Telecom plus PLC : Final Results for the year ended 31 March 2009

Telecom plus PLC, the UK's leading low-cost multi-utility supplier (gas, electricity, telephony and broadband), announces final results for the year ended 31 March 2009.

Financial Highlights:

· Turnover up 49% to £278.3m (2008: £186.5m)
· Profit before tax up 34% to £22.5m (2008: £16.8m)
· Year-end net cash balance of £25.4m (2008: £30.3m)
· EPS up 37% to 24.2p (2008: 17.7p)
· Final dividend of 12.5p per share (2008: 10p) making a total for the year of 17.5p per share (2008: 14p); this represents an increase in the total payment of 25% compared with last year.

Operating Highlights:

· Accelerating organic growth
· Customer base now exceeds 281,000 (2008: 217,857)
· 34% increase in the number of services being supplied
· Business Club has grown by 69% to 16,163 members (2008: 9,537)
· Over 27,000 distributors at year end (2008: 19,600)
· Successful launch of new CashBack card
· New office headquarters - first phase refurbishment complete

Extract from the Chairman's Statement:

"We are still the UK's only fully integrated multi-utility provider, offering customers consistent value across a wide range of services with the added convenience of receiving just a single clear and concise bill each month. Our distribution channel has demonstrated its continuing ability to gather high quality new customers, cost-effectively and in increasing volumes; this gives us a considerable competitive advantage in the residential market."

"The confidence we expressed last year in the ability of our business to deliver strong results has been vindicated. I am delighted to report on a further year of significant achievement for the Company in which we have seen strong growth in turnover, profitability and earnings per share. We are recommending a final dividend of 12.5p; this makes a total dividend of 17.5p (2008:14p) representing an increase of 25% over last year."

"It remains our intention to pay a total dividend of 22p for the current year, in the absence of unforeseen circumstances. This reflects our confidence in a continuation of the current rapid growth we are seeing in both new services and new customers, which can be expected to provide the Company with a platform from which to deliver significantly higher profits in future years."

There will be a meeting for analysts at Smithfield's offices at 09.30 am today.

For more information please contact:


Telecom plus PLC


Charles Wigoder, Chief Executive
020 8955 5000

Chris Houghton, Finance Director


Andrew Lindsay, Chief Operating Officer


KBC Peel Hunt


Richard Kauffer
020 7418 8900

Nicholas Marren


Smithfield


Tania Wild / Reg Hoare
020 7360 4900


Chairman's Statement

I am delighted to report a further year of significant achievement for the Company, in which we have seen strong growth in turnover, profitability and earnings per share.

Results

Pre-tax profits increased by 34% to £22.5m (2008: £16.8m) on group turnover up by 49% to £278.3m (2008: £186.5m). This strong financial performance has been driven by the rapid growth in the number of customers using our services during the course of the year. Gross margins during the year fell from 19.3% to 18.6%, in line with management expectations, primarily reflecting the higher proportion of our business now represented by supplying gas and electricity, where the margins are considerably lower than from selling telephony and broadband services.

Earnings per share increased by 37% during the year to 24.2p (2008:17.7p) and we are recommending a final dividend of 12.5p. This makes a total dividend of 17.5p (2008:14.0p), representing an increase of 25% over last year.

The rate at which new customers have been signing up to become members of the Utility Warehouse Discount Club has been gathering pace steadily throughout the year. This has been driven by a combination of record numbers of new distributors joining the business (almost 4,000 in the last quarter alone), growing confidence in the value of our services and the quality of customer service we provide, and an economic climate in which potential customers are increasingly looking for credible ways to reduce their costs. Residential Club membership increased by over 40% during the year to 222,705 (2008: 158,972) and our Business Club membership grew by almost 70% during the year to 16,163 (2008: 9,537); together, these clubs (trading under the Utility Warehouse brand) now account for 85% (2008: 77%) of our total customer base.

We are particularly encouraged by the accelerating rate of growth in the number of services we are providing, which reached 794,118 (2008: 591,981) by the year end - an increase of more than 202,000 services during the year. Of this total, 69,692 were added during the last quarter of the year, representing an annualised growth rate of over 38%.

We continue to invest significant resources in improving our UK-based customer service team, the effectiveness of which is clearly demonstrated by the various awards we received from Which? magazine over the course of the year. Churn has increased slightly from around 1.8% per month to 2% per month largely due to the faster organic growth we have been experiencing, and average spend per customer has grown to £1,057 (2008:£872).

Oxford Power Holdings ("Opus"), in which we maintain a 20% stake, continues to produce satisfactory results. Our share of their profits was fractionally lower than last year at £0.89m (2008: £0.94m) in what proved to be a very difficult year for other independent resellers of commercial electricity, which saw their two principal competitors (Bizz Energy and E4B) both going into administration. Opus's solid performance demonstrates the resilience of their business model and the strength and experience of their management team. International Power Holdings PLC, which currently own a 30% stake in the business (the remaining 50% is held by management), has a call option under which it can acquire the remaining 70%. This option is exercisable during a 30 day window beginning on the date that Opus completes its audit for the year to 31 March 2009, which is expected to occur shortly. The formula under which this option can be exercised places a value of approximately £15m on our stake in this business.

Year-end net cash balances fell by £4.9m to £25.4m (2008: £30.3m). This reduction reflects the significant growth in our energy business and the impact of an extremely cold winter which, combined with higher retail energy prices, has increased budget plan debtors by £14.1m to £23.2m at the year-end, and the cost of purchasing and refurbishing our new freehold headquarters office building for around £10m. The overall cash outflow was partially offset by issuing 1.5m shares from Treasury in February, which raised £4.7m.

Business Development

Our distributors have become increasingly confident in the overall strength of our customer proposition, which combines convenience, value and a consistently high quality of customer service; this has resulted in a substantial increase in activity. We have seen a net increase of around 7,500 distributors over the year (2008: net increase of 3,000), taking the total number of distributors to around 27,100 (2008:19,600); this represents an increase of over 38% during the year, most of which took place during the second half and provides a strong indication of the level of customer gathering activity that can be expected during the first half of the current year. Our distributor numbers include approximately 1,000 Community Fundraisers, a relatively new business opportunity introduced in October 2007, which enables local organisations (e.g. schools, sports clubs,

religious bodies and charities) to raise funds by promoting the benefits of using our services within their communities.

Our IT systems have been designed to manage a significantly larger number of customers than are currently using our services, and the recent purchase of a substantial freehold office building gives us the additional physical space we will need to support our anticipated future growth over the next 5 years. This means we have the potential to benefit from substantial economies of scale as the number of services we provide continues to grow. The achievement of these economies of scale, and maintaining our current growth trajectory, remains our key business priority over the next few years.

Last autumn we introduced full colour billing, enabling us to improve the clarity of the information provided to customers, highlighting the various savings and membership benefits they are receiving, and also giving us the opportunity to incorporate more effective marketing messages each month.

We also launched a pre-payment MasterCard ("CashBack Card") as an important new customer acquisition and retention tool. This gives our members the opportunity to save an additional 5% on their shopping at a wide range of participating retailers, which they receive as a credit on their next monthly bill from us. This valuable additional membership benefit has been well received, and customers using their new cards are achieving typical savings of 15%-30% on the cost of their utilities each month.

We have also enhanced our customer proposition with the introduction of "Free Global Calls" (where customers with multiple services can benefit from free calls at any time of day to UK Local and National destinations, 0845 and 0870 numbers, and to 10 popular international destinations), whilst reducing our fixed monthly line rental to £8.99, substantially below the price charged by any of our principal competitors.

Recently published customer satisfaction surveys continue to compare us favourably against our competitors, and we were delighted to receive our first "Best Buy" recommendation from Which? magazine during the year for our combined fixed telephony and broadband package. They also rated us as the best energy supplier on two separate occasions, with a customer satisfaction rating significantly higher than any of the "Big 6" suppliers. And when we asked our own customers directly for their opinion, over 94% said they would recommend us to a friend.

We intend to capitalise on these positive opinions by continuing to promote our customer referral programme. This provides existing members who successfully recommend a new customer to us with an ongoing additional discount on their own monthly utility bill - a discount which increases with the number of new customers they introduce. This initiative is being supported by our inbound telesales fulfilment team, which enables potential new customers (particularly those introduced by community fundraising groups) to sign up for our services with the minimum of effort or inconvenience.

Once again I would like to thank our staff and distributors for the loyalty they have shown, and the continuing contribution they are making to the success of the Company.

Board Changes

I am delighted to welcome Christopher Houghton to the Board, who joined the Company last autumn and was promoted to Finance Director in February 2009 following the departure of Mr Hateley. His previous experience at PricewaterhouseCoopers, where he qualified as a chartered accountant and had recently completed a two year secondment to The Takeover Panel, clearly identify him as a candidate of exceptional ability, and we were delighted when he accepted our offer. His appointment represents a further important step in our continuing programme to strengthen our senior management team in line with the significant organic growth being achieved.

Outlook

Since the year end we have seen continuing high levels of activity, with strong growth in both new customer and new distributor numbers. The confidence we expressed last year in the ability of our business to continue to deliver strong results has been vindicated.

The nature of our business model continues to give us considerable visibility over future revenues, and it is extremely encouraging that we were able to maintain satisfactory gross margins last year in each of the business areas in which we operate. However, it is more difficult to provide accurate guidance on short-term profitability during periods of rapid growth, not least due to the conservative accounting policy we adopt where all customer acquisition costs are immediately written off against profits. This difficulty is exacerbated by the seasonal nature of domestic energy consumption in the UK, where approaching 40% of annual consumption occurs in the final quarter of each financial year, and the actual amount used can fluctuate considerably depending on the weather.

Although the absolute amount of energy our customers will use this year remains subject to considerable uncertainty, as explained above, the Company remains protected against any volatility in the wholesale energy markets under our long-term supply arrangements with npower, under which they are responsible for providing the energy used by our customers in accordance with a price formula designed to ensure we earn a positive margin whilst maintaining competitive retail prices. The forward price curves for gas and electricity suggest that retail prices are unlikely to fall much further from their current levels over the next 12 months.

We are still the UK's only fully integrated multi-utility provider, offering customers consistent value across a wide range of services with the added convenience of receiving just a single clear and concise bill each month. Our distribution channel has demonstrated its continuing ability to gather high quality new customers, cost-effectively and in increasing volumes; this gives us a considerable competitive advantage in the residential market.

The directors consider the rapid and accelerating growth curve we are currently following is the best way to maximise shareholder value in the medium term, notwithstanding any pressure it may create on our profitability in the meantime. As we fund this rapid growth from the earnings generated by our current customer base, it will clearly have an impact on our reported earnings, which are also being adversely affected by a number of other factors, namely: a reduction in our financial income of around £1.5m compared with last year as a result of the sharp fall in interest rates; slightly lower energy margins following the reduction in retail prices from 1 April and a further small reduction anticipated later this year; additional fixed costs associated with our new headquarters office building; and an increase in bad debts. For these reasons, we believe at this stage it is unlikely our profits for the current year will match the record figure for last year which we announced today.

Dividend

We are proposing a final dividend of 12.5p for the year (2008: 10p) making a total for the year of 17.5p (2008: 14p). This represents an increase of 25% in our total payment compared with last year. The final dividend will be paid on 7 August 2009 to shareholders on the register at the close of business on 10 July 2009 and is subject to approval by shareholders at the Company's Annual General Meeting which is being held on 8 July 2009.

Notwithstanding anticipated lower profits in the short-term, it remains our intention to pay a total dividend of 22p for the current year in the absence of unforeseen circumstances, even though this may not be fully covered by our earnings.

This reflects our confidence in a continuation of the current rapid growth we are seeing in both new services and new customers, which can be expected to provide the Company with a platform from which to deliver significantly higher profits in future years.

Peter Nutting
Chairman
20 May 2009

Business Review

Performance

Overall performance for the year has been extremely encouraging in a number of key respects:
· record Group turnover and pre-tax profits of £278.3m and £22.5m respectively;
· continuing strong underlying cash generation;
· significant growth in the number of distributors actively promoting our services;
· 34% increase in the number of services we are providing to over 790,000;
· successful launch of new CashBack Card and mobile Pre-Pay service;
· 69% increase in membership of our Business Club.

This exceptional performance has been driven by increasing confidence within our distribution channel in our financial strength (as demonstrated by our profitability, cash resources, and promotion into the FTSE250), the value of our services, and our commitment to ensuring we consistently deliver a first class experience to our customers (as evidenced by the numerous independent endorsements we have received in magazines like Which?).

Our growth has benefited from the deteriorating economic climate, which has made the part-time earning opportunity we offer new distributors increasingly attractive against the background of a broader labour market where working hours are being cut, overtime is being reduced, part-time jobs are less readily available and unemployment is rising. It has also made it easier for distributors to find new customers, as households become more focused on finding new ways to reduce their monthly outgoings.

Margins

Gross margins improved during the year in all areas of our business, primarily reflecting the continuing competitive pressure on the owners of network infrastructure to attract and retain call traffic from the dwindling number of substantial independent resellers like ourselves, and the impact of higher energy prices compared with the previous year. The overall gross margin reduced slightly, however, due to the increasing proportion of our turnover which derives from supplying energy (which has relatively low gross margins) compared with telephony and broadband (which has relatively high gross margins), and the impact of providing "Free Global Calls" to a growing proportion of our customers.

The Market

Our focus is on supplying a wide range of essential utility services (gas, electricity, fixed telephony, mobile telephony and internet) to both domestic and small business customers. These are substantial markets and represent a considerable opportunity for further organic growth.

We remain a small operator in a market dominated by the former monopoly suppliers and a handful of other new entrants. However, our unique position as the only integrated multi-utility supplier gives us a considerable competitive advantage. We combine a highly efficient cost base, good customer service and competitive pricing with the unique benefit of a single monthly bill for each customer.


Our Customers

The majority of our customers choose to take advantage of our multi-service proposition, with over 85% having joined our Discount Club since its launch in October 2003.

On average, each member of our residential club now takes 3.07 services (2008: 3.13) with 85% taking two or more services, and 51% taking three or more services; this slight reduction in the average number of services per member compared with last year reflects an increase in the proportion of "energy only" customers, who are primarily in rental accommodation. These figures (which exclude CashBack cards) are illustrated by the analysis below, and demonstrate the effectiveness of our Club concept in encouraging customers to subscribe for additional services:



Members
Non-Members

1 Service
15%
55%

2 Services
34%
37%

3 Services
13%
6%

4 Services
14%
2%

5 Services
20%
-

6 Services
3%
-

7 Services
1%
-


At the year end we had 238,868 members and 42,307 non-members. Non-members relate to customers gathered prior to the launch of our Discount Club in October 2003 or who have moved into a property where we were the incumbent utility supplier, and have not yet applied to join the Discount Club.

The combination of an increasing proportion of customers taking our Broadcall service and higher retail energy prices has led to a further increase in average revenue per customer, notwithstanding considerable price deflation in the fixed telephony markets over the last nine years.



Average Revenue
per Customer


1999
£190

2000
£286

2001
£316

2002
£329

2003
£459

2004
£482

2005
£505

2006
£634

2007
£801

2008
£872

2009
£1,057



We enjoy high levels of overall customer satisfaction, as evidenced by the positive reviews we have received from Which? magazine on a regular basis, the relatively low churn we experience and a recent survey which we carried out amongst our members where over 94% stated that they would recommend us to their friends. Our overall monthly churn increased slightly to around 2.0% during the year, but remains considerably below the average levels experienced by our competitors, when compared with customers who had similarly already switched away from their original supplier.

The FUTURE is BRIGHT the FUTURE is PURPLE!!

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