While 2009 was marked across the globe by the crisis and disturbances in the financial markets which ended up affecting the real economy, 2010 was characterised by a slow upturn in economic and commercial activity.

Within the context of a bold upturn, the Entreprise des Postes et Télécommunications has generally succeeded in stabilising turnover, mainly thanks to the complementarity of its three fields of professional activity: postal services, financial services and telecommunications.

Following on from the last increase in net turnover in 2007, 2010 was the third consecutive year to see consolidation of turnover (-0.14%), reaching 511 million euro.

Given the 2010 increase in other operating income, and above all the significant upturn in extraordinary income, partially compensated by a slowdown in interest income, growth in the total income is generally positive (+5.14%), culminating in a sum of 593.1 million euro by the end of 2010.

Postal Services
Within a context of a general structural decrease in the volume of mail, turnover for postal activities increased by 3.3%. The general decrease in volume was balanced by the increase in mail from several new national and international customers, as well as price increases for certain types of mailing since September 2010.

It should be noted that at this stage, postal turnover does not take into account compensation granted by the State as part of the tax provisions introduced to support public services (distribution of newspapers, magazines and other printed materials).

In order to take into account structural developments, in 2009 the Government had requested a review of the compensation procedures for general public services provided by the Company. Pending the sanctioning of the final conclusions of this review by the Government, compensation for the financial years 2008 to 2010 through tax relief was kept in abeyance, and the related tax provisions have been put in place for the corresponding financial years.

Postal Financial Services
The cash in postal cheque accounts which, in accordance with the law on postal services of December 2000, is managed directly by the Company, grew by 7.8% over the course of 2010 (2009: 12.11%).

The net interest margin dropped by 5.3% due to interest rates which have been constantly falling to reach historically low levels in recent years. This has led to less favourable maturity transformation conditions on market transactions.

Likewise, based on generally stagnating commissions revenue, only Bancomat and Visa commissions have grown - in their case by 9.8%. The overall turnover of the 2010 Postal Financial Services dropped 4.3% in comparison with the previous financial year.

Telecommunications Services
After a slight increase in telecommunications turnover the preceding year (2009: +2.09%), it once again dipped by 1% in 2010.

With regard to the various telecommunications services, the restructuring of sales in favour of new products and the moving away from traditional services was continued in 2010. Following the drop in prices set in motion by the European Commission (roaming income) and the success of fixed rate plans, turnover in the GSM mobile phone market fell, compared to the increase of the previous financial year. It is worth noting that this turnover also includes telematics services, which in 2010 started to generate some revenue. Although revenue from national contracted lines fell, revenue from new technologies started to come to fruition. LuxDSL is still growing slowly, as is the Internet, while revenue from "business networks" slowed down slightly, following a more prudent investment policy from professional customers following the crisis. The IPTV product, launched in 2008, continued its rise in 2010.
Following on from an increase in 2009, revenue from the rental of international lines generated by TERALINK continued growing in 2010. Turnover stagnated in 2010 with regard to revenue from the rental of satellite capacity.

The liberalisation of the telecommunications sector necessitates the provision of interconnection services for new operators. The breakdown of the interconnection with other fixed-line and mobile operators has seen an increase of 17.3%.

Other operating income
Other operating income, essentially representing rent from buildings and housing, and, to a lesser degree, the partial recuperation of personnel costs and revenue from the provision of canteen services, increased by 36.2%.

Financial income
With regard to financial income, the drop of 24% was caused by both the reduction in dividends received from subsidiaries, a fall in revenue from transferable securities, as well as a drop in the interest applied to term deposits and other items.

Extraordinary income
Finally, extraordinary income increased sharply in 2010, mainly linked to a change in the principle of recognition of the postal and telecommunications turnover, which generated the additional extraordinary income of one month's worth of turnover. The rest of the extraordinary income represented the sale of various buildings and stock (vehicles) and miscellaneous equipment, as well as the AGDL reimbursement as part of the respite of payment for an Icelandic investment bank. Furthermore, extraordinary income also constitutes indemnities received as compensation for damage caused to the Company's networks and infrastructure.

Provisions for risks
The Company is exposed to a certain number of disputes and legal, arbitral, administrative and regulatory procedures in the course of its mobile and fixed line network operating activities:
• Like all other mobile operators, it faces commodo/incommodo authorisation request procedures as well as disputes regarding the commissioning and operation of GSM and UMTS radio stations.
As the law and case law stand, it is not possible to quantify future risks relating to this activity, and so some uncertainty exists which cannot by raised or resolved in the annual accounts.
• With regard to the deployment of very-high-bandwidth fixed-access infrastructure implemented following the publication of the Government's strategic plan, the ILR sector regulator prohibited the Company from operating and selling these services while related offers had not been approved by the regulator.

The report giving approval for the various reference offers submitted to the regulator since October 2008 involves a certain amount of regulatory uncertainty for the Company. This is revealing itself through a substantial reduction in the valuation time for investments made in this area, significantly lowering returns on investment.

A provision can only be built up in the event where the risk is certain or probable, and the amount can be estimated to a certain degree of accuracy. No provision for risks was introduced for 2010 in this administrative and regulatory context.

Costs
Following stagnation in 2009, operating expenses increased substantially (4.8%) in relation to the previous year.

Costs for consumable materials increased by 5.8%, mainly due to the hike in fuel prices, as well as the higher costs for purchasing telecommunications equipment intended for retail.

Overall, third party services in international traffic, the costs of which are directly linked to the turnover, once again rose by 2.9%: in relation to a drop in international costs for financial services and international telecommunications traffic costs (-4.5%), linked to the drop in wholesale prices between operators, and more specifically following the drop in roaming prices, we witnessed a substantial increase in international costs for postal services linked to the growth in mailing abroad, mainly due to the increased mailing requirements of a number of national and international customers, and to the increase in end costs.

Aside from the drop in advertising costs and training and documentation expenses, all other external costs increased. The highest of these increases were other external charges relating to turnover (+9.6%), interconnection (+9.9%) and maintenance and repair costs (+10.6%).

In spite of the slight fall in the number of agents in 2010 (-0.5%), staff costs saw an overall rise of 3.3%, mainly due to the last indexation of +2.5% in July 2010. This was also due to the provision of overtime and excess holidays not taken by the end of the year, as well as greater use of a more highly-qualified workforce. All these contributed overall to an increase in wages and pay and of social and pension costs. Total personnel costs represent 49.9% of operating expenditure, with the exception of value adjustments.

Following the performance of ambitious investment projects (deployment of fibre optics, construction of a datacentre and of postal distribution centres), the total amount of value adjustments on tangible and intangible assets, as well as on elements of the current assets, increased by 8.4%.

Finally, other operating expenses saw an increase of 8.3% in 2010. Although non-recoverable input VAT dropped slightly, this fall was balanced by the growth in ILR fees, provisions for repairs and other items, as well as various rental amounts and paid leases.

The financial expenses mainly represent bank charges and exchange rate losses.

The extraordinary charges can principally be explained by the sale of buildings, equipment, cables and rolling stock from the fixed assets prior to their full depreciation.

A slight rise of operating income in 2010 (+0.5%), compensated by a more pronounced upturn in purchasing costs (+4.9%), further exacerbated by the increase in the payroll (+3.9%), culminated in gross earnings before interest, taxes, depreciation and amortization (EBITDA) falling by 8.7%.

The earnings before interest, taxes, depreciation and amortization (EBITDA) reached 134.1 million euro, thereby falling by 8.7%. The increase in amortization charges (8.4%) further highlights this divergence at the level of operating income (EBIT), which reached an amount of 49.3 million euro (2009: 68.6 million euro). The financial profits of 28.8 million euro, falling by 8.1 million euro, balanced by the extraordinary income of 40.2 million euro (increasing by 39.3 million euro), results in an increase of profit before tax of 11.1% (2009: 21.5%) to reach the amount of 118.2 million euro.

Compared with the 2009 financial year, which featured particularly high taxes due to the retroactive provision on 2008 covering the suspension of tax rebates for special assignments, taxation costs in 2010 dropped by 23.3% to reach 22.3 million euro (2009: 29 million euro).

Despite a falling operating and financial profit, the significant rise in extraordinary income led to profits after taxes increasing by 24% to stand at 96 million euro (2009: 77.4 million euro).

P&T Group

The 2010 financial year was characterised by a number of changes to the scope of consolidation.

On 7 July 2010, the Company undertook the supplementary acquisition of 49.07% of shares in P&T Consulting Luxembourg, to become the sole shareholder in P&T Consulting Luxembourg and France. This acquisition had no impact on the consolidation method, as the subsidiaries were already fully integrated. Given this acquisition in the middle of the year, 49.07% of the income from the first six month period of these two subsidiaries went to third parties.

The absorption of Computersystems by Netcore, performed retroactively on 1 January 2010, changed the scope, as this absorption means that Computersystems moves out of the scope of the P&T group. Its Assets and Liabilities are now part of the Netcore Assets and Liabilities. It should be stressed that the goodwill shown by Netcore and the amortization of this goodwill were cancelled out in the 2010 consolidation (and the following years), given that the goodwill already came into play during the restructuring of the shareholders in 2009.

Net turnover for the P&T Group (633.35 million euro; 2009: 618.49 million euro) witnessed a strong increase over the current year (2.4%). The subsidiaries increased their turnover by 17.56 million euro (+9.46%). The best performance was that of the mobile telecommunications subsidiary LUXGSM S.A., even though it operates in a highly competitive sector. It was able to increase its contribution by 9.35 million euro. The subsidiaries EBRC (+4.01 million euro) and Netcore (+3.79 million euro) round off the top three best performances.

In 2010, intragroup transactions totalled 101.01 million euro (2009: 96.60 million euro), and is proof of a significant synergy and complementarity of the services and products offered by the companies in the Group.

Operating costs rose by 7.06% in comparison to the previous year, reaching 579.71 million euro (2009: 541.47 million euro).

Costs for raw materials and other external charges amounted to 236.36 million euro (2009: 218.77 million euro).

In spite of a significant hike in the price of raw materials and other external charges, the P&T Group was able to maintain its added value at the same level as in 2009.

Personnel costs saw an overall increase of 5.47% to reach 231.56 million euro at 31 December 2010. Personnel costs for the P&T Group increased by 12.10 million euro. The parent company's share of the increase amounted to 6.12 million euro. During the 2010 financial year, the P&T Group employed 3,622 people.

With regard to financial profits, amounting to 19.03 million euro (2009: 26.06 million euro), the drop of 26.97% is mainly due to the reduction in income from transferable securities as well as a drop in the interest applied to deposits at the parent company.

The extraordinary income of 39.56 million euro mainly comes from a change in the recognition of the national postal and telecommunications turnover by the parent company. The recognition of the turnover is now based on the date of the provision of services and not on the date of invoicing. This change has led to additional revenue of one month of turnover, which has been listed as extraordinary income.

The P&T Group's earnings after tax reached 99.21 million euro (2009: 80.11 million euro), linked to a significant increase in extraordinary income.

The contribution of the parent company amounted to 86.70 million euro (2009: 67.23 million euro). Aside from the increase in extraordinary income, taxable at 30%, the contribution of the parent company was 58.7 million euro, representing a drop of 8.53 million euro in comparison with 2009.

The contribution of the subsidiaries dropped slightly, in spite of a significant rise in their contribution to turnover. It amounted to 12.51 million euro (2009: 12.88 million euro).