BT Group plc (BTA) Earnings Call Transcript & Summary

Good day, and welcome to BT's H1 results call for the half year ended 30 September 2021. My name is Sandra Patrick, and I am your host today. [Operator Instructions] I would like to advise all parties that this conference is being recorded for a replay purposes. And now I'd like to hand over to Mark Lidiard. Please go ahead.

Sandra, thank you very much, and welcome, everyone. My name is Mark Lidiard from the BT Investor Relations team. Presenting on today's call is Philip Jansen, Chief Executive; and Simon Lowth, Chief Financial Officer. They will also be hosting the Q&A session. Before we start, as usual, I'd like to draw your attention to the 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.

Thank you, Mark. Good morning, everyone. Thank you for joining today's call. By way of an agenda, I'm going to make some brief interrupted comments and provide a quick overview. Simon then is going to talk through the results themselves. And then I'll come back and share some more details on our plans, progress and performance. Moving straight to Slide 5. The business continues to perform well, and we delivered results overall in line with expectations for the first half, demonstrating steady progress against our plan. This performance, coupled with our outlook, has given the Board the confidence to confirm today that we are reinstating our dividend as promised back in May 2020 at 7.7p per share with an interim payment of 2.3p per share. At the same time, we are generating enough cash to invest in our future at unprecedented levels. We have a compelling market opportunity, which, coupled with our unique assets and improving competitiveness, point to an improving picture for our path to sustainable growth. We're accelerating the pace of delivery and going further and faster on transformation, generating momentum into the second half of the year and beyond. And as a result, I'm reconfirming our outlook for this year and next, and we'll lay out expectations for an improving cash flow profile in the medium and long term. As ever, though, we have more to do against the backdrop of highly competitive markets and legacy product declines. Moving to Slide 6. Our strategy and plan remain the same, but we can summarize our efforts under 5 focused and clear priorities that will enable us to capture the opportunity ahead and allow us to deliver sustainable growth in value. Taking these in turn. At the top, it's all about driving growth in Consumer through our converged propositions and services. Next, we will capitalize on Enterprise and Global's unrivaled assets to restore growth. Thirdly, we will deliver Openreach growth and strong returns on FTTP. The fourth priority is to relentlessly and continuously transform our cost base and improve productivity. And finally, we'll always keep our heads up to ensure we optimize our business portfolio and capital allocation. Executing against these priorities will deliver consistent and predictable revenue growth from next year, EBITDA growth from this year and significant improvement in normalized free cash flow in the medium and long term, all of which underpins our progressive dividend policy. As I said, I'll cover some of these in more detail in a moment, but first, let me hand over to Simon to run through our first half results.

Well, thank you, Philip, and good morning to everyone on the call. So starting with our financial performance on Slide 8. Adjusted revenue for the half year was GBP 10.3 billion, but is down 3% as growth in Openreach was offset by declines in our Enterprise businesses. Consumer revenue was flat for the half year. Adjusted operating costs were down 5%, driven by the cost savings generated through our modernization program and tight cost control, partly offset by higher program rights and Openreach operating costs. Adjusted EBITDA for the half year was GBP 3.7 billion, that's up 1%. Moving to Slide 9, the individual unit results and starting with Consumer. Revenue was broadly flat for the half year, helped by higher direct handset sales although they were constrained by stock limitations given the ongoing global supply chain issues. BT Sport revenue was also higher versus the prior year. Tight cost management, including lower indirect and mobile commissions offset the benefit of prior year sports rights rebates, which meant that EBITDA was also broadly flat. In our Enterprise division, revenue was down 5% as continued declines in legacy products and the ending of some legacy contracts offset growth in retail, mobile and in our new products. However, strong ESN delivery and a fixed asset disposal both in Q1 and lower costs through the half offset the revenue decline, and that drove a 2% increase in EBITDA. Moving on to Global. Revenue declined as we saw ongoing challenging market conditions resulting from COVID-19. This led to delayed project-based spend and change control sales. The decline in revenue led to lower EBITDA. Excluding divestments, one-offs and foreign exchange, this was down 21%. Lastly, Openreach. Grew revenue 5% in the first half, driven by higher rental bases in fiber-enabled products and Ethernet and higher provisioning. This was partially offset by declines in legacy copper products. EBITDA in Openreach grew 7%, driven by the revenue flow-through and by efficiency programs that were only partially offset by higher recruitment, repair and provision costs. Moving below EBITDA on Slide 10. Depreciation and amortization was GBP 2.2 billion, that's up 1%. And adjusted net finance expense was GBP 382 million, that's down 1%. Our adjusted tax charge was GBP 183 million, down 22%, reflecting an effective tax rate of 15.3%. This resulted in adjusted profit after tax of GBP 1 billion, up 7%. The lower tax rate versus Q1 is due to a larger proportion of our CapEx qualifying for the super-deduction than initially expected. This translates to about GBP 5 billion of tax losses being carried forward into FY '24. That's up from GBP 4 billion. Our reported effective tax rate was 57.3%, reflecting the remeasurement of deferred tax balances following the increase in the corporation tax rate to 25% from April 2023. Specific items after tax of GBP 583 million included restructuring and property rationalization costs of GBP 135 million, but it was mainly driven by the increase in the deferred tax balance. Reported profit after tax for the period was GBP 431 million, down 50%. Finally, our reported earnings per share was 4.4p, and our adjusted earnings per share was 10.2p. Moving on to cash flow on Slide 11. We delivered GBP 360 million of normalized free cash flow in the half year, but is down 15%, primarily due to higher cash CapEx and working capital outflows, which offset the lower cash tax. We paid cash tax and interest charges of GBP 416 million, lease payments were GBP 319 million, and we incurred a net outflow of GBP 370 million from changes in working capital and other movements. This was driven by the payment of the annual bonus and phasing of Openreach collections. We invested GBP 2.3 billion in cash CapEx in the half year, that's up 9%. Net cash specific item costs totaled GBP 359 million. These included the Dixons Carphone settlement and restructuring payments of GBP 162 million. In addition, we received a refund of GBP 227 million on Spectrum. Our reported free cash flow was GBP 228 million, that's up 13%, as lower normalized free cash flow and higher cash specific item costs were more than offset by the refund on Spectrum. We paid GBP 600 million into our pension schemes, resulting in free cash outflow post the pension deficit payments of GBP 525 million. At the half year, we had financial net debt of GBP 12.3 billion, that's an increase of GBP 0.6 billion since the end of the prior year, primarily due to CapEx and our pension payments, which offset the net cash inflow from operating activities. As at the 30th of September 2021, the IAS 19 deficit was GBP 4.3 billion net of tax. That's an increase of GBP 0.1 billion from the 31st of March, as a decrease in the real discount rate was partially offset by positive asset returns and deficit contributions over the period. Moving to Slide 12 and our outlook, which we are reconfirming today. An improvement in revenue trends in the second half, largely led by our Enterprise businesses, supports our expectations for broadly flat revenue in FY '22, followed by growth in the outer years. We continue to expect to deliver between GBP 7.5 billion and GBP 7.7 billion of adjusted EBITDA this year and at least GBP 7.9 billion next year. As a result of the accelerated efficiencies, it's likely that CapEx this year will outturn closer to GBP 4.8 billion. Normalized free cash flow is still expected to be between GBP 1.1 billion and GBP 1.3 billion, but likely to outturn in the upper half of this range given the slightly lower CapEx. And finally, as promised, we're reinstating our dividend at a rebased level of 7.7p per share, with the interim declared today at 2.31p per share. And on that positive note, let me now hand back to Philip.

Thanks, Simon. So moving to the market opportunity on Slide 14. Understanding and demand for our products and services has never been higher. Customers are now focused on the capacity, speed, reliability and security of their connections more than ever before, driving fixed data consumption up nearly 4% last year alone. Value for money, not just price, is becoming more important. Products, performance and service matter. Coverage and adoption of next-generation networks are low in the U.K., including FTTP and 5G. And penetration of converged products is behind European markets. Furthermore, digitization of products and sales in the U.K. also lags behind peers. This, combined with the exceptional demand, leads us to forecast growth over the next 5 years in both our Consumer and Enterprise markets, a clear change from recent years. Given our network leadership in the U.K., this is a huge opportunity for BT. We're in a supportive and stable regulated regime with Ofcom's wholesale fixed telecoms market review, representing a marked shift towards a pro-investment wholesale landscape. And Ofcom's fairness agenda, which we fully support, has helped to ensure consumers are treated more fairly with lower pricing differentials between existing and new customers across the industry. And finally, whilst markets remain extremely competitive, we believe pricing environments have become more constructive in recent months, reflecting my earlier comments, and the higher costs associated with growing data usage. This has been further supported by Ofcom's WFTMR which allows for inflation on anchor FTTP as well as legacy product pricing at the wholesale level. Moving to Slide 15. These combined to create a compelling opportunity for BT given our unique assets. Make no mistake, BT is a stronger, better business and is now much more competitive. We are the market share leader in U.K. retail markets with a presence in over 50% of all households and over 1 million business customers and we serve around 4,000 business customers worldwide. Customers choose to buy from BT and EE for our differentiated products and our ever-improving customer experiences. We have the broadest portfolio of next-generation products, including 5G, FTTP, SD-WAN and Ethernet, all supported by our superior security and cloud access propositions. And we have a head start on converged products with a strong pipeline of truly differentiated propositions to maintain our edge. Our brands are going from strength to strength with all-time high Net Promoter Scores for the BT brand across Consumer, SME and Global's multinational customers. EE maintained its strong leadership position amongst consumers and generated the joint lowest complaints to Ofcom of all operators in the most recently published data. BT is also first choice consideration for business customers. We have unrivaled geographic sales, marketing and service reach with over 580 consumer stores in the U.K., over 3,000 salespeople in Enterprise and the ability to serve multinational customers in over 180 countries across the globe. And we differentiate further to having the largest, strongest and most reliable next-generation networks in the U.K. with leading 4G and 5G networks and plans for a new converged core by 2023. Openreach is the leading fixed access wholesaler in the U.K. with nationwide coverage, offering the best products and sharp price points and regulated ever-improving service. Additionally, its unique systems and networks are deeply integrated with those of our communication provider customers. This position is underpinned by the largest, superfast, fixed access network in the U.K., which covers nearly 29 million premises and the largest FTTP network now with almost 6 million premises passed. We've made great progress in driving forward the modernization of BT and we have scope for further savings as we continue to simplify and digitize our products, processes and systems. Supporting this is our move away from costly complex legacy to next-generation networks, systems and products. And we have the balance sheet strength to invest in the massive agenda of network and digital transformation at unrivaled pace and scale whilst maintaining our commitments to our BBB+ through-cycle credit rating target, to our pension scheme and to our progressive dividend policy following reinstatement this year. On Slide 16, we've distilled our strategy into 5 clear priorities to grow our business. First, we will drive growth in Consumer through our converged propositions and services. Our converged propositions deliver higher ARPU, underpinned by inflation-linked pricing and significant improvements in NPS, leading to lower churn as our customers are happier and more satisfied. We've already got 50% of Consumer's BT broadband base onto our flagship converged product, Halo, and have a strong pipeline of converged propositions on the way. Second, we will capitalize on Enterprise and Global's unrivaled assets and strong competitive positions alongside the attractive market dynamics to return these units to growth. Enterprise and Global have developed a strong portfolio of next-generation services, and we are committed to leveraging these to drive up market share in fast-growing areas where we are underindexed, such as unified comms, IP voice, IoT, security and managed cloud. This return to growth will be underpinned by a significant improvement in operational delivery driving down order complexity and driving up NPS. Third, we will deliver Openreach growth and strong returns on FTTP. Openreach is already building FTTP faster at lower cost and with a larger existing footprint that all of the competition combined. Our plan to cover 25 million premises by the end of 2026 will leave virtually no commercially viable home or business without an option to take the Openreach FTTP line, making Openreach the only national provider of choice for ultrafast speeds. And we will leverage our reputation for consistently high service levels together with compelling commercial deals to drive take-up onto our access platform, which is already connected to our many communication providers' customers and their networks through our exchanges. Fourth, we will transform our cost base and improve productivity through process simplification and digitization and through retiring legacy networks with customers phased off 3G by 2023 and plans to shut the PSTN by the end of 2025 and move to an all-IP network. This is a group-wide program and we expect it will drive margin expansion across all our units. And finally, we will continue to explore all avenues to optimize our business portfolio and capital allocation, including reviewing opportunities to grow in adjacent markets. These priorities will bring out the best of all our units to deliver growth in value and capitalize on the compelling opportunity we see in our markets today and going forward. Moving to Slide 17. We've already made significant progress against these 5 priorities, and we're gathering momentum into the second half of the year. Starting with Consumer. In the quarter, we delivered an inflection in broadband ARPU, and we continued to drive volumes on to Halo, which is our highest NPS, highest ARPU consumer product. Our Halo offering is underpinned by the higher speeds and improved reliability of Openreach's FTTP with over 900,000 of Consumer's customers now on the FTTP network. And our mobile network is second to none. We've extended our 4G geographic coverage to over 80 parts of the U.K., and our 5G network covers around 40% of the population with 5.3 million 5G-ready customers. This is indeed an incredible achievement since we began our rollout only 2 years ago. Bringing this all together, the result is that churn and complaints on both BT and EE are at record lows. Finally, and most importantly, Consumer's NPS is at its highest ever level. Moving to our second priority. We've significantly enhanced our business-to-business portfolio of next-generation services with the international launches of integrated secure services that include WebEx, Zoom and Microsoft Operator Connect. And in the U.K., we have a new lineup of Halo for business products and the digital marketing hub to give SMEs a platform to access digital advertising. Enterprise has focused on reengineering operational processes to drive NPS as voted by SMEs to an all-time high and has adopted a new operating model, which includes the formation of 2 new units. One, dedicated to serving the millions of small office, home office firms in the U.K. And the other, Division X, focused on selling solutions based on 5G edge and IoT technologies. We're already seeing customer growth in mobile and voice over IP and a stabilization of customer numbers in broadband as our revised strategy is driving an improvement in market share and lower churn. Global launched Eagle-i in October, our new transformational cyber defense platform. And despite the well-documented market challenges, Global actually delivered a strong order intake performance in quarter 2, up 29% to GBP 1 billion, helped by a major contract signing to connect a customer's operation across 60 countries. Moving on to FTTP. Openreach is now building at an annualized run rate of 2.5 million premises a year as it accelerates to its peak of 4 million over the next couple of years at the lowest cost and highest quality. We now have 1.3 million customers connected to our FTTP network and are driving even faster take-up through our recently launched FTTP-only 10-year framework agreement, which delivers long-term index-linked pricing certainty in return for rapid adoption. Indeed, 10 communication provider customers have signed contracts, including Sky and TalkTalk. Furthermore, Openreach continues to raise service levels and delivered its best ever first half on-time repair performance. Service performance, as measured against Ofcom's quality of service standards, is firmly on track giving customers another very compelling reason to stay with us. Next, on to our excellent progress in the modernization of BT since I announced plans in May 2020. Having already reached our target of GBP 1 billion of gross annualized cost savings, that's 18 months earlier than we anticipated, today, we are announcing the bringing forward of our fiscal year 2025 gross cost savings target of GBP 2 billion by 1 year to fiscal year 2024 with further savings to follow in fiscal year 2025. We still expect total cost to achieve these savings, including the savings in fiscal year 2025, to be GBP 1.3 billion. And finally, we continuously look to optimize the group's portfolio and capital allocation to maximize value. With this in mind, we've taken the decision not to pursue the FTTP joint venture. We've done a lot of work on a potential joint venture, including discussions with prospective investors. But with FTTP CapEx costs coming down and take-up ahead of expectations, we have decided to retain 100% of the project for shareholders and to remain fully focused on driving build and take-up. In addition, we continue to be in discussions regarding the future of BT Sport and we'll provide an update at the appropriate time. Bringing this all together on Slide 18. We will drive continuous improvement and deliver sustainable growth in value for all our stakeholders. Starting from the bottom of this chart, revenue will be broadly flat this year but with consistent and predictable growth from next year. Across the group, this growth is supported by recovery from COVID-19, by inflation-linked pricing on around 2/3 of our revenue and by sales of converged products in growing markets. And by mid-fiscal year 2023, will have moved 100% of Consumer's contracted base onto CPI plus contracts. Moving up the chart. As you've heard, we're accelerating our cost transformation plans, which, combined with an improving business mix, underpins our confidence in EBITDA margin expansion from today. As a result, we have increasing confidence in our ability to deliver EBITDA of at least GBP 7.9 billion next year, with growth ahead of revenue in the midterm. Our accelerated delivery of transformation efficiencies is also supporting a reduction in our CapEx despite inflationary pressures and without impacting our ability to invest in next-generation networks and digital transformation at unrivaled pace and scale. This means we expect CapEx this year to be below the GBP 4.9 billion that we guided to. But importantly, it will support a more meaningful reduction of around GBP 200 million per year from next year. As a result, we expect peak CapEx going forward of around GBP 4.8 billion rather than the GBP 5 billion we previously indicated. As a result of our continuous improvement agenda and drive for efficiencies, we are announcing today a reduction in FTTP build cost. The Openreach team now believe we can build FTTP at a cost that's 15% or GBP 50 lower than previously envisaged across our whole footprint. That's a range of between GBP 250 and GBP 350 per premises passed. We are focused more than ever on cash conversion, reflected in this improving outlook. And looking further out, we expect multiple step-ups in our cash flows as we move to an all-IP, all-FTTP network. From December 2026, post-peak FTTP build, we will significantly reduce our FTTP run rate from the peak of 4 million premises per year, driving a reduction in CapEx of at least GBP 1 billion. Additionally, by the end of the decade, many millions of customers will have been migrated to FTTP from legacy services. The fault rate on FTTP is around half that of copper, and we can manage many more aspects of the network digitally. So we expect maintenance OpEx per line will be around 50% lower. And the structure of the FTT network will enable us to rationalize our exchange estate, saving on lease, energy and maintenance costs. Overall, this move towards an all-IP, all-FTTP network will drive a further GBP 500 million in incremental cash flow entirely from operating cost savings. The bottom line is that we expect these 2 actions alone to deliver at least an incremental GBP 1.5 billion of normalized free cash flow by the end of the decade before any contribution from additional revenue growth and further transformation benefits net of tax. I have huge confidence in our ability to deliver this outcome as a minimum. And don't forget, based on our current plan, we expect the pension scheme to be fully funded by 2030. So our significantly improved cash flow will be used to increase returns to shareholders through our progressive dividend policy, support our BBB+ through-cycle credit rating target and invest in adjacent business opportunities where these provide the opportunity to drive further value. So to summarize on Slide 19. We see a compelling opportunity in our markets today. Our leading asset position and improving competitiveness mean that we are uniquely positioned to capitalize on this opportunity through our 5 priorities. Execution against these priorities will reverse the challenging revenue picture we've seen over the past few years. Our confidence in our outlook is underpinned by a number of high conviction drivers of cash flow which we announced today, including delivery of GBP 1 billion of gross annualized cost savings 18 months early, enabling us to pull forward our target of GBP 2 million by 1 year to fiscal year 2024 with further savings in fiscal year 2025. In OpEx, the accelerated savings increased our confidence in the delivery of at least GBP 7.9 billion EBITDA next year and in EBITDA margin expansion across the group. In CapEx, the accelerated cost savings will support a reduction in CapEx of GBP 200 million from next year and a lower peak CapEx of GBP 4.8 billion. We have increasing confidence in returns from FTTP with 15% lower build costs and take-up ahead of expectations. This has driven our decision to retain 100% of the project and keep the upside for BT shareholders. From December 2026, post-peak FTTP build, we will significantly reduce our FTTP run rate from the higher 4 million premises per year, driving a reduction in CapEx of at least GBP 1 billion. And finally, beyond this, by 2030, we expect our move towards an all-fiber, all-IP network to drive a further GBP 500 million in incremental cash flow entirely from operating cost savings. So we have identified clear drivers of at least GBP 1.5 billion in incremental annual cash flows by the end of the decade before any contribution from additional revenue growth and further transformation benefits net of tax. As I've said before, what we have today is a stronger, better and more competitive BT, which will deliver enduring and sustainable growth in revenues, EBITDA, cash and, consequently, returns to shareholders. We have around 45 minutes for questions and answers. So please limit questions to 1 per person to allow as many people as possible to ask questions within the time we have. And so could I ask Sandra please to open up the lines?

[Operator Instructions] Our first question is coming from Akhil Dattani from JPMorgan.

Maybe I can ask a question on the guidance you provided today on CapEx, build costs going forward. Obviously, it's great to see that the FTTP build cost is going to be GBP 50 lower at the midpoint. Maybe you could help us understand what exactly is driving that lower cost rate? And I guess where my question is really getting at is just trying to understand, do you think that, that is a cost saving your peers can equally benefit from? Or is there something differentiated here, which means that you have an advantage? And I guess the follow-up to that really is that when you think about what that ultimately means, does that essentially mean higher IRRs now for BT relative to your base case? Or are there any other offsetting factors that we should be thinking about?

Yes, I mean, good question. I'll give you a bit of an answer and then maybe Simon can chat as well. I think the short answer is, as we build more, get more expertise and we've got significant scale in what we're doing, we've managed to reduce the number of manhours it takes effectively to build fiber. And that 15% reduction is very significant to your point. I think, you have to talk to other people, I suspect that is a competitive advantage, yes. I think we would say that versus other people, we were already in good shape in terms of the cost. Again, if you compare those other countries, we will look at Germany where it's EUR 1,000 per premise. We felt we were competitive before this move, but the team have been working religiously to try and find ways of ironing out any of the potential wrinkles in the processes of delivering the build to the level we talked about now. So it's about every element of building that we're getting smarter at that ultimately reduce the price. The other thing I'd say is, and I'll let Simon chip in is, making a statement today on the basis that we know there's inflation in the environment, obviously, and that applies across the board, we still feel that we're going to see a 15% reduction versus what we've previously thought. So it's across many elements. I don't know, Simon, do you want to chip in there at all?

No. I mean I would say -- I mean it's unambiguously a competitive advantage. We've got scale and we've got a sort of proven record, which is building skills and innovation in what we're doing. And that -- those in combination are hard to replicate. I would say, secondly, to your final question, Akhil, that clearly, lowering the build cost absolutely further reinforces our confidence in getting the IRRs we discussed on the FTTP investment.

Yes. Akhil, one other thing, just I think there is a clear supply chain advantage in terms of -- we've got our own people doing it, but we've also got a significant chunk of people from a third-party contractor angle who have signed up to long-term deals to build for us. So I think we're really pleased that we can see acceleration in the build and get to the 4 million as quickly as possible and the fact that costs are coming down is very encouraging.

That's great. And can I just ask a super quick follow-up, which is, is the decision not to progress with the JV purely down to the lower cost and greater confidence in the IRRs? Or were there any other factors beyond that, that also contributed?

I mean the quick answer is it's mainly down to that with 1 other small factor, which is given the progress and the focus and the delivery that Openreach has, why run any risk of distracting them and confusing things when we are absolutely going to be successful in the FTTP build and the connection rate? Let's just charge at it because we're very confident about the returns we can make on it.

Our next question is coming from Polo Tang from UBS.

So just a follow-up in terms of the FTT build costs coming down. I mean if they're coming down by GBP 50 per home for you, why are they not also coming down for the old nets, meaning that you've actually got an increased risk of fiber overbuild in the U.K.? And then just related to that, in your guidance, you obviously reiterated your guidance, but do you make any allowance for Sky or TalkTalk signing wholesale deals with Virgin Media, O2 in terms of your guidance? And if you're getting all these cost savings kind of pulled forward, why are you not raising your guidance?

Yes, Polo -- I mean, look, you'd have to ask our competitors how they're doing on their build costs. All I'd say, again, is I'm absolutely certain that this 15% reduction we announced today is extremely competitive and, by the way, very difficult to do. So -- and we're going to keep going, by the way. We're going to keep looking for every opportunity to bring that down. I've always said on the returns, we feel really positive about the FTTP investment program. We talked about a 10% to 12% mid-case sort of planning case for the returns. This just underlines our increased confidence in delivering that for our shareholders. So there's still a lot to play for. We got to get to 25 million by 2026, and we got to keep connecting people in the way that we are. And just on your point in terms of our CPs, it's really encouraging. We've signed 10 CPs including the 3 biggest, including Sky, including TalkTalk Group have signed up to a 10-year framework agreement on pricing. And that pricing is really very, very sharp, providing exceptional value for, yes, our customers, but also the end customers. And that's what you can hear today. We've reached an inflection point. We're building such momentum behind this program. We're connecting people rapidly and all our customers, the CPs, are now connecting people onto the FTTP network. And the nature of the 10-year agreement encourages them to sell and is incentivizing them to sell FTTP over anything else. And so you're going to see it continue to expand over time. So we're really pleased that Sky and TalkTalk Group and many others have signed up to this 10-year FTTP deal, and now we just need to execute really, really well.

Our next question is coming from John Karidis from Numis.

I hope you can hear me. I just wanted to ask around the sensitivity of the pension scheme funding deficit to infrastructure-based competition at the Openreach level. And therefore, it would be really useful, please, if you can help us gauge the sensitivity of the funding deficit to BT's employer covenant and secondly, the sensitivity of BT's employer covenant to Openreach. So if Openreach's sort of business, for example, 5 years out were 20% lower, what would happen ultimately to the funding deficit of the BT pension scheme?

Sure. Simon, do you want to?

Yes. Okay, John. Well, thanks for the question. I mean, firstly, Openreach is clearly an important part of the BT Group, an important contributor to the overall BT Group value and therefore, an important part of the pension scheme covenant. And I think the pension scheme absolutely believes in and understands the long-term value generated by our strategy. In terms of the pension deficit, that is not sort of directly linked to the covenant although it has a -- the covenant has a bearing on the trustee's approach to their investment strategy. All I would say at this point is we've just completed a very successful, for both parties, triannual valuation. We've agreed a funding plan and we have a constructive relationship. I wouldn't expect to see significant changes in the covenant valuation as we move forward.

Right. Sorry, just for the sake of argument.

John -- we're going to move on, John. Thanks very much. We're going to take another question.

Our next question is coming from Carl Murdock-Smith from Berenberg.

To ask a question about inflation and the cost base, so around both energy and salary costs. So firstly, when will talks occur with the unions around the scale of pay rises next year? And how does the current inflationary environment play into that, particularly in the light of going into this after several years with no pay rises? And then on the energy side of inflation, how well hedged are you on energy costs and over what time period, going forward, are you hedged?

Yes. Carl, let me give you a general answer and I'll ask Simon just to talk about energy specifically because it's a big point. You know, historically, we take about 1% of the electricity of the U.K. grid. So we'll come back to that. But in general, first thing I'd say is -- the short answer is April next year is when the pay award has to be effective from. And we have said internally, by the way, that having had no pay increase, as you rightly point out, for 2 years, we will make a pay increase next year. So that's the first thing. In terms of the discussions with the unions, they will take place in the lead up to that, so beginning sometime next year. I think the broader point is -- I mean, there's 2 things to point to. Number one is, on the revenue side, the fact that we have 2/3 of our revenue linked to inflation, CPI or CPI plus is really a good hedge against the sort of impact of inflation on the cost side. But you are absolutely right that we can see across multiple elements, including pay but also energy and across other suppliers, we're seeing increased costs coming through now. What's important is to underline our complete commitment and confidence in at least GBP 7.9 billion EBITDA next year despite that, and that's as a result of, a, the transformation benefits we talked about that have come forward, but also our pricing plans looking into next year and beyond. So we think we're well prepared for it. But of course, you're right to say who knows exactly how inflation will play out. It's a big uncertainty, it's a big risk to the economy. But we are very, very well advanced in our planning around all the different eventualities. And the key point is the GBP 7.9 billion EBITDA is not at risk under any imaginable scenario. Simon, anything you want to add to?

Carl, yes. Firstly, property and energy costs, you'll see we report that. That was about GBP 1 billion in the last 2 fiscal years. something like half of that is energy, but Carl, within the energy cost, do recall that a relatively small part of it is actually the commodity. It's transmission, distribution, various forms of essentially sort of environmental costs. Of the commodity component, we have a rolling hedge program through purchase price agreements and derivatives. We typically roll 12, 18 months. We had some exposure and that wasn't a partially unhedged position, but small, and we don't expect the impact to be material. Hope that helps.

Our next question is coming from Maurice Patrick from Barclays.

On the retail side, I'm sure when you put through the 3.9% CPI price increases, you weren't thinking that CPI will be running at 3% or 4% even. So given what you said already, if we still see CPI sitting at sort of current levels, will you put through the full increase given all the noise around loyalty and customers and difficult times, et cetera? Would you happily put through a 7% or 8% price increase?

I mean the short answer is I wouldn't say happily, but yes, we will. I think you've got to recognize that -- to Carl's question, we are going to see, under all circumstances, an inflationary pressure on our costs. We want to make a pay increase to our people, of course, but also all the other things we just talked about, energy, et cetera, et cetera. So we're going to see that. Equally, we will put that price increase through, but it's not a move by itself. Remember, we're increasing the propositions and the products and the services in terms of quality that we're offering our customers. So it's a question of value for money and satisfaction. So we're pretty confident that our customers, based on all the evidence we can see now, churn at the lowest level ever, customer complaints lowest level ever, NPS highest level ever, then we will put the price increases through, yes. Having said that, if the market gets very, very competitive and we see changes in that, of course, we'll amend our plan a little bit. But the way forward is deliver the contract as per what we've articulated to our customers. But at the same time, always keep an eye on value for money and customer NPS. And the other thing I'd say is just -- sorry, it's a little bit -- remember, we have a Home Essentials product, which is available for up to 6 million homes, which is a GBP 15 product. That will not go up. So that is CAT. So there are some people in the vulnerable category or on universal credit, all those kind of metrics that you know so well. In that instance, the GBP 15 stays and will not see a price increase.

Our next question is coming from Nick Lyall from Societe Generale.

Hello? It was just a quick 1 about Consumer, please, Philip. Just the -- I take your point about broadband ARPU inflecting, but mobile ARPU or postpaid mobile ARPU still seem pretty weak this quarter, year-on-year, at least. Am I missing a little bit of roaming in the prior year that I was assuming was more stable? Or is there anything else may be going on that's weakening the ARPU numbers given what you've just said about CPI increases? And could I clarify as well, maybe with Simon, on the staff numbers. There seem to be some very strange staff movements in the numbers, particularly in Consumer as well, just in your KPIs? Have I missed something in terms of a reclassification of staff there?

Yes. I mean, look, Simon can do it -- I mean can comment on both. I mean, you're right, there's the continued SIM-only, out of bundle and roaming mixed up in those numbers. So yes, that's what you're seeing. You're absolutely spot on. And in terms of the employee numbers, Simon, have you got that?

Yes. The main change probably in the numbers, if you look at the movement between the end of the fiscal year '21 and today, we have had continued reductions in Consumer, and that's a function of the continued efficiency programs that we're running. You will also have seen that there was a slight increase in Global, but that simply reflects an organizational movement of a set of service activities that we've moved from our shared services in the corporate unit into Global. So there's a corresponding reduction in what's called other, which is sort of corporate functions. And that's simply that. That service unit is dedicated to Global, and we've integrated and driven synergies with it. I hope that helps you.

Our next question is coming from Sam McHugh from Exane.

A couple if I can, please? Obviously, you're doing an amazing job, I think, on cost and enterprise. But then the implied annual rate of cost cutting is about to slow, I think. And then revenues in Enterprise are down 5%, order books down 15% to 20% in the last 12 months. Global revenues fell 6% and the last 12-month order books down 10%. It does feel a lot like corporates are facing a lot of cost pressure at the moment. And telco is obviously something they can shop around a bit for. So can you just talk a bit what you're seeing in your end markets in terms of pricing, competition and demand? And then what gives you the confidence about turning around the B2B performance given people like ITS, Virgin, CityFibre are all ramping up their B2B investments?

Yes. Sam, it's a good question. This is the bit that we need to see next year. You're absolutely spot on. The cost work in Enterprise and Global is very strong. And I think the Global plan, they've executed extremely well in terms of getting out of local access network exposure. So we've divested a lot of assets, as you well know, which has simplified the business. So the global plan is spot on. So focusing on the right number of customers with an over-the-top, software-defined proposition and not having these local access networks, the return on capital is much improved. But you're dead right that the market is slower than we would like. And so we've got a subdued market activity, particularly around projects and variations, which is a big part of how Global hit their number every single year. So yes, that needs to come back, no question. We are assuming there is a recovery in that next year. Remember, we look around in Global, across the world, there are different levels of recovery in terms of back to the office, back to work. And a lot of companies still questioning exactly what's going to happen. So that's why the project work has really stalled. But from a market share point of view, we're confident we're not losing market share. And on the NPS side, we're extremely strong on Global. It's plus 40%. So -- plus 40 points. So you're right. We got to wait for that market to come back a bit, but we have definitely got the right products and services. And we're going to more broadly on the Enterprise part of the U.K., for example, where Rob is leading the sort of turnaround. We've got the right products in the areas that are growing. So whether it's be IP voice, security, managed cloud, edge, IoT. We're beginning to really mobilize our efforts where we're underindexed versus where we should be. So we're confident we're going to get growth. The question is how quickly does the market bounce back? So yes, you're right on that. But I have to tell you, the plans we've got makes sense. And also both in Rob and Bas's situation, they are improving the propositions and the customer service and the journeys as evidenced by the NPS going up. So we will definitely do better. We just need the market to firm a little bit.

Our next question is coming from Andrew Lee from Goldman Sachs.

Yes. I had a question just on your Equinox CP wholesale contracts that you've signed, kind of the flip side of the fiber boost you're having from the lower investment costs, only a key investor concern is the volume pricing risk at your wholesale outlook. What exactly do the CP contracts guarantee you in terms of wholesale customer fiber sign-ups? Or another way of asking the same question, how much does this reduce overbuild or wholesale risk? If you can give us some help in how to think about the materiality of this -- those signings, that will be great. And if possible, and you can just ignore this question, there's a follow-up in terms of what that basically -- how we should read into the fiber JV walk away that you're doing? Obviously, you've got higher returns. But how much demand did you have for the JV, given that kind of uncertainty in the wholesale environment? And did you learn anything about the way private investors would value your network versus how the public markets are valuing it at the moment?

Yes. Okay, Andrew. Let me just do the JV first, maybe Simon is going to talk about it in a minute. But I mean, I think what you can read into the JV announcement is a very positive conclusion that says we will do it ourselves because the returns are very attractive for our shareholders. And also, we don't want to, in any way, distract away from the progress we're making on building and connecting people at the lowest possible cost. So I think it's a real endorsement of our plan, and we're really happy with it. And the good news is we can afford to do it ourselves, we don't need to get external finance. So Simon might want to point -- add something in a minute. On the Equinox deal, you asked how material is it? I would say very because -- the scale of our build, we're at 6 million now, 1.3 million connected. We're ramping up from 2.5 million a year to 4 million a year as quickly as possible on the build rate. People are now asking for this product and service more and more. And therefore, from a CP point of view, whoever you are, you've got to have to connect on the Openreach platform over the next few years. So -- of course, we all know there is a hypothetical possibility of a big wholesaling change with some volume customers moving across from our network to somebody else's. But the chance of that, I think, decreases massively as we continue with our plan, which is why we're going so fast and accelerating. And some of the things we've announced today just point to a picture that says great progress on FTTP. The Equinox thing is a 10-year pricing agreement gives certainty to our CPs. And these are really, really -- we call them sharp price points. It's exceptionally good value for money. So we're out there competing heavily, delivering for our customers. And we're going to be the only nationwide provider of fiber to all these CPs. And the retail market is extremely competitive, right? So the other reason it is material is in this 10-year framework pricing agreements, these CPs commit to buy FTTP only where we sell it. So when it's available, there's a ratcheting system, which is 75% or 90% of what they sell is FTTP. So it just means the transition away from copper on to FTTP is accelerated, making it harder for other people to take up volume on other platforms, which is exactly what we should be doing. And the final thing I'd say just on that pricing, looking at the pricing, it's delivering -- at the retail level, the wholesale pricing we're offering is giving exceptional value for money to the end customers. You can get a 100 megabit service on FTTP for less than GBP 1 a day. And you can upgrade for GBP 2 per month through the different speed tiers. And the wholesale price for 1 gig is GBP 22 which would lead to roughly a GBP 44 retail price. Now if you look into the marketplace, that's very, very competitive. And I know that other people will struggle to beat those prices and make acceptable returns, which is why we're doing it. I'm sorry, anything to add? Simon thinks the JV question has been asked. I hope that's okay, Andrew?

Our next question is coming from Jakob Bluestone from Crédit Suisse.

Mentioned earlier that you're seeing supply chain shortages on the handset side. And just interested, are you also seeing any supply chain shortages in terms of your fiber deployments? And I guess, specifically, how would that feed into the ability to reduce the deployment costs?

Yes. Not really is a short answer, but actually, it's an important point. I think Simon and I just want to give you a sense of silicon shortages, supply chain challenges and friction in our system as we ramp up our activity and put so much resource and money into the company. Clearly, that is a question. Simon, do you want to just give your perspective on that? How much is it -- how much of a challenge is it for us on silicon and on supply chain?

Well, clearly -- I mean there -- as we all know, there's a global chip shortage and that does impact handsets. It does impact some elements of the equipment that we provide to our Enterprise customers. And you've seen that impact, and we've talked about it in Consumer and the handset market. And I think it is a contributing factor to some of the sort of revenue challenge we've got in our large end of our corporate markets. On network build, both in FTTP and also in the core and mobile, it has a bearing, but it's really not a material one to the pace of which we can deploy those networks at this stage. So it isn't having a bearing either on our ability to roll out or on our cost point. So that's on the chipset. And as Philip mentioned earlier, I mean the other critical element of supply chain, clearly, when you're rolling out network is the workforce. And we're in a position of considerable advantage through the strength, size, scale, skills, our internal workforce and long-term relationships we've got with subcontractors. So we see that as actually an advantage to us as we navigate through this period.

So yes, Jakob, look, we're not immune to the challenges in the macro sense, but we're extremely vigilant and we've got a good plan today.

Our next question is coming from Robert Grindle from Deutsche Bank.

Great progress on the FTTH homes pass cost. Is there a parallel reduction in the connection costs? And as your build costs go lower, do these get passed on via the passive infrastructure mechanism? Or are those prices effectively unchanged? And if your build costs fall, does that affect Equinox prices? Have the Equinox prices had any impact on the retail competition in Q3?

The short answer is -- I mean thank you for the comments on FTTP build cost. The short answer, Robert, is no. I mean that is -- I think everybody realizes, the engineering challenge is very significant to build 25 million homes and connect them in the way we described. So we will continue to work hard to bring down our costs on everything, looking at, are there further opportunities on build and provisioning. But as yet, the short answer is no. In terms of the pricing on Equinox, I sort of covered it before. That's what -- what we're really saying here, I'm sure you've got it, is we're feeling more encouraged by the FTTP project because we're building so fast, we're connecting so many people. The ARPU is good. The satisfaction is high, and our CPs are joining at a rapid pace in selling increased volume. Share of FTTP 1.5 years ago or a year ago was mainly BT. That's not the case anymore. So -- and that's because people need to sell this stuff because it's really compelling. So we're really excited by that. On the passive pricing, I mean, Simon, do you want to give a quick answer on that?

I can. No, it doesn't impact it.

Our next question is coming from Adam Fox-Rumley from HSBC.

It was helpful to get that first indication of the OpEx savings at GBP 500 million from fiber. But I just wanted to ask about the phasing of that and specifically whether or not some of those come ahead of the peak CapEx number, for example, the 3G and the PSTN switch offs that you referred to earlier.

Adam, we can't really give you the phasing of it. And actually, we wouldn't know exactly what that is. What we're saying is conceptually today, we're telling you that there is a material step up structurally in the cash flow of this business when we get to an all-IP, all-fiber network. And by the way, that will keep going. So I imagine a situation where you see continued improvements on the cost line, as evidenced by our transformation pull forward we've done to '24, plus the '25, we said there'll be more. Then we get into the new world where we're beginning to turn off the PSTN, get to all-IP, more fiber, more 5G. The cost will keep coming down. What we've looked at is we know at a minimum GBP 500 million will come out because we just know to operate a full fiber network in an all-IP world is going to be way lower. Once we get there, I fully expect there to be lots more opportunities to continue to improve the productivity and efficiency of the BT company because we'll be in new networks and we'll be in things that are fundamentally of the moment as opposed to living off legacy stuff. So we're just trying to give an indication of the things that we're absolutely certain about now, but there'll be more upside to come, but we've got to wait until we get there to know exactly what they are, and we're certainly not into the phasing game yet.

Our next question is coming from Siyi He from Citi.

Firstly is on the Equinox. And I understand that in the press release, you said that there's no commitment for volume. Just wondering if you can clarify whether there is no volume commitment for the current subs, what about the commitment for the new subs that CP gets? And the second question is really about the fiber. Now you see lower CapEx required to build and we have potential tax reduction next year. And we're giving the overbuild threats. I wonder whether there is a possibility that we can use the GBP 200 million savings to accelerate the build faster than 4 million a year and bring forward the free cash flow inflection that you expected by the end of this decade?

Okay. I mean the first answer is no, there are no contractual volume commitments and that's because of our significant market power position. So there is no change. The practicality is given the scale of our current footprint, 29 million homes on superfast and our build program on ultrafast, we will have the biggest FTTP network in the land and will have more customers connected to it than anybody else guaranteed. So the question is exactly what is it? So if you -- if FTTP was a football match, we don't know the score, but we know we're going to be the winner. On the GBP 200 million, look, we've announced today, we're really pleased with the plan to get to 4 million -- GBP 200 million reduction, I think, is again a reflection of what you just described in terms of the reduction in cost to build. No one else has hit 4 million, I don't think anywhere, per year in Europe. So we think that's a really lofty target, which we feel very good about. Let's see what happens when we get there.

Our final question is coming from James Ratzer from New Street.

So a question really about Project Gigabit, please. Would just love to get your thoughts on this initiative and, in particular, to what extent this is incorporated in both the 25 million FTTP build out target and the cash flow targets that you've given over the longer term? I mean to what extent do you think you'll be able to win the majority of the contracts that are up for kind of bidding in that GBP 5 billion government contract?

James, when you're talking Project Gigabit, you mean the government subsidized build, the original GBP 5 billion the government announced in which they say they're going to spend GBP 1.4 billion. Is that what you mean?

Yes, although I thought the commitment to spend GBP 5 million is still there, it's just been pushed out over a longer period of time. So I suppose I was just wondering to what extent that influences some of the longer-term targets you've given looking out to the end of the decade? Could, for example, the 25 million build go up as a result of Project Gigabit? Could that mean kind of longer-term extra spending, but in return, obviously, for more customers taking up FTTP?

Yes. I mean great question. So the short answer is no, it's not in the 25 million. These properties could increase our number, yes, because they are government funded, as you say. And obviously, in that situation, they would be -- and that won't be us, those contracts will be won by Openreach and other providers. And obviously, by definition, whoever gets there is going to be more than likely the exclusive provider. So we do see it as an opportunity at some stage. And again, I should say -- I talk about this FTTP footprint nationwide. At some stage, we turn our copper off completely. So the 25 million is by December '26. We have a reduction of GBP 1 billion in cash flow as a result of the reduced spend and reduced build, but we'll still be building. So in post '25, we see ourselves building -- sorry, post '26, we see ourselves building steadily in places that make sense and that could be some government-funded activity, and we may do a few before then.

But -- I mean it's an interesting topic given what you said today about reducing FTTP build costs, presumably in the taxpayers' interest. You should be the frontrunner to win the vast majority of those contracts as you were with BT U.K. Is that a fair thought to have?

I mean you could take that view. But at the same time, I guess, and when we're talking about the 15% reduction and the GBP 50 per premise, that is for the commercially viable areas, right? So -- and the bit that we understand well. If you can imagine, there's a huge hockey stick of costs associated with these very difficult, hard to reach areas that the government is going to fund. So there's a complicated formula for calculating how much it costs to build in these areas. So when the subsidy comes, it reflects that and we'll do and that's why it's complicated. That's why not a single property is being built yet. No contracts have been awarded because it is not easy to work out how that works. And that's why we've not included it in our numbers. But you're right, are we well positioned? Of course, we are. We're well positioned in every part of the U.K.; urban, rural, overall government-funded. Openreach is ready to play its part across the whole of the country. Look, thanks, everybody. I really appreciate everyone dialing in and the questions and your interest in BT. Thanks for your time. See you all soon.

Thank you, everyone. That marks the end of your call. Thank you for joining, and have a great day.