Annual Report & Accounts

There were three main reasons behind it.

First, obviously it is important in today’s fast paced, increasingly global, internet enabled market that all companies are vigilant and prepared to adapt. We were also seeing some sustained adverse trends in specific parts of the business that were unrelated to the overall economic down-turn.

It was clear that we needed to respond to the rapidly deteriorating trading conditions, but in ways that would strengthen our position once the market began to recover. The Group had seen a period of significant growth and development through acquisition, following which it was appropriate to take stock of our position. And finally, we needed to respond to market sentiment, as evidenced by the fall in our share price and to questions and pressure from our shareholders.

We concluded that, although the business is strong, it lacked a clear focus. We need to take the opportunity to implement a programme of managed changes in order to strengthen the business in terms of its competitive position, performance and ability to create shareholder value. We spoke with many of our larger shareholders in order to ensure we accounted for their specific concerns, in particular about the maintainability of dividends, given debt levels, pensions liabilities and the need to continue to invest in a sustainable strategy.

Our review gave us clarity on which parts of the business should continue to be developed and receive investment and which will not. At the same time we need to take action to deliver short term profitability and a reduction in operating costs. Going forward, any actions we take will be assessed for their impact on debt and on the balance between fixed and variable costs, while making sure they improve the longer term quality of our cash flows.

We’ve already started making changes. For example, we decided our cost base needed further reduction and so took the regrettable, but necessary, decision to make 150 roles redundant in our I&MS business.

We also looked at those areas of the business that have a high fixed cost base, such as the running of our national network, and evaluated all the options that could help us not only reduce fixed costs, but also make us more competitive in the market.

Our product supply activity, also part of I&MS, was under increasing pricing and margin pressure and consumptive of working capital and we decided to reduce very substantially our involvement in this activity. We are making similar decisions about other low value add activities.

It’s all part of the start of a managed transformation process. Within I&MS, we will be able to deliver communications services to our customers much more competitively. In addition to basic connectivity services, we’ll have access to many more next generation products and services than before.

The same applies to our Telecoms & Internet Services business, in serving the needs of the SME market. We need to strengthen our ability to provide connectivity solutions offered to those customers.

At a Group level, we need to change our financial model to become much more flexible and customer driven rather than the business carrying a predominantly fixed cost.

We are at the start of a two year plan and we have more initiatives in the pipeline that will continue to improve both the quality and competitiveness of our business.

We are not changing the Group’s direction, but we are tightening our focus, based on our core strengths, including our expertise in providing carrier and managed services and our reputation for delivering excellent customer service.

Not at all, it’s a very coherent focus and it’s the right place for us to be as a business. If you think about what customers of any size need to run their business, reliable advanced communications services underpin everything they do.

We aim to be in a strong position to design, deliver and manage the right communications services to help our customers achieve their business aims.

As an end to end managed communications provider. Whilst we may not provide every individual component directly, some aspects of technology fulfilment we will outsource to specialist contractors. Acting as our customers’ partner, we will pull everything needed together into a single integrated service with a single point of contact and the customer service tailored to that specific customer’s needs.

As a Group, we have a lot to do over the next two years as we continue to undertake our transformation of the business. As Executive Chairman, I will be working with the senior team to make sure we take full advantage of all the opportunities that come out of the transformation process.

At the same time, we’ve strengthened the Board with the appointment of two new Non-Executive Directors. Tony Illsley and Martin Towers have a great deal of experience and expertise to bring to the Board. My role will focus on the activities needed to deliver the Group’s transformation.

There are a number of factors, and certainly the economic climate has played a part. But realistically, the business had not been performing at a level that we and our shareholders had hoped for and that clearly had a material adverse effect on the share price. The actions we have been taking since November are designed to regain investor confidence in the business through the delivery of a stronger performance, underpinned by a tighter focus and a more competitive cost structure.

Absolutely. The business is fundamentally strong. It’s very well funded and we have a wealth of expertise. We know that we need to focus on the areas that deliver sustainable revenues and solid margins. In November we said we would return I&MS to profitability by the year end and we have.

We’ve reduced our cost base and have started the year as a leaner, more focused organisation.

And whilst I’ve said we have other initiatives planned as part of our transformation plan, I’m confident that we have already created a better business.

Focused – we know what we need to do and we know how to do it. Now it’s all about making it happen.