BT Group plc (BTA) Earnings Call Transcript & Summary

Good day, and welcome to BT Group Trading statement for the fourth quarter ended 31st of March 2022. My name is Chandler, and I'm your host today. [Operator Instructions] I would like to advise all parties this conference is being recorded for replay process. And now I would like to hand over to Mark Lidiard. Please go ahead.

Thanks, Chandler, and welcome, everyone. Presenting on today's call are Philip Jansen, Chief Executive; and Simon Lowth, Chief Financial Officer. Following the presentation, there'll be an opportunity to ask questions. Before we start, I'd like to draw your attention to the usual forward-looking statements on Slide 2 at our latest annual report or examples of the factors that could cause actual results to differ from any forward-looking statements we may make. The slide and the annual report could be found on our website. With that, I'll now hand over to Philip.

Thanks, Mark. Good morning, everyone, and thanks for joining today's call. Our agenda may make some brief introductory comments. Simon will talk through the results and sales and fiscal year '23 guidance. And I'll share some more details on the market opportunity priorities to address our longer-term ambitions. Starting with the highlights on Slide 4. Overall, the business continued to perform well in quarter 4, supporting an outturn for the year in line with guidance. As expected, we saw a softer enterprise market, which impacted revenue, but our ongoing transformation programs drive EBITDA growth of 2%. Let's focus on operational delivery. They have accelerated the pace of execution, clearly demonstrated in our network build and customer take-up in next-generation products. We finalized a joint venture with Warner Brothers Discovery, combining BT Sport and Eurosport U.K. to create a really compelling combined sports offer for our customers and also reduce cost exposure to right costs. Separately, we finalized the agreement with Sky on a new longer-term reciprocal channel supply deal, extending beyond 2030. In addition, Openreach signed a memorandum of understanding on a framework with Sky on FTTP co-provisioning. These agreements further strengthen our strategic relationship with Sky as a key partner. And the case of our content agreement will lead to more choice and more flexibility for our customers. Moving to the final point on the slide. While we are investing at unprecedented levels, I'm delighted to reconfirm as promised our full year dividend of 7.7p per share. More on all of this later. But let me now hand over to Simon, who will take you through the results in more detail.

Well, thank you, Philip, and good morning to everyone. So starting with our financial performance on Slide 6. Adjusted revenue for the year was GBP 20.8 billion. That's down 2%, and in line with our revised outlook. Growth in Openreach was offset by declines in our enterprise businesses. Consumer revenue was flat for the year overall, but it returned to growth in the final quarter. Adjusted operating costs were down 5%. That's driven by the cost savings generated through our modernization program, tight cost control and lower indirect commission costs in consumer. Adjusted EBITDA for the year was GBP 7.6 billion. That's up 2%. It's in the middle of the range that we set for our outlook. CapEx, excluding spectrum costs, came in at GBP 4.8 billion for the year. That's up 14%, primarily reflecting the ongoing acceleration in our FTTP and 5G network build, albeit at the lower end of our guidance due to FTTP build efficiencies that we outlined at our H1 results. Normalized free cash flow was down 5% on last year at GBP 1.4 billion. This was above the top of our outlook range, by the phasing of lease payments, which were lighter this year, a positive inflow from working capital and the FTTP CapEx efficiencies that I just mentioned. And as promised, we're proposing a final dividend of 5.39p, bringing the FY '22 full year dividend to 7.7p per share. We expect to maintain or grow future dividends in line with our progressive policy. Go to Slide 7 for our individual unit results. And starting with consumer. Revenue was broadly flat for the year. This benefited from broadband-based growth and the recovery in sport revenue post the pandemic. However, these were offset by ongoing legacy voice declines and lower postpaid mobile revenue, resulting from reduced market activity and continued migration to SIM-only contracts, tight cost management, including lower indirect mobile commissions, offset the benefit of prior year sports rights rebates and drove strong EBITDA growth, up 6% for the year. In our Enterprise division, revenue was down 5%, as continued declines in legacy products, the ending of some legacy contracts and the migration of an MVNO customer offset growth in retail mobile. EBITDA declined by 4% for the year, reflecting the lower revenue, only partially offset by the benefits of our modernization program. Moving on to Global. Revenue declined 10% in the year due to ongoing challenging market conditions, the impact of divestments and a GBP 106 million adverse FX movement. This was partly offset by a relationship-driven lower-margin equipment sales. The decline in revenue was partially offset by rigorous cost control, resulting in EBITDA down by 23% for the year. Excluding the divestments, one-offs and foreign exchange, EBITDA was down 14%. Lastly, Openreach grew revenue by 4% in the year, driven by higher rental bases in fiber-enabled products and Ethernet, coupled with CPI-linked price rises. This was partially offset by declines in legacy copper products. EBITDA grew 8%, driven by the revenue flow-through and by lower repair costs and by efficiency programs that were only partially offset by higher FTTP provision volumes and recruitment. Moving to Slide 8, and our outlook for FY '23, which we are reconfirming today. We face a challenging external environment. However, we've implemented index-linked pricing across 2/3 of our revenue before eliminations, primarily in Consumer and Openreach. This will help to mitigate the impact of inflationary cost pressures in labor, energy and the supply chain in FY '23. This supports our expectations for revenue growth in FY '23 and future years. We expect to deliver at least GBP 7.9 billion of adjusted EBITDA with stronger consumer performance, offsetting challenges in our enterprise businesses, and we still expect sustainable EBITDA growth thereafter. As we said previously, CapEx will remain at its peak level of around GBP 4.8 billion. Normalized free cash flow is expected to be between GBP 1.3 billion and GBP 1.5 billion with increased EBITDA, largely offset by lease payments returning to a normalized level this financial year and a payment of an GBP 80 million UEFA deposit, which will be reflected in working capital and also increased interest as a result of the higher interest payments on our hybrid bonds. To be clear, guidance does not include any impact from the sports JV -- following completion of the JV, which is expected by the end of 2022, we'll update our FY '23 guidance. While we're still finalizing the accounting impact, we expect the JV to be accounted for as an associate. And to give you an indication of the broad impact on our revenue and EBITDA, I'd anticipate on an annualized basis, a decrease in revenue of around GBP 500 million to GBP 600 million and no material impact on EBITDA relative to FY '22. And on that note, I'll hand back to Philip.

Thanks, Simon. I'd now like to lay out our track record of delivery, the compelling market opportunity ahead of us, remind you of our 5 priorities for growth and how successful execution against them will deliver significant value for shareholders. Slide 10 highlights some of our recent achievements and the progress we've made to derisk the business and underpin future value creation, all delivered against the backdrop of strong operating performance and extensive support for our customers, colleagues and country throughout the pandemic. We strengthened the way we worked with Ofcom and government, which culminated in the pro-investment wholesale fixed telecoms market review and the tax super reduction. Both of which support our 25 million nationwide fiber-to-the-premises commitment. Following another record quarter of network build in quarter 4, Openreach's total FTTP footprint is now at 7.2 million premises, reflecting significant progress towards our December 2026 pledge. We secured 5G spectrum at a lower price than expected. This additional spectrum has enabled us to maintain our mobile network leadership. And our 5G coverage now extends to over 50% of the U.K.'s population. We have renewed our customer focus, which has resulted in really strong leading indicators, with our group Net Promoter Score hitting another all-time high in quarter 4, while churn and complaints remained at extremely low levels. On modernization, we continue to make excellent progress, with GBP 1.5 billion of gross annualized savings delivered to date against our fiscal year '24, GBP 2 billion target. Given this progress, today, we're announcing that we expect additional savings of GBP 500 million in fiscal year '25, with the cost to achieve the total savings remaining, as previously communicated, GBP 1.3 billion. Now we've entered into a few important partnerships with leading industry players such as Warner Brothers Discovery, Sky, Microsoft, Eagle Cloud and AWS. And we agreed an enduring settlement with the pension trustees in order to reduce risk. A move to sourcing 100% renewable electricity alongside our accelerated net 0 digital skills targets showed the progress we've made as we further embed our manifesto throughout the whole of the BT organization. This will ensure that our growth is responsible, inclusive and sustainable. So this is by no means an exhaustive list, but I hope it does demonstrate a proven track record of delivery, particularly in the areas that are under our control. But like many, we will continue to be impacted by the consequences of the war in Ukraine, supply chain issues and the inflationary environment. But I have confidence in our ability to navigate these uncertain times. Moving on. Slide 11 lays out the market opportunity that will support our growth. Demand for our products and services has never been higher and is projected to increase exponentially from here as our customers increasingly focus on our combination of capacity speed, reliability and security, value for money, not just price, it's key in determining buying behavior. Coverage and adoption of next-generation networks are increasing in the U.K., but they're still at a low level. And penetration of converged products is behind European market peers. Combined with the strong demand from our customers, this leads us to forecast significant growth in next-generation products and services over the coming 5 years. Given our network leadership in the U.K., this represents a huge opportunity for BT. We're also operating in a supportive pro-investment and stable regulatory environment, underpinned by Ofcom's WFTMR. Openreach is clearly winning the FTTP race on builds, but more importantly, also on take-up. We're outperforming our initial plans and delivering significantly ahead of our competition. Now in the U.K. FTTP market, given the competitive and wholesaling context and wide range of scenarios is, of course, possible. But based on progress to date on our build and on our take-up and seeing how others are progressing in the market. We are confident that our FTTP investment will deliver attractive double-digit returns for our shareholders. However, we are by no means complacent about the competitive market risks. And we remain committed to ensuring that in all scenarios, we deliver acceptable returns. Now as I've said many times previously, we will compete vigorously to maintain our customer base and ensure we make a fair return using the many levers in our control. This includes, if necessary, adjusting our pricing and/or build plans to focus on the more competitive areas. Make no mistake, our priority is ensuring that under all scenarios, we make a fair return. And finally, while our retail markets remain extremely competitive, we believe our move to inflation-linked pricing has created a much more constructive and sustainable pricing model for BT. Consumers receive complete transparency and give value for money with continued data growth at faster and more reliable speeds on the latest networks for relatively small increases in their bills. So there is clearly a compelling market opportunity. What's more interesting is the picture that emerges when you marry the stat with BT's unique assets and competitive position, as outlined on Slide 12. At a retail level, our strengths lie in the fact that we have a relationship in the U.K. with over 50% of households and over 1 million business customers, and that we serve an additional 4,000 or so businesses worldwide. These customer relations are underpinned by our market-leading networks. For example, at 50% population coverage, our 5G network, if you'll excuse the pun, it streams ahead of our nearest competitor. And this gap will widen even further with the deployment of our converged core network next year. We have the broadest portfolio of next-generation products, 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. Now as you all know, we've worked really hard to improve our customer service. And as a result, I'm delighted to see that BT and EE now have some of the best scores in the industry. We have unrivaled geographic sales, marketing and service reach, around 500 consumer stores in the U.K., over 3,000 salespeople in enterprise and the ability to serve multinational customers in over 180 countries worldwide. As you also know, Openreach remains the leading fixed access wholesaler, underpinned by the largest superfast network in the U.K. It also has the most extensive FTTP footprint, and by far, the greatest engineering ambitions to cover every part of the U.K. The team are building FTTP at the fastest rate, lowest cost and highest quality, clearly outpacing the competition. Now not only does this enable Openreach to strengthen their existing CP relationships, over 40 of which have now signed up to the Equinix offer, it also cements in us an employer of choice in what is a very competitive labor market. So we see our in-house engineering capability as a key competitive advantage in the FTTP market. As you also know, we continue to modernize BT with a relentless focus on simplifying our product portfolio, simplifying our processes and simplifying our systems. Over time, this will enable us to shut down costly, complex legacy networks and legacy IT systems, transforming productivity and further improving our ability to deliver for our customers. And lastly, we have a balance sheet and capital allocation framework that appropriately balances our priority for investment in value enhancing growth, while supporting the pension fund, maintaining our commitment to our BBB+ through-cycle credit rating target and rewarding our investors through our progressive dividend policy, as Simon mentioned earlier. In November, we outlined how we had distilled our strategy into 5 clear priorities to deliver long-term growth, outlined here on Slide 13. Across each of these priorities, we genuinely have unique strengths. We also have a clear plan to accelerate growth with KPIs that will demonstrate success over time. The foundations are increasingly being put in place, and now it's all about execution. So let me touch on each of these in a bit more detail, starting with Consumer on Slide 14. As we evolve our already leading brand consideration with EE becoming our flagship consumer brand, we will drive growth through further penetration of FTTP, 5G and convergence, underpinned by a superior omnichannel customer experience and propositions at prices that deliver outstanding value for money. Success can be measured through leading indicators like NPS, churn and complaints. And in turn, these will support greater take-up of our next-generation products, as demonstrated by record consumer FTTP adds in quarter 4, driving the total base to over 1.1 million, in addition to our 5G-ready customers doubling in the year to 7.2 million. Alongside an increase in convergence, our CPI pricing and improving speed tiers will ultimately drive higher ARPUs. In parallel, our evolved brand strategy will bring simplification benefits both to customers and colleagues, further supported by increasing use of digital channels, which will drive a trajectory of improving profitability. Moving on to Slide 15. You can see we provide a consistency here with the previous slide by mapping out our unique strengths, areas of growth and KPIs in our B2B businesses. What I'd like to do on top of this is to provide more context on our distinct customer segments, because while we see clear opportunities for growth, there are smaller pockets where we face some near-term challenges. Starting with our SME and SOHO units, our U.K. subscription-based volume connectivity businesses, which account for around 20% of our total B2B EBITDA. Like in Consumer, we are the market share leader, and these businesses have stabilized in the past year. We will deliver steady growth from fiscal year '23 on the back of indexation and our next-generation product portfolio, all under the new BT brand, which will further leverage our market-leading brand consideration. Our wholesale business, which accounts for just over 20% of our B2B EBITDA, will continue to decline into fiscal year '23 following the termination of a very large MVNO contract. Now despite known price pressures, this business can start to grow over the next couple of years on the back of our next-generation product portfolio, including small cells and data center hosting for our operator customers as well as fiber, voice over IP and unified comms for our communication partner base, all delivered through our new state-of-the-art wholesale Hubco. On the U.K. public sector, which accounts for just under 20% of our B2B EBITDA, it has stabilized over the last 12 months, and will deliver growth from fiscal year '23 on the back of our next-generation network, cloud, security, vertical solutions and our unique managed services capabilities, all underpinned by significantly improved relationships with our U.K. public sector customers. Now when it comes to our U.K. and multinational corporate customers, which account for just over 1/3 of B2B EBITDA, and therefore, only around 10% of BT's total EBITDA, we do face significant market and competitive challenges. This is primarily due to the impact of accelerating migration off legacy networks and on to more standardized, lower-margin next-generation and hybrid networks, combined with increased competition. We will restore this business to growth over the next couple of years through investment in our new network capabilities, secure multi-card access, security and vertical solutions. All of which will be further supported by a positive and improving NPS. And lastly, our extremely well-positioned security business, which today accounts for just over 5% of our B2B EBITDA, had significant growth potential on the back of our new Eagle-i platform and increased investment in sales resource and capability. Turning to Slide 16. Openreach continues to go from strength to strength, hitting an annualized build run rate of 3 million premises in quarter 4, with take-up of 25% and a record 1.8 million connections. Furthermore, and this is a very significant fact, over 1/3 of both build and connections are in rural area 3. This year, I expect to accelerate the build further to reach over 10 million premises and an annualized build rate of 4 million premises later in the year, all still well within our GBP 250 to GBP 350 per premise build cost. Additionally, by holding our provisioning capability, we will accelerate migrations to the best and largest FTTP network in the U.K., with a target of well over 1 million net adds this year. Following a successful trial, Openreach recently signed a memorandum of understanding on a framework with Sky on FTTP co-provisioning, with Sky engineers completing the majority of their FTTP in-premise provisioning activities on Openreach's full fiber network. Sitting alongside our product offerings with fair and transparent pricing are high and regulated service standards, which provide increased assurance to the hundreds of CP customers on our network. Moving to Slide 17, and our fourth priority, transforming productivity and customer outcomes through digitizing, automating and the reskilling of our workforce. Progress has been wide-ranging here, improving our digital channel share and incubating new ideas through to simplifying our product portfolio. For example, we're in the process of withdrawing just under half of our legacy global portfolio. And in Consumer, we have half the number of broadband propositions by removing legacy promotional tiers. We've also fundamentally reshaped the business over the last couple of years, reducing the number of managerial and back office roles by around 13,000, and instead, hiring to ensure we have more colleagues focused on next-generation network build, the delivery of differentiated customer experiences and security. Overall, the net reduction in headcount is 7,000. Now gross cost savings achieved are a clear indication, I hope, of our success , with our ambition now increased to GBP 2.5 billion by the end of fiscal year '25 alongside a higher proportion of 0 touch journeys and digital transactions. Looking beyond fiscal year '25, we reiterate our expectations for at least GBP 1 billion reduction in CapEx per annum from December 2026 and the GBP 500 million of additional OpEx savings by the end of the decade, resulting from our move to all IP and all FTTP. Both of which we've said will clearly benefit cash flow. In addition, the move to FTTP will enable us to recover copper from our legacy network. Now initial estimates indicate that around 200,000 tons of copper could be recovered from our network through the 2030s. We're currently undergoing trials to better understand the cost and operational factors associated with recovering this valuable asset. As you can see, we will leave no stone unturned to deliver value for our shareholders. So lastly, on Slide 18. We continue to explore all avenues to optimize our capital allocation and business portfolio in order to maximize value. I already touched on our content announcement with Warner Bros Discovery and Sky and our co-provisioning agreement. We've also announced partnerships with Google Cloud and AWS to accelerate our digital transformation, which will further benefit from our investment in distributed that gives us immediate access to digital talent. In addition, our investment in safe security supports this key growth opportunity for BT. We're now one of Microsoft's Operator Connect partners, which include providing our customers with seamlessly enabled network and voice services through Teams. We'll continue to look at partnerships, and importantly, both organic and inorganic development opportunities to strengthen our assets and product offerings. So bringing all this together on Slide 19 illustrates how successful execution against our 5 priorities will deliver consistent and predictable revenue and EBITDA growth from this year forward. This alone will translate to an uplift in normalized free cash flow. But growth will be accelerated from fiscal year '27, with an expansion of at least GBP 1.5 billion by the end of the decade compared to last year as we move to an old IP, all FTTP network. To be clear, this benefit is a structural upside as the business changes and is before any benefit from copper recovery, organic growth in revenue and before the benefit of further transformation efficiencies. So to conclude on Slide 20. We had a strong overall performance last year despite the softer markets in enterprise. We're seeing continued positive and accelerating momentum in our operational performance, with many leading indicators turning green, reflecting the further progress we've made in offering valued propositions to our customers. We're strengthening and simplifying the organization, now expect to achieve GBP 2.5 billion of growth cost savings by fiscal year '25. We finalized the joint venture between Warner Brothers Discovery and BT Sport. And separately, we signed a new reciprocal content agreement and an MOU on FTTP co-provisioning with Sky. We expect continued market growth. And that, coupled with our unique assets, will ensure enduring success for the group. Continued delivery against our strategy and a focus on our 5 priorities will see BT return to revenue growth and achieve our at least GBP 7.9 billion of EBITDA this year. And on a longer-term view, we have the utmost confidence in the delivery of significant normalized free cash flow growth by the end of the decade. All of this underpins our confidence in our ability to deliver sustainable, long-term growth and value to all our stakeholders. Thanks for listening. Mark, over to you to manage the Q&A.

Thank you, Philip. We've got around 45 minutes for the Q&A now. We already have a lot of people in the queue for questions. And also, we didn't manage to get through everyone last time around. [Operator Instructions] Chandler, first question, please?

[Operator Instructions] And our first question is coming from Adam Fox-Rumley with HSBC.

I had a question on the Enterprise business, if I can. You've referred to the kind of long-standing challenges that you're seeing as customers are migrating their networks to new products. And I was wondering if it would be right to characterize what you're talking about now as kind of leaning into that transition and pushing harder, because it strikes me that kind of that direction of travel is not really changing. Do you need to get ahead of it and take the pain, so to speak, in the short term?

Yes, Adam, thanks for the question. I mean I think you're right, by the way. I think we've had -- over the last few years, in Enterprise, we've had the standard legacy declines that everyone knows about, the regulatory changes that everyone knows about. We're washing those through. But you're essentially right in that we're leaning into that transition more by having some of the answers for what our customers need in the future in a more integrated way. So, if you go back a few years, when we put together the consumer propositions, at the time, it was leaning into that whole problem too, which we now have delivered successfully against, and the foundations for growth offsetting consumer. Rob is doing exactly the same in Enterprise. It's a bit more complicated, and that's why today, we try to lay out the different segments so you can see what we're doing. And some, we're further down the track on others. But basically, you're absolutely right. It's a long-standing challenges. And we just got to get to the other side and accelerate into those new opportunities, which are growthful, by the way. Yes? It's just making that transition you're talking about.

And the next question is coming from John Karidis with Numis.

To Openreach's lines, total number of lines in service. And to date, that's sort of been affected a little bit by what's happening with the transition at Consumer to digital voice. So I'm trying to sort of figure out how many more lines are left to be transitioned? Have you -- I know you paused the move. I'd love to know what the problem was. And when you're likely to sort of resume the transition from traditional to digital voice? Essentially just trying to figure out -- take out the double counting and figuring out whether the double counting continues now because you've paused the digital voice transition.

Yes, sure. Let me make a couple of comments and maybe Simon can chip in as well. Firstly, in terms of the big macro picture, we've got a clear plan for the next 5 to 10 years for FTTP and all IP. And it's obviously really complicated as we get to those new landing zones. But we know exactly what we're doing. And we have a set of assumptions around line losses and line changes, right? So -- and you can see that in some of the numbers we talk about. So -- and we've assumed obviously some line losses as other people build. So just as a macro point. In terms of the all IP migration, we sort of got ourselves into a situation where we're moving quite fast. And in that move of all IP digital voice, we swept up some customers who had problems we hadn't fully envisaged. And so that's why we paused it. We can fix those problems. So we'll be back on the track in the next few months, I suspect. We just need to work through and make sure that all our customers understand the benefits of moving to the new world, which is digital voice. So see some announcements happening in, I guess, in the next 6 months, we'll update the market and what we're doing there. Simon, do you have anything else on lines?

No. I think, John, you were getting -- in the course of this year, you looked at our tank to line loss of something like 450. Something like half of that was wirelines that were supporting FTTP. And so that amplified the line loss this year. There will be a little bit more of that as we go into next year. But that it will be an attenuated impact as we go into FY '23. It's been particularly in significant this year.

And the next question is coming from Jakob Bluestone with Credit Suisse.

I had a question on the BT Sports JV. If you can just help us understand a little bit what's staying in BT and what's going into the JV. Because I think you reported an operating loss of GBP 222 million. But you also said that the impact from deconsolidation would be, I think, marginal to EBITDA. So can you just help us understand what are the revenues and costs that you're keeping? And what are you moving? And then maybe if you can also just elaborate a little bit on what are actually the targets that you need to hit to get the earn-out. Just any color you can get to help us understand if they're stretch targets or what exactly.

Yes. Sure. Let me do the last one first and then Simon can talk about the way the BT Sport revenue set up and some of the changes. I mean there aren't specific targets, by the way. This is a -- the clue's in the title. It's a joint venture. And as I said previously and also today, and this creates a much stronger proposition for our customers on a lower cost base, of course, so we get a chance to invest more behind that proposition to make sure we're delivering an outstanding product for our customers and a business that is much stronger and more profitable. Obviously, as we've said today, we do have that exit option, which will be very attractive. We do a great job, right? So we're sort of combined in an effort to do more for our customers, generate a stronger proposition that increases revenue and gross profitability. And we're very confident we can do it. And it's much more likely -- we had our own plan. It's much more likely to be successful with the partner being the -- one of the biggest content providers in the -- on the planet. Simon, do you want to do revenues in and out?

Yes, certainly. I mean, just to restate, you're quite right, Jakob. I did say that the guidance that we provided for this year didn't include any impact from the sports JV. But I did then further say that we expect the JV to be accounted for as an associate. And that as a broad indication, on an annualized basis, we expect a decrease in revenue of around GBP 500 million to GBP 600 million, but no material impact to EBITDA. That's sort of relative to '22. Behind that, best way to think about that is that the sport business goes into the JV. It's combined with a fabulous global media player, stronger portfolio, a set of synergies. So we have a 50% share in a strong, profitable new B T Sport or sport venture. What is retained in BT is BT Sports sold to our BT retail customers. And obviously, we generate revenue from that today, and that will continue and hopefully grow as we benefit from the enlarged portfolio of rights. And we pay a minimum guarantee for that to the JV. And so the movement is all of the revenue moving out into the JV other than the BT retail sport -- sport to BT retail customers and the minimum guarantee that we pay for that.

And the next question is coming from Carl Murdock-Smith with Berenberg.

In telco incumbents growing low to mid-single-digit pay rises with the unions. Can you provide an update on your talks with the CWU and the risk of potential strike action?

Sure. I mean, first thing I'd say is we have 2 union partners, CWU and Prospect. We have a really strong relationship with them. And the dialogue is consistent throughout the whole year. Obviously, right now, the whole pay topic is a very, very hot topic for everybody. What we've done is we have thought very carefully about how we handle this difficult situation and putting in a pay increase for our staff ranging from 2% to 8%. So broadly, for senior managers, they're getting 2%. And for our front-line staff, we're trying to push as much as we possibly can to give the highest possible pay increase. So that's what we've announced, somewhere between 2% and 8%, which averages out at about 4% for the total company and 5% for our frontline staff. So we think that's a really positive step. I mean, of course, we always want to do more, but we've got to balance all different stakeholders. In the conversation with the unions, I think they understand the situation very, very clearly. Of course, they'd want us to do more, but I think they understand the constraints that we're under. And we continue to talk to them. It would have been nice to have agreed it. You can't agree all the time on everything. And on most things, we do agree. And I tell you what we totally agree on is the direction of the company, the investment profile and making a stronger, better BT for the future. So of course, I hope that we don't end in a difficult situation. And we're doing everything we can to avoid any disruption for our customers and for our colleagues.

And the next question is coming from James Ratzer with New Street.

Had a question just regarding pricing, and in particular, the difference between the back book pricing and the front book pricing. And this has clearly been an issue, Ofcom has been looking at and closed over the past few years. But I suppose with all the price increases you're putting through at the moment on the back book, it would strike me that there is the risk over the next year or 2 that, that gap could reopen. So I'd be interested to get your thoughts on that. And in particular, your thinking about and the ability to start increasing the front book prices in the market to keep that gap low and also I suppose prevent the risk that customers might spend down at the end of their 2-year contracts.

Yes. James, look, it's an important point, obviously. In this current market situation, we find ourselves in with high inflation, lots of volatility, lots of uncertainty. That -- this whole question is really important. So first thing I'd say though, on front book, back book, we've done an enormous amount of work to clear out that challenge that we had as an industry for many years. And I would say to you, we've made enormous progress on that front, and I'm very pleased with where we sit today. You're right to point out, if we're not careful, you could recreate that situation again. And we need to avoid that, right? So we're working really hard to do that. I guess in terms of the pricing environment, these price increases are going through right now. And the best measure actually is listening to your customers and providing value for money. So when I look at what's actually happening right now, our complaints and our -- are the lowest ever been. The churn is very, very low, and the satisfaction is increasing literally month-on-month. So right now, we are very content with where we sit. We've got to make sure that in the next -- to your point, the next 12 to 18 months, that market stability that we see right now holds. Because ultimately, it's all about making sure you compete effectively in what is a very competitive market and delivering outstanding value for money. And I think that's the key point. And I always say this, you can get the average speed of 70 megabits per second, and it's less than GBP 1 a day. So that's great value for money. And versus other countries, whether it be Germany, Spain and America, we're 34% cheaper. So we're providing great value for money. What we're trying to do is make sure that we're offering both front book and back book customers great propositions and the opportunity to bundle more together more services, high-quality services, higher speeds, all at very, very attractive prices. So that's our aim. It's working right now unequivocally, you're right to raise the question is, can we keep that balance in tune. And that's part of my job with Mark and many others to make sure it happens.

And are you seeing -- Philip, you think at the moment, the feedback you're getting from customers that there is receptiveness towards the potential for back book increases over the next year or 2?

Yes, I think so. Look, it's a quieter market, as you all know, right? So what we've got is we've got a market where people really are valuing connectivity and speed more than they ever did, for obvious reasons. We can see the increase in the average speed tier that people are taking. So more and more people are taking higher speeds. So yes, I think that is the case. I think at the moment, the market is relatively stable. It's very competitive, but it's stable. So yes, I hope so.

And the next question is coming from Robert Grindle with Deutsche Bank.

The take-up from lower socioeconomic group customers of your social broadband tariff is low as often as called out. Is take-up accelerating or even stretched customers reluctant to take slower speeds? And a quick follow-up on the BT Sports question, on the minimum future payments. Will they ratchet up or ratchet down depending on the cost of future soccer rights?

Okay. I'll let Simon do the payment stuff in a minute. I mean, it's a good point. Overall, the 5 million households, this is nationally who are on universal credit, are eligible for low tariff, if you like. But at the same time, it goes to the earlier point, not everybody wants to have the basic product. And that's the truth of it, right? So we're doing everything we can to market for those people who would want it to make sure that they can get it. Because everybody is sensitive to the environment we're in right now. It's challenging for all our customers. So the social tariff at GBP 15 is attractive. It's available to up to 5 million homes. And we're doing everything we profitably can to make sure people who want it know it's available. And by the way, I should say, we -- I think versus -- we're a leader in this particular space is another point to make. Simon, do you want to do the payments?

The -- yes, sorry. The minimum guarantee, there is -- not going to go into the details of the commercial arrangements. There is some relationship to rights portfolio as it evolves.

And the next question is coming from Nick Lyall with Societe Generale.

Philip, Simon, jus a quick one on the Enterprise business, please. You've seen really quite upbeat about the SME business. Obviously, the quarter has been good. But can you explain why that would be? I mean, you've got through furlough relatively unscathed in SME revenues. It seems now we've got a cost of living crisis and things like this, and we're up against it. So is there anything in terms of the numbers that you and Rob are seeing that makes you feel a lot happier about the SME business? Do you feel you're through it? And secondly, just back to Adam's point, is it -- could you possibly give us some gauge, Simon, on the size of that gross margin or EBITDA hit if you were to like-for-like move those big, large enterprise customers on to next-generation networks today? Can you give us a bit of an idea of the size of the headwind, please? .

Yes. Nick, I'll do the first and then Simon can do the second. So I think you're right. I mean what we feel is, in the SME and SoHo markets, we've got a much sharper focus on those 2 separate segments. And they are different, by the way. So again, it's similar to what we did in Consumer a few years ago, is targeting the segments and delivering things that they need better than other people is what you've got to do. And I think as we develop new products and new services, and it's all around what you can put in the total bundle of converged services when you're combining mobile and all IP and unified comms and FTTP and 5G and all the new things. I think we can see a path that future success in that area in a slightly shorter time frame than the more complicated, more challenging multinational large corporate. That's what we're getting at. So we're not done yet. But that -- what's in the pipeline, what Robin is to put in the pipeline makes us feel good about in the next few years seeing some decent growth in that sector. The other stuff is a bit more challenging, which we're working on, but that's why we think that. Simon, gross margin question?

Yes. So in Enterprise, I mean, the answer differs a little bit by different parts of Enterprise. But let me take a couple of examples. If we take the networking, secure networking for our large corporate customers, where we're delivering increasingly hybrid SD-WAN services as opposed to sort of more dedicated MPLS networks, then you can see a gross margin contraction in the sort of high single digits of gross margin. However, over time, those are much more cost efficient to deliver. So you get a proportional reduction in the SG&A and service costs to support it. So over time, we should be delivering comparable EBITDA margins. The challenge for us, obviously, is as you go through that transition, you're driving revenue into a somewhat lower gross margin ahead of taking all of the costs out. And that's the impact you're seeing in global, and to some extent, large corporates. If you go to the right to the other end and think about PSTN lines replaced by VoIP, as you well know, both a lower priced product, but you also need to recognize there is an enormous amount of capital cost and energy tied up in the PSTN line. So from an overall sort of cash generation perspective, 2 products are actually equally attractive for us.

[Operator Instructions] Thank you very much, so we can get through everyone. Next question, please.

And the next question is coming from Georgios Ierodiaconou from Citi.

It's just around regulatory and government support beyond consolidation and the other things we may have discussed in the past. Specifically, there's been in the last couple of weeks in Europe, a bit more movement towards the idea of hyperscalers contributing to some of the access investments over time. Clearly, early days. But it looks like there is support from the main commissioners for this kind of initiative. I'm interested if you believe there should be similar discussions in the U.K., if not with this particular focus, other focus on how monetization of your investments can improve over time.

Georgios, thank you. Important question. At first, I would say, I think at the heart of what you're driving it is there's no question that the regulatory framework and the government policy framework is much more constructive than it was a few years ago for delivering great digital infrastructure for the U.K. That's really encouraging. I think there's a much deeper understanding of how some of the large technology companies work and some of the upsides and risks associated with that particular model. And yes, I do think that the conversations are much more constructive across the industry, including the hyperscalers, on what contributions and what funding models that's most appropriate for the next decade or so. So I'm really encouraged by the rhetoric and the dialogue that's happening. It's early days, to your point. But I think we all recognize things may have swung the wrong way and for U.K. specifically. But also in general, U.K. telco activity has been tough for a little while. And one of the reasons is what you're driving at. So if we can rectify that as an industry to help get better outcomes for customers and a bit of feeling of balance, that will be a really good thing. And I think it's more likely now than it's ever been.

Next question is coming from Polo Tang with UBS.

It's a question about Openreach. Can you comment on your Openreach framework agreement with Sky? So what's different about this agreement compared to the Equinox offer? Are there any minimum volume commitments in this deal? Does it tie Sky to Openreach in the longer term? Also, in your prepared remarks, you talked about being ready to lower your wholesale pricing on FTTP if needed, which I don't think you've mentioned before. So therefore, is the broadband infrastructure competition making you think differently about your FTTP economics?

Yes. I mean, look, the framework agreement is specifically for provisioning on FTTP. So what it allows is for Sky engineers who obviously will be given the move to -- over time to IPTV and less reliance on satellites, there's a workforce there that Sky have that they can use to provision FTTP, which, of course, is what you need for IPTV. So that's the first thing. So it's a contract that allows us to effectively pay for Sky to do that. And in 2/3, roughly, we're estimating 2/3 of the Sky provisions, they'll be carried out by their own people. So there's a framework for that. And look, we'd be open to other people who want to do that as well, by the way. Openreach is really open-minded, really flexible. So there are other people who would like to consider doing that, other customers, other CPs, that is more than possible. But it's a really strong partnership. And what it does for us, of course, is it frees up other labor to provision more in elsewhere and also build more. So this is good for the country as well as good for BT and good for Sky and good for end customers. On the point about pricing on wholesale, I mean, you're right, I did mention it. What I'm really saying is, as we built 7.2 million and connected 1.8 million to FTTP, and we're going to build this year some -- hit the run rate of 4 million a year, these are significant numbers now. And we are learning the craft every day, but we've got much more experience now than we did a year ago. And the numbers are significant. And we can see the financial impacts of different moves. So we feel ever more confident about the business case that was approved for the overall GBP 15 billion program on FTTP investment. And therefore, we're really confident in that. Of course, there still remains a sort of range of outcomes. And what we're saying is, if we have to compete further on price to make sure we maintain the volume that we need in our network, we will do that. And obviously, of course, returns will be slightly lower, but they'll still be more than acceptable. That's the point I'm trying to land.

The next question is coming from Nick Delfas with Redburn.

I've got a question about copper withdrawal. You mentioned the tons of copper. I guess that's about GBP 1.5 billion worth of copper. Can you actually get it out of the network efficiently? I know from when we were connected to fiber, there's enough to be done by the engineer in connecting the fiber to the home without then also withdrawing the copper. And it's allied also to the digital voice question, because, obviously, we have power cuts during various storms and no phone service. So how are you going to fix those issues?

Yes, Nick. Great question. I mean we just wanted to sort of tell the market that there is an opportunity. But to be honest, you're right. This is not a short-term opportunity. This is a long-term thing that's quite complicated, right? And so we are running trials. I've personally seen them. I visited an exchange and a whole process of taking out copper in a place where we've got fiber built to sort of 80% already, right? So of course, you have to have built a certain amount of FTTP. You also need to manage the migrations out of copper, but also within copper. It's quite complicated. And then you've got the whole process of actually getting it out and stripping it down and then sort of getting the financial benefit. So this is not easy. It will take a long time. But it's actually more evidence of -- the reason I want to talk about it is it's more evidence of the opportunities that arise when you get rid of legacy and you move wholeheartedly and fully, quickly to new next-generation networks. Because your whole point is right. You can't do it unless you're fully committed to FTTP and fully committed to all IP. So what I've got is the clearest vision on in -- around 2030, early 2030s, full FTTP, full IP, massive reduction in exchange estate. And by then, you can start taking out chunks of copper and generating additional revenues and further cost savings that are yet to be discovered. But that's the nature of the beast at BT. I think we've got huge opportunities. But it's steady as she goes. No big sudden take our copper in one year. It's not going to happen. You're absolutely right. It's steady, but it's a big number. Nick, go on.

Sorry. Just on the digital voice point and what happens in, power cuts. Is that actually going to be solved? Or is that something that just can't be solved?

Well, I think we're looking at it, right? So we're -- in places where it's really, really important, and you know this definition in the areas that are more likely to be affected are the rural areas where it's harder to bring back power ourself. So we're looking at what is a industry-wide, not just telco, but also the power companies, what is the overall answer to dealing with situation when power falls. We're happy to say you know, to provide and think about a certain amount of backup on power, of course, we'll do that, and we'll probably increase it significantly, probably in the end. But it can't all be on us. So that's what we're working on it. What's the overall answer, but there is no change to the plan. We are going to turn off the old copper-based product analog voice. And we are going to move to all IP digital voice. The question if we're going to do it really well.

And we have our next question coming from Jeremy Dellis with Jefferies..

Since you first established the FY '23 target of at least GBP 7.9 billion of EBITDA, I suppose the -- your ability to raise prices towards Consumer and some Enterprise customers has probably surprised us to the upside. And yet, obviously, the FY '23 guide remains sort of as before. Obviously, wage increases are an element that was also a little unexpected. But what are the other factors that you've taken into account when pitching the FY '23 EBITDA guide, presumably conservatively? And I'm particularly interested in the sort of factors that came from left field which we might not have fully considered.

Yes. I'll let -- Simon should give his view on this. But I mean, thank you for saying it. It didn't surprise us. So this has been in the plan for 2 years and is part of the overall strategy as opposed to just an opportunity to increase prices. It's really important. And this is in the context of overall customer service satisfaction propositions. And therefore, the churn and NPS and complaints are really, really important in the context of what's happening on pricing, so -- and the value for money point. So that's why it hasn't surprised us. We're glad our customers responded in the way they have. But actually, we have other new pressures that have emerged over the last 12, 18 months. Of course, we have, right? So it would have been nice to have some of these price increases that we've talked about and not have some of the other challenges we've had, and the chip shortages, chip increases in price and sometimes significant. When we look at it in the round, we feel we can manage it adequately, deliver the numbers we've talked about. And Simon will give you his view on it. But also, very importantly, get the balance right by continuing to invest in the company to make it stronger and better. And that's why we're saying at least GBP 7.9 billion EBITDA. It's an up-to-date view based on all the moving parts. And of course, you're right to point out that pricing inflation dynamic structurally helps BT. Of course, it does. Simon?

Yes. I think, Philip, you said, I mean, Jerry, we're very confident in our guidance. We said we would do at least GBP 7.9 billion of EBITDA almost a couple of years ago, and that's what we will do. We have benefited from somewhat stronger inflation, as you described. And as you know, we are at the EBITDA level positively geared to inflation. And obviously, we've also got the continued great rollout and take-up of our next-generation products, which is giving some ARPU benefit and terrific customer experience. But in terms of things that have perhaps gone outside in the other direction, we have had a hugely disrupted energy market. And therefore, whilst we are now largely hedged, about 85% hedged for '23, we had not rolled in all the hedges before we saw this huge spike in energy prices. So that's one factor that's run a bit against us. And the second, I think Philip touched on it, the B2B markets have been more challenging, probably amplified by chip shortages, kit shortages, which makes it more difficult to fulfill contracts. And also, the rebound has not been quite as we'd expected. So those are probably a couple of areas which have been more challenging than we had expected. But in the round, very confident in delivering the guidance that we set out.

Telefonica was saying on its call this morning that the work -- it feels as though the worst of the inflationary pressure is behind it. Would you make a similar statement?

We wouldn't actually. We're not able to forecast it more actually than other people, to be honest. So we'll wait for experts to give their views. Thanks, Jeremy.

And the next question is coming from Maurice Patrick with Barclays.

Just a comment really about the sort of competition and then gross adds in the broadband markets. I'm intrigued that Liberty Global now for a couple of quarters talked about a much lower churn or a lower gross add market, less changing -- and just you seem have called it out, and you've shown lower churn yourselves through declining churn. Why is it do you think that we have a -- as a market, not just you guys, in your chip, why is it you think you have a less -- a sort of lower gross add market in the U.K. market? Is something going on in competition we're not seeing?

Yes, look, I mean that is the situation. So I think you're right to point it out. I think the overall market is quieter. Less people moving, less churn, yes. And we've seen that for quite a few quarters now. I mean, we've got lots of research into why that may be happening?. And if I give you some, without sharing some competitive information, I think in our case, I can tell you that our customers value ever more what we're doing. So -- and I mentioned earlier about more and more people are taking higher speeds, and it's obvious, really, what's happened is the pandemic has thrown into sharp focus the importance of connectivity. And if you just think about it for a minute, for less than GBP 1 a day, 70 megabits per second and on -- for 70 megabits, you can do a lot. You can work from home. Your kids can play games at home. You -- on net the whole time. So the -- that's what's actually happening, is -- and that's what I said in my remarks. We've got an opportunity as an industry because people are now valuing our core propositions more than they ever have done before. And we shouldn't waste that. And we certainly shouldn't give stuff away. So in our case, it's quite simple, right? You can buy cheaper, but you can't buy better. And that's what our customers are telling us. And we can't be complacent because we've got to keep getting better. And that is what all the team are doing across Consumer and Enterprise and Global, working with our digital colleagues, making sure that the products and services we offer are getting stronger and better all the time. And that's why people aren't moving because they're thinking, actually, what I've got is quite good and it's improving. And we've got lots of evidence of that. And I can't comment on what other people are doing, but I know we're getting better.

The next one is coming from Andrew Lee with Goldman Sachs.

Sorry. Just had a question, Philip, on what you picked out, i.e., the fiber wholesale network competition risk, which is the key investor concern or debate. You mentioned a couple of times that you're confident that the FTTP investment will deliver attractive double-digit returns. And you said that the things you've been monitoring gives you greater confidence in that. Could you just give us some more color on what you are monitoring, the feeds into that competition -- into that confidence? And maybe any update you can give us on wholesale discussions with key wholesale customers, and/or whether it's been necessary as yet to adjust prices in any of those negotiations to secure volume.

Yes. Look, I guess the additional color I could add is, as we built the 7.2 million, we've learned more about the way in which you build. We've learned more about the true cost of build and provisioning. We've also learned a lot about rural build. So remember, 1/3 of these -- of the build is in rural area 3. So when we look at the financials of that and also the take-up in those areas, and we compare and contrast what other people are doing today and also what realistically they can do over the next 5 to 10 years, it gives us increased confidence. And because no one is building at the speed and pace and the cost profile that we are, they can't. And so we feel confident that that's why we made the decision and why we put our shoulder to the wheel to accelerate the build and get it done really, really quickly. So when we look at the financial scenarios, and therefore, the returns, we can see, yes, a wide fan of outcomes, a high probability in certain places, certain outcomes, which are very attractive for our shareholders. So they should be given the risk that we've taken. So it's a combination of all those things. And of course, there is conversations that we have with our CPs, our customers from an Openreach point of view. And Clive and his team spend all their time thinking about how do they deliver for their customers. And since I've been here, I'm trying to get everybody who works at BT to think about their customers. So all our customers: Sky, TalkTalk, Vodafone and many, many others at Openreach, is the focus. And therefore, providing a platform that they can migrate their customers to quickly with really attractive prices, the ability to go up the speed tiers easily and reliable service, that's regulated, that's guaranteed is very attractive. Of course, there are other options. Of course, there are people who are offering pricing which is a bit lower than ours. But as I said, you can buy cheaper, but you can't buy better. And I think most people recognize true value for money.

And with that, we have no more questions. I would like to hand it back to Mark Lidiard.

Okay. Thank you, everyone. Great question to finish on as well. So thank you, everyone, for joining the call. If you have any follow-up, please either contact myself or one of the other IR team. Otherwise, have a great day. Thank you.