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?