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?