BT Group plc (BTA) Earnings Call Transcript & Summary

Good morning and welcome to BT's first half results presentation for the financial year 2021. My name is Mark Lidiard from the BT Investor Relations team. Hosting today's event are Philip Jansen, Chief Executive; and Simon Lowth, Chief Financial Officer. Before we start, I'd like to draw your attention to the usual forward-looking statements on Slide 2 and our latest annual report for examples of the factors that could cause actual results to differ from any forward-looking statements we may make. Both the slide and the annual report can be found on our website. With that, I'll now hand over to Philip.

Good morning, everyone, and thank you for joining this morning's call. As is normal for the first half results, Simon and I will be making some prepared comments before taking your questions. And as usual, for the Q&A session, I have my whole executive team with me. Moving straight to the highlights slide. Despite the pandemic, BT had another good quarter, delivering results in line with our expectations for the first half of the year. For the full year, given the reduced uncertainty, further evidence of the fundamental importance of our products and services demonstrated through COVID-19 and the confidence we have in our operational performance, we are narrowing our full year '21 EBITDA outlook range to GBP 7.3 billion to GBP 7.5 billion, which is clearly a positive move. Looking further ahead, given the solid progress we have made in our delivery of our strategy and transformation, we expect EBITDA, in the financial year-ending March 2023, to be at least GBP 7.9 billion with sustainable growth from this level going forward. This underpins our commitment to the reinstatement of our dividend next year, whilst ensuring that we can continue to drive value-creating investments in our Investor Relations networks and products. Simon will talk you through the building blocks that support this medium-term outlook, but let me first deal with the results from the first half. Turning to Slide 5. You can see our group financials for the first 6 months at September, which, as I said, were in line with our expectations. To summarize, revenue in the first half was resilient at GBP 10.6 billion, down 7%. EBITDA was down 5% to GBP 3.7 billion. CapEx at GBP 2 billion was up 5%. And normalized free cash flow of GBP 422 million was down 30%. Moving to Slide 6 and some of the operational highlights from the first half that demonstrate continued successful execution against our strategy. We've continued to invest in our networks across mobile, fixed and core to build the strongest foundations. 5G is now live in 112 towns and cities, more than any other operator. And with EE winning all 7 RootMetrics awards for the U.K. wide mobile network performance for the sixth consecutive half year in H1, including the best 5G network, it leaves the business well positioned for any new 5G device launches such as the iPhone 12, for which we've seen encouraging preorders and presales. With our new enhanced consumer KPIs, you can see we already have 1.2 million 5G-ready users, an increase of over 850,000 in quarter 2 alone. We also announced both Nokia and Ericsson as key providers of equipment for our 5G radio access network, which helps form a key part of our strategic response to the U.K. government decision around the use of high-risk vendors in the U.K. Our partnership with these strategic vendors would allow us to build upon our leading position in U.K. 5G. Following the easing of lockdown restrictions at the end of the first quarter, we were able to reaccelerate our FTTP build to a record level of 40,000 premises passed per week. Openreach FTTP footprint has reached 3.5 million premises, putting us firmly on track to achieve our 4.5 million target by the end of March and continue on a trajectory to reach 20 million premises by the mid- to late 2020s, if the conditions are right. Openreach's local marketing and FTTP-only offers are proving successful, with all the major CPs now consuming FTTP. This has led to increased sales. And currently, we're selling at about 13,000 a week. Looking at BT's consumer division. The second quarter saw the largest quarterly growth of FTTP customers to date, bringing their total customer base to around 600,000. Having achieved a low-cost, fast-paced and high-quality sustainable build, Clive and the team have now shifted their focus to further improving and scaling the provisioning process and cost. In May, we outlined Phase 2 of our cost transformation program, which will see us further modernize BT and reduce our cost base. Despite the disruption caused by the pandemic, our plans remain firmly on track, generating annualized savings of around GBP 350 million in the first half at a cost of around GBP 160 million. We also outlined a number of short-term actions we've been implementing to mitigate the impact from COVID-19 on the group. Simon will cover some specific examples which illustrate the significant strides we've already taken to simplify our products processing systems over the first few months of this multiyear program. Looking now at creating standout customer experiences on Slide 7. We aim to create these by leveraging the strength of our superior networks to differentiate our products, propositions and service. We want to offer products that are high quality and good value for money. We launched our Halo product for consumers last October, which now makes up nearly 40% of the entire BT broadband base, providing customers with the best connection and experience with double data on mobile and inclusive home tech expert support. As part of enterprises small business support scheme, which we announced in July, we launched Halo for Business, which means SMEs can also benefit from this market-leading convergence product, including a digital voice line. In September, we announced the full works plan for the iPhone. This is a global first for EE, providing 3 new benefits to customers for the duration of their contract, that's Apple Music, Apple TV+ and Apple Arcade, all at unbeatable value for money. In addition to our Halo convergence vehicle for BT, we are also bringing together BT Broadband with EE mobile in a best-of-both approach. Now this premium convergence combination is expected to further drive cross-sell opportunities and improved ARPU. And lastly, in Global, we further expanded our portfolio of collaboration services by launching Zoom with Meetings from BT on our new cloud optimized platform, offering global organizations, enhanced managed services and security. These high-quality, high-value products are clearly resonating with our customers and a key part of what has driven 17 successive quarters of growth in Group Net Promoter Score. Also supporting improved NPS are lower complaints that have reduced by 20% year-on-year for BT Consumer Broadband and have halved over the last 2 years. Complaints about EE mobile remain equal lowest of any U.K. major mobile network operator. Separately, and as a result of the hard work and dedication of everyone who supports our apprentices, BT has been ranked the top commercial organization for employing apprentices by the National Apprenticeship Service. And finally, I'm absolutely delighted and enormously proud to share that the work of a number of colleagues during the pandemic has been formally recognized with the award of MBEs in the latest Queen's Birthday Honors list. I believe this is the first time that telecom workers have been recognized in this way. Now all of our colleagues have worked tremendously hard to keep the nation connected. But for Lucy Baker, Ian Hammond, John Hayday, Peter Martin, Reza Rahnama, Karen Smith, Gemma Towers and Scott McPartlin, I'd just like to reiterate my thanks to you and congratulate you all on receiving such a prestigious award. Before we look at business unit performance in more detail, let me now hand over to Simon, who will take you through the group's first half results, update you on our modernization plans, and as I said earlier, provide you with a road map of how we'll achieve our medium-term EBITDA outlook of at least GBP 7.9 billion by 2023. Simon.

Well, thank you, Philip, and good morning to everyone. I'm going to summarize our financial performance for the half year and the progress on our modernization program before providing updates on our group's net debt and liquidity, on our pension position and then on our outlook. So starting with our financial performance on Slide 9. Adjusted revenue for the half year was GBP 10.6 billion, that's down 7%, primarily due to declines in legacy products, a later-than-normal iPhone launch and of course, the impact of COVID-19, including reduced BT Sport revenue and a reduction in business activity in our enterprise units. These declines were partially offset by higher rental bases of fiber-enabled products and Ethernet in Openreach. We remain on track to end the year in line with our guidance for a decline in revenue of between 5% and 6%. Operating costs were down 8% due to lower product costs and commissions, sports rights rebates and the cost savings that we have generated through our modernization program and other cost initiatives, including short-term COVID-19 mitigating actions. Adjusted EBITDA for the half year was GBP 3.7 billion, that's down 5%. Moving below EBITDA on Slide 10, depreciation and amortization was GBP 2.2 billion, that's up 2%. Our adjusted net finance expense was GBP 384 million, up 7%. The adjusted tax charge was GBP 236 million, that's down 18%, reflecting an effective tax rate of 20%. So this resulted in adjusted profit after tax of GBP 950 million, down 18%. Specific items after tax of GBP 94 million included restructuring and property rationalization costs of GBP 163 million, a regulatory charge of GBP 18 million and interest on pensions of GBP 9 million, partially offset by a net credit from divestment-related items of GBP 66 million. Reported profit after tax for the period was GBP 856 million, down 20%. And finally, our reported EPS was 8.6p per share, and our adjusted EPS was 9.6p per share. Moving on to cash flow on Slide 11. We delivered GBP 422 million of normalized free cash flow in the half year. That's down 30%, primarily due to lower EBITDA, some offsetting movements in working capital and timing of cash tax payments. We remain on track to be in the range of GBP 1.2 billion to GBP 1.5 billion for the full year. We paid cash tax and interest charges of GBP 570 million and lease payments of GBP 363 million and then incurred a net outflow of GBP 281 million from changes in working capital and some other movements. We invested GBP 2.1 billion in cash capital expenditure in the half year, that's up 1%. I'll provide more details on our CapEx investments shortly. Cash specific items costs totaled GBP 221 million, including restructuring payments of GBP 198 million. Our reported free cash flow was GBP 201 million, that's down 70%, reflecting the lower normalized free cash flow and the increase in cash-specific costs, which last year included a GBP 210 million inflow from the sale of BT Centre. We paid GBP 425 million into our pension schemes, gross of tax, with a corresponding GBP 90 million of cash tax benefit, resulting in free cash flow post-pension deficit payments of negative GBP 139 million. Moving to our major investment programs on Slide 12. Reported CapEx was up 5% at GBP 2 billion for the half year, driven primarily by investments in our FTTP and our mobile networks. Within this total, we invested GBP 1.1 billion in our networks, that's up 9%, GBP 455 million in customer-driven CapEx, GBP 364 million in our systems and IT and then the remaining GBP 52 million was spent on nonnetwork infrastructure. We continue to expect reported CapEx for the full year to be between GBP 4 billion and GBP 4.3 billion. So turning now to our transformation program on Slide 13. Our objective, very simply put, is to modernize BT, and we've made solid progress in the first half of this multiyear program. As a reminder, we are simplifying our product portfolio, we're simplifying and automating our customer journeys, we're moving to a modern modular IT architecture and we're migrating customers from our decades-old legacy networks to modern FTTP and 5G networks. During the first half year, we continued to simplify our organizational structure to standardize and automate end-to-end processes and to further leverage shared services. Modernization activities span the group, and in the first half, we retired 8 legacy broadband products, which had outdated features such as low speeds or CAT usage out of a total of 25 legacy broadband products, and we expect to retire the majority of the remainder by the end of this year. We doubled the percentage of Ethernet orders, which are fast tracked to use existing nearby fiber to about 40% of all orders. On average, these circuits now take just 12 days to deliver versus an overall average of 42 days. We also signed a number of deals with leading software vendors in order to supply our modular IT architecture. We've continued to improve the capabilities of our procurement and our supply chain functions by adding new digital tools and embedding some new capabilities such as value engineering and Lean Six Sigma that will reduce supply chain risk, simplify our buying processes and drive down the cost of external purchases. In the first half, we delivered GBP 352 million in gross annualized cost savings in line with our expectations to achieve savings of GBP 1 billion per annum by the end of March 2023 and GBP 2 billion by the end of March 2025. The cost to achieve these savings in the first half was GBP 163 million. In September, as part of our program to modernize BT, we launched a review of our U.K. redundancy and paid lever terms. The purpose of the review is to create a simple, consistent and fair set for severance terms that will apply equally to all U.K. employees in BT, EE, Plusnet and Openreach. And today, we have a number of different options across the business. We started a consultation process, and we'll be talking to the unions with the aim of reaching agreement on any changes. Beyond this program, we're challenging every element of our cost base, and we've taken specific actions to manage spend and to reduce discretionary costs in order to mitigate the financial impacts of COVID-19. So far this year, we have canceled a delayed recruitment right across the group. We've worked with our suppliers to identify opportunities to deliver significant and sustainable cost reductions across the supply chain. We've focused and rephased our marketing spend, and we've obviously reviewed rigorously and reprioritized discretionary spend for the whole of this year in areas such as travel, training, external fees. At the end of the half, there were 3,600 fewer full-time equivalent roles across the group. That's a reduction of over 3% versus the end of the prior year. Finally, we continue to move forward with targeted disposals so that we can focus on our core business to deliver converged connectivity and services. And on the 1st of October, we completed the sale of selected domestic operations and infrastructure in Latin America. Moving on to net debt and liquidity on Slide 14. At the half year, we had financial net debt of GBP 11.3 billion with no net change since the end of the prior year as the GBP 425 million payments we made into our pension schemes were offset by the normalized free cash flow of GBP 422 million. We remain well placed for this period of uncertainty with cash and current investments of GBP 6.5 billion and an undrawn committed credit facility of GBP 2.1 billion at the end of the half year. During the half year and following our recommitment to our credit rating target of BBB+ and a minimum rating of BBB, all of the major agencies reconfirm their ratings of BBB or equivalent. Moving to our pension positions on Slide 15. At the 30th of September 2020, the IAS 19 deficit was GBP 4 billion net of tax, that is up GBP 3 billion since the valuation at the 31st of March 2020, which reflected the unusually high credit spreads at that time. The increase in the deficit reflects a decrease in the real discount rate, principally reflecting a fall in credit spreads, partially offset by deficit contributions over the period, and higher-than-expected asset returns. Moving on to the triennial funding valuation. As you know, this considers the values of the assets and the liabilities as at the 30th of June 2020 in order to determine future cash contributions. Discussions with the BT Pension Scheme trustee are progressing, and we continue to expect to conclude these negotiations in the first half of the next calendar year. As we did 3 years ago, we're considering a number of options for funding the deficit, including potentially noncash contributions. Finally, moving to our outlook on Slide 16. Since providing our outlook at our first quarter trading update, we've made good progress on our modernization and cost-saving program and despite the challenging and uncertain macroeconomic environment, demand for our products has remained robust. We've seen some of the most heavily impacted areas of our business recover quickly through the second quarter. For example, Openreach provisions and upgrades and BT Sport. While we will likely be impacted by business failures going forward, the digital transformation driven by businesses that survive or indeed new ones that emerge, mean that our platforms are becoming more important than ever. As a result, we have made a positive move in our EBITDA outlook range for this year to a range of GBP 7.3 billion to GBP 7.5 billion. So at the low end, that's a GBP 100 million higher than we had previously forecast. Our outlook range for normalized free cash flow remains unchanged, and there are 2 specific reasons. First, we expect to increase stock levels to manage through the end of the Brexit transition period and the possible disruption to supply chains that a no-deal scenario may bring. Second, we are making a final purchase of necessary Huawei equipment, including spares prior to the ban on purchasing new Huawei 5G kit from the 31st of December 2020. We are firmly on track with the delivery of our strategy and our transformation programs that we set out in May this year. As a result, we expect the EBITDA in the financial year-ending March 2023 to be back at the pre-COVID level of at least GBP 7.9 billion, with sustainable growth from this level forward. Our EBITDA progression will be driven by our recovery from the impacts of COVID-19; sales of our converged and growth products, including FTTP, 5G, VoIP and security; and with inflation-linked prices at both the retail and wholesale levels; and the significant savings from our modernization and cost-saving programs. These factors will, in combination, offset legacy product declines normal inflation in our cost base. The headwinds that we've experienced over the past few years from regulatory price reductions and increasing Cumulo rates have now receded. This growth in EBITDA will underpin the planned reinstatement of our revised dividend while ensuring that we can continue to drive value-creating investments in our networks and in our products. So to conclude, we delivered results in line with our expectations, made a solid start to our modernization and cost-saving program and this progress, along with continued robust demand for our products and services, has led us to increase the low end of our EBITDA outlook range for this year and to expect EBITDA of at least GBP 7.9 billion in the financial year-ending March 2023, underpinning the reinstatement of our revised dividend and our value creating investment plans. And with that, I'll now hand back to Philip, who'll talk you through the business unit results in more detail.

Thanks, Simon. So now I'm looking at the CFU performance in more detail. Let's start with Consumer on Slide 18. Revenue for the first half fell 6%, predominantly due to the continued impact of COVID-19, with revenue from BT Sport and roaming significantly down as well as the closure of our retail stores in quarter 1. A declining base of voice-only customers and a later-than-normal iPhone launch has also impacted revenue. EBITDA fell 9% due to lower revenue, continued investment in the fairness commitments made to Ofcom and increased bad debt. This has been partially offset by sports rights rebates and tight management of costs, and I should say that we don't expect any further material sports rights rebates in the second half of the year. COVID-19 will continue to affect consumer with further impacts from lower sport revenue from pubs and clubs, more price-conscious customers, reduced roaming activity and increased costs from major handset launches. Operationally, broadband and mobile churn in the second quarter both landed at 1.1%, each improving 0.1 percentage points year-on-year, driven by our continued focus on pricing, market competitiveness, fairness initiatives and lower market activity as well as accelerating our 5G and FTTP base, the success of which I've already touched upon. We've also driven fairness initiatives even further. Last month, we provided customers with increased transparency on future price rises, announcing that increases for new and upgrading customers have been standardized across all consumer products and across all brands at CPI plus 3.9% per year. Major growth in data usage, continued investment in our leading networks, superior propositions and U.K.-based customer services all support this standard annual increase. Moving to Enterprise on Slide 19. Revenue fell 9%, primarily due to the reduced business activity as a result of COVID-19 and ongoing declines in legacy products. Operating costs were down, mainly due to the revenue decline and cost transformation. And as a result, EBITDA was down 13%. Excluding the impact of the fleet and ticket divestments in Enterprise, revenue was down 7% and EBITDA 12%. We expect to see further impacts of COVID-19 from business insolvencies in the second half, particularly among our SME customers. And although the size of the impact will depend on the level and length of government support, it also affects our wholesale business, which indirectly serves SMEs. Enterprise continues to focus on reducing its cost base through supplier and product rationalization. It has over 500 individual cost reduction initiatives ongoing and during the quarter, introduced a number of measures to further tighten third-party costs. Operationally, retail order intake increased 3% to GBP 3.2 billion, and wholesale order intake decreased 1% to GBP 1.1 billion, both on a 12-month rolling basis. We continue to support small business across the U.K. through our small business support scheme. As part of this, we recently announced a partnership with Square to help EE small business customers securely accept contact-less mobile payments. We also launched the Buster scheme, which includes Halo for business and will be made available to 1,000 eligible companies initially with potential to expand that scheme. We've extended our 5-year development program for enterprise customers and have agreed a new landmark partnership deal with Belfast Harbor to deploy a 5G private network. This installation will allow the harbor to boost productivity, public safety and physical security across the port and surrounding areas while also addressing climate change. We've also partnered with Sterling University on its living laboratory project, which sees BT helping to create a state-of-the-art environmental monitoring system using 5G and complementary tech aimed at driving a green recovery. Moving to Global on Slide 20. The 13% revenue decline was largely driven by the impact of COVID-19, although it had a less material impact on EBITDA, which declined 5%. Excluding the impact of our divested domestic Spanish business, foreign exchange movements and prior year one-offs, revenue was down 10%, but EBITDA was actually up 6%. Looking at the revenue decline in more detail, we saw lower noncontracted business and some milestone slippages as a result of COVID-19. Further revenue declines were driven by our strategic decisions on lower-margin businesses, legacy portfolio declines and a GBP 16 million negative impact from foreign exchange movements. These were only partly offset by higher conferencing volumes. As I mentioned, underlying EBITDA was up as lower revenue was more than offset by lower operating costs, reflecting our ongoing transformation programs in global and COVID-19 mitigation actions. Looking forward, we are seeing a short-term reduction in spending and a more cautious approach from our multinational customers, resulting in cancellations and delays to purchasing cycles. Of course, this will negatively impact revenue and EBITDA in the second half of the year. Order intake in the quarter was around GBP 800 million, down 43% and due to a number of large renewals last year and the impact of COVID-19. However, on a rolling 12-month basis, it was up 10% to GBP 4.1 billion. Finally, looking at Openreach on Slide 21. The 2% revenue growth in the first half was driven by higher fiber and Ethernet volumes, partly offset by declines in legacy copper products. The first quarter, in particular, was impacted by COVID-19, driving lower provision and upgrade activity, partly offset by lower churn. EBITDA was up 3% compared to last year, with the revenue growth being partially offset by higher operating costs. The increase in operating costs was primarily driven by investment in people to deliver better service, partially offset by ongoing efficiency programs and reductions in discretionary spend. Throughout the quarter, Openreach took steps to increase capacity to deliver record levels of engineering work to bring customers back into service safely and quickly to support a nation working from home. I'm pleased to say that Openreach infrastructure delivery and maintenance of customer service was recognized in best-ever perception results for copper, fiber and Ethernet access from our CPs. As well as the progress we've made on the FTTP build, Openreach announced early this month that they plan to stop selling new legacy copper services in a further 51 exchange areas bringing the total number of exchange locations covered by this plan in the next 12 months to 169, which covers 1.8 million premises. In these exchange areas, the focus will be on providing FTTP as they will all have reached 75% FTTP coverage. As we accelerate the rollout of FTTP, we'll be issuing these stop sale notices on a regular basis. Now we look forward to receiving more clarity and detail on how the GBP 5 billion government subsidy may be allocated in more rural areas and the final WFTMR document from Ofcom, ahead of the new regulatory framework being in place from April next year. So to summarize on Slide 22. Despite the impact of the pandemic in the first half, BT has had a good start to the year and delivered results in line with our expectations. Our confidence in our operational performance has led to a positive move in our EBITDA outlook for this year. And the medium-term EBITDA outlook we have published today of at least GBP 7.9 billion to March 2023 reflects the growing confidence we have in our execution of our strategy for modernizing BT and underpins our plans to reinstate the dividend next year and to drive value-creating investments in our networks and in our products. I continue to be excited about the prospects and the purpose for BT. So as ever, thank you for engaging with us today, and we look forward to answering your questions. As per normal, I would like to cover as many questions as possible. So please can I ask you to limit each of you to one question and then Simon and the team will do our very best to answer them as succinctly as possible. So with that, what I'd like to do now is ask the operator to open the lines, and I'll get Simon to come and join me on the stage, and let's take the first question.

[Operator Instructions] But we do have the first question. This is from Akhil Dattani from JPMorgan.

Maybe I can start with the new midterm guidance that you provided today. And there's really just 2 parts to what I'm trying to get some color around. The first is essentially, if we take the midpoint of this year's EBITDA guidance, and we're going to, given from March 23, that's 7% cumulative EBITDA growth which is about GBP 0.5 billion. So I guess, firstly, just trying to understand if we could get a bit of color on the drivers of that? So just any sort of color and commentary around revenue growth cost-cutting and mix shift between the different segments? So that would be the first bit of it. And the second piece of that is, I guess, just want to understand how we should think about the phasing of that EBITDA growth? Do we think about it as relatively linear across the coming years? Or is it potentially phased a bit differently to that?

Yes. I mean Simon can make a comment on some of the specifics that you raised. I think the move today to sort of upgrade our lower end from GBP 7.2 billion to GBP 7.3 billion narrows the range clearly, and that sort of underlines our confidence in the performance we've got in the first half, but also for the remainder of this year. And again, you can sort of work out the number of things that are in there. But you can see a big performance on our costs. So what I'd say to you is if you look at what's happened in the first half, I think we're pleased with what we've done on controlling our costs, and we're pleased with what we've done on our transformation program. We're delivering GBP 352 million of annualized savings in the first 6 months of our sort of GBP 2 billion gross saving target over the next 5 years is a really encouraging start. So when you put it all in around, what we're really saying is we feel like we've got control of our costs, obviously, there's going to be some kickback at some stage from a COVID-19 bounce back, but we're not planning on that in the second half, particularly. So I'll let Simon -- I mean, do you want to add anything to that, Simon?

I mean I think on the key drivers of the recovery in our EBITDA from FY '21 to FY '23, where we get back to our pre-COVID levels. Firstly, there is the recovery from COVID. We essentially built a plan around an assumption that we are through the pandemic by the fiscal year '23. Recall that we essentially took about a GBP 400 million to GBP 500 million EBITDA hit as we went into COVID, quite a chunk of that was associated with activity like BT Sport revenues in pubs and clubs like roaming like out-of-bundle charges, which as we emerge from the pandemic is EBITDA that we will recover as we move forward. Secondly, we announced a cost transformation program, a modernization program that will deliver GBP 1 billion of gross annual savings in FY '23. And we're firmly on track to deliver that. And if you think about the normal course inflation, it's a small proportion of that. So the ability to deliver net cost savings is within our control, that will be a second very important driver. But in addition to that, we are seeing robust demand for our converged and our growth products. We have also obviously got a lot of our product portfolio now is indexed in consumer and in Openreach. So those are the -- probably the big drivers, recovery, delivery of sustained net cost reduction and then also growth from our strategic and converged products. And those together will more than offset the continuing sort of legacy declines that we've got on particularly traditional voice. But each year that goes by, that's a smaller base. And then as I mentioned in my remarks just now, do recall that a couple of really significant headwinds that we faced in the last 3 or 4 years, namely wholesale regulated wholesale price reductions, particularly in Openreach and a significant increase in Cumulo rates, those are essentially now receded. And then your other question was on the shape of the recovery. I mean I think we set a clear guidance for FY '23. The shape of the recovery is going to depend a lot on the macroeconomic and circumstances, the shape of recovery from the pandemic during the course of the next 18 months or so. Also, do bear in mind that the delivery on the cost transformation and the indexation starts to accumulate more as you move out over time.

And that's what I was saying is just on your question about the linear, who knows? But given we've got good control of our costs, if there is a decent bounce back next year or the year after, we can release some of that costs behind revenue growth that comes on the COVID -- hopefully, COVID-19 bounce back.

So the next question is Maurice Patrick from Barclays.

Yes, it's Maurice here. I'll stick to the same question. I mean Slide 16 is very helpful providing the drivers and I think Simon [Technical Difficulty] pointed that. But looking at numbers there, it looks as though given you've got GBP 1 billion of gross cost savings and the shape -- the size of the chart there, it looks as though all that EBITDA growth is coming from cost cutting rather revenue growth or rather a lot of that cost saving is being reinvested in growth. So I guess the question is, when should we expect to be back to underlying revenue growth? And all the credit recovery, I mean [Technical Difficulty] your point on that but ignoring the MVNO loss, but when do you think we'll start seeing revenues actually growing on a structural basis rather than just the cost cutting?

I mean I guess Simon should give us an opinion. Again, it's being confident on the short-term revenue profile is difficult given the circumstance we've talked about, right? So again, we keep repeating, we feel strongly that the modernization program, the cost control we put in place and all the stuff we talked about just a minute ago is going to deliver good results. What we're hopeful is that when this is behind us and there's a vaccine and the economy is back to a more normalized approach, we would like to see us sitting in a positive revenue growth post 2023. So what we're saying here today is in 2023, GBP 7.9 billion and moving forward from there onwards with some revenue growth is our target. Simon, do you want to add anything?

No, so I...

I couldn't quite hear the whole question.

Maurice, your line was a little bit distorted. But I think that's right, Philip. I think that a significant driver of the EBITDA recovery over the course and that's probably -- clearly does come from actions that are entirely in our control, like driving cost reduction. We will see growth in some of our converged and strategic products. But in the next 2 years or so, we still got that drag from traditional voice decline. We've obviously got a loss of MVNO contract. So Philip, the goal of driving sustainable revenue growth from FY '23 so where it will start to...

Yes, Just -- I was actually trying to hear some of your question. I think, Maurice, the other thing to say is if you've got on one side, you've got the cost under control, but also you've got in place sort of revenue model. Once, as Simon said, some of the legacy old voice revenue disappears, we have got indexation, and we have got CPI inflationary increases built into decent chunks of our business, particularly around Openreach and particularly in consumer now. So you can see costs on the one hand, tightly controlled. A model for revenue growth that is beginning to emerge, but obviously, there's this uncertainty in the middle about what happens to the economy, which obviously is the macro effect, which we can't really forecast really accurately. Maurice, I hope that answers. We couldn't hear all your questions. Does that do it?

That's great. Yes.

Thanks, Maurice.

Excellent. So this is Carl Murdock-Smith from Berenberg.

I just wanted to ask a question about headcount in Openreach and kind of how you are thinking about in-sourced versus outsourced engineering capability going forward? In the release, you talk about the large tender process that you went through in the period kind of suggesting potentially more outsourcing going forward. And I also noticed that the headcount in Openreach has gone down in the half, which bucks the trend of the last few years. I was wondering, is that a signal that you are thinking of more outsourcing going forward? Or is it simply a sign that with COVID-19, that's having an impact on your ability to hire and your ability to train?

Yes, Carl, it's a good question. I'll get Clive just to give you a view on that. Let me just say one thing. I think The story in Openreach which is incredibly positive, I'm sure you can see that. We're building FTTP so fast. We're connecting people really quickly. Sales are fantastic of FTTP at 13,000 a week. And operationally, the feedback from CPs is very strong, particularly given the weight of activity in that area. The other thing that you're sort of driving at is, there's a big transformation program going on as well within Openreach, which is trying to be more efficient and more effective how one does ones work, right? And so there's 26 million lines to be maintained and managed. So Clive and his team are doing a fantastic job under that on multiple fronts. So you've got FTTP, you've got 26 million lines and you've got transformation as well. So balancing the -- our own people versus outside help is really, really important because don't forget, we're now building at 500,000 in a quarter FTTP. We're trying to get that up to a -- that's a 2 million rate a year. We're trying to get to 3 million as quickly as possible. So Clive needs to work at how he does that in the most economically sensible fashion, so we don't commit to costs that we don't need in the longer term. So Clive, do you want to say a couple of things?

Yes. Carl, thank you for the question. Most definitely, we're going to use a mixed model. So we are going to use our employee base, both to build fiber and to provision services over the new fiber platform, and we're going to use contractors in those 2 same areas as well. The sort of simple way to think about it is that we are going to bias towards contractors for the easier footprint build, and we're going to use our own people to do the harder, trickier stuff. And broadly speaking, it is easier to build in urban and suburban areas. It is much more challenging to do so in rural and super rural areas. And the same rule applies to provisioning. So where the provisioning activity is straightforward and simple, we'll use more contractor labor, where it is more complex and challenging, we're going to use more of our employees. I do think, Carl, Our employees are a fantastic differentiator. It gives us competitive advantage. We can do the tough stuff that others can't do because they are very heavily dependent on contract labor alone.

Carl, can I just add one thing, Carl? Thanks, Clive. Again, it's on the headcount. And I think as Simon said, we've got 3,600 less people now than we ended the year in. And the reason that's important, obviously, the cost savings, yes, but it's actually a demonstration of the company being more efficient. Because remember, what we're describing for you is a lot of activity. So again, Clive has described what he's doing. But across the business, we are seeing a lot of activity, and we're managing to deliver great service And our Net Promoter Score continues and our customer service continues to go forward and our churn is coming down. So that's a little formula that we're developing very nicely. And obviously, we've got to do more of it over the coming years, but it's an encouraging start on that sort of formula, if you like.

And as you're seeing the actual kind of take-up accelerating, do you have any update on the kind of provisioning cost per home?

Yes. I mean the provision costs are still higher than we'd like. But I think Clive's got a whole team working on how to reduce that provisioning cost and scale it up. And I think, obviously, by definition, we've got much more expensive building than we have connecting. But I've got every confidence Clive is going to get that number down to the right sort of level.

So we now have Nick Delfas from Redburn.

Just a quick question on the comment on Page 9 of the release about the potential for pension fund to have a prior claim over certain BT assets. Can you talk a little bit more about any issues with self-investment rules or indeed, whether those assets would need to be transferred into a separate entity?

Sorry, Nick, can you just -- sorry, I'm really sorry, it's distorted again. Can you repeat that question? Did you get it?

I think I got it.

Okay. Sorry.

I think you were asking about the potential -- a range of potential options for funding the deficit and in particular, potential sort of asset-backed contributions, was that your question, Nick?

Yes. And whether that would create an issue for the fiber investment rule?

No. I mean I think it's too early to say. We're looking at a wide range of options as we do routinely as part of the valuation process. I'm not at this stage. I hope you'll understand, Nick, going to comment on the specifics that we are looking at.

This is now John Karidis from Numis Securities.

I just need to ask a question, please, around fiber investment enablers. Should we give up, for example, seeing Openreach signed long-term contracts committing retailers to supply absolute number of lines over time? Secondly, should we really expect the government to give you a pass on Cumulo rates, given the cost of COVID? And then thirdly, given that Ofcom can't really say anything for the second 5-year period, what sort of clarity should we expect Ofcom to be able to give by April next year?

Sure. Okay. I'll give that a go. I mean, look we're still hopeful that we the appropriate contracts with our CPs. I mean the great users were up and running with all the major CPs now in FTTP. So -- and the demand, as I said before, is very, very encouraging in the early days. So the challenge is actually from a competition law point of view, signing up long, long-term commitments on volume. So what I can tell you is I'm very confident we will deliver brilliant contractual obligations between Openreach and our customers, which are the same for everybody, right? So that's what we've got to do. So, so far, I think we've got something in place which makes sense. Hopefully, we'll sign some bigger contracts, but we won't be able to tie up volume for very, very long periods of time because that's going to be a deemed as anti-competitive. In terms of the Cumulo rates, now, I'm very hopeful that the government -- given the desire for the government to deliver gigabit-capable networks by 2025, one of the things they could do is to reduce that Cumulo tax effectively for the whole of the industry. So I'm hopeful that they will look at that given the sheer productivity gains you can get from fiber. So I think there's a big number to be gone for the country. So I'm hopeful they'll do that. And again, on the enablers, I think you can see where we are today. I think there's lots of encouraging rhetoric and commentary around the enablers and not least the indexation, but also switch over 75% that you know so well. I think around the fair bet, I think there is, again, more encouraging signs of Ofcom that understanding the nature of our investment, which really is, it's a very long-term project. Now we're talking about 20 years here. So I think I would expect and hope that over the coming months, as we finalize the detail of it and if again, it's published and from Ofcom in sort of early next year, I'm hopeful that we're going to get more signs that there's recognition. This is a very, very long-term payback and our shareholders by putting GBP 12 billion into building that full fiber network deserve a decent return over that long period of time. Simon, anything else? Did I miss anything there? John, is that okay?

Yes, of course.

So now Nick Lyall from Societe Generale.

There's a quick one on Enterprise, please, Philip. Could you give us some details, please, on any nonpayers or whatever? Because your subs numbers look pretty steady in Enterprise so far. So what's your policy been so far is an SME comes to you and talks about not being able to pay its bill? And could you also give us an update on or a reminder of how you set the bad debt policy?

Yes, sure, I'll ask Gerry to give you some details. And as an overall point, I mean, I think in general, BT's worked really, really hard with all kinds of customer segments who have been under pressure for lots of different reasons. And of course, that's in lots of different areas, but from the NHS specifically to NHS workers through to SMEs and lots of other segments, so elderly people vulnerable. So we've really stepped in there. With the specifics of SME, we have this sort of specific program SMEs to support them, and I'll let Gerry just give you a few details of how we've done that and also provide the view on bad debt, is that all right?

Yes, it's been an interesting period because all the way through the last 6 months, we've seen different dynamics through every month, really. But let me just try and give you a picture of where debt is and what we're doing about how we deal with customers, how we try and support them. So all the way through the initial phase of lockdown, we took a very customer-friendly policy. So what we had is a number of very obvious insolvencies and downsizing straightaway, but actually not necessarily customers just telling us they were doing that. We saw that direct debits being canceled. We also saw fairly quickly an increase in actually nonpayment. If you look over the period, what we saw was about a 25% increase in debt. And the reason we saw that was partly because -- in a large part because what we did was actually we were taking very customer-friendly policies. We didn't cut anyone off. So if you took a like-for-like policy of where we had been before, where we would take them through the dunning process and after 60 days, we would have started to see services, the like-for-like is an increase in debt of about 8%. You'll know that we actually last year -- at the end of last year, we took a GBP 50 million provision for debt, and we're pretty comfortable that's covering our outlook for what's happened and what our outlook is. So In terms of debt, we saw definitely a quite significant increase. We allowed that to get higher because we wanted to make sure we didn't cut people off early. As I think I said in the last results, from July, we started to take a slightly more -- not quite as friendly policy. We just want to make sure that people were contacting this because we saw a lot of the debt when we're chasing couldn't contact the customer. So the next phase was to make sure the customers contacted us would give them terms to be able to pay it off over time, give them some free periods of nonpayment, then they pay later on extension of the contracts. So there was a number of policies we put in place to try and extend that. So that initial phase actually stopped pretty quickly. We didn't see an increase in debt post lockdown easing. So week 7 of the year, we started to see that ease pretty quickly. We didn't see the debt increase very much through the period of week 7 to last few weeks. We have seen in the last few weeks, however, that the debt begin to increase slightly. So very low single digits on debt increasing And we will just keep the policies we have today going forward. So there's still not quite the same policy we had pre COVID, and we'll make sure that we just review that in carrying on. Another way to look at it is, we've got what we call the cure rate, how much does of our bills that go out? How much is paid in the period? And previously, that would be running about 98%, it's currently running about 96%. So there's a couple of percentage points that we're seeing that it's just getting slightly worse over the last few weeks. So we're keeping an eye on that. The policies will remain customer friendly. And you've seen whether it's a small business support scheme, we've got 10 items there that we're trying to make sure they're just for those customers who are -- was trying to help them do business, whether that's about giving them cash flow benefits, just giving them tools to actually run their business. And we'll continue to look at that how we support them. But it's definitely -- as we sit today, we can see there's another phase evolving, and we're just reviewing our policies going forward about how to deal with SMEs over the next few months.

Nick, is that -- thanks, Gerry. Nick, happy with that?

That's great.

So now Sam McHugh from Exane.

I just want to talk a little more about FY '23, if I can? I think most of us know EBITDA is probably not the most useful metric especially with changes in capitalization policy, lease costs below the line, the sale and leaseback of head office, et cetera, and maybe even a change in U.K. corporation tax. So I understand you want to give investors reassurance on the balance sheet and dividend. But I wonder if you could give a bit more color around cash conversion and cash flow growth over the next few years kind of ideally on a post-restructuring basis, should we expect this EBITDA growth to translate into decent cash flow growth?

Sure. I mean, Simon, do you want to give a...

Yes, certainly, Sam, thanks for the question. It's an important one. So I mean EBITDA is an important measure. It's a very important measure. It's the great measure for the success we have as a business in driving cash generation from our trading operations and the management of our cost base. So it's an important measure, with all my colleagues in the room to understand how important the measure is. But the -- in terms of cash, we have, I think, been pretty clear, Sam, that as we ramp up FTTP, that we'll see a growth in our CapEx. And if we get to the sorts of rates that Philip and Clive discussed earlier, we've talked in the past about getting to sort of peak CapEx with FTTP rollout in the GBP 4.5 billion to GBP 4.6 billion range relative to the sort of GBP 4 million to GBP 4.3 million that we're looking at today. In addition, if you look at the lease interest and tax, I'd expect lease payments to be relatively stable at their current level. Clearly, we got cash tax and interest. If you add that with lease payments, it's probably running in the GBP 2 billion to GBP 2.2 billion range. As we move forward, we get -- potentially get a little bit of pressure on cash tax rate, but interest cost of debt remains low for the group. So we've seen in working capital interest tax leases in the GBP 2 billion to GBP 2.2 billion range. We talked about specific charges. And if you take sort of a rolling trend basis, it's probably running at GBP 200 million to GBP 300 million a year. So if you take those 3 elements of CapEx -- peak CapEx, working capital lease interest and tax and then the specific charges due to the arithmetic, you'll find at GBP 7.9 billion the reinstatement of the dividend is fully covered and obviously, as we move forward from there, we'd look to try and drive growth. Thanks, Sam.

Yes. Sam, I'll just add to that. I hope you do feel EBITDA is a good measure because without that, we can't generate the cash in the way that Simon has talked about. And I just want to reiterate what we're saying today and we feel strongly that we'll be able to pay the dividend and invest in the numbers that Simon talked about and peak CapEx somewhere between GBP 4.5 billion, GBP 4.6 billion, that should all go well for the long-term future of the company: investing heavily, paying a dividend and growing that dividend over time. So that's why the EBITDA of GBP 7.9 billion in 2023, we think is quite important.

So now Michael Bishop from Goldman Sachs.

My question is on towers. It looks like Hutchison is talking about spinning out its European tower portfolio, including the U.K. towers, of which I guess a lot sit within MBNL. So I was just wondering if you could remind us of the MBNL structure and the ownership model? And ultimately, whether you could do something with the towers within MBNL? And more broadly to that point, just what's your latest thinking on towers more broadly?

Well, I get Simon to give you -- I mean the short answer is not really. I mean, a lot of the sale and lease activity was done a little while ago. There are opportunities around the edges, I think, in our infrastructure, but there's nothing very significant. So there's important things we can probably look at, but it's complicated and most of that -- the big stuff has already been done. And we don't really want to look at any other sale and leasebacks, which are just sort of mere financing type of activities. But I mean, Simon, do you want to add anything on the structure of MBNL and how different is to do that anyway?

No, I think -- I mean, couple of key drivers from potential monetization of these sorts of assets. The first is raising debt. We typically find there are better sources of that. So you've really got to focus on what's the real value, intrinsic value that's created through these structures. And then may be opportunity for additional revenues to be generated if there is spare capacity on the asset. potentially some operational synergies through sharing as well so OpEx. So where we have assets, where there is a revenue or an OpEx opportunity that creates genuine value, then we will consider the next question. Do we own and have rights to monetize that space? And if we did so, would it compromise the strategic flexibility and the competitive advantage in our network? And when we examine those questions, there are important but selected opportunities and you will notice, you will remember a year or so ago we did indeed monetize a portion of Adastral. Specifically within MBNL, that is a venture which really does allow us to fully share our assets with a partner. And in doing so, we feel we're driving the values of those shared assets, so not a major opportunity for BT but there are important ones that we will go after where they hit the 2 criteria I mentioned.

Yes, I hope that makes sense, Mike. So of course, we're looking at it, but nothing significant and major that we could go in that category I'm afraid.

That's clear.

Any more questions?

No. Thank you. Sorry, this is Paul Sidney from Crédit Suisse.

I had a question on FTTP. Your fiber connections have now ramped up quite nicely to 13,000 per week. I'm assuming the majority of BT consumer customers. My question is, are there any other indications on what the average uplift in the customer's monthly bill as they move to FTTP from copper-based products? Just we kind of get an idea of what customers' appetite is to pay more for the premium service?

I mean I'll get Marc to give you his perspective on that. I mean, yes, you're right. Look, we're -- the build of FTTP is really exciting. I mean it's 4 premises per minute. And you're right, we are selling 13,000 a week from Openreach. And again, you are right, the majority is in BT consumer, but all CPs are now consuming and getting going on it. And I think BT consumer has 600,000 customers on FTTP already. So it's beginning to be meaningful numbers here. So it's really encouraging. The other thing is it's premium price. I'll let Marc give you the sense of how the customers are responding to it and what they're doing on speed and the pricing. Is that all right?

Yes. Thanks. Good morning, yes, we are, as Philip says, seeing really encouraging demand for FTTP. And this is reflected in the huge demand that we've seen in recent weeks, sort of post the lockdown for better connectivity from all sorts of customers, particularly in the home but also out the home with 5G as well. So we're pricing FTTP at a premium to copper and FTTC. And we're not seeing that impact demand. It's a premium that customers are paying in and around sort of GBP 5 a month versus an FTTC equivalent, and we're seeing good demand, as we've said, 600,000, close to 600,000 customers, and that demand is continuing. And off the back of that, we're also driving convergence as well. So I think encouraging signs that the U.K. consumer is prepared to pay a little bit more for a faster and more reliable service, and we think that's really encouraging.

Okay. Lovely. This is Charlotte Perfect from Arete Research.

My question is around long-term CapEx in Openreach. With the switchover moving over moving forward and with fiber maintenance CapEx being less than copper. I was just wondering if you could give us some guidance around what long-term maintenance CapEx might be in an all-fiber world, could we even see it getting down sort of 13% or below that sort of level?

Yes. I mean, Simon can give you his perspective. I just thought just to say on the transition. I mean, clearly, the faster we go in lots of ways is really helpful. So I think the vision for a 10-year 2030, where copper is over in the vast, vast majority of cases, we're on a full fiber network, and we are an all IP network shutting down some of our estate and all the exchanges that we know we won't need in the future. I mean that's a really happy path for us to go down and it has significant benefits across the board and not least environmental, for example, need less energy. But by definition, you're right, of course, to maintain that network will be less capital-intensive by definition. But there is -- there are some big steps to that because until you turn it all off, you've still got to maintain it. But nevertheless right. I'll let Simon give you his perspective on the CapEx implications of that.

Yes. I mean, I think we're very focused on rolling out FTTP to the entirety of the country over time. And that is a very significant undertaking and is going to place significant upward pressure on the Openreach CapEx associated with FTTP. And we talked about ramping up to sort of peak build rate in the '23, '24, '25 time frame. There will be some mitigation of that in the short to midterm as Openreach is able to dial back on the FTTC CapEx. There'll be some mitigation. But we can see CapEx in Openreach staying in the similar sorts of levels as we roll out FTTP. When we get to the end of that rollout program, then, of course, CapEx will drop really very sharply. Because we'll have completed the program and the cost of provisioning FTTP is considerably lower in the long-term once we've got the lines installed. And of course, the maintenance cost ongoing CapEx will be lower. So as Philip said, when we get to the end of that rollout, this is going to be a business that's consuming much less capital, but with some years from that.

And Charlotte, that was my point earlier on to another question about the long-term nature of the investment they need to get the enablers from Ofcom in the right place because clearly, there is a great case here, but we're going to have to run 2 networks for at least a decade, if not a bit more. And that's costly as well as building a new one. So -- but there's no question if the fair bet is in the right place over the long term, and I'm talking 10 to 20 years, it's going to be a good outcome and we're going to be left with a great national institution having a brilliant network for everyone to consume that is delivering fantastic speeds with great service and a low fault rate.

So now we have Robert Grindle from Deutsche Bank.

It's also related to CapEx, bringing it back to the more short term. However, you chose not to narrow the CapEx range. Just to clarify, that's not to do with Huawei spares, which Simon flagged. Is it because you are expecting open rates to accelerate again in the second half? And some of that cost is provisioning. Do you think you'll be able to pass on that provisioning costs to the CPs as you -- for the volumes you hope to do so when you strike a deal with them on the wholesale side?

Let me talk about the dynamics on this year's CapEx. I'll ask Clive, if he'd like to talk about how open reach think about commercial arrangement around provisioning with CPs. On the CapEx trends for this year, firstly, there is a range, and we've maintained that range because we are seeing a reasonable element of our CapEx, which is driven by customer volumes, that's particularly in Openreach with pace of provisioning, but it also impacts the consumer business where you'll know under our accounting we will capitalize some of the consumer premise equipment. Clearly, more volume in those 2 areas during the course of this year will press us into the upper end of our CapEx range. Clearly, that drives additional revenue in next year and beyond. So that's one uncertainty for us. The second is, in fact, the Huawei and indeed Brexit stock, some of that would indeed be capitalized. And so that is also a feature that's driving the CapEx range. And then finally, we have a very significant modernization program underway in BT. We are driving IT investment into maintaining customer service in our existing product set, but we are also developing the new product set, and there was also the range caters for differential pace and delivery during the remainder of this year. So those are the drivers, and that's why the range remains 4% to 4.3%. Clive, did you want to touch on sort of how you've thought about provisioning costs with CPs?

Yes. Thank you for the question, Robert. And the provisioning cost is not all passed on to the CP at the point of purchase. You can see the offer pricing that we put in the market to date, which is driving very high levels of take-up. Broadly speaking, it's GBP 50 for a connection for a CP to attach one of their end customers to our FTTP network. It costs more than that right now to -- for Openreach to do the connection work. What I am confident of though is that we will reduce the cost of that connection over time. We will do that by reducing the amount of labor time spent on the connection, and we will do so through reducing the component costs that we consumed during connection. We are commanding, at the wholesale level, a decent price premium over VDSL once the customer is connected, and that will cover the connection cost over time. So I'm happy with the direction of travel on reducing the cost of connection. We do not recover all of it at the point of connection.

So now Polo Tang from UBS.

Just a quick question in terms of consumer. Can you maybe just talk through what you're seeing in terms of the competitive environment and dynamics for both broadband and mobile?

I think, Marc, you're probably best just to give you a perspective on that, if that's okay?

Yes. Polo, thanks for the question. Still remains a very competitive market for us, of course, but we've seen really encouraging demand over the last few weeks. So if I look at all of our channels, whether it's retail, digital, contact center, we've seen levels of sales and demand actually exceeding the levels that we saw pre lockdown. So whilst it's a competitive market, the demand is good. And for the premium products that we're selling, FTTP, I spoke about that being it's a faster, more reliable, better network, and for that, we feel confident we can charge a premium in the U.K. consumer has taken that up in really good numbers. We've seen the 5G iPhone, the latest iPhone, 2 of the 4 that are on sale right now, off to an encouraging start as well. And of course, these are products not cheaply priced. These are premium fantastic product, and we're seeing good demand for that as well. We're seeing encouraging uptake in convergence as our Halo base grows, best are both off to a good start. So whilst the market remains competitive and very crowded, I feel like over the last few months, our trading performance has been encouraging.

Can I just check in terms of the 5G iPhone, could that result in more promotional activity in terms of the mobile market as we approach Black Friday?

Well, it's a bit early to say, Polo, because I think we're -- it's only recently gone on sale. We've only got 2 of the 4 items of the product launch on sale. And the promotional period of Black Friday, Christmas, I think it's going to be very different this year for a number of reasons. Some retailers are choosing not to participate. Some of the promotional activity, I think, has been brought forward. So we'll have to see. It's a bit early to say. I expect, as always, it's going to be a very competitive market. There's lots of choice for the U.K. consumer out there and lots of brands in a very crowded space all buying for attention. But we're performing well and trading well despite that level of competitive intensity.

So now David Wright from Bank of America.

Just kind of a quick question. We obviously had the Virgin Media O2 presentation submitted with a series of pledges one of course included the ambition pledge, however, we want to describe it to build a further 7 million houses with a gigabit capability, which I think we have been advised broadly FTTP. I just wondered how you guys thought about that, whether you've seen any obvious kind of acceleration competitive build your experience? But also when you look at your longer-term return on capital invested capital assumptions for the Openreach fiber build, to what extent you have competitive infrastructure build of that scale in your model? So just any thoughts around that would be really appreciate?

Yes. Look, I had to give you my thoughts and maybe Simon want to chip in as well. Again, looking at the overall build program, again, we obviously have got a plan to build 20 million premises by the mid- to late 2020s. And when we built the business case, we made a number of assumptions around that. And clearly, there are other builders planning to do a similar sort of activity, not to the same sort of scale. I guess the important point for us is a couple of things: one, the speed at which we can build and scale of the program; the cost, which is incredibly competitive compared to anywhere around the world. So I think we've got a real competitive advantage there. And also the quality of the product. And you heard talk about how his customers are responding to that. And we can see other CPs, the likes of Sky and Vodafone and TalkTalk, all seeing the full fiber proposition as being very, very strong. So that technology is definitely the winning technology in our perspective. So we just got to build as fast as we possibly can and deliver that. And I think there's -- the demand is out there. Of course, there'll be competition by definition. But we're very, very confident that where we take our fiber proposition, the demand will come, and we'll do well on it. Simon, do you anything else on other people's build?

No. I mean I think we clearly do see as you do, lots of communication of ambition over time, often quite hard to sort of understand exactly what timetable is associated with that and the extent to which its ambition already stated, that's been changed in some way. So we try to follow that. But In terms of our assessment of the build and the returns, absolutely, we take into account a wide range of scenarios, and that's built into the 10% to 12% range of returns that we have talked about. What I would say, of course, is that we're really focused on getting on with the build. We're building at an incredible pace and can cover the sort of target that you described in 2 to 3 years. That's the sort of pace we're building.

David, maybe just to give you some sort of bit of encouragement. If you look at our opportunity in the big cities, I think with fiber, I think that is something that you'll see BT make good inroads in over the coming years. I think there's a decent size opportunity for us to go after there when the full fiber product comes on stream. I think we're very excited about that.

This is now Siyi He from Citi.

I just have a quick follow-up to the previous question. I mean I think Virgin Media and Otto also talk about the potential open up the network for wholesale. I'm just wondering whether that could impact the way that you structure your wholesale agreement with CPs so that you can increase the take up before any potential rollout kind of take place?

Yes. Look, I mean it's a good question. As said, in general, in his area, it's really competitive, but also in Clive's area, it's really competitive, as I've just described. So there's a lot of people out there seeing the opportunity of great digital infrastructure, specifically fiber and fixed line connectivity. So a lot of people out there building, no question. And how the wholesale market plays out in this new very, very competitive dynamic who knows. I go back to the point of saying, BT will have the biggest and the best footprint for FTTP. And I believe that all the CPs will want to connect into that network because it's the best and the cheapest and delivers the best service for our customers. Does it mean that there are other options to people? Yes, there will be. Now if some big CEP decides to put all their volume not on the OpenEdge platform, of course, that would affect us. Would that bring the returns down? Definitely, it would. But I still tell you, even in those situations, the investment case makes sense. It will be lower than we would like, but it still makes sense, and we'll keep plowing on delivering that massive build of 20 million homes by mid-2020s or late 2020s.

I'd add to that, Philip, I mean, it is a recognition that there are a wide range of scenarios for this build, which is why the fair bet is so crucially important. Our investors need to have confidence that they were able to benefit from the upside scenarios because they're taking the risk on some of the downside scenarios as well. So that's a very important part of the FTMR process that's underway.

That's a crucial point. So as Simon says, there is not insignificant risk in this, by definition, for the reasons you're saying. What we're saying, what we believe is, BT has to build a significant footprint and will be successful, that I'm sure about. How successful? I don't know exactly because the markets, as we just described, is very competitive, it's very uncertain, and there are loads of moving parts, right? So there's build, there's take-up, there's other technologies, there's competition, there's a whole host of this pricing. So that dynamic is what we're dealing with. And the great news for BT is, we've got a unique position. We are the market leader, and people really, really value the kind of propositions and products that we offer and that we're building right now. So I think in the long term, that will be a favorable thing for shareholders as long as that we can get that sort of fair bet terminology right in the regulated framework.

And now James Ratzer from New Street Research.

I had a question I'd like to dig in a bit more around the headcount reduction, please. So I mean, firstly, an encouraging start on the first half this year with the 3,600 reductions. So just wanted to check how much of that is the net of the disposals because it seems like a lot of that did come in, in Global Services? And then secondly, I'd just love to get your thoughts on then how that run rate develops over the next 2 to 3 years within your program to grow EBITDA to FY '23? How should we think about net headcount reduction from here over the next 2 to 3 years?

Yes. I mean I'll give you a sort of an overall answer and maybe Simon can talk about sort of the net and disposal effect. Look, again, as I said many times, we're -- our sort of agenda here is very straightforward. It's to build a stronger BT, a better BT and modernize the company to make it really competitive in dynamic for our customers in the future and a great place to work for our colleagues. And again, I said, over the next 5 years, there's no question we're going to have less and less people, okay? But -- and therefore, we plan to do that in a steady professional thoughtful way. And what's driving it is, is using technology to make it easier to connect into BT as a customer and for people who work here. So I expect that to see a steady continuation of that trend of less people being at BT. And my main aim is to use natural attrition, for example, which runs at about 10% as the major driver of that. And I think we've seen quite a lot of that in this number so far, and we'll continue to do that, right? So we basically really tightened recruitment, and we've really been very, very careful about thinking about getting people into the business. And that's why -- that's probably the single biggest driver of that, I suspect. And so put us down for continued gradual reductions in our workforce over the next few years as we grapple with new technology and put it in place. Simon, anything on the global headcount?

No. In this year, the 3,600 does include the benefit in the hundreds of sum divestments. But bear in mind, we've also made some quite significant investments in our We have in-sourced a number of operations, which we believe we can do more efficiently internally. We have been bringing customer service activities back into the U.K., which creates an increase in headcount for time. So the net number is after divestments, but after also investments in the business to drive better customer experience and sales, so the underlying efficiency-driven reduction is meaningful and will continue.

And the other thing, sorry, triggered in my mind, and Clive is obviously recruiting engineers to build the FTTP program as well. So it's another example. So that's net of all that activity. And so we'll continue to recruit more people to build the network to get out to the 3 million a year from where we are today, which is a run rate of about 2 million.

Net run rate of around kind of 7,000 a year should be achievable for the next 2 to 3 years?

I think I wouldn't extrapolate that rate.

So then based off your earlier comments about why not, I suppose, if we're saying you did 3,500 in the first half, and that's going to continued efficiency in natural attrition?

You've heard that concept of a low-hanging fruit, haven't you? So typically when you're at the beginning of an exercise and what we're seeing is the sort of swim off of the first transformation program, which sort of came to a close at the end of this year, that carries on through. The real trick here and the reason we're that cautious is, we're not just asking people to leave or not getting people to do their work, we're changing the work. So the work's got to go. So unless the work goes, we're keeping the people because we've got to deliver for our customers. So that's why it's not as simple as a straight line in the way you're describing it. So we're going to make sure we deliver for our customers, make it a great place to work, and we believe we will need, over the next 5 years, less people. And in the end, it will be significantly less people, but it will be steady as she goes and the most important thing is to maintain the delivery of our service for our customers and do it in the most efficient way which, as I say, will need less people, but I wouldn't extrapolate the run rate that you've got in the first half.

Can I also just, Philip, one other point. We have got a significant modernization and cost transformation underway. That is going to deliver GBP 1 billion of gross cost savings in FY '23 and a couple of billion in FY '25, that will be delivered. The -- that will drive the costs down, it will also deliver some net cost reduction, as we described in our guidance. In terms of the mix of our own people versus the third parties that we use, you heard indeed Clive talk about getting that balance right between internal and external. The same is true in some of our shared service activities, the same string some of our IT activity. The key is delivering gross and then net cost reduction after appropriate investment. The mix of that between our own organization, third parties, that's something we'll get right for every single decision as we move forward. And that's what will then drive the shape of our own direct workforce.

Yes. And that, sorry, just final point again, just say within that sort of GBP 2 billion cost program, clearly, less people is a big part of it, but also there's many other very important moves in procurement and other costs, which are part of that program, which again, we've made a lot of progress in the GBP 352 million that we announced annualized in the first half, it's many other things in there as well, a long lines I've just suggested, which is, again, is very encouraging, but it's early days, and there's a lot of hard work to be done over the next few years.

And now Jerry Dellis from Jefferies.

The question is really on Enterprise. From the outside, Enterprise generally seems rather opaque. But obviously, you've managed to put a range of outcomes on it in order to define your March '23 EBITDA guidance. So I mean as we look at it, there's GBP 1 billion of fixed voice revenue declining double digits at the high marginal margin, the mobile market looks pretty competitive, and we look forward to the switch off in about 5 years' time. So perhaps could you clarify for us what enterprise looks like as we navigate past the COVID situation towards building towards your FY '23 guidance?

Yes. Look, I'll make a couple of comments and maybe Simon and Gerry, if you want to chip in. I mean look, you're broadly right, okay, I think there is still a few years of sort of negative outflow of legacy voice. And that does need to flow through. Of course, you're right. I think when you step back, there are -- once that's out the way and we've sort of focused on the newer type of activity, I do see opportunities in mobile. I do see opportunities in And actually, as we mentioned in our results, you can see that the corporate and public sector is holding up very nicely in some of the pipeline wins that we've sort of mentioned and some of the numbers you see there are sort of quite encouraging, of course, early days. So I think that you're right, it is challenging and some of the numbers are speaking for themselves. But I think over the medium term, I can see that the tide changing slightly when those price downs and the regulatory downs sort of move away. Simon, anything to add on then we'll ask Gerry to make his...

I think we should go to Gerry.

Gerry, do you want to add anything?

Yes. I think that covers the broad brush of it. But I mean in terms of the opaque comment, I do understand the nature of Enterprise is very diverse. So you get lots of different moving parts within the business. I think the key dynamic in terms of the legacy voice is very clear. Mobile is probably the most impacted by COVID. And if you look at the financials on mobile, actually, just the whole mobile base, the base is we're trading well. And what you see in terms of the downside year-on-year, there's about 30 million in there, half of that is a move to SIM only. So what we're seeing is like handset has certainly been sort of an area where people over the year, but actually, especially through the last period, we're seeing people not want to renew on the basis of handset in the B2B market. And the other half is out of bundle and almost -- not all, but almost all of the out-of-bundle impact on mobile is actually roaming. So we do see that actually with the trading and to move away from COVID, we'll start to see more out of bundle. Actually, the service revenue ARPU just on service revenue, It's pretty stable. We've got about a 5% increase in the base, and we certainly, through the last period, we've seen about a 5% dilution in terms of the service revenue. So I do think that will come back over the years. I think what we're seeing with not having the Apple 5G, people having to renew their handset base. We see a big focus on that through mobile. So there's definitely an opportunity in mobile. I think what you saw -- you see in the broadband base is the revenue per broadband connection at the moment is actually pretty stable year-on-year. We've certainly seen an impact on wholesale, where there are price impacts. But again, I think the broad brush of the trading is strong. We've definitely the impacts of COVID that is affecting the numbers. I think they will come back over time, whether it's going to be this year or next year. But I think over time, we'll start to see those come back. So in terms of the networking, fixed broadband, mobile, I'm pretty confident on that. I think where we definitely have the issue is the headwind of legacy voice, that's not going to change, and we've got the headwind of the MVNO loss. But actually, I think the underlying trading can be pretty strong going forward.

I think we've got a last question now, I think it's for Adam, is that right?

We do. Yes, it is Adam Fox-Rumley from HSBC.

It's around Openreach's relationship with end customers. To me, there seems to have been a bit of a step-up in rhetoric from a number of service provider customers in recent weeks, particularly around pricing. The tone of the prior 12 months appear to basically be constructive across the board from all parties. So I wondered if this was a function of moving to the last stages of the regulatory consultations or if there were any other concerns that are emerging?

No, I mean again Clive, you should comment here. Again, what I would say is, Clive and I spent quite a lot of time talking to our major customers. And I have to say I think the relationships are really, really strong. And I think, you can see in some of the feedback Clive gets from the CPs on the performance that him and his team are putting in. So I think it's really positive. When you're looking at fiber, clearly, that is the future. everyone recognizes that. And I think we're galloping away and building so much pace in the program of build and also now sales I think everyone is beginning to think, right, we you get cracking here. And I think that's what you're seeing is people thinking through their business models now that fiber is here. It's here and it's here to stay and it's going to start accelerating even more. So that's all you're hearing. We've got to find a way of delivering a program into the market, which at the end of the day, it's the same price, the same terms for everyone. That's the nature of the beast with Openreach. So people can talk about what they want. In the end, we're going to listen to all the CPs, get all the feedback and find a compromise that works for everybody to deliver what the country needs, which is brilliant digital infrastructure, on an FTTP platform that gets as many customers on it as quickly as possible, enjoying the benefit of that service. Clive, do you want to add anything on the conversations?

Okay. Thank you for the question. We are intensely speaking with all of the service providers around FTTP. The whole thing's become really real, I think, the CPs. Sales volumes are increasing very rapidly. As Mark talked to you about earlier. CPs are getting their IT sorted. They're getting their processes sorted They're experimenting in the marketplace to try to understand what level of premium for what tier of speed will customers be happy with. So they're trying to work out their pricing. And of course, they're in deep dialogue with us about the kind of pricing structures that they think they need to support their businesses. In the round, though, loads of engagement here, nearly all of it very, very constructive. And as an industry, we're going to go to this fiber platform together, and we will debate just how and at what pace and at what price points we do all of this. So you're going to -- you are going to hear lots in the press and in other fora because this is now very real. Fibers arriving. We've got a footprint already addresses 11% of the U.K. population, and we're building a rate of 2 million homes a year and still accelerating. So it's because it's very real that you see the debate -- the kind of leaking out of meeting rooms and into the press.

Great. Well, look, thank you, everyone, for all your questions. They have a great question. Really enjoyed engaging with you, and thanks very much, and see you next time.