BT Group plc

Good day and welcome to BT's Q3 results call for the third quarter and the 31st December 2022. My name is Shreya and I'm your host today. During the presentation, your lines will remain on listen only. I would like to advise all parties that this conference is being recorded for replay purposes. And now I'd like to hand over to Mark Lyddiard. Please proceed.

Thanks Freya and welcome everyone. Presenting on today's call is Philip Jansen, Chief Executive and after some prepared comments, 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. 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 examples of the factors that could cause actual results to differ from any forward looking statements can be found on our website. With that on our hand, you're over to Philip.

Thanks, Mark. Good morning, everyone, and thanks for joining. As usual for our third quarter results call, I'll make some prepared comments before Simon and I take your questions. I'll summarise the highlights for the quarter and our business unit results, update you on our FDTP investment, and then briefly cover our cash position. Before diving into the detail of the quarter, I want to confirm that we remain on track to deliver our long term ambition to transform to transform our networks to 5G and to digitize and automate our systems and processes. And to significantly enhance our customer experience through delivery of next generation products and related services. So overall, we made good progress in the quarter and the business performed well, given the current market conditions. Against last year's pro forma results, group revenue was flat, while EBITDA was up 1%. As we said at the half year, normalised free cash flow will be more back ended than last year, and I'll explain why that is and why we are reaffirming our full year outlook shortly. So the pace of operational progress has continued. So a few examples. Our FTTP program is delivering on all fronts. We've built FTTP to a record 810,000 homes in the quarter, while staying within our cost range of 250 to 350 pounds per home passed, which has taken the footprint to 9.6 million premises. Customer demand is extremely strong from both CPs and end customers with orders up a staggering 51% versus last year. And the take up rate has now reached 29% with 324,000 net ads in the quarter, bringing our total FTTP customer base to 2.7 million. So we are building like fury and we are connecting like fury. So staying with Openreach, we announced regulated price increases from this April of 11%, and we're delighted to say a number of major CPs have given statements of intent to sign up to Equinox 2 once Ofcom has concluded its review of this offer. In consumer, we confirmed last month that we will raise prices by 14.4% from April. This uplift is needed to offset cost inflation and pay for our investments. On average for our customers, it equates to only around an extra £1 per week and still represents exceptional value for money. You can see that ARPU has reduced as we've invested to protect the base, with the result that churn to date has remained pretty stable in the face of robust competition. And as I've said many times before, we will not stand by and allow others to take our customers. Despite current cost of living pressures, our confidence in consumers trajectory remains strong. We know that we will be facing a value focused market, but we were prepared for this and we are well equipped to compete in this market. For example, we connected a record number of customers in quarter 3, taking our consumer base to 1.6M. And in mobile, we've extended our award winning 5G coverage to 60% of the UK population. Moving to our B2B divisions, as you know, we'll integrate these as a single unit BT business from quarter one next year. This will enable accelerated transformation and delivery of next generation products and solutions. It will also deliver at least 100M pounds of run rate cost and capex synergies through the streamlining of management teams, support functions, product portfolios and systems by the end of fiscal year 2025. Next, we're very pleased to have reached an agreement with our union partners on a consolidated cost of living payment that started last month for our UK people, paid less than £50,000. That's 85% of our workforce. Now, very importantly, the CW and Prospect have agreed to work with us as we continue to transform and modernize the business. Following the industrial action, operating and service metrics are steadily recovering. And finally, despite today's market volatility, we are reaffirming all our outlook metrics for this year and beyond. So as I said earlier, we remain on track delivering our plan, supporting our customers and our colleagues while underpinning economic growth in the UK and delivering for our shareholders. Now moving to quarter three CFU results, which I'll talk to on a pro forma basis. So assuming the sports JV had been in place last year. While consumer service revenue grew by 2%, overall revenue for the division was flat as the benefit of contractual price changes and the return of roaming was offset by lower handset sales as we see customers holding onto their handsets for longer. EBITDA was up 1% as the revenue flow through and strong cost control was up against a strong prior year comparator. Enterprise revenue was down 3% as legacy product declines and the migration of an MVNO customer were partially offset by continued growth in our SME and SOHO divisions. While conditions clearly remain very challenging, we're pleased to see sequential improvement once again in both enterprise revenue and EBITDA. In global revenue was down 2% as lower equipment sales and prior divestments more than outweighed the benefit of an FX tailwind. EBITDA was flat as cost transformation counteracted the lower revenue. Finally, open reach revenue was up 4% in quarter three as price rises and increased sales of FTP and Ethernet offset the decline in physical lines and lower chargeable repair volumes. EBITDA grew by 6% as revenue flow through and cost control more than outweighed costs from higher levels of FDTP provisioning and pay inflation. I should add that the broadband lines position, which was down 10,000 in quarter three, did see some improvement on recent quarters as reduced market activity and losses from industrial action were counteracted by a seasonally stronger market in quarter three and some catch up in last year's provisioning. Staying with Openreach, I'd like to share a little more detail on the FTTP program. We are still building at a pace of over 3 million premises per annum. But most importantly, as I implied earlier, we have begun to industrialize our connections machine and we're now at 29% take-up overall. However, this does not really give a sense of how take-up has developed over time. So if we were to look at FTTP built just 24 months ago, Nearly 50% of end customers using Openreach's broadband network have made the switch to FTTP, supporting higher ARPUs, delivering better end customer satisfaction and lowering operating costs. Equinox 2 is designed to accelerate this take-up even further. Before closing, I want to spend a little bit of time taking you through our outlook, which, as I said, is unchanged. Maintaining our EBITDA outlook of 7.9 billion set 2 years ago has meant we have had to deliver an additional 700 million of EBITDA this year. 300 million is a step up from last year's 7.6 billion. Then unforeseen headwinds just from high energy price and pay inflation added around 300 million to costs. Whilst I'm sure you'll recall, we have also had to deal with the migration of a large MVNO customer. So, to achieve that sort of 700M swing, we have delivered on cost transformation together with the implementation of price indexation and solid trading in many areas of the business. The plans we are actually executing set the business up for consistent and predictable growth in the future. Of course, we also need to convert that EBITDA to cash. As I said earlier, BT is structurally skewed to deliver much more cash in the second half compared with the first half. This year, our normal phasing has been further accentuated into quarter four by two factors. 1st, very significant capital consumption in the 1st, 9 months of the year as open reach accelerated its build, including considerable work in progress. As we mentioned last quarter and accelerated take up of resulting in over 650Million pounds worth of more cash this year today versus last year. We will unwind some of our work in progress, giving us a unit bill cost tailwind and therefore lower our cash capex in quarter four. The second factor is on phasing a more back ended EBITDA and receivables delivery than usual, primarily from our B2B units. So to wrap up, Openreach has built a record number of premises, but more importantly, connected a record number of end customers. As a result, FTTP take up has continued to increase and is now at 29%. We expect this to accelerate further in quarter four. And again, once Ofcom's review of Equinox 2 is completed. Consumer has connected a record number of customers to FDTP and can now reach 60% of the UK population with 5G. Its transparent pricing mechanic will help offset the considerable cost pressures in the business and allow us to continue to invest to deliver the quality of service and value for money our customers have come to expect from BT. Enterprise and global have delivered a more stable quarter overall and while the market is still tough. I'm convinced that the combined BT business can complete the job of transformation that is already underway in both divisions. So, overall BT is delivering to plan and we are on track to achieve our long term ambition. And with that, I would now like to open up to questions as usual. Can I please ask you just to stick to 1 question operator? Could we please open up the lines?

Everyone, your question and answer session will begin now. 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 your question, please click on the hand icon again. Once it is your turn to ask a question, we will unmute you. Please limit your questions to one per person. Thank you. Our first question is coming from Adam Fox Romley from HSBC. I am now unmuting you. Please go ahead.

i would uh like to ask briefly about pricing please um and your engagement with ofcom uh around the recent price changes or the announced price changes where they're most interested if there are any tensions and and also i suppose the reflections on their investigation into you being sufficiently upfront in contract terms with your customers thank you very much yeah i mean look

Obviously, we are engaged in conversations with Ofcom on multiple fronts all the time. It's a really important relationship, given what's happening in our business and in the industry at large. One of the key elements is clearly pricing. There are two parts to that. There is the regulated pricing through Openreach, and then there's the retail pricing part for our consumer businesses. I think on the regulated part, You know, everybody understands that the had a very clear indexation, a mechanic to it. That's been absolutely necessary to help fund some of these investments that we're making. And you can see that in our description of how we've. Put our foot down on the on the gas here in terms of building 9.6M homes, but also preparing the pathway to the next 6M as we described that the sort of. Network work in progress activity we announced last quarter. So I think. I hope that the regulator recognizes that, you know. The indexation that's inherent in is designed to fund. This kind of aggressive expansion, which we are absolutely delivering so that. you know, the FDTP initiative is now a runaway train, both in terms of bill, but also now in connections. And that's what really matters, by the way, is that customers get connections to this new fantastic network. And I hope that they're encouraged by that. Without the CPI, that's obviously much harder to do. So I think that's a long-term regulatory settlement, as you know. So on the one hand, no one likes seeing prices go up significantly. No one's happy with the inflationary environment, but it is what it is. And the that the cpi mechanic is there for a reason because it's to insulate us against massive increase in cost which of course we're seeing by definition so that's the regulator part on the other part which is that the cpi plus 3.9 which we're putting through as we speak almost again the real challenge there and i think it's a fair challenge by the way is Have we been transparent and clear with our customers what the pricing mechanic is? And obviously we feel we have, and we'll do whatever we can to make sure that is the case. So I think it's fair to investigate and make sure we're doing everything we possibly can. Um, you know, we, we research and talk to our customers all the time. Clearly, we've got millions of minutes of customers calling us every month. So I think it's fair to say people understand it. Do people appreciate and like a big price increase? No. But again, you've got to go back to it. This is the thing with with off commerce, which they do understand. I, I believe. The value for money of what we offer both in broadband and mobile is truly exceptional. It's less than a pound a day to get unbelievable service and it's unlimited usage. Let's not forget that. It's not gas. It's not electricity. It's not a meter. So people can camp at home and spend all their time on our network using as much data as they want for a pound a day. And therefore, percentage wise, these look like big increases, but it's a pound a week extra on this price increase on average for our customers. So if you put that in the context of the overall household bill, the relative importance of what we do and compare it to other things, that's why all our research tells us, although no one you know, celebrates a big price increase, they understand why we're doing it. Adam, I hope that's okay. We're going to move to the next question.

The next question is coming from Maurice Patrick from Barclays. Please proceed, you're unmuted now.

Yeah, thanks, guys. Hopefully you can hear me okay. We can hear you, Maurice. Hi there. Good to know. Thank you. Morning, guys. Yes. Um, so I guess, um, just a quick question on open reach momentum, please. I mean, you've seen stories in the press today around city fiber cutting 20% of their staff. Your own broadband numbers inside open reach improved significantly. I know you blamed the strike action on the negative number last quarter. Just curious to see from your side of your view on the relative growth in the broadband markets changing, if you're seeing any impact from alt net build actually taking market share away from you at all. I think you indicated before you thought the market was broadly stable in the last couple of quarters. Has the market picked up this quarter? General views in terms of market dynamic, how Openreach is doing and market share losses. Thank you.

Yeah, I mean, I'll make a comment and then Simon can chip in. Yeah, again, stepping back, you know, overreach has well in excess of 20Million broadband lines effectively. Right? So, so, um, we've always said over the longer term, we think our broadband base is going to be broadly flat. And, um, we see a few losses, obviously, as you, as you reference to certain other players, but that's offset by by sort of market growth and other factors, particularly new. New bill, particularly right? So, at the moment, we've had a double whammy if you like in the year, because we've seen. The market for new homes come down and we've seen a pull forward of people in taking more broadband. They would have otherwise done. So, and you've also got this 3rd factor, I guess, which is people being a little bit more cautious and there is some evidence of. A few people taking mobile only, but it's in the noise and so I wouldn't get carried away on any 1 quarter. What we're looking at here is, you know, we're very confident that we can keep the thing roughly flat in the medium to long term given what I just said. And I sort of point to what's happening with our base. The base is enjoying a good migration from copper to fiber and the. Is up 7% with satisfaction levels, obviously heading the right direction. So stable base. Each quarter, you know, we'll bump around a little bit. We benefited in this quarter from the fact that students came back. Yes, we're unwinding a bit of the strike action that obviously hurt us. But again, I need to look at this over across multiple years and we think it's going to be broadly flat.

but we need the market to come back and new homes to to start being built again and that's not going to happen anytime soon simon anything to add to that i think the key point is that that open reach is investing at you know massive pace scale in building ftp and end customers and cps are really advantage. And the small movements in broadband base, as Philip said, are more about homes and broadband market overall. We're not seeing any change in sort of competitive loss, very much in line with what we'd expected.

I hope that's okay. Just to reiterate, what we're looking at is the mix, which is really good, and the RP, which is really good, and the bouncing around in any one quarter, we don't get too worried about as long as there's no mega trend, and we watch it very, very carefully, but do expect it to be a soft market for the foreseeable future, right, as the economy continues to be under great stress. Given that situation, we feel very credible performance to be doing those kind of KPI performances I've just read out. Next question, please.

The next question is coming from Nick Delfaz from Redburn. Nick, I'm now unmuting you. Please go ahead.

Hi, Nick.

You're going to put the prices up.

Nick, sorry. Nick, we're going to have to start your question again. I think we just missed the mute button. Can you start again?

Yes. Can you hear me now?

Yes, loud and clear.

Just a quick question on price structure. So obviously you're intending to raise prices and we understand why that is from a market perspective. And as you say, from value for money perspective, but how does this work while you're trying to keep the base stable in terms of the loyalty penalty discounts and all the other things that you have to comply with? So, in other words, if you raise price on existing customers, how does that impact your ability to be aggressive in the front book market? Thanks.

Yeah, great question. I mean, first of all, I would just step back a little bit and let's make sure we understand what's happening. If you look at our drop through, what we're saying here is we put our prices up by CPI plus 3.9%. And in the end, in the end, we think the net drop through after everything of cost increases and recalibrating what we're offering our customers through the year is a drop through between 30 and 50%. In this year, we think we're going to be a bit close to the upper end of the range. For next year, we'll probably be at the lower end of the range because the number's much higher, obviously. And what actually happens is the prices are completely transparent. It's in the contract. They all go up in April. And so you'll see next year, exactly see what you see this year, which is quarter on quarter, you'll see a slight degradation that just goes down over the course of the year as customers ring up and come onto new contracts, A, And B, we deal with some things you're talking about, because what we don't want to do is create lots of anomalies in our customer base. So we've got a machine that Mark runs, which manages that place, which is to keep everything in equilibrium. I've talked about this for four years, and it really is high customer service, strong NPS, great value for money, low churn. And if you look at our KPIs, All of those things are happening and the revenue is going to go. Obviously, you've got handset sales, which are obviously offsetting a little bit, but you're going to see increased revenue and you're going to be dropped through in the EBITDA line. And that's going to happen this year and it's going to happen next year. The only thing I'd say to you is just to bring it a bit more to life, Nick is. We've always said we're not in the business of losing customers. So, so we will compete really heavily to maintain our market share. But the mechanic of the price increase is done. And it's then as people ring up, remember, they average have a 2 year contract as they ring up. We discuss with them. What's the best package for them? And of course, we've got. much more in our locker now with FTP and 5G and combining things together and bundling higher speeds and a whole host of other factors and features into mobile. So overall, what we look at is customer lifetime value, and I can reassure you, you've got to see this in our KPIs. We're making sure we've got the right share of the right customers who will stay for us as long as possible. Okay, next question.

The next question is coming from Garagus Lerodiakounou from Citi. Garagus, I'm unmuting you now. Please feel free to speak.

Yes, good morning and thank you for taking my question. It's actually on the guidance for the full year and specifically on EBITDA. Looking at the run rate implied for the fourth quarter, it does imply an acceleration in EBITDA. And I'm just trying to understand, you do have some headwinds. as you mentioned from customers optimizing during the course of the year. You also have some higher labor costs perhaps coming in the fourth quarter. So I just wanted to get a bit more understanding as to what can drive this acceleration. And perhaps I'll follow Maurice's example in asking a bit more than a question. If you can also give us a bit of clarity on energy, not just for the fourth quarter, but how you're thinking about it into next year. Thank you.

Yeah, sure. Good questions. Simon can give you the answer to those.

Yeah, so, firstly on Q4, I mean, we've reaffirmed the outlook for EBITDA and we are going to see continued strong trading momentum in consumer and open reach that you've seen during the year benefiting from the continued strength of But, you know, the, the pricing, um, but do remember, you know, yes, there's been some a pay award, but we continue to drive our cost transformation hard. And that simply ramps up through the course of the year. Um, so you'll see continued strong trading from consumer open reach. And also, as we generally see in Q4, you know, our B2B units typically deliver a stronger Q4 than the first three quarters. And of course, that will be further, you know, characterized this year because the Virgin MVNO, of course, dropped out Q4 last year. So we don't have that same quarterly comparator headwind. Um, that's on, um, on, uh, on the reaffirming the, the outlook, um, continued training momentum in consumer, a bit of a step up and a big drive on on the continued, uh, cost transformation on energy. Um, for this year, um, we, you know, largely hedged. We've also had the benefits of the. Um, energy, uh, scheme from the government. So I think not an awful lot more to say on that for this year. For next year, we're following our policy, which is we progressively look to hedge demand. We've made good progress in hedging next year's energy position through a combination of our purchasing agreements and market purchases. As you know, power prices have been somewhat weaker and there's been some growing liquidity. So we're ramping up the hedges for this year. Clearly, we've still got some exposed position and we're still exposed to sort of volatility energy prices. We'll update you at Q4 when we'll have the hedge book finished for the year.

Thanks.

The next question is coming from Andrew Lee from Goldman Sachs. Andrew, I'm unmuting you now. Please go ahead.

Hi, Andrew. I just had a follow-up to Nick's question, Philip, in your comments, a helpful range of drop-throughs that you anticipate and see from your price rise in consumer of 30% to 50%. You touched on it, but I just wonder if I could dig in a bit more on one of the key inputs into that drop-through, which is clearly competition. Could you just give us an update? It looked like competition had picked up a bit this quarter, and people have been trying to work out what your consumer broadband net ads were in the quarter. They looked a bit weaker, but I think there's – there's some issues with rounding there anyway if you could just give us an update on the degree of competition you're seeing and and and both in q3 and in the run rate into q4 and how you've been able to maintain customers through that um increasing competition if there was one thank you yeah thanks andrew um yeah look look you're right it is a very competitive market um but we're competing really well in it and again we monitor

many, many elements of Some of the things that we report on, so obviously at the macro level, you can see the churn, right? So. We kept turning consistent levels, um, despite a more competitive market and yes, we are reinvesting. To keep our customers, and that's what you see is that our through the, the quarters comes down. Um, but again, it's going to take a big step up. But the thing is, it's going to take a big step out by everybody. And that's the thing is, you know, obviously we, we announced our pricing. Mechanic a long time ago, everybody has to put their price up for the reasons that are obvious. Right? So, given what I said earlier, so I think there's a level playing field from that point of view. Um, and I think there's a general understanding that that. A more stable market is better for everybody and I'm seeing that, you know, in terms of the, the, the churn is low for for most people. So, in our, as we look forward, the reason I said, we expect it to be at the. The lower end is a, the pricing is higher and B, we think the competitive intensity is higher. So, um, and also there are a bunch of people here. Who don't get price increase and we've got the social tariff. We got, you know, a landline only. So it's a blend of things. And also on the drop through clearly the costs. That consumer experiencing, you know, by definition of going up, not least of all, they get the, the outreach costs that that everybody else gets as well. So. Very competitive market. I think we got a handle on it. I mean, we're very well prepared and 1 of the great things that the consumer division do is get organized and plan for how to manage the customers. With a lot of science, a lot of data and a lot of understanding of which. things to offer which customers and why and when. And that formula is proven to deliver this year. We're on our targets and I think we'll deliver the same next year. Notwithstanding, it's going to be a very competitive market, of course.

Our next question is coming from Polo Tang from UBS. Polo, I'm unmuting you now. Please go ahead.

Yeah, thanks for taking the question. It's just about consumer fixed service revenues, because they've seen a notable slowdown quarter on quarter, despite the benefit of the 9.3% price rise. So if I look at the numbers over the past three quarters, consumer fixed service revenues were plus 6% and plus 4%, and then the recent quarter is plus 1%. So can you comment on what is driving the slowdown and give some colour in terms of both NERADs and ARPUs, and how should we think about consumer fixed service revenue growth into Q4? Thanks. Do you want to have a go at that?

Yeah, Paolo, as I think we've already mentioned through the year, the price rise goes, and I think Philip touched on this, two dimensions. Firstly, ARPU, as we've said, we put through the price increases on the 1st of April. During the course of the year, we engage with our customers. We ensure that as they come up for renewal, they've got the best offer for them. and that does include some ARPU reduction or indeed putting more benefits into their package and therefore during the course of the year as you can see we get some quarter by quarter attenuation of the ARPU and that flows obviously through to the The broadband base is overall broadly flat, down a touch, but really very modest. It's mainly a drop through some attenuation of ARPU. And of course, as we get into the 1st of April next year, we'll put through the price increase and we'll continue then on the same pattern of working with our customers to get them on the best package, retain them, but seeing some attenuation through the year. So it's really just what you're seeing in the fixed revenue is exactly the pattern that Philip described. Right.

It's going to happen again next year. I mean, you're going to see a step up from quarter four to quarter one. As the price increases go through, you're going to see quite a big step. If you look back, you'll see it happened last year. Quarter four to quarter one goes up quite considerably. And then each quarter it will come down. And that's because people are joining on new contracts. And what we're trying to do is make sure that we don't have any big extremes. So, of course, we're dealing with the dynamically with the whole customer base. So if you're the very, very top end paying a super premium, and there are some people like that, obviously, when they come to reconnect, we do a better deal for them. That is how the market works. And in totality, it ends with a drop through of somewhere between 30 and 50% in the consumer EBITDA. And that's the most important thing. As long as we're looking after our customers and they see good value for money, we keep churn low and maintain our broadband base in the way that we described. Simon, you want to say something?

I just did say, just to finish, but there's a couple of other factors. I mean, I think Philip mentioned one of them. One is that we are seeking to engage with customers who are vulnerable customers to ensure that they have access to the Home Essentials product that has a little bit of a bearing. And then we're also seeing some small reduction in our SOLUS voice customers as we really try to drive to all IP to enable the PSTN closure. These are not really not material in the grand scheme of consumer, let alone BT, but they have a small impact quarter on quarter. Thanks. Thanks, Paolo.

The next question is coming from Jacob Bluestone, calling from Credit Suisse. Jacob, I'm now unmuting you. Please go ahead.

I just want to follow up on Morse's question around open reach. Last quarter, you kindly gave some breakdown of what was the impact of strikes. And as you mentioned, the underlying performance is sort of stable. Just to help us understand what that underlying performance is, can you Break down what was the impact of this quarter strikes and also what was the impact of any catch up from the Q2 strikes just so we can sort of back out. I guess the organic trend in broadband ads and open reach. Thank you.

Simon, do you want to? Do you want to give them that?

Yeah, sure. No, I mean, overall, um, you know, the open reach lines quarter on quarter. So I'm talking about broadband lines here. Um, but down about 10 K, um, we estimate, um, that the, um. Impact of industrial action through essentially orders being placed and then delayed in being conversed converted was something like 20,000. um strip those out clearly the the lines would have been up about 10k in the quarter um the the specific dynamics for that um firstly um for the for the overall dynamic firstly um some continued um you know, turn to competitors. We'd always expected that. I think, as I said earlier, in truth, that driver is possibly somewhat lower than our expectation. I think a reflection of, you know, the great progress Openreach is making in rolling out fibre and migrating its customers. We've had, that has been offset by still a relatively subdued new house market, which Openreach gets the majority it's to q1 and q2 is we saw the normal q3 seasonal uptick in the broadband market um generally associated with school university returns um you know people moving on and setting up their own home so that that gave us a bit of a boost um in q3 relative to uh first two quarters hope that helps you um it's really a it's a continuation of of what we've seen in the year with a with a more buoyant market in q3 mobile and seasonal market. Thanks, Jacob.

The next question is coming from the line of Sam McHugh from BNPP Exane. Sam, I'm going to unmute you now. Please go ahead.

Hi, Sam. So just first, where do you think working capital should be falling out this year? And then looking into next year, you obviously have the sports JV where you've got that 700 million provision that will be unwound, I think, through working capital. Giving you a bit of a non cash boost, but consensus only has minus 50Million of working capital next year. Can you just maybe talk us through where your expectations are and what the moving parts are on working capital? Thanks very much.

So we got, we got, I guess, most of the last bit. We didn't hear the intro. Can you just repeat it for me?

I'm sorry. Terrible headphones. Um, I should upgrade them. It was just a working capital kind of what the moving parts are for next year. Really? I see consensus around minus 50Million. I think you have quite a drag from the sports JV, which is being unwound through working capital. So, just what the moving parts are on working cap for next year.

Okay, so, okay.

Yeah, I mean, the, um. The, the, well, sorry, the shape of working capital for next year. Um, we don't expect to be, um, really materially different from this year. Um, it's always a seasonally skewed phasing. So we always have a negative. Um, working capital outflow in the 1st. um nine months followed by a very strong inflow in the fourth quarter that's the pattern we're seeing this year um and we expect that pattern uh next year uh yes you are right that um the uh sports jv has a working capital um impact um which will slightly um you know uh increase the word capital network deterrent, the net working capital position for next year, but it's offset in EBITDA. And so I don't think it's a major factor on the overall cash profile year on year, Sam. Thanks.

The next question is coming from James Ratzer from New Street. James, I'm going to unmute you now. Please go ahead.

Morning Philip and Simon, can you hear me? We can hear you well, James. Morning. Great. Yes, thank you. I was actually going to ask a very similar question to Sam. So, if possible, I'll try and ask it in a slightly different way, which I think consensus for next year is looking for around 1.1Billion pounds of free cash flow. Given, you know, what might happen with working capital, maybe with interest with tax. So, some of these below the line items. Do you think that kind of level is a sensible level for consensus to be at at the moment? Thank you.

Thanks for the question. I mean, we're, we're comfortable with, um, you know, consensus, um, beyond, uh, this year. Um, obviously, we'll give you the normal update in May and talk you through all the different moving parts.

Our next question is coming from Robert Grindle from Deutsche Bank. Robert, I'm going to unmute you now. Please proceed.

Thank you. Can you hear me okay? Hi, Robert. Hi there. So just a point of clarification on energy costs. Is that a pass-through for Openreach to the ISPs so BT is only really exposed to the bit that BT customer-facing business is? And, uh, actually, my question is, uh, I saw the code power applications by the have been slowing and I wondered whether you're seeing that in the demand to pass this infrastructure requests or those still accelerating for now.

On the 1st question, I mean, yes, um, where, um, are using the open region for structure and drawing power. Yes, they, um, pay for the cost of the power they consume at the, uh, price it, you know, that it took us to procure it. Um. I think in terms of the your 2nd question, um, you know, we're not seeing any particular change in, um, you know, the, the request for passive infrastructure. It's in line really with what we'd expected and reflects. A progressive build plans by, although, as we have seen typically. The plan and ambition is rather higher than what we actually see on the ground.

The next question is coming from David Wright from BOFA. David, I'm going to unmute your line now. Please proceed.

Good morning, gentlemen. Can you hear me okay? Hi, David. Okay. Hello. Yeah, thanks for taking my question. I guess it's just back to the drop through, the price drop through discussion. I think my colleagues before have pretty well covered the sort of dynamic and how we should expect revenues to evolve. But I guess my question is a little bit more theoretical. That's quite a poor rate if you're down towards the 30% or so levels next year versus the perhaps negative sort of headline perceptions, both from a regulatory and a political perspective, the Daily Mail, et cetera. Why do you think there's almost a discussion to be had around price elasticity here, which is you could actually lower the price rise on the headline price rise, but you could actually deliver broadly the same result. I'm just wondering because, you know, to announce 14.4% and only really monetize four, feels like um you know i i guess a poor result i might be sort of wording that badly but do you feel like there's something missing here and i know you uh feel it very uh in my view accurately describe the value that it brings but perhaps that message is just still not getting through to the customer so i'm just interested in your thoughts a little bit more theoretical

no i think it's a really interesting point um one thing i think maybe you're not forgetting maybe you're not acknowledging it to me is the drop through is affected by uh you know yes anything we change with our customers on pricing but don't forget the massive cost increase that we're experiencing so so you've got to remember there's there's there's you know we feel inflation as we've said on multiple fronts our pay bill is you know close to six billion pounds So, you've got to recognize that there are cost pressures energy Simon's talked about across the board. Everything is going up. So. That part, you've got to remember when you look at the drop through, I think it's a good point on the theoretical point. There is a. There is definitely a perception that prices are going up by 14.4% and they just stick there and everyone gets it and they get compounding of another big price increase the following year. That's not how the market works. And that's what we're saying to you is, and actually, we've got a mechanic, which we think is. Absolutely transparent and it gives you a. Predictable outcome, but you also know the timing of it and I think there's a virtue of the predictable contracts, right? So we can actually plan for it, manage it as opposed to being random. So, actually, the mechanic we think actually works, I can understand from a mathematics point. If you're just looking at a spreadsheet. You think yourself, hang on a minute, your revenue should go by 14.4. what are you giving it all away for? the whole point about it being a competitive market it is and we set ourselves out to compete well um but notwithstanding the point that prices need to go up on average overall and they are and this is the second year we're doing a significant price increase and we think and that's the argument with ofcom by the way which is why we think we'll be fine in the end if the drop through is only 30 maybe a bit more this year and all that ends up going to cash capex And we spend so much on the network to invest in the future. That's sort of the message, which is why we're getting support. I think from from the, the main stakeholders, both the government and to keep going down the path. We are notwithstanding checking that we're being totally transparent with customers on on pricing mechanic. That's how we think about it. Um, but I understand what you're getting at, because we get a lot of negative publicity. on the price increases, when in reality, over the course of the year, prices average out below that because people are on two-year contracts. And when they re-contract with us, we give them the best deal we can.

The next question is coming from Carl Murdoch-Smith from Berenberg. Carl, I'm going to unmute you now. Please proceed.

Listen to lots of questions on consumer and open reach. So I'm feeling a little bit sorry for enterprise. So I'll ask 1 of that if that's okay. I was wondering if you could just comment on the competitive dynamics in enterprise. Obviously, we've seen retail broadband line loss. Um, in enterprise this quarter, the worst it's been for several years. So, if you could talk about competitive dynamics there, and also the, the logic of the merger between enterprise and global to create BT business, the synergies there and kind of what, why now? Why does it make sense to do it now? Thank you.

Yeah, sure. I mean, you know, on enterprise, you know, there's some encouraging signs on on as you saw, um. And, you know, mobile's modestly up, so there are some positive signs, I think, in the other part of the last contracted base, which we've always talked about continues to be softer than we rely. Um, and that remains challenging. So to your point about, um. Why, why now? We had a lot of change going on in both divisions and. We wanted to sort of get the, the bulk of that done that was independent to each place. And that's what we've been doing over the last couple of years. So I think they are very much stabilizing the way they operate. So we've got, you know, people in certain places doing the right stuff. I think this is the right time now to look at it as 1 entity. And so it's. it's partly to deliver the cost savings but the timing is about being able to get those cost savings without turning the businesses upside down so it's a lot of change i mean they've changed a lot if you look at global we've divested 30 plus entities over the last few years that business you probably see it's firming a bit stabilizing and the return on capital is you know much better than it ever was so It's stabilized, so host me mobile in good shape. The large contract business and corporate public sector is under pressure in the UK. And that can benefit from some of the thinking in global and vice versa. So, we've got a really good group of people in, in, in there in the, in the corporate public sector. Working with bars. He's working through a new plan. I think he comes out of global originally. So there's lots of good reasons why now is a good time. So we've got the right management in the right place at the right time to get the synergies. But as important as the 100 million synergies is to make sure that the products and the services that we're offering those customers are fit for purpose in the new world of cloud and multi-cloud, secure multi-cloud, software defined networks. no voice over IP, all those newer areas, many of which are growing quite nicely. But you seem to get more of that kind of stuff and see the back of some of the legacy voice declines, you know, well, so that's a good plan. It's tough market. And Baz is getting himself in the right place.

We have a question from Terence Sui from Morgan Stanley asking cash flow expectations for Q4. Is BT already seeing signs so far this quarter that cash flow is picking up materially and can you share any anecdotes?

Yeah, I mean, look, obviously that there are 3, sort of 3 main elements. Um. On, you know, CapEx run, right? You know, and obviously receive it. I'll let Simon just give you his perspective on that. Because, yeah, of course, some of the indicators are need to be in the right place at this stage. And they are so Simon, do you want to just. Give you a view on that.

Yeah, no, I mean, I think, uh, probably touched on it earlier, but, but the key for, um, cash flow, um, you know, delivered through 3 primary things, but obviously. Will step up, um, further and to underpin the 7.9Billion outlook. We took a question line up it earlier. very much in line with our expectations. Second, very importantly, cash capex will drop significantly compared to the first nine months of the year. It'll be probably lower than Q4 last year when you recall we actually had a big capex step up. Philip explained the reason for this. It's that we moved extremely fast in FTT build in open reach in the first nine months. We built significant WIP. And we've completed 9.6M premises, but we've actually started work on probably another six. So we'll unwind that with lower unit cost. And see much lower cash capex and the exit rate. Of December on the cash capex run rate was where we needed to be to deliver on the, on the, on the Q4 outlook. So that's the 2nd cash capex. On, um, on the 3rd, um, which is the, um, working capital inflow as it always does in the queue in queue for, um, moving to an inflow principally driven by timing of of collections and receivables. Um, and again, you know, the teams sales and collections. They got clear line of sight, they got the clear plans and indeed the collection rate again as we exited December in our B2B units was pretty much where we needed it to be. Of course, you know, there's not just BT involved in this, it's customers as well. And so there's lots of work to do in Q4 that we're very firmly focused on that.

Just as it's related, back up one on cash flow. Just to repeat, I'm sure you've all got it, but we haven't had a question about it, but I'm going to say it anyway. This cash capex that we spent of 660 million more in the nine months compared to the previous year, that is strategically very important. We've explained what's happened on the build and the connection rate. To connect 300,000 customers in the quarter, to build 810,000 and to prime the pump for 15 million households using a lot of third party contractor labor and our own to get ourselves strategically positioned in the right place so we can put our foot down on the connections next year is probably the most important thing that we've talked about today. Haven't got a question on it, because I guess you've all understood it. But that's what the decision we took is to, and it's a tough decision, put our foot down on build and connections in the face of an economic storm I'm really happy with the outcome. 29% take up, building like Fury, connecting like Fury. Any questions left, Mark?

Yeah, I think, Trey, a couple more.

We do have a few more questions. The next question is coming from Akhil Datani from JP Morgan. Akhil, I'm unmuting you now. Please go ahead.

Hi, Akhil.

Can you hear me? I can hear you now, yeah. Great. I've got a question. You mentioned at the start of the call that if you look at the early cohorts of fiber that you rolled out, you're now at 50 percent penetration rates, obviously in a very good take up rate. I wondered if you could give us a little more color on what you're seeing around trends and economics around that. And I guess the things I'm interested in are if. There are interesting changes around market shares you're seeing. I mean, I presume quite a bit of this build is in Virgin Media footprint area. So obviously it'd be interesting where you're under-penetrated, how that's impacting. And then similarly, any sort of comments you can give around wholesale and retail ARPU trends in that footprint area, just so that as we think about as your fibre build progresses, how that can impact economics.

Okay, that's a great question. The answer is, yes, we've got lots of encouraging underlying indicators on that. 50% is a key number. Anything built 2 years ago to have half. Of them on is a very significant number and you've already put your finger on the button here in terms of what it means to a market share point of view. And we've got it by different slices of places in the country. uh including um rural areas cities towns highly urbanized very densely populated every slice you can imagine we can see it so i think we'll probably provide a bit more info maybe in may as to what those things might mean so when we finish our full year we'll come out with a full build number you know hopefully an accelerator connection rate and a sort of might well do a bit of a deep dive on your question because you can There's some leading, I've given you the sense of the build and the connection rate of macro sense. I've laid the breadcrumbs of 50% where we built it 2 years ago. You can imagine there's a whole host of things hanging off the back of that and I'll give you 1 other copper recovery. So, in places where we are a long way down the path, we're beginning to work at how we get the copper out of the ground, which, as we all know, is potentially worth. Quite a lot, so so I can't do it now for your kill, but we will try and lay out a bit more of. Why the build and that I talk about the fighter runaway trade. It's a runaway trade now. Why is that? It's because of all these indicators I've shown today and a few more that are underneath the 50% number that you've rightly picked up on. Sorry, I can't give you more today, but wait until May.

The next question is coming from Nick Lyle from SockGen. Nick, I'm going to unmute you now. Please go ahead.

You can hear me?

Yeah, I can hear you, Nick.

Great. It was just a couple of questions about enterprise, if that's OK. The enterprise trends at the EBITDA level looked quite a bit better. this quarter was there anything lumpy in terms of savings that came in or is that just underlying business improving and I mean obviously x any contract implications or you know including the MVNOs and the second thing was you know we've talked a lot about price rises at open reach and at consumer, but enterprise faces a big corporate tax rise, as in its customers face a big corporate tax rise from 1st of April instead. So what are they thinking about the outlook into a 1st of April corporate tax rise? And should we just assume that enterprise just keeps on getting worse for the time being? Thanks.

Yeah, Nick, thanks. Look, the answer is, there's nothing significant 1 offering. So, yeah, things are stabilizing. But it's still much more to do, right? Because you're right. It's a tough market. Um, and and obviously, you know, these businesses more than likely are going to be. You know, under more pressure in the, in the coming 12 months. By the way, I would say in terms of, you know. Sort of failures and lack of funds, but that's not a problem for us. Right? We monitor that really carefully. So what we're doing, as you can imagine is working really hard with all our. Large medium and small customers to make sure we're giving them the best. Possible propositions we, we, we possibly can. So, um, and actually, unfortunately, as ever, the price increases are going through right now. So you can see that in. So, you can see it, you can see it in mobile as well a little bit. So, um. The tax rise is going to affect people. They are going to have to be careful. And we're working with them to make sure we deliver the goods as best we possibly can.

Okay, Shreya, I think we've got time for one more question. So if we have the last question, please.

The last question is coming from Andrew Bale from R8 Research. Andrew, I am now going to unmute you. Please go ahead.

Plus one more question on the 30 to 50% net drop through instead of about CapEx. I just wondered if the coming EE brand focus on new convergence and connectivity products gives you some more perhaps, you know, more for more type angles beyond the renewal discounts that might help deal with the 14.4% price increase, or whether you think that the cost of living issues for consumers sort of trump everything. So... You know, you still only end up at 30%, just any thoughts on, you know, what, what you might be able to do with a new brand.

Andrew, I got sorry, it's a great question again. The answer is short answer is yes, I mean, it won't be immediate. But the stuff that's being done sort of. Under the surface from a technology point of view, which I sort of inferred earlier. allows us to be able to be much more nimble with our customers so that the new ee that you're going to see has underneath it a a flexible dynamic it capability which will allow us to do much more on the conversion you can see on our convergence we sort of you know it's been steady we haven't grown that enough we are selling bundling things together in on mobile and we're bundling more on broadband we're not putting it together as much as we would like so and there are lots of reasons for that but the unlocker is the technology so you're dead right it's really really important i think in the next 12 months it's going to be a tough market to be very competitive and some of the technology will arrive in the year but it's phased over the year so i wouldn't expect that to help us much in the year but it will help us in year two three and four unquestionably so thank andrew thank you thanks everybody for joining appreciate your interest and questions as ever and look forward to seeing you all soon

Thank you everyone. That marks the end of your webinar. Thank you for joining and have a nice day.