BT Group plc

Good day and welcome to BT's first half results call for the half year ended on the 30th of September 2022. My name is Ben and I am your host today. During the presentation, your lines will remain on lesson only. I would like to advise all parties that this conference is being recorded for replay purposes. And now I would like to hand over to Mark Lydiard. Mark, please go ahead.

Thanks, Ben, and welcome, everyone. Presenting on today's call is Philip Jansen, Chief Executive And after the presentation, Simon Louth, Chief Financial Officer, will join Philip to answer your questions. We'd like to ask that you keep it to one question per person to accommodate as many people as possible. Before we start, I'd like to draw your attention to the usual forward-looking statements in our press release and our latest annual report, for example, to the factors that could cause actual results to differ from any forward-looking statements we may make. Both the press release and the annual report can be found on our website. With that, I'd now like to hand over to Philip.

Thanks, Mark. Good morning, everybody, and thanks for joining today's call. Before I get into the detail of today's results, I just wanted to sort of step back and give you an overview of progress this quarter and how we're tracking against our long-term ambition. First, despite some of the unimaginable circumstances we have faced, we have delivered a strong quarter two financial and operational performance. And we are reiterating our commitment to delivering at least 7.9 billion pounds of EBITDA this year. Second, our investment strategy is working. We are strengthening our competitive position and accelerating progress through improving our products, propositions and service, whilst investing heavily in our digitalisation and next generation networks. In addition, to help offset current macroeconomic conditions, we are increasing our focus on costs and are today announcing a £500 million increase to our fiscal year 25 cost savings target. Third, and very importantly, our £15 billion investment in FTTP is delivering ahead of expectations on all fronts. More on this later, but this is much more than just the build. Fourth, We are increasing capex this year, but this is good capex as it is focused on FTTP connections and we are paying for this through reinvesting a tax refund received last month. The result is we are holding our cash outflow outlook for this year. And finally, despite all of today's market volatility, we are reaffirming our long-term ambition and continue to expect at least £1.5 billion more normalised free cash flow a year by the end of the decade following the peak of our full fibre investment. This cash uplift is before any contribution from revenue growth or cost savings and underpins our progressive dividend policy. What I'm reiterating today is that we have the right strategy, we have a solid plan, We are executing against that plan and we are on track to deliver our long term ambition, supporting our customers, underpinning economic growth in the UK and delivering for our shareholders. Now, moving on to quarter two results on slide five, which I'll talk to on a pro forma basis. So assuming the sports JV has been in place last year. We delivered another quarter of strong financial and operational performance. Revenue was up 1% with better trading in consumer and overreach, offset by the migration of a wholesale MVNO customer, legacy product declines, and continued pressure on large corporate customers in enterprise and lower kit sales in global. EBITDA was up 4% reflecting the revenue flow through, coupled with strong cost control and one-off items that more than offset the impact of energy and other cost inflation. Quarter two capex excluding spectrum rose 29% to £1.4 billion, mainly reflecting higher fibre build and connections and the impact of inflation. Quarter two normalised free cash flow was down 33% at £269 million, primarily due to the increase in capex, partly offset by the increased EBITDA, stronger collections and the phasing of sports rights payments. With customers continue to embrace open reach for fibre and the take up ahead of our plan, we now expect a greater proportion of fibre connections in the early years of our investment programme. This is very good news, but it brings forward provisioning spend on top of already higher inflation. Separately, We received a tax refund of around £200 million in October and have decided to reinvest this back into our fibre build, meaning that we are raising our capex outlook for this year to around £5 billion. The tax refund will allow us to absorb this high capex within our £1.3 to £1.5 billion normalised free cash flow guidance, though we will likely outturn towards the lower end of the range. We are more focused than ever on CapEx discipline, particularly legacy CapEx, and we expect CapEx beyond fiscal year 23 to stay at £4.8 billion for the remainder of the peak fibre build, which will complete in December 2026. Finally, and as expected, we are announcing our interim dividend of 2.31 pence per share in line with our policy for it to be set at 30% of prior year's full year dividend. Moving now to our operating performance on slide six. Despite higher inflation, rising energy costs, and macroeconomic uncertainty, we continue to build the critical network infrastructure that will underpin economic growth and productivity in the UK for many years to come. We continue to connect more customers to these best-in-class next-generation networks, whilst at the same time uplifting customer experience. Our full fibre network today reaches 9 million homes and businesses, and we have accelerated to an annualised bill rate of 3.2 million premises in quarter two. Beyond that, we've already laid down some of the infrastructure that underpins the next 6 million premises, meaning the bill is either complete or underway for around 15 million premises. That's around half of the UK. Our average bill costs remain within our range of £250 to £350 per premise. We've also seen strong demand with the fibre connection rate accelerating ahead of the build. At the end of quarter two, connections were at 27% of the total build. Of course, we are determined to remain the partner of choice for CEPs. in a competitive marketplace and our advanced discussions to sharpen our FTTV pricing to further strengthen our relationships, attract new customers and facilitate even faster migration. At the same time as this unprecedented pace of fibre delivery, we've made fantastic progress upgrading the nation's mobile connectivity and have now deployed 5G in nearly all major towns and cities across the UK. As you know, we are also investing to transform and digitize our systems, processes, and products to improve the customer experience and lower our cost base. Through our modernization program and tight cost control, we've seen the cost base continue to come down and have already delivered 1.7 billion pounds of annualized cost savings since launching the program in May of 2020. Whilst of course we're pleased with our performance to date, given current market conditions, it's important that we go even further. We are therefore announcing plans to expand our existing program to deliver an additional 500 million of savings by fiscal year 25, bringing our total target to 3 billion pounds of gross annualized cost savings. To deliver this, we will implement further product process systems and organization simplification, along with procurement and supply chain improvements. This will increase the cost to achieve to £1.6 billion up from the £1.3 billion previously communicated. Our accelerated delivery, significant network and systems investment and relentless focus on our cost base all culminate in a strengthening of our competitive position. This will result in continued network leadership through our best in class FTTP and 5G networks. More customers on our next generation platforms at an ever accelerating rate and a lower cost base with a simpler modernized operating model. This will put us in a really strong competitive position with a strong balance sheet and strong cash flow. I now wanted to take a few moments to update you on the progress against our five strategic priorities. So turn into slide seven. In consumer, we remain well positioned to continue driving growth, delivering another strong quarter with pro forma revenue growth of 3%. Pro forma EBITDA grew ahead of revenue and was up 16%, supported by tight cost management and one-offs. We're encouraged by these financials and that our customer satisfaction metrics and leading indicators remain strong. Customer NPS is near record highs, churn remains low, and complaints are still trending below the industry average. This excellent performance results from decisions and actions that have been taken over the last few years, such as our relentless focus on customer experience, including onshoring our customer contact centers. Our market fairness agenda that has seen customers upgraded to fiber with no price or contract change and a significant reduction in our back book pricing differential. And our annual contractual pricing policy, which provides greater transparency for our customers. We've added more customers to our next generation platforms in quarter two than any other quarter with 121,000 fiber net ads and 308,000 new 5G connections. We're committed to introducing new products and services to evolve our offering to customers with recent launches of e-security powered by Verisure and Norton and new gaming bundles in a drive to become the UK's number one network for gaming. Now, high quality connectivity has never been more important for our customers and our products provide great value for money. However, we do recognise the pressure on the UK consumer. It's important to us that those customers that need support in the current economic climate do not get left behind and continue to have access to a decent broadband and mobile. That's why we've led the way and have by far and away the most customers on social tariffs as referenced recently by Ofcom. We are committed to even greater awareness of our social tariffs, and we're launching a mobile social tariff, ensuring those who are eligible can remain connected on the move. Moving on to our second priority on slide eight, to capitalize on our unrivaled assets in enterprise and global. And starting with our SME and SOHO business, we are pleased to see another quarter of revenue and EBITDA growth. Our public sector business is stable with BT remaining a key partner across many areas of government and the country's public services. Our security business has grown 10% year-on-year in quarter two and will maximize our leadership position here to continue growing this business ahead of the market. Our wholesale business is annualizing the end of an MVNO contract and is focused on accelerating the move to all IP and expanding data center and backhaul solutions for communication providers and other telcos. While the annualization of this MVNO contract puts pressure on growth, in enterprise, we have seen a sequential improvement in both revenue and EBITDA from quarter one to quarter two. And while we continue to see pressure on our larger corporates and multinational customers, we're responding by pivoting harder to win new business. And so we're pleased to announce important new contracts, including with Sellafield and Enterprise and QB Insurance in Global. We are seeing ongoing declines in our legacy portfolio, of course, but have been encouraged that the growth portfolio in Global is performing well ahead of the market. Now turning to open reach on slide 9, which has continued to fire on all cylinders delivering yet another record quarter of build and connections. We passed over 800,000 premises in quarter 2. And we are the only national builder rolling out right across the UK with 2.8Million of our fiber footprint in rural areas. We've delivered this whilst maintaining a premium build quality and our low 250 to 350 pound per premise build cost with ongoing build efficiencies and scale economics, helping to offset the obvious inflationary pressures. We're also really pleased to see that the fibre take-up has accelerated again in quarter two, despite the higher provisioning worked out resulting from industrial action. The UK infrastructure market is changing quickly, supply chains are stretched, the labour market is incredibly tight, and financing costs are rising. We are not immune, but we are best positioned. Openreach's scale and experience, coupled with our commitment and balance sheet to fund the build, mean we've never been more certain that we will win the fibre race and deliver strong, fair returns comfortably within our expected range. However, as you all know, we are not complacent. We know others are building, but only Openreach is connecting customers to full fibre at real scale, driving ARPU up and driving costs down. Our Equinox pricing offer remains incredibly successful. 90% of broadband orders in fibre areas are now for full fibre, and over half of these are at ultra-fast speeds. We want to go even faster to maximize returns on this network and are in advanced discussions with our communication provider customers to sharpen our pricing, strengthen our partnerships, and facilitate even faster migration of existing customers off copper and onto FTTP. In addition, Sky is continuing to ramp up the number of its engineers performing fiber provisions on the open reach network at a greater scale than we originally envisaged. Now, looking at the key part of this chart, the top right on chart on slide nine, we are very encouraged by our broadband mix, which, together with CPI indexation, underpins revenue growth in Openreach over the median term under all scenarios. We outlined last November at the Openreach business briefing our expectation that the broadband market growth would offset competitor churn. Looking at the bottom of the chart, we saw strong broadband net ads during the pandemic. This did pull forward demand and has resulted in the current lower market growth no longer offsetting the expected level of competitor churn. We consequently saw 89,000 mainly copper broadband line losses in quarter two. This did include around 40,000 line losses from a higher provisioning work stack stemming from four days of industrial action. We expect the broadband line loss trend to continue for the rest of the year. Turning to slide 10, we've moved incredibly fast on our fourth priority to digitise, automate and reskill to transform our cost base and improve productivity. I mentioned earlier that we're focusing ever harder on our cost base and have delivered £1.7 billion of annualised gross cost savings since May 2020. We achieved this with a cost to deliver of £9. 100 million pounds. This is really strong progress, but in the context of the current macroeconomic environment, higher energy prices, and our unprecedented level of network investment, it's crucial we go even further. And as I mentioned, we're therefore expanding our target by a further 500 million pounds to 3 billion of gross annualized cost savings by fiscal year 25 to be delivered through further system process and product simplification, organization simplification, and additional procurement savings. Our confidence in this upgraded target is underpinned by our strong delivery in H1 with recent proof points, including the rationalisation of our HR system landscape, reducing the number of supplies and savings on licence fees. The announced closure of over 200 buildings in the UK under our Better Workplace programme and a 14% reduction in Global's overseas building lease costs through a programme of site closures and optimisation. Work in our digital division is delivering genuine business transformation. One fantastic example is our sweeper app, which is underpinned by our recent deal with Google. This app allows open reach engineers to identify and input real time on a mobile device, additional houses in a street that are commercially viable for the FDTP build. This allows us to connect more homes to full fiber faster, whilst also obviously keeping costs down. This app has been active nationally since July and already contributed to 4,000 premises to the quarter two bill. Our digital journeys are proving increasingly popular with our customers with a number upgrading to HTTP through our digital channels tripling in just one year. We've also launched our new EE app, improving our digital capability and engagement with the monthly average usage of the app up 24% since launch. In networks, another example, we've now migrated millions of customers onto our converged core, the first of its kind in the UK. And we are making efficient use of our spectrum and have already started refarming 3G spectrum into our 4G and 5G network, cementing our network leadership positions. And finally, on slide 11, in making sure we optimise our capital allocation and business portfolio, we have completed the sports joint venture with Warner Brothers Discovery in a very attractive partnership that will improve our sports proposition for consumers, reduce our exposure to sports rights auctions, and gives us greater strategic optionality over the medium term. On the capital side, we are pleased that the VT pension scheme funding deficit remains stable at 4.4 billion pounds as at June 2022. and that the BT pension scheme have managed well through the recent period of gilt market volatility, with no worsening of this funding position since June. We are also pleased to see the IAS 19 deficit remains relatively low at £1.7 billion as at the end of September. So to conclude on slide 12, we are accelerating our growth strategy. We're investing heavily in our next generation networks and lowering our cost space by a further 500 million pounds, leading to a strengthening of our competitive position. We are operating in difficult economic circumstances, of course, but we have a robust strategy, a strong plan that we are executing well, and we are reiterating our long-term growth ambition. CAPEX is higher than we had forecast this year at £5 billion, but this is good CAPEX due to higher provisioning and we expect to retain CAPEX at £4.8 billion for the rest of the peak fibre build as we exercise ever stricter discipline on legacy spend. Beyond the peak fiber build, we continue to expect at least a £1 billion reduction in capex flowing through to normalize free cash flow with an additional half a billion pound uplift by the end of the decade as we benefit from all IP, all FTP network. This is a clear route to more than double our fiscal year 22 normalized free cash flow before the benefits of revenue and EBITDA growth. All of this combines to underpin our progressive dividend policy with the interim dividend of 2.31 pence per share confirmed today. And with that, I'd now like to open up to questions. So as usual, can I please ask you to stick to one question? Operator, please could we go to the first question?

Certainly, thank you. Allow me to inform our audience. If you wish to ask a question, please click on the raise hand icon at the bottom of your screen. If you'd like to withdraw the question, please click on the hand again and please kind of keep it to one question at a time so that everyone can participate. Thank you. And with that, our first question comes from Akhil Dattani from JP Morgan. Akhil, please go ahead.

Hi, Akhil. Can I start with a question on pricing, please? And it's got two parts to it, but hopefully it's quite quick. So the first is if we look at Q2 numbers, it looks like the broadband growth has slowed a bit, has the broadband ARPU growth and the churns ticked up a little bit. I mean, they're all very small changes, but I guess it would be useful to get some understanding and colour on your confidence and sort of what you're seeing around the prices sticking or if there's any sort of sign of churn or discounting. and then i guess the bigger picture part of the question is that i'm sure you've seen comments from ofcom um where they've said that whilst pricing is not regulated in the uk they would like telco operates to scrap their annual cpi price increases for april um so obviously just keen to understand you know your response to that and what your likely intentions are thanks

Sure, Akhil, a key topic. I mean, you know, for this year, you know, everybody knows the pricing changes that were made in April 2022. You know, that was announced to our customers a long time in advance. It's totally transparent. And that whole program has gone extremely well. So, you know, there's the consumer business in terms of its customer base is nicely in equilibrium. It's balanced. The net promoter score is good. The churn is low. Customer clients are low. So the value for money scores continue to be good. So that's this year. So there's no challenge at all to the balance of what we measure on the consumer side. As we look forward, we are going to be putting our prices up by CPI plus 3.9% next year. And the reason for that is very, very simple, really, which is we're experiencing significant inflation. The whole business is under pressure like every other company and every other household. So energy costs up significantly. But it's across the board, right? So we have to put in CPI. But equally, we've got to fund this huge investment. You'll have noticed today that CapEx is significant. partly due to inflation. There are other things in there, excess provisioning, the stuff about the 6 million additional pipeline of FDTP. So these inflationary pressures we are seeing, we're also investing heavily in the future. So the 3.9 above CPI is funding that investment, which ultimately is leading to fantastic customer experiences in FDTP. And you can see in the ARPU. So our customers are happy paying higher prices for FDTP. And we are still great value for money and that is the most important point. The thing that we measure so carefully. Is the value for money of our core proposition? No, 1, like seeing prices go up. Unfortunately, in this environment, they just have to go up. Because otherwise we can't balance the books and fund the investment. So, and the most important thing is, I say again is when you look at what we offer. For about a pound a day, you can get exceptional connectivity, both for fixed and for mobile.

Our second question comes from Andrew Lee from Goldman Sachs. Andrew, please proceed.

Yeah, good morning. So I had a question, I guess the other side of the question to Akhil's question. So you answered, I think, really helpfully on the consumer pricing power and stickiness. I guess all investor pushback today on your results revolves around higher spend on new fibre, but questions around the monetisation. So I wanted to just ask on the wholesale side of things. The question really is simply, is alt net pressure rising and or your broadband pricing power outlook faltering? Because what investors see is obviously your comments around sharpening the pencil on the open reach wholesale fiber pricing, get that that can accelerate migration. But is there another side to it, which is that you're just seeing more network competitor pressure? And investors are also seeing that acceleration of the line loss to, let's say, open reach broadband line loss to 49,000, as you mentioned in your release. So, How do you reassure investors that the balance between price and volume is still heading in the right direction and that network competitor pressure is not actually rising and structurally rising?

Yeah, Andrew, great question. I mean, the short answer is do we see increased network pressure? No. What we see is a situation where we have never felt more confident about our FDTP investment, genuinely, honestly. And the reason for that is, yes, the build, the build is going extremely well, 9 million. We've also got in the pipeline another six. We can see those 6 million. We know where they are exactly. We've already started building some of that infrastructure. The connection rate at 27%. I mean, that's the most important number to stare at. At such an early stage in the build, we've got 27% connected to FDTP. And the stats on selling FDTP in fiber-only areas are amazing. So the reason I say in terms of the network pressure, it's all about customers now. It's not about the build anymore. We're going to finish the build. It's all about connecting customers. And that's the most important thing. So what we want to do, the Equinox 2 change is to help migrate as quickly as possible to get us off copper and get us onto fiber as quick as possible. Because the answer to your last question is all about the ARPU, right? Look at the ARPU. The ARPU is up one pound year on year, six and a half percent on average. So we're moving people off old stuff into much better technology at a higher price where they're happier. So we couldn't be more confident about the FDTP program. And we're delighted with the progress being made in Openreach. But look to see us go even further. And that's why we think it's a very sensible decision to spend five billion this year, which is more than we'd originally thought.

Our next question comes from Nick Delphos from Redburn. Nick, please go ahead.

So just coming back to this issue of 7.9 billion, obviously you made some good progress in the first half of the year. But there are also quite a lot of one-offs. So there's a one-off, I think, in consumer. There's a one-off in enterprise. You've deconsolidated BT Sport that might save you 40 million. Could you just give us a quick roundup of roughly the size of those and also for any negative offsetting ones? I mean, looking at it from a very high level basis, maybe there's 100 million of extra stuff contributing to the 7.9 billion, but just some sizing. Thanks very much.

Yeah. I mean, let me just say a couple of things. I think if you just step back, I'm really encouraged by where we are today. Genuinely, two years after talking about 7.9, in an economic world which is fraught with challenge and uncertainty, we're growing revenue, growing EBITDA for the half year in line with what we thought we would be doing. We're reaffirming our outlook at £7.9 billion, despite obvious pressures that everybody knows about. And, you know, I joke about we'll deliver that under any imaginable circumstance. Things I didn't think of. I didn't think there'd be a war. I didn't think energy prices would do what they did. I didn't think inflation would be double digits. I didn't think interest rates would go up as they are. So there's loads of things that we as a company have dealt with. And I think we've dealt with them really, really well. To say that we're still on 7.9, I'm delighted about it. And the team should take great credit. I mean, my leadership team to deliver that 7.9 billion in the year will be a great achievement. And yes, there are lots of moving parts there. Let me just give you a couple of other thoughts. You know, that's a 300 million improvement if we do it versus last year. you know we've taken an energy hit of over 200 million this year compared to last. Our MVNO is about 100 million. That's a 600 million swing right there. Improvement. And I think that's a pretty good result. So yeah, of course there's ups and downs in it. And any business like this has one-offs. They're not really one-offs, actually. I'll let Simon give you a sense of them. But they're just things that are individual items that, for good order, we separate out for ourselves so we understand it.

um simon do you have anything there no philip i think that's a key point i mean the underlying business performance and you know is improved by over 600 million pounds as you've just said um we have rightly called out there have been some non-recurring items in h1 i mean it's sort of mid to high tens this is the you know these are not unusual for a business of our size and scale and they're completely dwarfed by the underlying improvement What are they? I mean, there's some movement in rebates on trading between last year and this year. Why? Because we actually traded better than we'd anticipated in the year. We did have a VAT settlement. That's a small, small number. And in addition to that, yes, there's a modest contribution from WIC, but that's been vastly overplayed. Remember that, you know, from the BT Sport, because The business was improving in the course of this year. There's only six months of it. So that's really in the noise. So I think we feel very confident on the at least 7.9 billion. Hope that helps you know.

The following question comes from Carl Murdoch Smith from Barenburg. Carl, you may proceed. Hi, Carl.

and the net debt mix today. So in 2020, BT moved its management share options away from incentive share plans to restrictive share plans, creating a lot more certainty around the size of the buybacks that you will have to execute to offset the dilutive impact of these options. Last year, you bought back 184 million pounds of shares, and in H1, you've bought back 138 million pounds, in large part leading to the net debt missed today versus consensus. And yet, when I look at consensus, it only forecasts about 40 million pounds. a year going forward, which I view as materially wrong. I wanted to ask if you could provide some guidance on this line going forward and whether you would agree or disagree with my view that consensus is currently wrong by £100 million or even more each year on this cost line. Thank you.

Well, I think consensus appears to be wrong in the prospects for the business, and therefore it might cost us to buy back some shares. But the core point, Carl, is yes, we are undertaking, as you know, we've repurchased shares to cover employee share schemes. I'm not going to give guidance for subsequent years on a total net debt of 19. It's not a material number. Thanks. That's great. Thank you.

Our next question comes from David Wright from Bank of America. David, you may proceed.

Hi, David.

Thank you. Sorry about that, guys. It just took a while to go through the meeting process. Just on the 40,000 lines, you have flagged the broadband line losses due to the strike action. I guess if we just annualize that, you know, and potentially with some increased strike action that I think is even planned, then we could be talking like a sort of 200,000 broadband line loss Am I just kind of thinking about that all wrong? And the only reason I just think about that is you guys are still standing firm with your offer to employees right now, but this is really quite material disruption. I'm just wondering how you're thinking about that and, you know, what measures you can take to offset that risk or how even those discussions with the unions are going at all. Thank you very much.

Thanks, David. I mean, David, these 40,000 lines, they're missed appointments effectively as a result of the industrial action. So it's four days where we weren't able to deliver on our customer commitments, which obviously is very disappointing. We'll make those up eventually, right? And of course, you're right, there may be a few cancellations in there inevitably, but we're absolutely determined to make those up. So of course, we hope that the industrial action doesn't carry on. by definition, and we're working really, really hard to find a way forward where we get back to a more normalised situation within BT. And I just say on the point with our CWU partners, they're a really important partner. We're always talking to them, and I'm really, really hopeful we'll find a way forward. But to be crystal clear, the pay award that we described for April 22, that matter is now closed. So we're just moving forward, trying to work out what we're doing going forward for our people. And we want to do the right thing by our people, of course. And you'll get the point, which is trying to balance all the different competing pressures on the business, deliver our commitments to the market, to our shareholders, to our pension holders, to our employees and to our customers. So I'm pretty confident we'll be in a good situation over the next few months, but we've got a lot of hard work to do.

The next question comes from Sam McHugh from Exane BNPP. Sam, please go ahead.

Brilliant. Ebitda to come with a dividend. And at the time you talked about tax, working capital, interest and leases in the region of 2 billion, which consensus has at the moment. But obviously a few things have changed, whether it's tax, the slight cash benefit of the EBITDA boost from the sports JV, you know, inflation, interest costs. Is this 2 billion below the line items for all that stuff? Is this all the right ballpark? And how are we thinking about the dividend coverage in light of that target and the below the line cash items?

Thanks. We missed, Sam, we missed the first part of your question. I think you were asking whether our expectation of normalized cash flow outside of CapEx remained at about 2 billion. We didn't hear whether you were referring to this year or next year. Could you just clarify that for us, Sam, so we can help answer?

Okay, yeah, sorry. Yeah, yeah, exactly. I was saying in the future, if I look at consensus, and you had talked about this 2Billion roughly in the, in the medium term, that's kind of a level of the cash items to explain the dividend coverage. So, is that 2Billion still the right number? Pretty much.

Yeah, it has not changed, Sam. That is sort of in line. It's a combination of leases, which you've got pretty good visibility of. It includes interest and tax. We will have a bit of a step up in tax, as we've always said, next year. But equally, you know, we're managing, we've got a lot of working capital improvement that's flowing through. So no, we've That's a good handle for those items as we move forward.

The following question comes from Jerry Dulles from Jefferies. Jerry, please go ahead.

Hi, Jerry. Jerry?

Jerry, could you please, if you're not on mute? We'll move on to our next question, which is coming from James Ratzer. James, please go ahead.

Hi, James. You guys hear me? Yeah, good morning, Philip. Thank you. So I was very intrigued and interested by the comment you made earlier that you are going to go ahead with the CPI plus 3.9% increase next year and tie that to your costs growing, which presumably are the costs that BT Consumer effectively faces, of which one of those is obviously the payments to Openreach. Does this mean that with the Equinox 2 pricing that is being talked about, you are still going to be sticking with CPI increases on Equinox 2? I'd just love to get a little bit more detail about how those might be structured. I was really wondering whether actually BT consumers costs wouldn't be going up as much as CPI

um if a price cut is potentially being thought about at open reach thank you sure i mean i can't go into details on equinox too okay that's that's a a very important piece of work which we're working with our cps and ofcom um it by definition means that we're offering better value for money right um and there are changes in that which have some reductions by definition again versus what we're currently doing on equinox one So I guess the CPI plus 3.9, I tried to explain in my previous answer, it's so important that you don't just look at it as the price. It's the whole business in equilibrium. And will our customers feel good about what they buy from us as we put our prices through? So I think you've got to remember, What we did a few years ago is we corrected some of the anomalies that we had in our consumer customer base. So we spent, you know, from memory, it was like, I don't know, 250, 300 million pounds correcting some of the places where our customers pretty were out of kilter with what was delivering great value for money. So as I said earlier, we monitor the hell out of that. So now that we are putting our prices up, as we have done last year and this year, the reasons for it are all the inflationary costs we're experiencing across the whole business, by the way. It's not just consumer. Don't look at it as consumer. They rely on a 5G network. They rely on our core network. They rely on all the network activity. They get all the benefits of IT and technology, all our buildings. So don't look at it as just in isolation. The total business has inflationary cost pressures and is investing enormously for the future benefit of all of us. And therefore, the CPI is a reflection of inflation, and the 3.9 is a reflection of the massive investments going in to benefit all customers and all stakeholders.

The following question comes from Maurice Patrick from Barclays. Maurice, please go ahead.

Hello.

Hi, Maurice. We can hear you.

Can you hear me okay?

Yeah, we can.

Yeah, great. Sorry. You never know these days. Only two years into post-COVID. So a bigger sort of value versus volume question, please, mainly for consumer, but I guess it applies also to open reach. Now, I recall a couple of years ago you sort of overtly moved to protect your consumer base by effectively cutting price on some of the back book, saying you didn't want to lose customers. You know, signaling today that you're going to put through another CPI plus 3.9% increase next year, maybe run some risk of loss of market share going forwards. So I guess, are we going back to a value over volume approach for the next couple of years whilst you're defending those cost increases? I guess the same question kind of applies to open reach too.

The short answer is no. It's too simple. That is an overly simplistic way of looking at it. It's right in the middle. So we want to make sure we've got the high market share of the customers that we want. And when we, as you said, cut price for the back, but we didn't actually cut prices alone. We changed some of the propositions dramatically. so we added more products in we provided halo which is a key thing um and we also sort of added other things the bundle and also certain cases reduced prices and moved people from copper to fiber so there was a whole range of things that made sure each customer segment was getting great value for money that brought churn down brought complaints down and increased nps What we're doing now is yes, if you look at just price, of course, prices are going up. You see it in our numbers now, and you're gonna see the numbers going forward. But there are lots of things changing below that, right? And that's all about delivering the right thing for each customer segment. And price is just one part of that. But the proposition is changing too. So under the banner of that price, people are getting more value. And that's what I'm trying to drive at. So where we feel really good, is that the BT consumer, and in Opreach for that matter, the NPS and the value for money scores remain absolutely where you want them to be, as do the churn, by the way. So don't think of it as a change in strategy of value versus volume or volume versus value. It's all about getting the right balance. And at the moment, that balance is working.

Moving to Jan Caridas from Numis. Jan, you may proceed.

Hello, can you hear me?

You're on mute. I can see it now. You're great. Okay, great. Excellent. Thanks. Okay, so a year ago in a briefing to the city, Openreach put up a slide that said that on the worst case scenario, Openreach would lose about 600,000 lines over seven years to the end of 28. In the last two quarters, it's lost 130,000 lines. So could you help me sort of square the point that you made about network-based competition having no impact on Openreach? And sort of related to this, and maybe your answer is going to be value again, but. I wonder whether that matters in once we have it now that we have a. So, a cost of living crisis on the 1 hand, you're cutting your wholesale prices. So potentially choking off a net infrastructure based. Competition and on the other hand, you're increasing retail prices. How do you sort of convince Ofcom that this is to the benefit of citizens going forward?

Okay, let me do the last one. I've already sort of answered the first one, I think. Simon, you give your perspective on open reach line losses over the pressure. We'll talk about the overall business case and what we assumed, but Simon can do that for you. Let's be clear. The wholesale prices of broadband through open reach are going up. So, you know, they are index linked to different degrees and there are some specific things around certain types of products. But basically, there is indexation on open reach and that's not going to change. And so that inflates the wholesale prices. And then obviously, that's part of the reason why the customers of open reach have to pass on those price increases. That's a well-recognized dynamic that was agreed a long time ago. so so you're seeing overall indexation at wholesale and retail is going to happen um what i'm really saying to you is you know we're actually committed to the cpi plus 3.9 um as a mechanism for funding the investment that we all so badly need to get to the new technology that we know people value um there are no there's no shortcuts to delivering that and that's what we're going to do so you want to give your point on the on the line losses and um

Yeah, sure. And I think we've covered it, John, but we were pretty clear in the business briefing that we expected to see some very modest loss of broadband lines. And we saw that as a function of loss of market share to competitors, given that they are building. And secondly, that would be compensated for by a combination of homes coming new to broadband and secondly, new homes. than like three or 400,000 a year. What has changed in the last sort of six to nine months is we have seen slightly lower new home build, which is conceivably a function of the macro situation. And secondly, as Philip described, we've seen fewer new homes to broadband, which is now very apparent, was due to a huge pull forward during the pandemic. So going forward, we would expect, not in this year, but certainly over the next two or three years, we'd expect the rate of new home builds to pick up again to meet the sort of government targets. And we would expect the large number broadband to come back into the market. It'll happen over the next two or three years. Final point I would make, which I think Philip also made, do remember that the real driver of revenue is the ARPU uplift and the ARPU uplift by moving people to higher speed FTTP product is what gives us confidence in the revenue and the year on year increase in that dwarfs the very small reduction. I think it's about 40 basis point reduction in the broadband lines. And finally, of course, moving on to an FTTP platform dramatically reduces our costs. So that thesis for the open retail business case remains absolutely intact.

And John, that is why I said at the beginning, we never felt more confident about our FTTP investment case and not just the investment case. The strategic advantage it gives BT, that's going to last for decades. So, you know, and it's what Simon said, the financials of it are like no brainer. So we're just accelerating it, getting on with it. Comfortable connections, 27%, higher ARPU, lower fault rate, lower cost, better service, higher satisfaction. What's there not to like? Apart from it's expensive to get it done, but you only do it once in a generation.

Up next is Georgios from Citi. Georgios, please, go ahead.

Thank you. I've got one question around the energy costs more in the medium term. And I just wanted to understand the options that you have around PPAs in the next few years in order to give yourselves and also give more clarity to the market around your long-term energy needs and costs. If you could give us an indication of what's the average price you're paying now versus what the can offer you, it could perhaps give us a breach over the next couple of years to have an understanding despite the volatility what the end game could be in terms of costs. Uh, and if it's possible, I apologize for that, but I just wanted 1 clarification around your fiber topics. Because you mentioned with the 2.0 that you expect, uh, faster connectivity, uh, and migration of customers. So, I'm just curious the 200Million reduction in complex next year. While I'm guessing a lot of the connections will happen next year. Is it coming from other areas, from efficiencies? I just wanted to maybe clarify that point.

Thank you. I mean, we can't get into the individual details of our energy PPAs. I'll say something, I know Simon chipped in. You know, obviously extremely challenging energy, very important for us, big number. We've been transparent about how much extra we're paying year on year, 200 million. Actually, give credit to Simon and his team. I mean, we are on this, you know, daily um with another member of the exec looking at it really really kept so we've done as good a job as anyone could have expected given the circumstances and we're very thoughtful about what we do going forward given the volatility we don't hook ourselves into a position that then looks a little bit uncomfortable in a year or so's time so getting the The balance of hedging and spot market and PPAs, getting that right with key partners is really important. And Simon leads that effort. But I would just reassure you, we're not short of data and info and perspective on what to do. We think about it very carefully. We look at it all the time. Simon, do you want to add anything to that? I mean, some sense of how we think about PPAs and hedging and stuff.

Yeah, I mean, we're not going to give you the details of demand. information that allows you to piece this together. We told you our energy prices went up £200 million and we told you about 85, 80 to 85% hedged and that will allow you to figure out kind of what the approximately what the current contracted price is. What I can tell you going forward is that we're about half hedged for next year already and those were hedges that were actually put in place early part of last year so they're actually rather better than our hedged price all in hedge price for 23. um that's good um the other half obviously we do face market exposure but we are seeing you know much more activity um amongst ppa providers both physical and virtual and we will manage the energy position as we have done this year and deliver on our EBITDA growth into next year.

Great. Thanks. The following question comes from Nick Lyle from Societe Generale. Nick, please proceed.

Hi, Nick.

Hi, Liam. Great. Just a question on enterprise, please, on the EBITDA. When I take out the MVNO losses for the rest of the year and some of the one-offs, it still seems as if you need slowing declines in the underlying EBITDA numbers. So, in other words, on an improvement in either the SME or large corporate position. So could you just update us on how they're both going? It doesn't seem like the sort of environment you want to be looking for an improvement in underlying trading in. So you could just maybe give us something on SME and large enterprise to give us some confidence.

Yeah, I mean, let me give you my experience and then Simon can chip in. Look, I think, as I said in my earlier remarks, the SOHO and SME areas are growing and you know, we're in good shape there. I mean, there's always more to do. And we've got lots of work in the background and improving some of the things we're going to offer our customers in both those segments, right? So I think we've talked about that a few times before. So again, that trajectory is reassuring. It's good, but there's always more to do. I think you're right to say it's in the other part of the business, which, you know, we sort of call corporate public sector is a larger accounts. which includes some of the government contracts which by definition are lumpy you know and there are larger contracts managed service contracts in that so yeah we need a bit of a bounce back in the market of course um there's still a bit of a covered hangover in terms of the amount of activity uh change controls you know new new developments um new ideas it's not quite there versus what we used to have um but again rob and the team are working really really hard to pivot and reorientate that business to be selling more of the newer, higher growth things which you know about and move away from the legacy. And it's the same old challenge which we're working on. Simon, do you want to add anything to that?

No, I think, I mean, the businesses, if you add global and enterprise together, business was up sort of 30, 35 million Q2 and Q1. So we're seeing, you know, momentum restored, as we said. We're seeing, you know, sound trading, you know, in the volume part of the business. It is There's challenges in the large corporates. We've been very clear about that. The teams in both businesses are doing a fabulous job in working with customers to build the pipeline, and you've seen they've grown. But it's the cost transformation opportunity there. They've done a great job delivering on it, and they will do more. It's a tough market. The business is going to get back to growth over time.

Thanks, Nick. Moving to Robert Grindle from Deutsche Bank. Robert, please go ahead.

Hi, Robert. Yeah, hi there. Can you hear me? Yeah, we can hear you loud and clear. Super, thanks. A quick clarification on the strike's impact. Do you save wages on strike days, or is that offset by penalties? And if you raise prices by CPI+, is it sustainable to argue for your sub-CPI wage increases? And I saw some trade press on giving resellers access to EE.

under the partner plus scheme is this a major thing is the idea to offset mvno losses via resellers thanks um simon can you do that last one quickly when i just make sure i've got those down it's it's a small thing um immaterial in the in the scheme of uh in the scheme of uh consumer and bt okay great okay on the strikes impact i mean the best way to describe it is

We're desperately sad that our staff have gone out and taken industrial action. It's not good for anybody. It's not good for the company. It's not good for our customers. It's not good for our people. It's not good for the union. So it's a sad situation, which we're very disappointed on, and we're working really hard to get some way forward out of that. From a financial point of view, the impact is modest right it hasn't really hit us from a financial point of view but i'm not you know i prefer in some way if the financial was bigger but the the the morale wasn't so bad so you know being honest with you it's very tough inside the company when you've got that kind of industrial action so financially uh not that not that big because we've managed and mitigated it really really well um and therefore you know whether it be answering 999 calls um handled perfectly all the way through to delivering for our customers across the board. But there are some impacts and the one that we've been transparent about is this 40,000 deferrals in open reach, which we haven't got to because our people weren't there on the day to connect our customers. So we'll make it up. We've got very clear plans to make sure those people are contacted and put back in the work stack. And of course a few will fall out. So we're doing everything we possibly can. I mean, specifically, People lose pay where they, that's why it's so sad. So if you go on strike, you don't get paid. And there's limited way to make that up, right? So it's a real, that's why I'm saying no one wins. So we're really keen to find a way out of this. But the pay award that we made in April, which was, as I say, industry leading, better than anybody else in our industry, that matter is closed. But I'll always talk and we will always talk to anybody about what we do in the future. And we want to do right by our people and we want to help them as much as we possibly can. Particularly the lower paid deal with the cost of living crisis again. I mean, you know, again, just so you ask it linking it to our CPI. Plus price increases, you know, we're a business here, right? And we're here to deliver commercial outcomes for all our different stakeholders and make sure that BT has a bright future and is stronger relative to its competition. We are definitely doing that. And I'm not putting that at risk for anything. And so what we can't afford is to get the balance wrong. So those price increases, I said before, are funding progress and investment. And that investment is to the benefit of everybody. It's making sure that for our customers, things are better. And therefore, also, by definition, that we can provide employment for our colleagues and the prospects both for customers and our colleagues are bright in the future. and we don't run out of road. So that's what we're doing.

Up next is Adam Fox Romley from HSBC. Adam, please.

Thank you very much. Just had a question about the new cost savings, please. You gave us a few bullets of detail in the presentation, but I wanted to ask if those are new plans or whether they're longer term plans that have been brought forward and the extent to which the kind of detail is being fleshed out there. And then on the subject of efficiencies, I just wondered if I could re-ask George's second question about delivering a step down in capex alongside a faster pace of FTTP connections and the balance there, please.

Yeah, the short answer is on the new cost savings. It's in three buckets. So you mentioned two of them. The first bucket you didn't mention is existing activity even harder. New, yes. Anything that was in longer term, trying to bring it forward. So, you know, leaving no stone unturned to reduce unnecessary costs, look for wastage, look for duplication, use technology to automate whatever can be automated to make it lower cost, more efficient, better for customers. So it's the same stuff. It's across organization, procurement systems, technology. I literally want everybody at BT looking at how we spend our money and treating it as though it was their money. So it's a it's a it's a doubling down. We've got a good track record. We know how to do it. We did with the one point seven. Now it needs to be three. We've got to get cracking on that on the step down and capex. Look. No, the decision to go to 5 billion this year is a really good decision, right? But the discipline is still there. We can afford it for the reasons that Simon and I have mentioned on the tax credit, but 4.8 billion is the right number. That doesn't mean that's an easy number, by the way, right? So we have to be very, very disciplined how we spend that capex, but it's a big number. So we will be continuing to drive fiber hard on build and on connections, but there's lower copper capex needed, right? So more discipline across every element of capex just has to be exercised when you're facing into very challenging, difficult economic circumstances. So at the end of the day, let's not forget cost savings improve capex.

The following question comes from Andrew Beale from Aradi. Andrew, please go ahead.

Hi. I've just got a question on cash flow impacts from the BT Sports Discovery JV. I guess we can now see the financial obligations for the minimum guarantee, the 745 gross, a million gross of the tax credit of 186. And then on the other side of the equation, you've obviously got the deferred and contingent consideration, which I guess are largely offsetting. You've got a new revolver for working cap. You've got other working capital settlement. you've got the ANC prefs, you've got a modest benefit on pro forma EBITDA going forwards from the deconsolidation. I'm just wondering if you can set out which of these multiple effects might land in your normalised free cash flow, and alongside that, whether there are any ongoing net cash impacts outside that definition.

I mean, the cutting through that as we move forward, Clearly, the minimum guarantee offset by the revenues we generate from selling those rights flows through the normalized cash flow, as will the distributions that we receive from the JV. And so those will be the two impacts as we go forward. And you'll see those as we go into the second half and into next year. Thank you, Andrew.

The next question comes from Jacob Bluestone from Credit Suisse. Jacob, please go ahead.

Hello. Hi, Jacob. Quick question regarding the cost savings. You mentioned in the press release or press presentation earlier today, you talked about reducing jobs in a controlled manner. I set a question around your absolute headcount levels. They actually went up this quarter or this half year. So you went from about 98,000 employees to 100,000. So if you can maybe just give a little bit of colour, you know, how come your headcount's rising? Thank you.

Yeah, good question, Jacob. Simon can just give you that.

Sure. I mean, the headcount rose slightly in the As you said, there are two things going on. Firstly, you know, we continue to see a step up in our build activity in open reach and we are favoring internal direct labor over subcon. So there's a switch essentially. from subcon into direct labor. But in addition to that, we're also, as a matter of strategy, moving more of our external subcon in our digital environment in-house. And so that's also increasing our own employees, but reducing subcon. Those are probably the two main factors that are at play. And, you know, Typically, we're doing that because from a total labor cost perspective, it leads to a cheaper, better, more efficient outcome and more importantly, more effective delivery. So that's what's driving the court, the direct labor being offset largely by even more significant reductions in subcon and our plans to bring down and deliver the total labor costs, gross savings very firmly on track.

Our next question comes from Paulo Tang from UBS. You may proceed.

Question. Just have a question about CPI indexation. So in Equinox 2, you mentioned that you intend to keep CPI indexation for open reach wholesale pricing, but would there be a ceiling on this? Otherwise, does this not risk communication providers transferring volumes onto competing altnets, given that altnet pricing does not necessarily have the same degree of CPI indexation But also on this topic, you've mentioned that you'll press ahead with CPI plus 3.9% increases in consumer. But is this sustainable given that front book pricing does not seem to have increased? And operators like 3UK have 4.5% absolute price increases built into contracts. And also you have Sky and Virgin Media only having ad hoc increases. Therefore, is there not a risk? that other operators put through much lower increases to take share from BT consumer. Thanks.

The short answer to the last question, of course, there's a risk. I'm on the CPI indexation with an open reach. What I'm trying to say there is whatever happens, there is indexation on open reaches lines like copper and fiber. I'm not going to get drawn into the detail of Equinox 2 because that is a confidential document. Um, and but but we feel really confident. Really confident that that is a very competitive proposition that will help everybody. Our customers, um, and the end consumer get outstanding products and outstanding technology at very good value for money. And from a business case point of view. This makes total sense. So to your core question, which is under both of the open reach and consumer CPI indexation pricing, underneath both of those questions is, can we keep the equilibrium in the right place so that our customers are happy and we keep the customers we want and the answer is we really believe so because we spent years carefully thinking through how each segment is looked after and so i go back to what i said it's really important to understand it we're quite sophisticated in the way in which we think about customer segmentation and it's not as simple as a price change so when you look at the different segments and how we approach them and what we offer them we're really really quite advanced and make sure that's tailored to the circumstances and tailored to the individual in the right way and so far It's worked, I will say to you, of course, if there are massive changes in competitive dynamics. Of course, we'll respond because I've always said to you, we're not losing market share. We haven't lost market share since I've been here and we're not going to start. What I'll also tell you is other people seem to make price increases in a more random fashion. Sometimes. They're not necessarily lower than us, but they're not as transparent as us. So we want to be clear with our customers. This is what you get. This is how your prices are calculated. They know what's happening. We communicate to them and we make sure we're always providing the best value for money we possibly can above and beyond just price.

Gentlemen, we have received a question from Jerry Dulles from Jefferies via email. And the question is, Slide 9 suggested that the broadband market was flat in that open reach is losing actually going to. What gives you the assurance that alternative networks might not be gaining some traction? Thank you.

Yeah, look, the broadband market is not growing. It has done historically. That is true, right? That's to do with the economic backdrop and probably some market pull forward from COVID. So you can see what's happened when the market's growing. You can see what happens to our line. So we are losing less share than we expected. So whilst, you know, I said earlier, you know, there is a lot of build out there. The key thing is connections. I keep saying you've got to think about the connections because building the network once you've got the money and a bit of operational expertise is easy. It's connecting customers that ultimately will make a difference. And that's why we are so concerned and happy with the activity of the 27%, right? 27% connection rate is what's important. And that's what we're focusing on. So when we look at the overall business case, and Simon mentioned it before, the ARPU change, the customer satisfaction change is so important that the investment of the 15 billion pounds never looks more, never look more attractive than it does now.

Thank you. And our final question comes from Stan. Noah from Berstein. Stan, please go ahead.

Hi, Stan.

Can you hear me well? Stan, I can hear you. Okay, cool. Just a clarification. Sorry, I know this was covered in the previous question, but going back to the... the wholesale pricing update for Openreach that is where you would like to have an acceleration of migration to F2TP. Is this acceleration embedded in your assumptions for the 4.8 billion pounds of capex in the coming years? Thank you.

The answer is yes. Yeah, the question, I think we caught it, which was, We are seeking to really drive continued fast take up in Openreach FTTP. And is that delivery on that reflected in the 4.8 billion capex that we guided to its peak and for next year? That's what we heard the question to be. And the answer to that is, yes, it is. You know, we're confident in delivering our capital plan at 4.8. Huge opportunity to improve our capex productivity through our cost transformation efforts, but also rigorous prioritization, which we do as a matter of course, a lot of opportunity to prioritize away from some of the areas of legacy spend. We just take an example on non-fiber capex was down something like 20 to 30% so far in the year. So it just gives you a sense of we're pushing back on non-strategic capex. Hope that helps you, Stan. Thanks for the question.

Thanks, everybody. I think that's the end of our call. Appreciate all your questions and interest in BT. See you soon. Thank you.

Thank you, everyone. That marks the end of your webinar. Thank you for joining and please enjoy the rest of your day. Goodbye.