded a five year contract by the UK Ministry of Defence worth more than £99m to support communications across 197 military bases, and the Fiat Group renewed its global outsourcing contract, worth €325m over the next five years. We were also awarded a new two year inbound services contract by Lloyds Banking Group.
Operating results
We have made progress with our cost saving initiatives. Excluding foreign exchange movements of £166m and acquisitions of £8m, underlying operating costs of £1,853m for the quarter increased by only 1% representing continued improvement in the sequential trend from the previous two quarters. Total labour resource was reduced by around 2,300 in the quarter. Operating costs were adversely impacted year on year by lower contract costs being capitalised in the quarter. Net operating costs increased by 11% to £2,017m.
As a result of our progress in addressing the cost base, EBITDA increased to £62m compared with £32m3 in the fourth quarter and £7m3 in the third quarter of last year. Depreciation and amortisation increased by 3% to £186m due mainly to the adverse impact of foreign exchange movements.
Capital expenditure was reduced by 47% as a result of improved procurement efficiencies and more stringent investment return criteria. Operating cash outflow was £178m better due to improved working capital performance and reduced capital expenditure more than offsetting the lower EBITDA.
BT Retail
Revenue
BT Retail revenue declined by 2% to £2,110m due largely to a reduction in calls and lines revenue. Revenue for the quarter includes a one-off benefit of £38m relating to prior periods, which also flowed through to benefit EBITDA. Underlying revenue, excluding the one-off benefit, declined by 6%. Consumer revenue declined by 1% and BT Business revenue declined by 8% as small businesses are impacted by the economic downturn.
In the maturing broadband market, BT remains the largest provider with a retail market share of the DSL and LLU installed base of 35% at 30 June 2009. Net additions were 78,000 in the quarter and total customers remained at 4.8m. BT's retail share of net additions was 46%. During the quarter we announced the launch of ADSL2+ to consumer and business markets, more than doubling the broadband speed at no extra cost.
BT Vision net additions were 38,000 in the quarter before adjusting for inactive customers. After these adjustments, the customer base was 433,000 at 30 June 2009.
Operating results
The decline in revenue and focus on cost control has driven an 8% reduction in net operating costs to £1,634m, delivered through cost transformation programmes focused on labour productivity, systems rationalisation and supplier management. Underlying operating costs decreased by 10% to £1,620m.
EBITDA increased 26% to £476m, although on an underlying basis (excluding the one-off benefit) the increase was 15%. This reflects the timing of price initiatives which will not continue to flow through at a similar level in this financial year. As a result, we expect the increase in the EBITDA growth rate to return to mid single digits for the rest of the financial year.
Depreciation and amortisation increased by 17% to £117m. Overall this resulted in an operating profit of £359m, an increase of 30%.
Capital expenditure was £46m lower largely due to lower central infrastructure expenditure. Operating cash flow was £194m higher due to the EBITDA growth, improved cash collections from customers and lower capital expenditure
BT Wholesale
Revenue
BT Wholesale revenue declined by 1% to £1,142m, which was better than anticipated as the decline in transit did not materialise as expected. The revenue movement reflects reductions in low margin transit of £27m, conveyance of £21m, circuits of £18m and broadband of £12m as a result of continued migrations to LLU. These declines were largely offset by continued strong growth in managed network solutions which more than doubled to £167m. We still expect a decline in transit revenue during this financial year, primarily from the price impact of mobile termination rate reductions and also as operators continue to interconnect directly.
We continue to win major new contracts, including a 10 year managed network solutions agreement with KCOM Group to outsource the management of KCOM's UK network operations. We will manage, maintain and enhance network operations, network management and vendor management on KCOM's behalf.
Operating results
The decline in revenue and continued focus on cost control including initiatives to reduce total labour resource has reduced net operating costs by 1% to £822m. EBITDA decreased by 1% to £320m, continuing the improvement in the rate of decline over recent quarters. Depreciation and amortisation increased by 1% to £171m and as a result operating profit declined by 3% to £149m.
Capital expenditure was £49m lower due to improved procurement, process efficiencies and more stringent investment return criteria. Operating cash flow was £63m higher primarily due to lower capital expenditure and improved working capital performance as a result of the timing of receipts from customers.
Openreach
Revenue Total revenue remained flat at £1,306m. Revenue from other BT lines of business decreased by 4% primarily due to Ethernet price reductions, the impact of the continued migration to external communication providers (CPs) and lower connections, as a result of external factors such as lower activity in the housing market. This was partially offset by a one-off internal billing to ensure compliance with the Undertakings. External revenue increased by 18% due to continued growth in the WLR and LLU rental base with external CPs.
Operating results Net operating costs reduced by 1% to £803m, helped by our continued investment in the quality of our network, driving the number of customer reported faults down by 30%. Continued process improvements and efficiencies, together with the lower levels of connection and migration activity, have contributed to a reduction in total labour costs. This has been achieved through reducing overtime, minimising the use of third party resource, natural attrition and leavers.
Despite flat revenues, cost reduction activities have delivered a 2% increase in EBITDA. Depreciation and amortisation increased by 9% due to the significant investment in prior periods on high value software assets, provisioning activity and improving the health of the network. As a result, operating profit decreased by 2% to £302m.
Capital expenditure reduced by 11% to £203m due to lower connection activity in the housing market and our efficiency initiatives. This has been partially offset by increased investment in our fibre network programme to provide super-fast broadband services to at least 40% of UK households by 2012. We plan to accelerate the rollout of these services and aim to provide speeds of up to 40Mbps to 1.5m homes and businesses by summer 2010. 1m of these homes and businesses will have access by March 2010 which represents a doubling of our original plans.
Operating cash flow reduced by 7% to £237m. Increases in EBITDA and a reduction in capital expenditure were more than offset by lower cash receipts from customers primarily due to higher one-off collections in the prior year.
OTHER GROUP ITEMS
Net finance expense Net finance expense before specific items was £283m, an increase of £153m, principally due to the notional non-cash pension interest expense under IAS 19. The increase in the notional pension net interest of £147m is largely due to the reduction in asset values during the 2008/09 financial year.
Tax
The effective tax rate on the profit before specific items was 22.2% (23.5% last year) compared with the UK statutory rate of 28%, reflecting the continued focus on tax efficiency within the group.
Specific items
Specific items are defined in Note 5. Specific items in the quarter were a charge before tax of £41m (Q1 2008/09: £27m) and a net charge after tax of £30m (Q1 2008/09: £19m). Specific items before tax comprise BT Global Services restructuring charges which relate to people and transformation costs. Specific items recognised in the prior year comprised costs of £27m relating to the group's transformation and reorganisation activities.
Earnings per share
Adjusted EPS (before specific items, leaver costs and net interest on pensions) was 4.2p (Q1 2008/09: 5.1p). This is based on average shares in issue of 7,735m (Q1 2008/09: 7,731m). EPS before specific items and leaver costs was 3.6p (Q1 2008/09: 5.9p). Reported EPS was 2.8p (Q1 2008/09: 4.9p). A reconciliation from reported EPS to adjusted EPS is provided in Note 7(b) on page 17 of the attachments.
Cash flow and liquidity
Net cash inflow from our operating activities in the first quarter was £839m (Q1 2008/09: £387m) largely due to improved working capital and a tax repayment of £210m relating to the prior year. Free cash flow was an outflow of £122m, being an improvement of £612m. The significant improvement in free cash flow reflects the impact of lower working capital outflows, lower capital expenditure and the tax repayment. Free cash flow is defined and reconciled in Note 8(b).
Net cash outflow for the purchase of property, plant and equipment and software was £678m (Q1 2008/09: £836m). The net cash outflow on acquisition of subsidiaries in the quarter was £12m (Q1 2008/09: £94m) principally comprising deferred consideration relating to a previous acquisition.
During the quarter we raised new long term borrowings of £520m at an average annualised interest rate of 6.8% for which there was a strong demand and the issue was oversubscribed. Our undrawn committed facilities of £2.4bn provide us with a strong liquidity and funding position and the group has no significant debt maturities until December 2010. Cash collections from our customers remain strong, in spite of the difficult economic conditions.
Net debt
Net debt was £10,517m at 30 June 2009 (31 March 2009: £10,361m, 30 June 2008: £10,581m). Net debt is defined and reconciled in Note 9.
Capital expenditure
Capital expenditure reduced by 30% to £559m and we remain on track for our full year capital expenditure target of around £2.7bn. The reduction in the quarter reflects improved procurement, better process efficiency within our engineering workforce and more stringent investment return criteria.
Pensions
The IAS 19 net pension position at 30 June 2009 was a deficit of £5.8bn net of tax (£8.0bn gross of tax), compared with a deficit of £2.9bn at 31 March 2009 (£4.0bn gross of tax). The market value of the BT Pension Scheme assets was £30.4bn at 30 June 2009 (31 March 2009: £29.3bn). The value of the BT Pension Scheme liabilities was £38.3bn (31 March 2009: £33.1bn). The IAS19 liability valuation position is based on an AA bond rate of 6.2% (31 March 2009: 6.85%) and an inflation rate of 3.25% (31 March 2009: 2.90%). The deterioration in the position since 31 March 2009 is due to the reducing discount rate and increasing inflation rate, more than offsetting the asset value increase of £1.1bn.
The IAS 19 deficit pension position at 30 June 2009 has resulted in an overall net balance sheet liability position of £3.2bn. This does not affect the distributable reserves and dividend paying capacity of BT Group plc, the parent company.
