BT Group plc (BTA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I'm your Chairman, Jan du Plessis. On 8th of June, in our notice of meeting for the AGM 2020, we announced that due to the current U.K. government restrictions on public gatherings and to protect the health and wellbeing of our shareholders, employees and the wider communities in which we operate, this year's AGM will be held as a closed meeting. Unfortunately, this has meant we're not able to welcome shareholders to attend the AGM in person. Further to the enactment of the Corporate Insolvency and Governance Act 2020, shareholders were duly advised through our website on 7th July that our 2020 AGM would be a fully virtual meeting held by phone without anyone attending in person, with only the limited number of required directors and personnel joining to ensure that a quorum is present and to conduct the formal business of the AGM. The Board and I appreciate your understanding in these difficult times. The AGM is a really important mechanism for us to hear from our shareholders. That's why we invited shareholders to submit any questions in advance of the AGM. And I would like to thank those shareholders who did so. As set out in our Notice of Meeting 2020, a recording and transcript of the answers to shareholders' questions have been made available on our website today, and will be there for a period of 30 days after the AGM. Also, to allow you to hear from both your Chief Executive, Philip Jansen, and me, we have recorded video messages, which are also available on our website for you to watch in your own time. Moving to the formal business of the AGM. With me on today's call are Philip Jansen, BT Group Chief Executive; Sabine Chalmers, Group General Counsel; and Pritti Patel, Interim General Counsel Company Secretarial. I can, therefore, confirm that we have a quorum present, and the 2020 BT AGM has been duly convened. Today, I'm proposing 29 resolutions, the details of which are set out in the notice of meeting 2020 published on 8th of June. As usual, I will take the notice of meeting as read. Resolutions 19 to 22 and Resolution 29 are special resolutions requiring a majority of at least 75% of the votes cast to be in favor. All other resolutions are ordinary resolutions. Voting on all resolutions will be by way of a poll. Our share registrars, Equiniti, will act as scrutineers. I can confirm that as of the proxy voting deadline at 11 a.m., on Tuesday, 14 July, we had received proxy voting instructions in respect of just over 64% of BT's total voting rights. I can confirm that based on the votes cast at the proxy voting deadline, all of the 29 proposed resolutions received significant support in their favor. We will announce the final results of the poll by way of a Stock Exchange announcement, and also publish them on BT's website later today. A recording and transcript of this meeting will also be available on our website for a period of 30 days after today. The future of this great business depends on our ability to drive change so that we are ready and fit to take opportunities as they arise. It also depends on your continued support. I would like to acknowledge the responsibility you have bestowed upon us, and take this opportunity to thank you for that support. Finally, I would like to thank everyone involved in the planning and delivery of our AGM today in these most unusual circumstances. Ladies and gentlemen, that concludes the business of the meeting, and I declare the meeting closed. This is Jan du Plessis, Chairman of BT. The COVID-19 crisis unfortunately means we are unable to gather together in person this year. Instead, we're holding a fully virtual AGM, but we still wanted to give our shareholders the opportunity to submit questions in advance of the AGM. I'd like to personally thank those who got in touch. We will respond to each of the questions received in turn. And to help me do this, and on this call, are Philip Jansen, BT Group Chief Executive; Simon Lowth, our Chief Financial Officer; and Nick Rose, our Senior Independent Director, who is also the chair of our Remuneration Committee as well as of our Audit and Risk Committee. In the interest of not sharing personal data, we have decided against naming the relevant shareholder who asked the question. Sabine Chalmers, our group General Counsel, is going to read out the submitted shareholder questions. So let me hand over straight away to Sabine for the first question.

Will the CEO and Directors be reducing any benefits they receive in line with reduced profits and reduced dividends?

Thank you, Sabine. I think I'm going to ask Nick Rose, our Remuneration Committee Chair, to answer that question.

Thank you, Jan. The short answer is yes. The Executive Directors have both received lower incentive awards this year, in light of the tough but necessary decision to cut the dividend and the share price performance during the course of the year. Following consultation with shareholders, we have taken the decision to reduce Philip and Simon's restricted share awards from 200% to 160% of salary. And we also took the decision that no cash bonuses will be paid to our Executive Directors this year or next. Bonuses paid to our Executive Directors this year have been deferred into shares held for 3 years, and any bonuses awarded next year will also be deferred into shares.

Thank you, Nick. So Sabine, next question, please?

Yes. So the next question has a number of parts and reads, "this company is an absolute disgrace in terms of performance. I can do a far better job myself at getting results than the current board. Even as a previous customer of BT, the service was very poor. It is no wonder, as a business, we lose business. The experience I found was with poorly trained staff or outsourced call centers that offer customer experiences at the lowest common denominator. This company cannot blame COVID, the rot started long before that. The company cannot blame industry trends. There are many telcos faring much better than this one. I'd like to know one, if dividends are to be cut, Directors' pay and bonuses should be cut. The results of the company hardly warrant a bonus in any event. Will the Board accept this? Two. Outsourcing to poor quality offshore operations needs to stop. Diageo is an investment company that, although based in Amsterdam, operates from Sofia, but all operatives are native speakers of the country that they serve. Three. This company needs to spin-off the various divisions of the company that make a profit from those that are laggards, with immediate effect. The profitable bits should become new businesses detached from the failing parts of BT. Will the Board sign up to this? Four. This company needs to seek mergers with more successful worldwide telcos. Are the Board looking for these partnerships and mergers? And lastly, if you really cannot stomach any of this, you need to put the company up for sale. I don't really see how the Board could do a worse job than they are doing right now."

Thank you for that long question, Sabine, with lots of points. Let me say that I was sorry that this shareholder is disappointed with the Board. We acknowledge that the share price performance has been unsatisfactory. And as both Philip and I mentioned in our speeches, which, by the way, are available to view on the BT website, we are working to remedy this for the long-term benefit of the company and its shareholders. The first part of the question, on pay and bonuses, has just been answered by Nick, when dealing with the prior question. So I'll hand over to Philip to answer the question about outsourced call centers. Philip?

Thanks, Jan. Yes, we know that our customers, like you, value a local feel to their interactions with us. We also know it was a sort of frustration for many customers to speak to someone outside the country when they called us. So in recognition of this, last year, we set out to move all our customer call centers back to the U.K. And in January this year, we completed this move 1 year ahead of plan. So all calls to BT are now rooted to our call center in the U.K. or Ireland.

Thank you, Philip. In answer to the question about divestments and possible mergers, you should rest assured that the Board takes very seriously its duty to consider all options for value creation and realization. To this end, we've been divesting noncore parts of our global business, and we will naturally consider other corporate opportunities should they arise. That said, BT Group's current priority is in the substantial investments we will be making over the coming years in 5G mobile and full fiber broadband. These investments will strengthen BT for the long-term, and drive future value for our shareholders in the U.K. and our customers. So next question, please, Sabine.

The next question is, "why are shareholder communications so poor? It is 3 years since the Italian Accounting Scandal, which started the collapse in the share price, but what has happened? Have there been prosecutions or any recovery of losses? The strategy that was launched over 2 years ago talked of delivering cost savings and organizational streamlining, including headcount reductions. Again, has any progress been made?"

I'm sorry to hear that. This shareholder clearly thinks that the shareholder communications has been poor. In fact, we've been telling the market everything we can. And naturally, for something so significant, we have devoted a lot of effort, time and money to sorting it out. Can I ask that the answer the first part of the question is dealt with by Nick Rose's capacity as Chair of the Audit and Risk Committee; and the second part on cost savings is handled by Simon. Nick?

Thanks, Jan. Over the last 3 years, we had to deal with a number of things arising from the Italian accounting irregularities. However, with legal proceedings in Italy still ongoing, I'm afraid it's difficult to give you the specific details behind all of the issues. However, what I can say is that immediately after the fraud was uncovered, a very full program of investigation and remedial work was undertaken, which was overseen by the Audit and Risk Committee. And analysis of huge quantity of data confirmed that the historic fraud was committed by and confined to a number of people in Italy. And we remain confident that this is still the case. Of course, we've taken since then, steps to improve our controls, both within Italy, and our wider controls that monitor our overseas operations in our shared service centers across global and at a group level.

Thank you, Nick. So Simon, can I hand it over to you to talk about cost savings?

Yes, indeed. Thank you, Jan. So we announced with our full year results back in May that we had completed the first phase of our cost savings program, which delivered GBP 1.6 billion of annualized savings. We completed that 1 year ahead of schedule. We also announced our plans for a further GBP 2 billion of annualized savings by early 2025 through a second phase of transformation. In this phase, the second phase, we're going to be taking fundamental action to create a much more efficient BT. We're simplifying our product range, we're looking at simplifying, automating end-to-end customer processes and also streamlining and modernizing our IT infrastructure. I should be clear that this isn't just about cost cutting, it's also about creating a simpler set of products that we can bring to market faster. It's about automating customer journeys on new networks to give better customer experience, and about moving our customers onto new networks and products for the future. So the actions are going to drive efficiency, but they'll also deliver a far superior customer experience.

Thank you, Simon. So Sabina, back to you for the next question, please.

The next question also contains a number of parts. "Why, according to Page 78 of the annual report, has the Board lavished nearly GBP 7 million of remuneration on itself? 10-year total shareholder return to March, shown on a graph on Page 106, is paltry 10%, sharply declining since 2016, spanning the tenure of the present Chairman and Executive Directors and before the COVID-19 pandemic, of which March is made? Surely, this shows incompetence. Why does the Board retain underperformers like, for over 9 years, Iain Conn, a failure at Centrica plc and [ subordinate competence ] to gender? When and how will this be rectified? As the dividend is canceled, by how much has the 86 million spent on share repurchase, as shown on Page 48 of the annual report, increased total shareholder return, if at all? Annual report, Page 45, shows revenue, operating profit and profit before tax, all down. Why was this allowed? And how and when will it be rectified? Whilst the situation is so desperate as to necessitate selling your headquarters for GBP 115 million, as annual report Page 45 states, and is the replacement building, as mentioned on Page 22, bought or vulnerably leased? And for how much? How and how soon will product proliferation, admitted by annual report, Page 23, be rectified? Board effectiveness review suggests the Board has lost the wood for the trees, how and when will this be rectified? Please will you elaborate on annual report, Page 21, to clarify how and how soon BT plc will cease reliance on Huawei? Please, will you improve future annual report legibility by printing in black on white, avoiding pastel contrast such as white against purple prose?"

Also be quite a number of points. I'm going to ask Simon, a few moment, to respond to some of them. But let me take the last question first. Our annual report is created in line with our brand guidelines. And anyone wishing to receive a black and white copy of the report is able to request one through our registrars, Equiniti. With that from my side, Simon, why won't you just point, please, to the next few points?

Well, thank you, Jan. So let me start with a review of the financial performance of the company historically and looking forward. I mean, over the past 4 years, the company has faced material external headwinds to our profitability. Prices have been reduced materially through stringent regulation by Ofcom. Secondly, business rates and energy costs have almost doubled. And thirdly, we have faced decline in legacy fixed voice telephony, as our customers move to mobile and digital voice applications. And of course, we have also been exposed to the wider macroeconomic pressures created by Brexit and now by COVID. While the company has delivered GBP 1.6 billion of cost savings from our transformation program and seeing growth in other products like mobile and networking, this has not fully offset those external headwinds, and that has resulted in some revenue and profit declines over the last 3 years. I should say, though, that our results for the financial year '19 -- 2019 and 2020, were in line with our guidance, as indeed they have been for the past 3 years. For this current year, so 2020/'21, we do face a financial impact from COVID-19. We've not issued an outlook for this year due to the uncertainty, but we will do so as soon as we've got sufficient visibility. But looking ahead, we've got a clear strategy, one that we are confident will reverse recent profit declines, drive longer-term growth, and it's got 3 key elements. We're investing in 5G and FTTP to maintain our clear network leadership in the U.K. We're delivering really differentiated products and services to our customers at predictable and competitive prices, all underpinned by that leading network and by continuously improving our customer service. And thirdly, as I mentioned earlier, we're delivering further cost reductions, with a gross savings target of GBP 2 billion through a program to rationalize our product portfolio, simplify processes, upgrade our systems and then switch off many of the legacy services. We took the difficult decision to suspend and re-base the dividend to ensure that we've got the financial capacity to fund that strategy and indeed navigate through the COVID uncertainties. More positive sentiment should return to the shares over time, now that we've provided clarity on our investment and funding strategy and as we deliver consistently against those plans. On the specific question about BT Center, we sold the property, which was too large for our future needs, for proceeds of GBP 210 million, and a realized profit of GBP 115 million. We'll be moving our head office to a leased building, one [ Brimmel ] Aldgate. The annual lease costs have not yet been disclosed, and are not yet on our balance sheet since the building is still under construction.

Thank you, Simon. So let me respond to the question regarding Board composition. We will continue to keep this under review, and have welcomed a number of new Directors since last year, including Leena Nair, Ian Cheshire, Adel Al-Saleh and, just today, Sara Weller. We said farewell to Jasmine Whitbread last December, and Nick Rose will step down at the conclusion of today's AGM, after, may I say, more than 9 years of exceptional service. Each year, we carry out an effectiveness review of the Board and its board committees. This year, we carried out an internal evaluation. There was positive feedback, and the Board is considered to be well balanced, with diversity of gender, skills and experience. As in previous years, the board agreed a number of key areas of focus for the following year, and we will report on progress against those agreed actions in next year's annual report. The 2020/'21 board and committee evaluation will be externally facilitated. Philip, can I ask you to comment on Huawei, please?

Of course, Jan. Well, as we said many times, at BT, the security of our networks is absolutely paramount. It's the #1 priority for us. So the government's revised proposals, which were announced on Tuesday, which essentially called for the removal of the Huawei equipment from the 5G communications networks in the U.K. by the end of 2027, does give us enough time to make all the necessary changes without impacting on the coverage, or indeed, the resilience of our existing networks.

Thanks, Philip. So Sabine, back to you for the next question, please.

The next question reads, "The company performance is very poor. After a look at the website, it appears to be a lot of political correctness. Being PC will not save the company. I'd like to know how the gender and race of the images featured on the website are decided. I have not seen any images of my gender and race and feel discriminated against. The numbers of certain groups far outweigh the percentages of those groups in the community. Alternatively, am I to assume from the website that I am now considered a second-class citizen, and at best tolerated as an investor, but in truth, not wanted and discriminated against?"

Thank you also for that question. Let me assure you that the question of fairness and equality is something which BT and the Board take very seriously. It is also a topic which I addressed extensively in the formal remarks that we posted on our website during the course of today. But let me perhaps ask Philip to expand on this. Philip?

Thanks, Jan. As you say, we do take it very seriously, of course. At BT, we absolutely believe in respect for human rights, and we want to build a business, which is as diverse and vibrant as the communities in which we serve. So we select images that support the content on our website and in our marketing, and those are designed to reflect what are in line with our brand guidelines. In fact, I should say that I'm extremely proud that our BT community is a diverse and respectful and inclusive one. We operate in 180 countries, with over 100,000 colleagues supporting customers and communities all over the world. This carries a great responsibility, which means that what we do and how we act really matters. So we don't view anyone as a second-class citizen at BT, and nor do we merely tolerate our investments. It's really important to say, we value support enormously, and the same applies to all our shareholders, no matter of their gender, ethnicity or background.

Thank you, Philip. Sabine, next question please.

The next question is, "I've heard a rumor that the dividend is not being paid for 1 year. Is this correct? And is the business intent on blaming COVID-19 for its continued poor annual results?"

Thank you, Sabine. Yes, this is indeed correct. We took the decision to suspend last year's final dividend and any dividends in this financial year. We plan to reinstate the dividend in the financial year 2021/'22 at half its previous level. Recognizing the importance of dividends to our shareholders, the Board's decision in relation to the dividend was exceptionally difficult. However, it will provide us with a cash saving, totaling GBP 2.5 billion, over the next 2 years, which we will make available for investment into our next-generation networks, 5G mobile and full fiber broadband, and which we remain confident will prove value-enhancing over time. It will also provide greater financial flexibility to manage the business with confidence through the COVID-19 crisis. So COVID-19 is part of the anti-yes, but it's not the whole picture. We took this decision in the best interest of shareholders under the long-term future success of BT Group [indiscernible], and I continue to believe firmly that it was indeed the right decision. Next question, please, Sabine.

The next question is, "I note that in the Articles of Association, 41.2 says that extra fees can, 'also include any kind of benefits for the Director's dependents.' I fail to see why such a provision should be regarded as appropriate, and wonder what kind of benefits might be in mind? The same question is raised by 42.2."

Thank you for the question, Sabine. Articles 41.2 and 42.2 could cover benefits such as dependents' pension or life cover and/or private medical insurance, if, for example, we're not able to provide this via a funded pension scheme or medical scheme that did not exist in a specific country. Any decision related to this will be made in line with the Director's remuneration policy as approved by shareholders. Also, just to clarify, these articles are in BT's current Articles of Association, and are not new provisions that have been introduced this year.

The next question is, "why has the Board appointed Sir Ian Cheshire as a Director of our company when he is contractually obligated to commit at 80% of his time to the chairship of Barclays Bank U.K. plc and has signed a contract with Barclays that guarantees he will prioritize Barclays Bank U.K. plc over any other role? In addition to Sir Ian's chair commitment at Barclays Bank U.K. plc, he is also on the board of Parent Company, Barclays plc., and Chairman of Manhattan plc as well as a number of other private companies, and has further public service responsibilities. It is unacceptable that the Nomination Committee of BT plc should appoint a Director who is contractually committed to deprioritize our company in favor of another. Will the Nominations Committee now withdraw the invitation for Sir Ian Cheshire to join the Board, so he can focus on Barclays U.K. plc, Barclays plc and Manhattan plc, and we can have a fully engaged nonexecutive Director at BT plc?"

Thank you, Sabine. Let me firstly say that the fundamental assumption on which this question is based is, indeed, not correct. Sir Ian's contract as Chair of Barclays Bank U.K. plc does not have a contractual obligation to commit 80% of his time to that role. We're recommending Ian to be appointed to the Board as a non-Executive Director. The Nominations Committee considered these other appointments and engagements, of course. And both the Nominations Committee and the Board were satisfied that he would be able to allocate sufficient time to his role at BT. I would also like to confirm that Sir Ian has stepped down from his role as a lead non-Executive Director for [ HM ] government and the cabinet office, a decision on his part of which he made us aware when we considered his appointment. Therefore, he no longer holds these public service responsibilities. As Chairman, I personally have no doubt that Ian will prove to be an outstanding Director of the company, and I can confirm that we continue to recommend that shareholders vote in support of his election at the AGM. Next question, please, Sabine.

Will the Board agree to abolish CPI charges, which I regard as an unfair contract term in the customers commit to a 2-year contract without knowing what exact sum they will be paying?

Philip, can I ask that you take this one, please?

Sure. Well, price changes are necessary, and that's in order to keep up with inflation and the rising costs of both running and upgrading our networks, whilst also providing the best possible products and services. And what we believe is that the fairest way of doing this is to make them clear and predictable. So that's why we linked them to a recognized index, like the CPI, and the price review happens once a year for our mobile, broadband and phone customers.

Thanks, Philip. Next question, please.

Next question is, "at the last AGM, you forecasted 2% decline in revenue for 2019/2020, but not the actual drop in pretax profit of 20%. Page 27 of the annual report indicates what your shareholders want you to deliver. Having had your own business review at the end of June, do you expect to avoid similar declines in 2020/2021?"