BT Group plc (BTA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to BT Group's results presentation for the year ended 31st of March 2023. Presenting today is Philip Jansen, Chief Executive; and Simon Lowth, Chief Financial Officer. The presentation today will be followed by a Q&A session. I'd like to also make everyone aware that this event is being recorded for replay purposes. Before we start, I'd like to draw your attention to the usual forward-looking statements in our press release and our latest annual report for examples of the factors that could cause actual results to differ from any forward-looking statements we may make. Both the press release and the annual report can be found on our website. And with that, I'll now hand over to Philip.

Thank you, Mark. Good morning, everyone, and thank you for joining us today. By way of agenda, I'll make some brief introductory comments highlighting some of the great progress we've made through the year, and then Simon will talk through the results themselves and our forward guidance. And then I'm going to share some details on how we see the transformation of BT Group shaping up over the longer term, before obviously opening up for your questions. So starting with the highlights on Slide 4. Overall, the business had a strong year and met its financial guidance despite some significant cost inflation, including increased energy and labor costs. We delivered growth in revenue on a pro forma basis, more than GBP 7.9 billion EBITDA and around GBP 5 billion of capital expenditure and GBP 1.3 billion of normalized free cash flow. This performance means that despite investing at unprecedented levels, we're able to maintain our total dividend for the year of 7.7p per share. I'd like to put on record my thanks to the dedication and commitment of my colleagues right across the business, which is underpinned and delivered this fantastic achievement. The world was quite different when we set the GBP 7.9 billion EBITDA target, and our people have repeatedly risen to the challenges we've encountered along the way. Last year saw some significant progress against our strategy. To give you just a few of the many examples, our FTTP build is up 43% to over 10 million premises with take-up of 3.1 million. Customer demand is really strong with consumer FTTP customers up 50% to 1.7 million. That is more than 0.5 million households moving to FTTP in the year. Our leading 5G network now covers 68% of the U.K. population with 8.6 million 5G connections on the network. Now we continue to transform and simplify the company with the completion of the BT Sport joint venture and by integrating the former enterprise and global divisions into a single CFU business. And we remain laser-focused on efficiency and are now more than 2/3 of the way towards reaching our target of GBP 3 billion of gross annualized cost savings by 2025. But we're not stopping there, and we are raising the bar again. Looking forward, we will step up the pace of FTTP connections, supported by the introduction of full expensing for qualifying capital expenditure announced in the spring budget. We will continue at pace to move from legacy to next-generation networks, delivering better customer experiences and lower costs. We will continue to drive and transformation of BT Group into a lean and agile organization with superior digital AI and automation capabilities. And we will do all of this whilst remaining a responsible, inclusive and sustainable business. Future BT Group will be a leaner business with a brighter future that will bring sustainable growth and value. Now more on all of this later, but let me now hand over to Simon, who will take you through the results in a bit more detail.

Thank you, Philip, and good morning to everyone. So starting with our financial performance on Slide 6, which I want to talk to on a pro forma basis, assuming that the Sports joint venture had been in place since the beginning of last year. So I'm really pleased to say that despite all of the known headwinds, we have grown both revenue and EBITDA for the first time in 6 years. This has been a great effort by everybody in the company. And I'd really like to reiterate Philip's comments and thank everybody who contributed to this result. We've achieved our FY '23 guidance for revenue and for EBITDA and as we guided at H1, we delivered normalized free cash flow in the lower end of our range with higher CapEx in FTTP build, including work in progress and FTTP provisioning, only partially offset by the tax refund. Moving to the details. Adjusted revenue for the year was GBP 20.4 billion. That's up 1%. There's growth in Openreach and Consumer was offset by declines in our Enterprise businesses. Adjusted operating costs before depreciation were down 1%. Cost savings generated through our cost transformation program more than offset inflationary impacts, including inflation and of wages under energy. We're well on our way to achieving our GBP 3 billion gross annualized cost savings target by the end of FY '25 with GBP 2.1 billion achieved to date at a cost of GBP 1.1 billion. Increased revenue and lower costs led to adjusted EBITDA for the year of GBP 8 billion, that's up 3%. CapEx, excluding Spectrum costs, came in at GBP 5.1 billion for the year, up 5%, primarily reflecting the ongoing investment in our FTTP program and the 5G network build. Now this was slightly above our updated GBP 5 billion outlook due to the accelerated FTTP provisioning, which grew by over 70% to GBP 3.1 million. CapEx in the final quarter was down 23% year-on-year, driven by the unwind of the FTTP work in progress. Our cash CapEx for the full year was GBP 5.3 billion, higher than reported CapEx due to a reduction in the capital creditors balance over the year. Normalized free cash flow was down 5% on last year. This was due to the increased cash CapEx, some adverse working capital movements, offset by the EBITDA growth, the tax refund and low interest due to timing. We expect our interest costs to normalize next year. Significant growth in Q4 normalized free cash flow was as expected, driven by improved EBITDA, the timing of receivables and lower cash CapEx. We're proposing a final dividend of 5.39p, bringing the FY '23 full year dividend to 7.7p per share. This is flat year-on-year given our current elevated level of CapEx, but it is in line with our progressive dividend policy to maintain or grow future dividends. Moving to Slide 7 for our individual unit results. And starting with Consumer. Revenue was up 2% for the year. Service revenue grew by 3%, driven by the 2022 annual contractual price rise and supported by a higher FTTP base and higher roaming. Increased service revenue and tight cost management, including lower indirect mobile commissions drove strong EBITDA growth was up 9%. In our Enterprise division, revenue was down 4%, as continued declines in legacy products and the ending of some legacy contracts, including the migration of a large MVNO customer, offset continued growth in SME and SOHO. EBITDA declined by 15% for the year, reflecting the lower revenue, the lower legacy product mix only partly offset by the benefits from our cost transformation program. Moving on to Global. Revenue declined 1% in the year due to lower equipment sales and the impact of prior year divestments offset by GBP 131 million positive foreign exchange movement. EBITDA was flat, driven by ongoing cost transformation and rigorous cost control offset by lower revenue and inflation. Excluding divestments, one-offs and foreign exchange, EBITDA was flat. In both Enterprise and Global, we signed some significant new customer and partner contracts in the final quarter, including a global networking contract with Rio Tinto, this one contract to provide connectivity to the public sector in Scotland and a partnership with AWS to bring edge computing to our customers. These contracts provide early momentum to our new business division. Lastly, Openreach grew revenue 4% in the year, driven by growing sales of fiber-enabled products and Ethernet and by increased price. And this was partially offset by declines in legacy copper products and an expected decrease in chargeable repairs due to the lower repair volumes. EBITDA grew 8%, driven by the revenue flow-through, lower repair costs and by efficiency programs that were partially offset by inflation. Now, should note that broadband line losses did increase in the fourth quarter to 68,000, bringing the full year total to 210,000. We've not yet seen any meaningful recovery in the U.K. broadband market or the rate of new home construction. And as you'd expect, we have seen modest growth in competitor losses. And we do expect losses to peak this year at around 400,000. We're not expecting any change in the overall market environment. But as we move to FTTP, we are aware of a small number of MPF lines that have been used by CPs for voice services alongside an FTTP line ahead of implementing a voice over IP solution. So these are likely to be removed from our base over the next 12 months or so, artificially accelerating the losses. This makes up around half of the 400,000 broadband line losses. But don't forget. Our strategy is all about building and upgrading customers to FTTP to benefit from increased ARPU and margins whilst reducing churn. And this strategy is working. With ARPU up around 8% in the year, well ahead of the average 4% price increase in Openreach and far offsetting the 1% reduction in broadband lines over the year. Moving to Slide 8 on our outlook for FY '24 and beyond. As context for our outlook, we expect to be a significant beneficiary of the government's full expensing scheme from FY '24 to FY '26. And we expect to pay no U.K. cash tax for the next 3 years. Now this means that our normalized cash tax will reflect just our overseas tax as it has done for the past couple of years. With demand for full fiber well ahead of our expectations, we will reinvest to this benefit into further accelerating our FTTP connections and absorbing inflation while remaining committed to our targeted building to 25 million premises by December 2026. So this brings our CapEx outlook to GBP 5 billion to GBP 5.1 billion for each of the next 3 years, up from our previous guidance of GBP 4.8 billion. We do expect take-up to accelerate beyond 30% while maintaining our build cost envelope of GBP 250 to GBP 350 per premise. So turning then to our guidance for FY '24. We continue to expect both adjusted revenue and adjusted EBITDA growth on a pro forma basis, but the growth driven by CPI-linked pricing, on around 2/3 of our revenue before eliminations that's primarily in Consumer Openreach and by the impact from our cost transformation program. This is despite headwinds from cost of living pressures, cost inflation, including energy. Normalized free cash flow for FY '24 is expected to be between GBP 1 billion and GBP 1.2 billion as the tax benefit from full expensing will be offset by the higher CapEx. Cash CapEx in FY '24 may be up to GBP 200 million higher than reported CapEx of GBP 5 billion to GBP 5.1 billion due to the repayment of government grants resulting from higher-than-expected fiber take-up on the BDUK programs. Beyond FY '24, we continue to expect consistent and predictable revenue and EBITDA growth, driven by CPI-linked pricing and by cost transformation. We remain confident in expanding normalized free cash flow by at least GBP 1.5 billion when compared with FY '22 by the end of the decade. This comes from lower CapEx and lower OpEx as we move past peak CapEx and towards an all-fiber, all-IP network. If I conclude, following the formation of business, we will provide pro forma figures for the new entity in the coming months. At the same time, we're taking the opportunity to refresh and improve our KPIs and to revise some central cost allocations to better reflect usage across the group. Finally, we will also be simplifying our quarterly disclosures from Q1 FY '24 onwards, including the removal of our quarterly KPIs. Now on that note, I'll hand back to Philip.

Thanks, Simon. Now I'm going to lay out the shape of the BT Group in the future and how this helps drive significant growth and value for shareholders. Slide 10 shows the ongoing market opportunity that will support our growth. Demand for our products and services has never been higher and is projected to keep on increasing. As our customers focus more on a combination of capacity, speed, reliability and security, it's value for money, not just price, but is the key input to buying behavior. Coverage and adoption of next-generation networks are increasing fast in the U.K. However, penetration of converged products remains behind European market peers. Combined with strong demand -- this leads us to forecast significant growth in next-generation products and services over the coming years. And given our network leadership in the U.K., this does represent a huge opportunity for BT Group. In addition, the move to FTTP will enable us to recover copper from our legacy network and sell it forward. We remain confident in our early estimates that around 200,000 tonnes could be recoverable through the 2030s. While our retail markets remain extremely competitive, we believe our move to inflation-linked pricing has created a more constructive, fair and transparent pricing model for BT Group. Consumers receive complete transparency. And I'll say it again, great value for money with fixed broadband at around GBP 1 a day and mobile at around 50p a day, buying access to future-proofed and reliable networks for relatively small increases in their bills. Building on our next-generation networks, we also see significant growth in value-added services over the coming years. Both in consumer and enterprise markets. This represents a major opportunity for BT Group to capitalize on a number of growing adjacencies. And really importantly, we're also operating in a pro-investment and stable regulatory environment, underpinned by Ofcom's WFTMR and recent investment incentives from government that Simon mentioned. Moving on, Slide 11 lays out the unique assets which support the transformation to future BT Group. As you know, Openreach is by far and away the leading fixed access wholesaler, underpinned by the largest superfast network in the U.K. Having built more than 10 million premises and connected more than 3 million premises, Openreach has established a track record of FTTP rollout at the fastest rate, the lowest cost and the highest quality. An engineering powerhouse, they are continually outperforming their plans. Now not only does this enable Openreach to strengthen their existing CP relationships, it also makes them an employer of choice in what is a very competitive labor market. We continue to see our in-house FTTP engineering capability as a key advantage, particularly when allied to strong, long-term and nationwide contractor relationships. At a retail level, our strengths lie in the fact that we have a relationship with 14 million U.K. households through 25 million subscriptions and over 1 million business customers. This gives us the #1 share across mobile and broadband combined. These customer relationships are underpinned by our market-leading networks. This includes 5G currently leading the pack at 68% population coverage and our new converged core, designed to manage peak network growth. 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. As you know, we have worked really hard to improve our customer service. And as a result, I'm delighted to say that BT and EE are now regularly ranking amongst the best in the industry. We have unrivaled geographical sales, marketing and service reach with a growing digital presence, more than 450 consumer stores in the U.K. and over 3,000 salespeople in business. And also, we have the ability to serve multinational customers in around 100 countries -- 180 countries worldwide. I've spoken before about using digital capabilities to modernize BT with a relentless focus on simplifying our product portfolio, our processes and our systems. Over time, this will enable us to shut down costly, complex legacy networks and IT systems, transforming productivity and further improving our ability to deliver for our customers. Lastly but importantly, we have a balance sheet and capital allocation framework that appropriately prioritizes 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. We, of course, remain committed to becoming a more responsible, inclusive and sustainable company. We will be circular by 2030 and reach net 0 by the end of fiscal year '31. These 5 priorities outlined on Slide 12 will be familiar to you from last year. [indiscernible] will enable us to deliver our strategy and long-term growth and value. Across each of these priorities, we genuinely have unique strengths. We also have a clear plan to accelerate growth with key metrics that will demonstrate success over time. The foundations are increasingly being put in place. It's now all about execution and delivery. I'll look at each of these in a bit more detail, starting with Consumer on Slide 13. With EE as our flagship consumer brand and with its leading brand consideration, we will demonstrate measurable growth through metrics which illustrate further penetration of FTTP, 5G and convergence. These metrics will be underpinned by key characteristics of the division, such as low churn, high NPS, a new digital platform from which to deliver related products and services and superior multichannel customer experience. All of this will allow consumer to offer profitable propositions at prices that continue to deliver outstanding value for money for our customers. And we're already on that journey with a 50% increase in our FTTP base last year, alongside a 58% increase in 5G connections. Our share of converged households was flat last year, and this is going to change. Progress has been slower than we would have liked, but we expect this KPI to accelerate as we launch our new consumer IP platform in a few months' time. Future successes will be measured against the stretching but achievable goals you can see on the slide. Moving to Slide 14, business with BT as the lead brand, will be the most trusted partner for small, medium and large enterprises, helping as 1 million-plus customers thrive using the best secure connectivity and solutions. Businesses success will be measurable through growth in U.K. revenue generating units, which aims to increase by almost 40% by the end of the decade. Business will also address the long-standing challenges in its large customer segments and pivot these to growth. Improving customer experience will be essential to achieve both these metrics, helping to drive low churn and high NPS. Business will have an outstanding base of converged products, outer to which a focus on next-generation propositions means the growth in its already leading security business will outpace the market. Bas in the team will tell you a bit more about the updated strategy and how things are progressing later in the year. Turning to Slide 15. Openreach continues to go from strength to strength, as I said earlier, maintaining an annual build run rate of over 3 million premises in fiscal year '23 and despite increased cost inflation, all still within our GBP 250 to GBP 350 per premise build cost. Furthermore, by honing our provisioning capability, we will build on the great progress last year and accelerate migrations to the best and largest FTTP network in the U.K. As we move customers to FTTP, full rates obviously reduce and so do repair volumes, resulting in significant cost savings. Towards the end of the decade, repair volumes are approaching half of today's levels. Underpinning Openreach products are excellent service standards and a best-in-class provision and repair, which together lead to strong NPS. Openreach is fair and transparent in pricing, coupled with an ever-improving mix of FTTP underpins its ARPU growth over time. Moving to Slide 16 and our fourth priority, enabling growth by transferring productivity and customer outcomes through digitizing, automating and the reskilling of our workforce. We will show measurable progress through fewer business applications and reduced reliance on legacy networks, both to a tiny fraction of today's level by the end of the decade. Future BT will be more efficient and need fewer people. Today, we have around 130,000 employees and subcontractors. But as we complete our peak FTTP build, stop the dual running of networks automate and digitize our systems and process and continue to restructure the business, we will move to a total workforce of between 75 and 90,000 people. Now clearly, this is a big reduction, but through natural attrition, reskilling and less need for contractors, we can work with our union partners to deliver this outcome. Slide 17 presents a 1-page visual of future BT Group, setting out our 3 CFUs with their characteristics shown in the 3 activity drivers; networks, customer and efficiency. When it comes down to it, future BT Group is a much simpler business than the one we have today, leading networks, great customer experiences powered by lean and efficient organization. All of which ultimately help to fulfill our purpose. We connect for good. Slide 18 shows some of the key strategic metrics to measure the successful delivery of our strategy. Importantly, it also shows the significance of our achievements over the past 4 years. This isn't the start of a journey, but one where we have already demonstrated our track record, providing much more confidence in the delivery of the final outcome. Now we've grew the metrics into the same 3 activity drivers used on the last slide. I've already touched on many of these points, but needless to say, there's much more to do as we continue to build on the strong foundations we have laid and we are confident that the best is yet to come. Slide 19 brings all this together, reminding us that successful execution and transformation of the business will result in consistent and predictable revenue and EBITDA growth from today. This alone will translate to an uplift in normalized free cash flow. And as we complete the FTTP build and move to an all-IP, all-FTTP network, normalized free cash flow growth will accelerate from fiscal year '28. With an expansion, as Simon said, of at least GBP 1.5 billion by the end of the decade compared with fiscal year '22. To be clear, this 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 net of tax. The cash flow generated will be used in line with our capital allocation policy. First, to continue to invest in value-enhancing growth opportunities; second, to support our commitment to the pension fund that should be close to fully funded by the end of the decade. Third, to support our through-cycle BBB+ credit rating target and finally, to underpin our progressive dividend policy to reward shareholders for their investment in BT Group. So to conclude on Slide 20. The business had a strong year of delivery. And despite some material headwinds, we delivered our financial guidance. This has underpinned a final dividend, which maintains the full year payout at 7.7p per share. We've stayed focused on operational delivery and will step up the pace once again. We will utilize full expensing for qualifying CapEx to connect more premises to FTTP while remaining committed to our target of reaching 25 million premises by December 2026. As BT Group transitions towards its next-generation infrastructure, these networks will serve as an enabler to delivering industry-leading customer experiences. So by the end of the 2020s, future BT Group will be a more efficient next-generation connectivity provider with a much smaller workforce and a significantly reduced cost base, a leaner business with a much brighter future. Thanks for listening. We'll now move to Q&A. So given the number of people in the room but also online, can I ask you to ask one question. And could you all do my favor, when you're asking your question, could you just say who you are, so other people know who's asking the question. Simon and I are going to go and sit over here and take questions. We're going to sort of -- if you're okay, why don't we just move less and than see you put your hand up. We'll do the room first, move left to right, pass the mic over, say you are, please pass the mic, and then we'll go to the people online later on.

It's Andrew Lee from Goldman Sachs. I say the big kind of feedback we had from investors this morning is you've shown good operational trends in the fourth quarter, and you've announced you're investing more in the networks. But what they can't see explicitly at least, partly given the nature of your guidance, is the fruits of that greater investment. They can't really see that in the kind of EBITDA growth broad guidance. They can't really see it in FY '24 free cash flow, which is below where some people were. And they haven't seen an uptick in that GBP 1.5 billion or more increase in FY '30. So many investors are questioning but you just having to spend more to achieve the same outcome. What could you give investors in terms of explicit better performance or outlook that would reassure them that this isn't classic telco spending more to prop up a sinking ship and is actually supporting improving returns?

Yes. No, it's a good question. Let me give you my answer and maybe Simon can chip in. I mean, firstly, I'd just step back and say, look, we are -- we're actually really pleased with what we've announced today. First time for 6 years, revenue and EBITDA are growing. I mean, that's a really important milestone. And we're saying that we are now on the growth trajectory. So that's number one. Number two, it's obviously been a challenging environment for us, like everybody. So you've had inflation, cost living crisis, energy crisis, all the things you know about. And I think we've navigated that really well. And so what we've got -- we're delivering our strategy, delivering our plan, and we're on track. Now that we have sort of got a plan for the next 5 to 7 years, and we've got a lot more things under our belt, the bill specifically, but also a lot of the digitization and investment in IT. We've got a clear picture of where we're going. So I think -- the one thing that I'd point out in terms of it's not more for the same outcome. The connection rate is much higher than anyone expected. I mean -- and so we -- what Simon said is the extra benefit from the tax is helping us drive the connection rates even harder. And obviously, we are -- it is offsetting some of the inflationary pressures that we had on the build. So of course, that's has happened to us. So I look at it and go the future has got even brighter because the success is more obvious. And I think I said before in terms of our investment in FTTP. I hope that today, people can see that is now going to be a successful endeavor for the BT Group, and we're going to get nice returns from it. And if you've got a growing company, we're growing EBITDA where the cost that's coming down dramatically structurally that's a pretty good picture. Do you want to do the cash flow mix?

I'll just add, I mean, for FY '24 specifically, we've been very clear that we will be delivering growth in pro forma revenue and EBITDA. I think the market expected that, and we're comfortable the market understands the trajectory on revenue and EBITDA for FY '24. On normalized free cash flow, if you go back to the -- prior to the budget announcement, our guidance for this year is pretty much bang on with what the market was expecting at that point. Since then, we've obviously seen significant cash tax benefit. And as I said, we'll only be paying 0 U.K. cash tax in the next 3 years. We've made the decision to put that into reinvestment to drive this much faster take-up we're getting. And at the same time, be able to sustain the build. That gives us even greater confidence, as Philip said, that we'll be able to continue to drive predictable revenue and EBITDA growth because we're provisioning even faster than we'd anticipated. That does mean, of course, that we're reinvesting pretty much the majority of the cash tax benefit. And so the overall normalized cash flow is pretty much in line with where we were pre the budget announcement. We feel that's exactly the right thing to do for the business. If you then look longer term, we've underpinned the GBP 1.5 billion improvement in free cash flow once we complete the peak build, which will still be in December '26. But there's significant further potential for us, a couple of reasons. I mean, firstly, as we've built the new networks, moved on to strategic IT, as we've said today, we can see a much lower-cost BT that will provide some further momentum to improving cash flow in those outer years. Clearly, as we develop the plans, we have to quantify that better in terms of timing. And that would be more than enough to offset the fact that there will be some additional tax costs at that time because essentially we brought forward some of the tax benefit. So I think it really gives us greater confidence in delivery of that GBP 1.5 billion. We've always said it's at least GBP 1.5 billion.

I mean that's the key thing, Andrew. I think what the message we are trying to say today is we're even more confident in delivery in the future because we've got real evidence, and we've got our plan that's fully funded, and we can see all the detail of it. And you can see the costs structurally coming down. There is no doubt they're going to be down. No one can debate those. The question is when are they going to happen? That's why we put some broad ranges on it. But it's -- towards the end of the decade. This is a totally different company and it's positioned for future growth and can take advantage of new opportunities because it's not looking to the past. So that's why you get the tone hopefully, which is it's really generally positive for all the reasons I said in my remarks earlier on. Thanks, Andrew.

Sam McHugh from Exane. I think the new occupational pension scheme regulations are coming into force at the end of this year. So just a 2-part question on it. Firstly, do you have -- do you expect to have to abide by those new regulations for your June deficit calculations? And then I think if I'm not wrong, the intention is to get deficits repaired on a shorter time horizon than before with a bit more scrutiny on investment and dividend plans of the sponsoring employee. And the trustees have also talked about relying more heavily on you post the LDI blow-up. Can you give us a bit of a sense of how you expect all this to impact you and the pension deficit in the shape of repayments?

Well, we, of course, have to comply with requirements and regulations on pensions coming to the specific point about the BTPS and the scheme. We have got a very constructive relationship with the trustee. We have a very clear investment strategy, which derisks the investments over time to reach maturity in 2034, be very clear about that. We put in place a funding plan to get us to fully funded. That plan remains -- we're firmly on track with that. We've got a valuation coming up in 2023. And the pension fund navigated the LDI issues of last September, October well. So we're firmly on track with the plan we put in place. We'll obviously be able to update you once we've been through that valuation process.

It's Maurice Patrick from Barclays. If I can ask a question on the Openreach momentum. So if I'm not wrong, you did minus 70,000 adds in the quarter, and you talked about 200 losses this year going to 400 next year. I understand the point you made about half of the 400 losses being NPFCs. Was that a tailwind in the mark of 23 years or the 200 you loss, was that actually a benefit from that? Or was it a drag? And I guess do you see that 200 increasing in the next 12 months? We understand how much of your line loss really is to alternates rather than just a temporary shift in direction of NFPCs.

I mean I think the -- there has been a modest tailwind where some customers have been taking FTTP and have not been enabled to carry voice over. In some cases, however, this has been a customer that might have moved on FTTP to an outlet, so another provider, in which case, it's not. But I think as we made clear, there is a specific headwind that we face over the next sort of 12 months or so. Once we travel through that, we think we'll be back into a much more steady-state situation. So we see next year as probably being the sort of peak period for losses because of that double run.

Yes, I'd just add, honestly we are doing that now. I mean it's modest losses to other people. And this -- we're not worried about it at all. So we've been transparent on what we think the year is going to be 400,000 this NPF -- this multipart facility, they're just basic copper pairs, right? So -- and they are -- it's a big number here, and these are basic ADSL. Low speeds, low prices that have to go and there's this complication as we move to all-IP and digital voice, people who've got land lines and broadband. So that will -- that is a technical reporting issue, which frankly, will lead to 400,000 losses this year. We're not troubled by that at all. And what you will probably recognize as we step up the build even further, we're entering more places where FTTP is available. And in the last 18 months, 2 years, of course, at a certain place where Openreach wasn't available, and therefore, we might have lost those lines. That's going to happen less often. Let's do this table, then we'll go to that next. Go ahead.

Nick Lyall from SocGen. Just on the price rise side, so we know they're supposedly developing sustainable growth. How sustainable is that? The labor parties made some quite aggressive comments about getting rid of CPI links, for example. So what have your latest conversations with them told you? And can I just take a point of clarity, Simon. Also you mentioned on the dividend, no divirise because of the high CapEx level. It's high for a couple of years. I mean there's no -- does that restrict your dividend growth over the next couple of years because of the continued high CapEx levels as well.

Do you want to do that one, I do the first one.

So I mean the dividend, I would be very clear that our dividend -- progressive dividend policy is that we will maintain or grow our dividend, taking full account of the investments and the cash flows at the time. We're clearly traveling through a period of elevated CapEx. We said we're going to stay at 5 to 5.1 for the 3 years well full tax expensing in place. We've clearly said that for this year, the dividend has remained flat. We will take those decisions each year as they come.

Yes. On the price rise, look, obviously, it's a really important topic. As I've said before, we watch this and measure this and monitor it extremely carefully and researching the dynamics of what's happening in the marketplace, both back book, front book competition, but also general value for money, where we sit in the overall bundle of someone's builds for the whole household. So I go back to what I said, we're investing in these new technologies. It's GBP 1 day for fix, 50p a day on average for mobile. Those are exceptional value for money numbers, and they compare really well with America extremely well but across the world, right? So we're in good shape on that point. No one knows what's going to happen in inflation. We know that the plan is to halve it. And all I'd say to you is our game is to deliver for our customers, look after them. We've always said we will keep our customer base and pricing is an important part of that. But the way we put together the services and the end proposition for our customers delivers the NPS and the customer satisfaction and the value for money. So you can see, and we've talked about it before, not all that pricing flows through to the bottom line because we are reinvesting in our customer base to make sure they have the very best proposition from us. So it's too simplistic to say prices go up by inflation, plus 4%, period. That's not the way it operates, and you know that. So it's a very competitive market. It averages down significantly. And we choose very carefully to invest in certain areas to make sure the value for money and customer service and satisfaction levels are what they need to be. So it's just not one thing, but we're alert to it. We look at it all the time to reassure you.

I think [indiscernible] made its way to the back and [indiscernible] have come back here.

It's James Ratzer from New Street Research. I was wondering if I could come back to the free cash flow guidance you've given for this year because you talked about what had moved relative to consensus. I think the one big thing that wasn't in anyone's numbers really was the BDUK grant repayment, and that makes up about 15% of your free cash flow for this year. So can you just kind of talk to us about -- is this just a 1-year effect only. Should we expect cash CapEx into like FY '25, '26 is going to continue to be higher than the accrued level of 5 to 5.1. If you really get more successful FTTP take up, is there more gain share that goes back to the government on this? It'll just be great to understand the kind of movement on the cash CapEx around this.

So I mean there are 2 main drivers to the difference between the reported CapEx and our cash CapEx. The first of those, obviously, is the capital creditors. That's mainly a function of timing. So we had quite a high capital creditor balance as we came into this year into FY '23 because you'll recall, we had a very high level of build in CapEx in the tail 2 months of FY '22. We -- so that's been one of the factors that's driven elevated cash CapEx for this year. Once you hit a sort of constant rate of CapEx, which we're now traveling at about 5 to 5.1, we shouldn't see the same drag from capital creditors. To your specific point about BDUK, so we invested over the past sort of 7, 8 years in a set of government-funded schemes to provide FTTC and FTTP to rural communities. The way that works is we bid, we bid against a certain set of assumptions, particularly take-up. And if take-up exceeds the bid level, then we are required to share the benefit of that with the grant funding. And so we put a quantum on our balance sheet, and it's in the sort of mid-400s, 400 to 500. And then we have to start repaying that. FY '24 happens to be a year where quite a lot of contracts came up for -- if you think about the timing of the contract, this is a year when we have to start repaying that gain share. That's a significant outflow for this year. Bear in mind, it's giving us a return because it means the investment we made on those contracts is higher than we'd anticipated because we got higher take-up, and it's another manifestation of this very strong demand for FTTP and higher-speed FTTC. It will continue to be an additional cash outflow for the next 2 or 3 years as we run through that gain share. We'll be clear each year as to what the quantum will be. It will depend upon the take-up at the time.

Akhil Dattani from JPMorgan. Can I just come back to your guidance, please? Just to better understand some of the comments you've made. I guess at a high level, you're guiding to growth for revenues and EBITDA, that's maybe less granular than you've been in prior years. And I guess I was keen to understand what the motivation was? You mentioned in your opening comments that visibility is stronger, 2/3 of your revenues are contracted with price increases. So it sort of feels the tailwinds are stronger, but clearly, that's not reflecting the way you're guiding. So I'd love to understand what are the puts and takes? Why is that, particularly having grown 3% EBITDA last year, the momentum is clearly building well. And I guess, very similar to that on the OpEx and CapEx reduction method, you said GBP 1.5 billion which obviously is a nice mid-term number. But you're also pulling forward CapEx at the moment. And equally, you are announcing some very bold headcount reduction plans. So I guess the same question applies there. There were strong tailwinds yes, that doesn't seem reflected. So color on that would be helpful.

Yes. I mean, look, it's a good question. what we've outlined today is a future BT, which whilst in years looks -- a few years out, I think it looks much more certain. I hope people can see that. And yes, you're right. Our general guidance is we're now growing, and it's no more complicated than that. You're right. We absolutely know we can deliver a fantastic future state BT. And I think we've laid that out, and that is a great place to be because once we're into the new world of new technology and you've got this fantastic next-generation networks on a digitized virtualized cloud native type activity, all the new products and services that haven't been invented yet are going to fit perfectly onto our network in a seamless fashion. So that's a nutshell of the strategy, which is bullet networking, associated services, allowing other people to plug into that network and deliver outstanding stuff for customers on a very low cost base. But it's a really competitive market. And what we're not going to do is box ourselves into some short-term targets that will avoid us having to take the decisions we've been able to do so far, which is make sure we land in the zone in 2030, which you see, which is a brilliant BT with a bright future. And that's why we stuck with some general guidance of we're growing. Isn't that good after 6 years or not. I don't know if you want to add any to that?

Yes. I mean, clearly, I think we've got confidence in predictable pro forma revenue and EBITDA growth. Clearly, if we thought the market didn't understand what that meant, we have provided some more guidance, but we're comfortable that markets got a better understanding of the consistent, predictable growth we're seeing in consumer and Openreach. They understand the dynamics. That's reflected well. So we see it in what investors are expecting. And I think, again, I think there's a sense that we're seeing some stabilization on the business side, that's also flowing through.

And again, just to Akhil and others as well. I think the challenge for BT has always been how to balance all the different competing pressures and stakeholders. And hopefully, you sense it from us. We feel we struck the right balance in difficult circumstances. Obviously, you've had COVID and then you've got all the economic crisis we know about. We've made it through. We had a clear strategy, we had a clear plan. It is working, unequivalent. You can't deny that. And what we're saying is we're going to stick the course now. And therefore, we think we want to -- we've got the right balance. It's not perfect. What we don't want to do is destabilize the ship by pushing one area too much too soon, but there's upside in this plan as we go forward. If we execute well, we've got to execute really well. And it's not easy, particularly in some of the technology and IT areas, which I've talked about before, that's tough stuff. And it's a really competitive market. I mean you all know that it's really, really competitive. And we are competing like fury, right? We have to. And I think we're doing okay. But we can't take anything for granted.