BT Group plc (BTA) Earnings Call Transcript & Summary

So I have slightly croaky throat, you'll bear with me, please. So I want to say hello to everybody. I'm Clive Selley, I'm the CEO here at Openreach, and I welcome you all to Judd Street. This is our Openreach headquarters. Welcome to everybody in the room today but also those joining online. We last spoke 2 years ago in late 2021. So I'm pleased to welcome you back and provide a business update. It's been a really busy period for us, so there's plenty to report on and to discuss with you. And specifically, I want to take stock of our business and operational performance over the 2 years that has now elapsed, and then I want to look forward to the next 2 years, and then into the medium term. I'm going to be joined by our Chief Strategy Officer, Richard Allwood, and he's going to examine the market and value creation here at Openreach. Also by my Chief Commercial Officer, Katie Milligan, who will cover trading and customers, and my Chief Financial Officer, Matt Davies, who will update you on the Openreach financial performance and outlook. Good news. I also have the wider leadership team of Openreach on hand today. And between us, we will be very pleased to answer your detailed questions area by area. So let's start, please, with the big picture. This is what we're up to at Openreach. We are a business undergoing very fundamental change. For us, it's a revolution and not an evolution. We are swapping out our underlying revenue-generating platform over the course of a decade from copper to Full Fibre. We began in 2018, and the pace of change has accelerated year-on-year ever since. So why do this? Well, it's simple. We are the U.K.'s only national broadband company. Full Fibre is the global gold standard for customers anywhere in the world. It delivers extremely high speeds and it's actually almost infinitely upgradable. It exhibits very low latency. It's highly reliable in an age where customers expect an always on service. And for our business, it is lower cost to own and to operate compared to the old copper network. And it commands higher ARPUs. Simply put, it is the future for our customers, for the U.K. economy and for our business. And my job is to drive Openreach towards a Full Fibre future at ever higher pace. Our strategy is very straightforward, and we capture it in this picture. We must do 3 fundamental things. Firstly, deliver fantastic service. So customers want to buy connectivity services from us and stick with us through the transition from copper to Full Fibre. Secondly, build a national-wide high-quality Full Fibre network to serve the U.K. nation in their homes and their businesses. And to build it everywhere. By which I mean my aspiration is to build in every city, town, village across the U.K. and to many far flung farms and island communities adjacent to the U.K. mainland. And finally, migrate our customer base, tens of millions of them from copper to fiber and to do so at high pace and low friction. So the nation, our customers and the Openreach business can realize the benefits of a Full Fibre connected future. In terms of how we deliver these 3 fundamental activities. Firstly, we execute safely, protecting the well-being of our employees, members of the public and our partners. Secondly, we're making Openreach inclusive -- increasingly inclusive, open to everyone and reflecting the communities we serve. And thirdly, we have relentless focus on efficiency, reducing unit costs and our overall cost base. And finally, we play our part meeting the group and U.K. sustainability targets, in particular, electrifying our fleet. I'm proud of the contribution this strategy will make to the U.K., the Center for Economics and Business Research, the CEBR, estimates that a fully fiber-connected U.K. will boost GDP by GBP 72 billion, deliver a reduced carbon footprint by cutting commuting, and it will bring back 0.5 million people into the U.K. workforce. I'm genuinely privileged and proud to be owning and executing on this strategy. So let me start the session with a quick look back at Openreach progress over the past 2 years since our last business briefing here at Judd Street. So starting with service and the service we deliver to our customers. We are currently exceeding the high standards set by Ofcom. Our Net Promoter Score has risen from 29 to 45 over the past 24 months on our volume products and from 46 to 54 on our Ethernet and optical portfolio. This has only been possible thanks to our highly skilled teams. Our Trustpilot score now stands at 4.5 out of 5, which is excellent, representing an assessment of Openreach by end customers in their homes and their business premises up and down the U.K. So we have strong momentum on service performance. And this is vital because the products we're delivering are becoming progressively more important to our customers as ever more of our social and business interactions are performed online. So moving to build. 2 years ago, we had a Full Fibre platform available to 6 million premises. Today, our Full Fibre platform passes 12.5 million premises. Our rate of build has increased each year, and I expect to be at peak build rate of 1 million premises per quarter in Q4 of this financial year FY '24. And just as the rate of build has been increasing, so the average unit cost of build has been falling. We are now executing on our commercial build program below the midpoint of the GBP 250 to GBP 350 range I described to you when we met just 2 years ago. And regarding upgrading our customers, Full Fibre broadband sales, FTTP sales are buoyant and have been increasing. The provisioning engine has raised throughput from 18,000 visited connections per week, again, when we last spoke back in 2021 to around 35,000 per week in Q3 this quarter of FY '24. We now have 4.2 million customers taking Full Fibre broadband and a take-up rate of 33%. In fact, over 90% of CP orders taken by Openreach in our Full Fibre footprint are for FTTP. And furthermore, we are at regulatory stop sale of copper in 50% of our FTTP-enabled exchanges. Our provisioning unit costs remain at around GBP 300 as 2 years ago with process improvements offsetting significant inflationary headwinds. ARPU for broadband at Openreach has been rising and will continue to do so as more customers choose to take ultrafast products on the full fiber platform. And our strong operational performance has resulted in strong financial delivery. Openreach revenues have grown over the period, up by 13% driven by growth in the sale of Ethernet and optical products to U.K. businesses and the change in mix of broadband products from lower-priced copper products to higher ARPU fiber products. EBITDA has grown over the period, up 22%, reflecting strong control over OpEx costs as well as flow-through of revenue growth. We have invested big time in our Full Fibre future. And I can report that CapEx spend at Openreach peaked last fiscal year FY '23, even as we continue to raise the rate of fiber build this year and next. So now let's look forward to the future of the Openreach business. Starting with service, here is the good news. Copper fault volumes are decreasing as customers migrate from copper platform to the fiber platform. And in fact, copper fault dropped by about 0.5 million from FY '22 to FY '23. And of course, the reduction in copper faults, the volume of copper faults is inexorable because the migration to Full Fibre continues at pace long into the future. This fault volume trajectory has a profound impact on our OpEx cost base. The graph shows the copper fault rate plotted against the fiber fault rate. It's very clear. The OpEx costs of [ opening ] and repairing customer faults will fall continuously at Openreach because the Full Fibre fault rate is about 60% lower than the copper fault rate. Now please examine this chart. It shows the movement in reported faults on the 2 platforms during bad weather periods. And you may recall, storms, Babet and Ciarán a few weeks ago. As you can see, the impact of the 2 storms on the copper platform was severe. We saw a 10% spike in customer fault reports. In contrast, the fiber platform showed a minimal rise in fault reports. So not only is the fiber platform less fault prone, it does not generate the same unhelpful rise in faults during bad weather. And that is another OpEx saving. So in summary, the mass migration of customers from copper to fiber delivers 2 tremendous outcomes. Firstly, superior service for customers and secondly, materially lower OpEx costs to the Openreach business. Fiber build at Openreach has accelerated over the past 2 years, we have faced challenges of supply chain constraints on labor and equipment and components and of course, significant cost inflation across all spend categories. Our North Star goal though has not changed. 2 years ago, I described Milestone 1, 25 million premises by December 2026. Today, we have built 12.5 million. So we're precisely halfway to Milestone 1. It has taken just shy of 6 years. The second half of the journey will take only 3 years. We need to achieve a run rate of 4 million premises per year or 1 million premises per quarter. In Q4 of this year, the January, February, March quarter, I expect to be a target run rate for fiber build. 1 million premises per quarter. And as we have learned to build fiber networks at ever faster pace and scale, so too, we've learned to hone our build techniques to reduce the unit cost of build. We innovate continuously, our processes for build have evolved. The equipment we use has improved and the componentry we use has been refined in cooperation with the manufacturers and productivity in our own workforce and in the supply chain partners has risen. Overall, our build capability has improved and in all geographic areas, both urban and rural. And as a consequence, our build unit costs have fallen. Average build unit costs are now below GBP 300 in the commercial build program and they will remain so for the next 2 years as we exploit new technical innovations and benefit from new longer-term supply contracts. And I'll remind you, CapEx spend in Openreach peaked last fiscal year FY '23. We will take stock again on the business briefly in late 2025, by which time the platform will pass 20 million premises across the U.K. The scale and build phase of the fiber program at Openreach will take us through December 2026 and 25 million premises of footprint, accompanied, of course, by high levels of sales and high levels of provisioning. But what happens next? What comes next? What happens beyond 2026 and the 25 million? Well, the answer is simple. I aim to build everywhere in the U.K. We won't be stopping the build 3 years from now. The build rate will reduce though, nominally to around 1 million premises per year. And this will embrace new home build, which I expect to rise in the medium term to perhaps 0.25 million each year. It will also include ongoing builds for commercial premises in areas not yet addressed, and there will still be plenty of those left 3 years from now. I hope too that it will include government subsidized build in ultra-rural locations, perhaps under the [ BT ] U.K. gigabit program, if we are fortunate enough to be awarded some of that business. We are, after all, unrivaled in our experience of building an ultra-rural locations of the U.K. Our work in the highlands and islands of Scotland is a case in point. And to illustrate our ability to build extensively yet economically, please consider our progress in Northern Ireland. Today, we have 87% fiber coverage. Today, we are still building additional footprint commercially. I expect coverage in Northern Ireland to rise albeit at a modest pace to the mid- to high 90%. This Northern Ireland example shows what we are capable of achieving and points the way for the rest of the U.K. Now I'd like to remind the team that the fiber build program is an interesting way to spend money, but the fiber sales and the fiber provisioning programs are actually the way we make money, filling the Openreach fiber platform with happy paying customers is actually the core objective. 2 years ago, we had 1.4 million fiber customers and we're provisioning 18,000 per week. Today, we have 4.2 million customers and many weeks recently, we've been provisioning around 35,000 customers per week. Two years ago, I shared with you that I wanted the sales and provisioning program to reach a weekly throughput of 40,000 per week. That remains the goal. Our Equinox 2 pricing offer for Full Fibre services was launched earlier this year that offers great value to our customers. It has been adopted by all our major communication providers. I am committed to pricing competitively, offering great value and a product that is accessible to everyone. I see a future where all our customers are on fiber broadband, and we decommission the copper platforms and become a much simpler business with all the economic benefits that will entail. Katie will explore Equinox 2 in more depth, and Richard will touch on our exchange closure and copper recovery ambitions in their presentations. I shared with you the fast-changing service hydraulics of our business, falling copper volumes, much lower FTTP fault rates and improved unit cost efficiency in our fiber build program. I've also made clear that the build program will reduce in scale very significantly just 3 years from now. This latter point will deliver a sharp decrease in CapEx spend and a cash inflection. But I want to assure you that the Openreach plan is not just about a cash inflection a few years from now. We are making important financial deliverables back to the group right now, and Matt will explore this with you in more depth in his presentation later. But as evidence of this, I want to describe to you what is happening on our employee labor, which, of course, is a very strong indicator of the trajectory of our fixed cost base at Openreach. In order to raise the fiber build rate and to raise the fiber sales and provisioning rate, I hired people to a peak of 38,000 in September 2022. Kevin Brady, our HR Director, built training centers right across the nation and provided world-class skills training in fiber technology. And this has been the key to scaling the whole fiber operation. But if customers move to fiber, we need fewer engineers to work on the copper platform. And while some copper engineers will retrain for fiber work in the training schools, [indiscernible] fault rate is 60% lower than the copper fault rate. And that tells me that we will need fewer field engineers ongoing. This is not just a future-facing narrative. This is happening right now, and in fact, for the past year and more. Our employee workforce peaked in September 2022. It declined by 3,000 in the year to September 2023. And I expect to outturn the fiscal year with 33,000 people, and the reductions will continue into the future, [ powered in the main ] by natural attrition. So clearly, the fiber dividend is delivering now. And in summary, here's what to expect from the Openreach business in the 2 years ahead and into the medium term. Firstly, we reached peak build run rate of 1 million premises passed per quarter in Q4 this year, FY '24. Constant technology and process innovation has lowered fiber build unit costs to below the midpoint of the previously stated GBP 250 to GBP 350 range. There will be no unit cost increase over the next 2 years. Rapid fiber build of 25 million premises by December 2026 and continued build beyond that date of about a 1 million premises each year because I aim to build everywhere, serving the U.K. population and its business community nationwide. OpEx costs at Openreach will decline year-on-year as customers migrate from copper to fiber. This movement is inexorable, a steadily reducing employee base, EBITDA delivery will grow year-on-year, reflecting increased sales of fiber products and OpEx reductions and normalized free cash flow delivery from Openreach will rise materially this year and will rise progressively year-on-year thereafter. So with that, I'm now going to hand over to Richard Allwood, our Chief Strategy Officer here at Openreach.

Thank you, Richard. Good afternoon. Thanks, Clive. So I'm going to cover 3 topics this afternoon. I'm going to lay out the progress we're making on our FTTP investment, I'll provide an update on the market. I'll outline the range of levers that we're using to increase the value of Openreach. And my key message for you is this. Whilst there is some uncertainty about how the market unfolds and what that means for Openreach's broadband volumes, given the progress we're making right now on FTTP and the range of levers that we have available to us, we're extremely confident that we will create value from our FTTP investment and good returns for investors across a wide range of scenarios. So let's start with the progress that we're making on FTTP. We're rolling out faster than our competitors. We're achieving lower unit costs than our competitors, and we're securing faster and higher take-up than our competitors. And these things are mutually reinforcing, low build costs today give our customers confidence that we can price competitively now and crucially that we can [ lower ] price competitively in the future. Low unit costs also mean that we can reach places commercially that others cannot, which, in turn, allows us to offer scale to our customers. Now I'm particularly pleased with the progress that we're making in driving rapid and high levels of take-up on the FTTP platform. Overall, take-up which is a number of active Full Fibre lines divided by the number of premises of which Full Fibre is available is 33%. In our older build cohorts, our take-up is now 50% and still rising. We've also seen significantly faster take-up in newer cohorts to build. It took 11 quarters to achieve 30% take-up in the FY '19 cohort, and now that's taking just 6 quarters. And that's despite the later cohorts being both larger and more competitive at the point that we started building. In each of these cohorts, we still have significant volumes of broadband customers to convert to FTTP. Even in the oldest cohort, the 50% take-up only represents 3/4 of our total broadband customers in that footprint. And the approach that we take to encourage adoption in older build cohorts is something that we'll continue to innovate with our CPs. The impact of FTTP availability on the competitiveness of our overall broadband portfolio is very clear. Quite simply, where we have Full Fibre available, then we and our CPs are winning. Last time we spoke, I shared with you some data on Salisbury, which is one of the first cities we built the Full Fibre. I'm pleased to report that we've continued to make strong progress in Salisbury. In the last 2 years, our total broadband base has grown by around 9%. And the proportion of those broadband lines are on FTTP is now almost 80%. More generally, when I look at our total broadband base of premises that have FTTP available that has grown by around 2% over the last year. Now these results aren't surprising. Where we have Full Fibre, we can use it to win back share from the competition. And remember, we face a competitor with faster speeds than us for about 20 years. So our retailers are able to compete much better once they have FTTP. And where we're facing a competitor for the first time, we're much better able to retain customers if we can offer them Full Fibre. So as our overlap with competitor networks grows, so will our ability to win back customers that we've lost and to retain customers still on our network. Five years ago, our coverage of competitor networks with FTTP was close to 0. And today, that's over 35%, and this will grow quickly in the coming 2 years as we accelerate our build to 4 million per annum. So some of our competitors have benefited over the last 2 years because they've only had to compete against Openreach copper and FTTP services. And this will become increasingly rare as our footprint expands and our retailers offer the full suite of Openreach Full Fibre products. That's great for customers who will enjoy an increasingly wide range of choice of broadband retailers. So I'd like to take a moment to explain what our FTTP footprint looks like today and how this will change over time. The U.K. has 76 cities. And today, we are already selling Full Fibre to some extent in 75 of them. That was a small price, if you can figure out the one city where we don't have an FTTP. Now we're also selling Full Fibre in virtually every town and in over 80% of villages. And that means our Spine network already reaches into pretty much every corner of the U.K. And our coverage of those places is also expanding quickly. So we offer 50% coverage or higher in well over 1/3 of the U.K.'s towns and cities and 1/5 of its villages. As we progress towards 25 million that proportion will more than double with well over 90% of towns and cities and over 60% of villages having at least 50% coverage. Our build beyond FY '27 will finish the job and create a ubiquitous nationwide Openreach Full Fibre platform, filling in coverage gaps in towns and cities and continuing to expand in more rural locations. And we see 4 main build programs that will persist beyond 2026. First, there will be premises we can reach an attractive cost points even when the main build wave completes. And in that regard, it's important to remember that we have fiber assets right across the country that we built to support FTTC and Ethernet. And those assets can be repurposed to deliver FTTP commercially, even where others may have built using public subsidy. Second, we will want to increase Full Fibre coverage to allow us to retire legacy infrastructure. Third, we're very keen to continue building fiber in conjunction with governments, reaching communities that are not commercially viable. And finally, we'll continue to deploy Full Fibre new housing developments. So build will continue into the late 2020s, but at a much reduced rate. And our retailers will enjoy access to a truly nationwide platform, offering a brilliant and consistent customer experience, sustained build by Openreach beyond 25 million will require a supportive regulatory and public policy environment. Ofcom set out the regulatory framework in detail in 2021 to encourage fiber investment and to create a level-playing field for competition. It intended the framework to last for at least 10 years to provide investors with certainty on the rules of the game. We're less than 3 years into that period, and we see no reason why Ofcom will want to change the framework, given the successful outcomes it's producing. Rapid build by Openreach across the whole of the U.K. rapid build by VMO2 in the alt net sector, are locked in part by regulated access to our ducts and pole assets. Increasingly strong competition between access providers, giving customers a choice of competitively priced Full Fibre services. We think the framework put in place by Ofcom and the government is demonstrably working, and there's no case for change. The one area where the 2021 framework was not fully developed was in relation to the withdrawal of Openreach's copper services where Ofcom did not reach [ firm ] conclusions. And we think there is a need to provide further clarity here. Since in some regions, we're already at very high levels of coverage, take-up is rising quickly and decommissioning is rapidly moving up the agenda. And switching off legacy platforms will enable the industry to save cost and achieve its environmental commitments. So we expect that Ofcom will want to consider this as part of its review of the framework in 2026. Having covered our progress on FTTP in detail, let me turn to the fixed broadband market overall. Whilst the value of the fixed broadband market has grown, we have seen less growth in the volume of lines than we anticipated when we spoke 2 years ago. The housing market has been weak, with fewer new homes built in the last year than the historic average. Broadband adoption has also been weaker with cost of living pressures perhaps causing some households to economize on communication spend and a rise in mobile-only households unwinding some of the growth we enjoyed in the pandemic years. And as a result, market growth of around 1% to 2% historically has fallen to close to 0 this year. Looking to the future, we still see structural factors that will drive broadband adoption higher in the long term. Fixed broadband penetration of premises is around 85%. And over the long term, as delivery of voice and TV moves to IP and as more things require secure, ultra-reliable fixed connectivity, we expect penetration to rise. In particular, we expect the closure of the PSTN in 2025 to drive a significant proportion of our 2 million non-broadband lines to a fixed broadband service, with the balance moving to mobile solutions. We also expect housebuilding to recover when the macroeconomic outlook improves and even accelerate if future governments are successful in reforming the planning process. Today, there are over 28 million broadband lines in the U.K., and we expect that to rise towards 30 million by the end of the decade. The flat market has had a significant impact on the trajectory of our broadband base over the last 2 years. And so you can understand this. I've set out our estimates of market growth and competitor loss and how these contribute to our broadband net adds in each period. In FY '22 and prior years, we benefited from a tailwind of around 400,000 per year in market growth and dual line use which more than offset competitive losses. And last time we spoke, we expected this tailwind to continue. In FY '23, competitor losses increased as we expected. But the tailwind from the market growth began to fade. And in FY '24, this tailwind has fallen away more sharply. The market has been flat and dual line use is reducing, meaning we have no tailwind to offset the impact of competitor losses. It's worth noting that our cumulative losses since FY '21 only amount to around 125,000 lines. And that's a 3.5-year period, in which our competitors have built FTTP to around 10 million premises. And as Philip highlighted at results, our losses to competitors have been flat over the last 12 months. The outlook for the next 24 months is hard to call precisely. We expect our broadband base to be supported by the conversion of fixed voice lines to broadband ahead of PSTN closure. But the timing of this will depend on the individual approaches taken by our communication providers. We also expect the housing market to recover. But given lead times, we're likely to see a subdued benefit from this tailwind for much of the next 12 to 18 months. Voice-to-broadband migrations and the gradual housing market recovery will help to offset competitor losses which may grow modestly from current levels. Now I would like to describe briefly the levers that we have available to create value at Openreach. The number of broadband lines we have gets a lot of attention, and this is understandable. We're operating in a febrile environment with uncertainty around the extent of competitor build, the timing and nature of consolidation and the impact that may have on our line base. But within Openreach, along with protecting volume through FTTP rollout, we are focused on 5 levers that will allow us to create value in a wide range of competitive scenarios. And these levers are, first, driving ARPU growth through our portfolio and pricing, which Katie will explore in detail. Remember, although our broadband line volumes have declined, the value of our broadband base has increased significantly. Second, reducing OpEx per line through customer migration and transformation. Clive's already talked about our head count reduction, which is central to this effort. Looking to the future. Use of generative AI is at an early stage, but we are in pilot and we're excited about the potential to free up time for our field engineers and improve service to our customers. Third, reducing the unit costs in each of our major CapEx programs, which has been a huge focus for our engineering teams who will make -- meet in the breakout sessions over the last 12 months. Fourth, the recovery and sale of copper freed up by customer migrations to FTTP [indiscernible]. We've now proven our capability to free up copper cables as customers migrate, and we've established a robust supply chain. The copper recovery program will be a 10-year of effort, which we expect to contribute progressively to our EBITDA over the 2020s. And finally, exiting exchanges and reducing the associated fixed overhead. And in the long term, we'll be able to operate from around 1,000 exchanges, approximately 4,500 fewer than we use today. And to give you a sense of the scale of the opportunity, Openreach spends about GBP 220 million per year today on those 4,500 buildings. That's a combination of rent and rates and power and repair. Exchange exit will be a highly complex program of work, requiring close collaboration with our customers and support from the industry regulator and adjudicator. Importantly, each of these 5 levers is largely under our control and using them to create value is not something that has to wait until we finish the build. We're already using them to improve the financial performance of Openreach and increase the value of our business today. And Matt will take you through that in more detail later. So to summarize. We face rising competition, but we are extremely well placed to win with the fastest build, lowest unit cost and highest take up. The market has been somewhat softer than we anticipated. But where we have Full Fibre, we are growing our broadband base, and we are intent on building a truly nationwide Full Fibre network. We aren't dependent on volume growth to increase the value of Openreach, we have a much richer set of levers that are largely under our control and not dependent on the uncertainties that will play out in the competitive environment. So we are very confident of our ability to generate value and returns on our investment across a wide range of competitive scenarios. And with that, let me hand over to Katie, our Chief Commercial Officer.

Thank you, Richard, and good afternoon, everyone. So as a wholesaler, Openreach's success depends on how well we serve our communication providers and their customers in their homes and businesses right across the U.K. Quite simply, we succeed whenever our customers succeed. So today, I'm going to lay out the 3 commercial priorities that have made us successful since the last briefing. And hopefully, will continue to do so over the next 2 years before we speak again. So let me remind you briefly about our portfolio and our customer base. We sell voice and broadband services to over 23 million premises, and this accounts for around 80% of our revenue. And this revenue is growing by over 8% by year driven by FTTP and the implementation of the CPI price increases across the portfolio. The overwhelming majority of our broadband and voice sales are through the big 4 CPs on our network. That's BT, Sky, TalkTalk and Vodafone. In the business market, it's slightly more fragmented, and there we've got over 600 communication providers. There we build and deliver Ethernet services. These provide dedicated and secure point-to-point connectivity to businesses as well as underpinning our CP's own infrastructure. Of course, this portfolio is the one that's often overlooked, but it is GBP 1 billion in its own right. And in the first half of the year, it grew 12% year-on-year. That's driven by a growing base and also price increases. The rest is other trading lines, including alternative network providers using our passive infrastructure access product, otherwise known as ducts and poles. Right? So back to my 3 commercial priorities. My [ overriding ] priority is to maintain Openreach's position as the first choice network provider for our customers. Our second priority is to drive the move to Full Fibre in the U.K. And finally, by offering our CPs differentiated product offerings that they can sell to their customers. This underpins our ARPU growth. So let me explain what makes us the first choice partner for our communications providers. As Clive said, today, we've announced that we're halfway there on our 25 million commitment. But the important thing is that this is just the start. We'll continue to be the only U.K.-wide network present in every community. And this really matters to CPs because all of them are committed to selling FTTP, and they need to be able to sell to the widest possible base of customers. Of course, price really matters. Our customers know they will always remain competitive on price. Our CPs always expect excellent service right across the whole of the U.K., and that's what we give them. Of course, it's easy to claim good service on a small operation, but doing it at scale requires years and years of experience. And our experience means that we know our CPs well. We're always innovating in collaboration with them to develop the products and offers that they need. And we'll grow our business in a sustainable way, meeting our commitments on the environment and to those of our customers. As I said, our customers need scale. They're all national providers, and so they need a national network to deliver their services. We're the only U.K.-wide provider of broadband services. Remember, our superfast fiber network covers 90% of the U.K. And with FTTP, we're approaching 40% coverage of the homes and premises in the U.K. And over the next 3 years, we'll double that. And as I said, we'll continue to build beyond 2026. Of course, as Richard mentioned and Clive, albeit at a slower rate, filling in the gaps and building for new premises, and that will take us to around 90% coverage, of course, supported by that existing infrastructure. And given Ethernet is an on-demand business service that allows us to leverage our U.K. wide fiber infrastructure, don't forget 100% of businesses can already order our Ethernet products. We offer our CPs a U.K.-wide one-stop shop for their needs. Now of course, Openreach is a largely regulated business. But that means that we are able to provide long-term fair pricing to our CPs. It's the regulation that actually creates certainty for our CPs to invest. And where precise levels of pricing are not set by the regulation, for example, Full Fibre, we have committed to be competitive on price. Two years ago, I was outlining where we were on the Equinox 1 deal. And we explained how this was going to help us drive our Full Fibre take up. As a reminder, Equinox is a 10-year deal, which gives our CP certainty on FTTP pricing to enable them to invest in migrating their customer base, offer rental discounts and return from meeting specific criteria, the most important of this being the proportion of orders on FTTP enabled in areas and also provides commitments for our CPs for a small pricing premium for FTTP, but yet a CPI minus arrangement on the high speeds to encourage that move up the speed ladder. Earlier this year, we tweaked that. That was Equinox 2, kept the same naming convention. And what that did is it encouraged CPs to recreate their own base as well. And later on, I'll remind us just where we are doing against our Equinox objectives. So with the network as extensive as ours, as I said, it takes experience to offer excellent service. In terms of our scale, Openreach consistently makes 150,000 visits every single week. That's either to provide services or to repair them. And we now complete over 35,000 visited connections weekly on FTTP. And I'm sure Clive will really need to increase that goal. I'm sure he's setting us the new sales targets in his head as we speak. And not only that, we also connect more than 1,000 Ethernet circuits every single week. But the key is we do this, and we still deliver those Ofcom quality of service standards. That's 30 out of 30 on copper broadband and 5 out of 5 on Ethernet. And our Net Promoter Score has more than doubled over recent years to 45 on broadband and 54 on Ethernet. That's exceptional and way above the average for telecoms and media companies. And not only that, our Trustpilot reviews are 4.5 out of 5, which is an excellent rating. And with that, we're leading the pack amongst our main competitors and our satisfaction with our Openreach engineers is 93%. We will continue to innovate and improve this further. We'll do this through deploying AI within our processes to enable greater efficiency. To put it simply, we don't believe that anyone else offers this quality of service and delivery at this scale. Now to make sure the end-to-end experience for the CPs is excellent, we also need to make sure that we have robust integration with our CPs. We have years of experience working with the CPs, and we know them well. And through that, we understand their IT systems. So what we've done is we've established software interfaces, known as APIs. And what this means it allows us to directly connect our IT systems between each other. This has actually taken years of coding and refining to ensure that the organizations can work through IT directly, they don't need the level of people. And then when we innovate, whether it's on a new product or on an offer, we do so in collaboration and design with our CPs, and that means that we can be guaranteed that we're delivering them what they need. A great example of this is the partnership model that we've got with Sky, which they now do that end customer connections for 3,000 of their own Full Fibre connections per week, and this delivers a fantastic 97% on-time performance. We've also developed a sophisticated contact engine. And what this does, it manages the communications between our CPs and [ their end ] customers. And this enables the CPs to migrate their customers to FTTP in bulk. And the breakout shown here from [ Surinder and Chris ] on those examples and some of the ways that we've been innovating on engineering and AI. Sustainability is as important to our customers as it is to us in Openreach. Building and maintaining our network sustainably is one of our driving principles as you've heard from Clive. We have set ourselves 3 specific objectives: reduce our carbon footprint, use pure materials and reduce our waste and reducing our impact on the natural habitat we encounter. We've committed to be a net zero business by 2031 for our own operations and 2041 for our supplier chain. Our network and operations are already powered by 100% renewable electricity. And it's the shift from copper to fiber will also save energy on the network. For example, an active copper network requires energy, whereas a passive Full Fibre is one that requires light. So an average, FTTP is at least 80% more energy efficient than fiber to the cabinet. And as I said earlier, we make around 150,000 visits every week. So of course, that means we have one of the biggest fleet of vehicles in the U.K. And we have 28,000. But I'm glad to say we are progressing well on converting our fleet to electric vehicles, and we'll have 4,000 of them by the end of the year. FTTP is also more reliable than copper, and the FTTP fault rate, as Clive mentioned, is about 60% lower than the copper fault rate. And we're using innovative AI to make sure that we can better plan [indiscernible], which means, overall, we can start to reduce further the size of the fleet, too. And as we build, we are using less. We're wasting less, and we're keeping our tools and materials for longer. We're also recycling, we're reusing or repurposing materials in new ways. And for example, this year, we managed to donate 600 used poles to wildlife sanctuary in Suffolk. And we're also making sure that where we engage with nature, we are taking field care and responsibility. From creating special builds for national parks, as I know personally in our Scotland build to training our engineers to check sites for wild life, and we also installed bird boxes when we are there. The point is we aim to protect and enhance the natural habitats that we encounter as we go about and build our network. So let's talk about our second commercial pillar, growing Full Fibre. This takes us back to the objectives for the Equinox deal. Now the first step was to make sure that our CP customers sell FTTP wherever it's available. That was the main point of the deal. And the fantastic news is that in the last 2 quarters, about 93% of our orders in enabled areas are FTTP. And I'm hoping that this will continue to grow because what we'll also see is that our CPs will also bring on some of the smaller reseller brands. There are still to come on. And it will also grow because in areas where we have declared [ stop sell ], only FTTP products can be bought in those exchanges. And that footprint is continuing to grow too from the 50% that we've already mentioned. And not only that, the Equinox contract also enables us to remove the copper lines as we install FTTP, which means there is no going back to copper for those premises. The second measure of success for Equinox is take-up. We've already talked about the fact that we've got over 4 million lines on Full Fibre, and we have reached 33% take-up. And I'm really happy to see that we are seeing all of our CPs do fantastically well. We've got BT here at now over 2 million lines on Full Fibre. And a short while ago, we announced the Sky were already at the 1 million mark and increasing. And we're noting that faster move to FTTP than we had originally expected. 50% of our broadband lines migrate in 20 months after the footprint release and 62% after 3 years. And it's not just about what it does for Openreach FTTP works for our CPs. It reduces churn. FTTP customers churn is 50% of that compared to fiber to the cabinet at 24 months and at 36 months. It's more reliable than copper. You only need to look at the triple whammy of storms and you have seen the impact of the copper versus fiber. Not only that, as Richard has talked about, fiber allows our customers to compete on speed and win back customers, and it allows our CPs to sell more speed options to their customers, and that in turn creates more revenue opportunities. So this is a fantastically good news for our CPs and it shows that they are getting the customers over to FTTP as quickly as possible. That brings us nicely to our third priority, which is to stimulate ARPU growth by enabling our CPs to sell better products to their customers. Full Fibre creates a fresh new opportunity to own the home and deliver new services. Our CPs are taking the full range of speeds, giving us and then the opportunity to sell higher speeds and bundles at a premium price. We offer customers a full range of speeds. They start at super fast. That's below 100 Meg, and that works all the way up to 1 gig, and we've got price differential in those tiers of about GBP 6 per month. And these speeds can be very easily upgraded without any engineering work. And if I look at our speeds, our ultrafast speeds already represent 72% of sales. That's up from 59% when we last spoke. We also see stronger demand up the very high tiers with 20% of our sales now on 500 meg and 9% on 1 gig. And we will not stop there. We've also recently just added the 1.2 and the 1.8 gig services, and this enables CPs to offer that premium set of products right at the top end, and we're already seeing strong interest from CPs as we pilot that. Not only that, we're also already deploying XGS-PON capable headends into our network. And over time, we believe that, that will allow us to deliver up to 8 gigabit symmetric services. And this all means that we'll continue to help our CPs maintain a premium FTTP service into the future. By driving FTTP demand, and these ARPUs are around GBP 17 per month, that means we're able to grow overall ARPU. Together with our CPI price increase, this means that broadband ARPU is forecast to grow this year by 19% since FY '22. And that speed mix on FTTP is really strong. We've already reached a level where 2 of our biggest 5 CPs, are earnings an ARPU share as part of the Equinox deal but of course, that means it still leaves plenty of room for the other CPs for further growth. So despite those broadband losses that Richard talked about, we are actually growing our broadband revenue by 8.8% year-on-year. But let's not forget about Ethernet, of course. In my introduction, I keep reminding you every single time the Ethernet is often overlooked as a portfolio. And let me just spend some time reminding you about the importance of it in our strategy. Ethernet provides secure business-grade point-to-point network connectivity to businesses right throughout the U.K. It's the first choice for banks, corporates, government agencies and critical network infrastructure providers. And not only that, it underpins our CP's own networks that they use to deliver their broadband and mobile services. On that portfolio, we offer speeds from 100 Meg right through to 10-gig services and then right on to our optical products, which, in essence, offers almost limitless capacity through using multiple wavelengths. And on the Ethernet access product, we now have over 400,000 Ethernet lines. And as I said, this business has now grown to be over GBP 1 billion. In half 1, we posted a year-on-year growth year of 12%. And Ethernet is also a growing part of our ARPU story, and we've seen our ARPUs there grow by 8% in half 1 to GBP 210 per month. This is driven by 2 things. It's driven by the application of CPI onto the portfolio, and it's that continued transition, similar to Full Fibre to those higher bandwidths. 77% of our core EAD product sales are now on 1 gig orders, and we're now really starting to see that demand pick up for our 10-gig services. 10 gig is important for us because what we think it does, it creates a new opportunity for us to continue to be competitive in the market. And as I said, our portfolio already provides 1 gig, 10 gig, and even 100 gig. But we're going to talk to you today about a new platform that we are developing. And this allows us to offer a new ladder of bandwidths for increments, say, on 2 gig, 3 gig and 5 gig speeds. This will be otherwise known as EAD2 until we come up with a new special marketing name for it. And we'll be launching this as a new product on a new contract that gives us flexibility to simplify our processes and reduce our operating costs. And Matt and the team will give you a demo of this later and talk you through exactly what we're doing there. We've also honored our Ofcom commitments to build our duct and poles product that can handle scale and provide a quality of service. We've already seen over 0.5 million consumers and businesses connected via this product and with well over 100 established alt net using the platform. And to put that into context, alt nets now use over 40% of our poles and 50% of our ducts, and we've received over 30,000 requests for network adjustments so far this year. That's where work is required on our network. And where we do work on the network for alt nets, 86% of these have been delivered to our customers confirmed date. And we can continue to collaborate in this space to improve the product further. For example, one of these improvements was a Tour of Duty trial, which allows our customers to flag defective poles in advance. But what that really means is it reduces those barriers for others to build. And our Net Promoter Score here has grown over the year and now stands at 30. Now before I summarize, there's been a lot of information to take in from me. And it's easy for me to stand up and say what our customers feel. But what we're going to do today is actually being one of our customers virtually into the room to hear what it's like actually partnering with Openreach and why it works. [Presentation]

Hi, everyone. I'm Colin Jones, the Chief Operating Officer at Sky. It's great to be able to film this video to tell you a little bit about the excellent partnership between Sky and Openreach. And throughout our partnership, we pushed each other as true partners should and have delivered some industry-first together. The success of our partnership has been done not only through the shared vision that we have but also to the many talented and passionate teams at both Sky and Openreach. We've challenged each other and worked together and shown incredible commitment across the last 4 years, overcoming many challenges along the way. Now it starts with service and how we can deliver the best broadband service for Sky customers. Clive and his team have embraced this and increasingly think about how the Openreach business can make it better for the end customer. And in doing that, we helped Sky deliver the best customer service in the U.K. of any major CP. Sky now has over 1 million FTTP customers on the Openreach network and growing, enjoying a very good service, although it can always be better, of course. We now have over 5 million customers on copper-based services, and I'm pleased to say the service on copper has never been better. The FTTP is the future, and we're quickly moving customers to that product. And it's great to see the improvements on service in lead times, reduced early life failures and reduce [ tails ]. and that will only encourage us to go faster. What's really important to us is that both Sky and Openreach continue to work together to drive further service improvements that will make things better for our customers. And key to this approach is the relationship between our teams, we jointly identify the right service priorities and then work together to drive improvements through the year, both for the Sky service agent and the end customer. And I'm pleased that as part of this, Clive and his team have prioritized regular feedback sessions with Sky customer service agents to learn from their feedback. It's clearly how Openreach have listened. Now one initiative that both Sky and Openreach teams are particularly proud of is the project to have Sky engineers do the in-home parts of an FTTP install with Openreach still providing fiber to the outside wall of our customer home. Now this is an industry first. It's been a fantastic journey, which has seen us break new ground together, combining our shared strengths as technical experts with a joint commitment to always put the customer at the heart of what we do. And it started as an idea in a joint Sky Openreach ideation session. We made an official request to industry, which is approved then we piloted it around 2 years ago, and now we're operating at scale. Now the aim is always to believe in better for Sky customers by making things easier, more reliable and seamless using our brilliant Sky engineers to do even more for customers and bring them the latest technology. It required Openreach to help train Sky engineers and for Sky and Openreach to operationalize the process and work closely together to make the entire service seamless for our customers. We're really happy with the results for customers, which we believe is helping us extend our service leadership. With the new process, we have significantly improved both on-time delivery and early life failures with less customer drop out and very high customer satisfaction. Having a Sky engineer manage the in-home part of an FTTP in-store, we believe ensures the best service for the customer. It would not have been possible without the excellent collaboration with Openreach. I believe the Sky and Openreach partnership is probably the strongest it's ever been and will hopefully continue improving. Thank you.

So you've not just heard it from me. You've heard it right from our customers. So in summary, I just want to remind you of those 3 key objectives: We'll continue to be our CP's first choice as network partner, drawing on that scale and experience that I've outlined We'll drive harder Full Fibre products, FTTP and Ethernet, and we've seen fantastic progress on this so far, and we are growing our ARPU, moving customers to the best product available and stepping customers right up that speed ladder. Now let me hand you over to Matt, our CFO, who will take you through the financials.

Thank you, Katie. Good afternoon, everybody. My name is Matt Davies, and I'm CFO of Openreach. In the 2021 business briefing, I set out a range of financial outcomes in a broad range of competitive scenarios. The financial projections were underpinned by our strategy and investment in FTTP. In this presentation, I'll revisit those projections, give you an update on progress over the last 2 years. And I'll explain why we remain confident that our strategy will deliver on the long-term financial objectives that we set out 2 years ago. As a reminder, those financial objectives were as follows: Sustained revenue and EBITDA growth underpinned by higher ARPU and cost savings of around GBP 0.5 billion by the end of the decade. And significant free cash flow expansion with an inflection in FY '28 driven by a reduction in CapEx of at least GBP 1 billion. Okay. So let's start by looking at how the strategy has shown up in financial performance since the last business briefing in 2021. And starting with revenue. Over the last 2 years, we've seen revenue grow at a compound rate of 4%. And in our last set of financial results for H1, revenue was up 8%. And this has been underpinned by growth in our fiber base, growth in our Ethernet base and growth in ARPU across all products, supported by CPI price increases. Now to EBITDA. We're also seeing significant growth with the 2-year compound growth rate at 9%. In our last set of financial results for H1, EBITDA was up 12%. This has been underpinned by revenue growth and broadly flat OpEx costs, with the impact of cost inflation and higher FTTP provision volumes offset through efficiency and lower repair volumes. As a result of growing revenue and broadly flat costs, we have significantly increased the EBITDA margin from 56% in FY '21 to 63% in H1 FY '24. And turning next to CapEx. We've significantly increased our CapEx investment in FTTP, up GBP 0.8 billion in FY '23 versus FY '21. However, total CapEx increased by less at GBP 0.5 billion, with growth in FTTP investments, offset by reduced spend on legacy networks. In our last set of financial results for H1, total CapEx was 8% lower year-over-year and FTTP CapEx was 16% lower year-over-year. This reduction was underpinned by lower FTT build cost per home, which was sub GBP 300. Now moving to the next slide, which sets out how we're progressing with our longer-term revenue outlook given at the time of the business briefing in 2021. So let's start by looking at our broadband customer base. The blue color represents the expected outcome at the time of the last business briefing, and the green shows the actual performance and latest outlook. In the last business briefing, we said that we expected market growth of around 400,000 homes per year, which had been the long run average. We also said that there was a wide range of competitive scenarios with our base case around 400,000 competitive losses a year, resulting in a broadly flat broadband base. However, market growth has been materially lower than expectation. In H1 FY '24, the broadband market declined, therefore, no offset to the circa GBP 240,000 H1 competitive losses. But as a reminder, in aggregate, we actually grew the broadband base in areas where we had FTTP. It's hard to predict when the market will recover, but given the growth in data usage, we think it's highly unlikely that fixed broadband penetration has peaked at 85%. Now turning to ARPU. The softer-than-expected broadband market is more than offset by ARPU growth, which has increased by 19% over the last 2 years, supported by CPI-linked pricing. This is substantially above the ARPU expectations at the time of the last business briefing, and we expect ARPU to remain above plan over the longer term with price increases assumed to be in line with CPI. The net effect of these factors can be seen in revenue. When you combine the broadband based outcome, with the ARPU outcome then you can see that we are materially above the top end of the revenue range given at the time of the last business briefing. I would also add that current consensus for FY '24 is circa GBP 200 million higher than consensus for FY '24 at the time of the last business briefing. To know the revenues shown here for total Openreach, not just broadband. The next slide looks at OpEx costs. At the last business briefing, we said that we expected OpEx reductions to be GBP 0.5 billion by the end of the decade, largely underpinned by a high proportion of the broadband base on FTTP, resulting in lower repair volumes. This slide shows how we're progressing against that goal. Starting with the FTTP base mix. The business briefing in 2021 we set out our expectations for the proportion of the broadband base that would be on FTTP. The blue color represents the expected outcome at the time of the last business briefing, and the green color shows the actual performance and latest outlook. As you can see, the current outlook is above expectations that we gave at the time of the last business briefing, underpinned by the Equinox discount scheme. We expect the majority of our broadband base to be on FTTP when we complete the 25 million build in calendar 2026. And this is ahead of previous expectations. Now moving to fault rates. Fault volumes are dropping faster than our expectations at the time of the last business briefing, driven by higher FTTP penetration and lower in-line fault rates. In-line fault rates, were running 60% lower than copper, which is 10 percentage points lower than previous expectations. And the combined effect of more customers on FTTP and the lower FTTP fault rate has resulted in materially lower fault volumes overall. And this benefit is showing up in OpEx. As a result of these lower fault volumes and other efficiency programs, we've managed to keep OpEx costs broadly flat, and that's despite significant inflation and higher FTTP provision volume. Consensus for FY '24 is circa GBP 200 million lower than consensus for FY '24 at the time of the last business briefing. So the combined upside on revenue and OpEx means that current FY '24 EBITDA consensus is now circa GBP 400 million better than consensus for FY '24 at the time of the last business briefing. Looking ahead, the higher-than-expected mix of customers on FTTP, combined with the lower-than-expected fault rate means that we are able to pull forward the GBP 0.5 billion OpEx saving from the end of the decade to FY '28. The next slide looks at labor costs, and this is a new slide. There was no equivalent in the previous business briefing. The slide shows the evolution of labor costs setting out how this will underpin the FY '28 OpEx reduction of GBP 0.5 billion and the FY '28 CapEx reduction of at least GBP 1 billion. So the first chart shows total direct labor costs, and these are Openreach employee costs. This shows that direct labor costs peaked in FY '23 as we scaled up FTTP build and provision. It also shows that we're now on a downward trajectory underpinned by lower repair volumes. And we've already seen this in our H1 results with direct headcount, circa 3,000 down from FY '21. Over the next 5 years, we expect to make a significant contribution to the 40,000 minimum headcount reduction targeted by BT Group. The next chart shows the split of labor costs between OpEx and CapEx. And it shows that OpEx direct labor costs have been reducing since FY '21, driven by lower repair volumes. However, CapEx direct labor costs were growing between FY '21 and FY '23 as we scaled FTTP build and provision. The net result was higher direct labor costs and higher headcount overall. We now expect both OpEx and CapEx direct labor costs to reduce steadily from the peak in FY '23. And this is an important enabler to realize the GBP 0.5 billion OpEx savings and GBP 1 billion of CapEx savings in FY '28. And now the final chart shows capitalized direct labor costs and capitalized subcon costs. And importantly, this demonstrates how the combined reduction in direct labor costs and subcon costs will contribute to the reduction in CapEx of at least GBP 1 billion. Total capitalized labor peaked in FY '23, and we expect it to be broadly flat with an inflection in FY '28, when total capitalized labor costs were reduced by GBP 0.5 billion. The mix of total CapEx spend is circa 50% labor. Therefore, a reduction of GBP 0.5 billion is consistent with the overall reduction in total CapEx of GBP 1 billion. Now moving to the next slide, which looks at the evolution of CapEx spend over time. And the first chart shows CapEx by product. These are the same charts that we've shown at the last business briefing, but updated with actuals and latest outlook. And this shows that the proportion of CapEx spend on legacy FTTP, Ethernet and other. And what you can see is that CapEx spend on legacy shrinks as we increase investment in FTTP, helping to offset some of the growth in FTTP spend. Reduction in legacy spend is on track, reducing from GBP 0.6 billion in FY '21 to GBP 0.3 billion in FY '23, a reduction of around 50%. Now moving to CapEx by activity, and this shows a proportion of CapEx spent on provision, network and other. As you'd expect, network build grows as a proportion spend, but then this drops off in FY '28 as the bulk of the build completes in calendar 2026. Though as Clive has outlined, we do expect to continue to build at a rate of around 1 million THP per year from FY '28. FTTP provision makes a higher proportion spend than previously expected as the total FTTP customer base is now forecast to be higher than the time of the last business briefing. Bringing this together, in the next chart, we can see how these dynamics play out in total CapEx spend. We previously said that we expected CapEx to peak in FY '24 and then remain flat during our peak build years from FY '24 to FY '27. However, we now expect CapEx to have peaked in FY '23. this is despite increasing the FTTP build and provision volumes, which were offset by lower build unit costs and lower legacy CapEx spend. By FY '28, we anticipate a significant drop-off in CapEx of at least GBP 1 billion as the bulk of build is completed in 2026. The final slide isn't changed from the previous business briefing, and there are 3 simple messages. In a broad range of alt nets and market scenarios, we are confident that we will grow revenue over the long term, in line with previous guidance. We are confident that we will see sustained EBITDA growth underpinned by higher ARPU and lower OpEx costs, pulling forward $0.5 billion of savings from the end of the decade to FY '28. And we have reached peak CapEx, and we will now see sustained free cash flow growth with an inflection of GBP 1 billion in FY '28 as we complete the first phase of our build. Thank you for listening. I'll now pass to Clive to sum up.

Right. Thanks to Richard, to Katie and to Matt. Let me bring the various trends of the outlook together and summarize. The future of this Openreach business is in Full Fibre, both FTTP and point-to-point business Ethernet, achieving the objective of a Full Fibre future is great use for the U.K. people, for the U.K. economy. It's good for Openreach customers and it's good for the Openreach business. At Openreach, we have cracked the code on building fiber in urban, suburban, rural, ultra-rural areas of the U.K. Next quarter, I expect to hit peak build run rate of 1 million premises per quarter. The scale build program completes just 3 years from now. And after FY '27, CapEx investment falls as we target a lower build rate of about 1 million premises each year ongoing. This will drive an immediate normalized free cash flow step change. We continue building post December 2026. To be clear, I aim to build everywhere to every city, every town, every village across the U.K. And my intention is to move customers to Full Fibre and decommission the copper platform. Despite inflationary pressures and supply chain pressures, the unit cost of commercial fiber build has been falling. Billing cost is now below the midpoint of our previously stated GBP 250 to GBP 350 range, and it will not rise over the next 2 years when we are due to meet again. Building fiber is very interesting, but frankly, not as exciting as selling fiber and filling up that fiber network. We are selling hard, provisioning hard. Take-up rate is increasing FY '24 to FY '26. But the fiber dividend is not 3 years away. Yes, it becomes very stark in the last quarter of FY '27 and beyond. But in truth, the fiber dividend is already delivering. Fault volumes are in decline, OpEx costs are falling right now and will continue to decline. So we are at a point of inflection. The benefits of a Full Fibre future are arriving now and I have high confidence that we will achieve the business case for Full Fibre and deliver a great return for our shareholders. And with that, I would like to open up for Q&A. We'll start by taking questions from those of you in the room. [Operator Instructions]

The way I'm going to do this is I'm mostly going to pass over to my team because my voice is running out. So you'll excuse me for that. So if you fire the questions to me, I think these 3 guys are going to come up. And I'm also going to use the rest of the team here in the room today. So you fire them, and I'll select who's going to answer.

Matt Howett from Assembly. Hopefully, this will be easy because it's for Richard. I was interested in the point you were making about the copper withdrawal and what you'd like from Ofcom in terms of more clarity. Is that, just to be clear, something you're asking for now? Or can that wait to the WFTMR in '26? And if so, what it is that you're looking for from them?

Yes. I think it can wait until WFTMR in '26. So the way Ofcom handles these market reviews. It doesn't sort of wait until 2026 before it sort of consults on the approach. I would expect it to consult well ahead of that. And I think what we'll be looking for is greater flexibility, really, because I think we and industry have a lot to learn about the process we're going to have to work through together and with end customers to make sure that we can withdraw legacy products in a way that's safe to end customers and that allows us as an industry to not run dual platforms for extended periods of time. So it's really more clarity and flexibility to be able to get on with that process in a way that is safe for customers but allows the industry to save money.

It's [ Titus Khan ] from Bank of America. I have just a follow-up question on your commitments to, as you said, quite often, fiber everywhere, every city, every town, every island, you also mentioned this the gigabit program in which there's funding provided subsidies for alternative operators. How does it relate to your ambition to kind of provide fiber everywhere? How much -- are you prepared to overbuild those? And how do those economics work?

Do you want to open up -- Katie owns the gigabit program for me, and she'll explain what we're doing.

Yes. So just a reminder of the gigabit program, there's multiple ways of funding in that program. First of all, there's vouchers, and we actively use those vouchers. We like those. And then also there is the gigabit intervention areas, which you've mentioned, type As, Bs, and Cs. Now on the type As and Bs, some of these have been awarded so far quite frankly, Openreach hasn't gone for them. That's been a very conscious decision on our part where the terms and conditions just haven't worked for us. We have extreme experience of working in ultra rural and we couldn't sign up to those terms and conditions where it's very hard to get your money back. So that's definitely not for us. We are absolutely working on type C. In fact, the 3 of us here are heavily working on it at the moment. And I think on the type C, there's a much bigger area, there's much more flexibility. And I think the experience that we've had in delivering ultra-rural, whether or not it's in Wales and Scotland, I run the R100 Scotland gigabit piece. In fact, you've seen the video. We've got the battle scars. We know what it's like doing ultra rural. So we are looking forward to bidding and working on that one. And I think your point around over or under building, the reality for us is that we are in these communities. Richard outlined how far and extensive the network is. So we will, by virtue of where our network is next door these -- a lot of these brands will already be commercially viable. We'll be building them in our plans anyway as we announce further rollout. And we're finding innovations every single day that allow us to do even more. And in fact, when you go to the demo, you'll hear about our subtended headends. This is technology that uses our fiber to the cabinet infrastructure and allows us to repurpose these. Anyone whoever wants to visit to the far-flung places of the U.K. where we go and see these. We were there in Inverness last week in gale force winds and sub-minus temperatures, it's really good to see because it reminds us how much fiber we've actually got in the middle of nowhere that we can repurpose. So the story from us is, we're absolutely going after type C, and you will find the fact that we'll continue to build. And we will either get there first or in some cases, we'll overbuild, but it will become commercially viable for us.

It's key to understand that we have honed our rural build techniques. We spent huge amounts of time and energy on it. In the showcases, you'll be able to inspect some of those techniques. Much of these intervention areas will be commercial for us to build. That is my belief.

Maurice from Barclays. Also it's very helpful to get an update on the financial targets that you gave 2 years ago. And thanks also for many of the financial targets you've given. If I can understand just in terms of the trajectory of net adds on broadband. I know there's more to Openreach than just broadband numbers, but you said you expected to see the impact of competition increasing. You talked about a few offsets, such as data growth and increase in penetration, but you hinted that maybe will come later. So should we expect the sort of the minus 250,000 number the last half year could continue for the next few periods and maybe even get worse.

Okay. I will point you at Richard, please.

Yes, I mean it's hard to be precise and to sort of box these things into financial years or quarters in a very precise way. And let me explain a bit why just by recapping on the key sort of tailwinds and headwinds, right? So the tailwinds are, number one, we're building FTTP, right? And where we're building FTTP, we've seen that we've been growing our broadband base. And our rate of build is accelerating. Number two, then is the housing market, which we do expect to recover at some point as the overall macro economy improves. And then third is sort of points relating to broadband adoption. In the near term, as the PSTN closes, we are expecting a bunch of customers who are on non-broadband products today to move to broadband. But exactly when that happens, it depends on the particular strategies that our retailers are going to pursue. So that's going to be quite lumpy and it's a little bit unpredictable. Headwind is then competitive loss, and that's a function of how much network is built by competitors and what take-up competitors achieve. And as we said, over the last 12 months, that's been pretty flat. So when you put them together, it's hard to sort of be really precise about what does that mean this quarter or this half year or that. But hopefully that gives you -- we try to give you a sense of what the moving parts are, so you can understand the sort of underlying dynamics better.

Maurice, if I can add, right? This fact, we win where we have FTTP. A year from now, we'll have another 4 million FTTP footprint. 2 years from now, 8 million; 3 years from now, 12 million. That's the way to think about the long run arrangement for winning share in the market. We win where we have FTTP, and we're building it at a ferocious pace.

Nick Lyall from SocGen. Could I ask a bit on the ARPU, please. I think the ARPU per line is 11% to 12% give or take, for the first couple of quarters this year. How much of an Equinox benefit or impact -- your benefit from mix, but impact from pricing does that include? How do you expect that to progress as you move into sort of lower CPI. And then the second one was just to say you mentioned, I think, in the presentation, indexation continues, but the labor party don't seem to agree with that. So can you tell us what the discussions have been around index linking, please?

Yes. So just on the ARPU. So if you actually look at the ARPU, particularly on the Equinox, don't forget between Equinox 1 and Equinox 2. We actually reduced the FTTP pricing anywhere between 3% and 6%. But actually, our FTTP ARPU has only dropped 2%. So you can see actually that it's the mix in speeds. And you can see on the chart how we've grown these are actually contributing to offsetting some of that dilution. And also we've hit on ARPU share as well -- in this year as well. So that means as you start to get to those upper tiers, that will bring down slightly in the short term, the ARPU and then the remainder has been driven by CPI.

Okay. And I'll do the thing on labor, exactly what was the question?

A couple of labor measures of [indiscernible] as well as retail indexation where possible...

Right. So we're super well engaged with labor. I have Catherine, who gets me in with [ Keir Starmer, ] Rachel Reeves, Johnny Reynolds, Peter Kyle, the Shadow Secretary of State for DSIT. We are super engaged with them and communicating about what we're doing and how we're doing. Rachel told us only last week how she supported the arrangement for permanent 100% capital allowances to us. We have clarified what they believe in terms of CPI pricing and how it applies to us. Catherine, take the mic?

I think he's probably answered everything for me, but I mean, as Clive said, we've had extensive engagement with labor over the last 1.5 years. I think the key thing about labor is that they absolutely understand that delivering Full Fibre connectivity underpins most of their growth and productivity targets. They can see, Clive sort of pointed to the stats earlier that you get GBP 72 billion of productivity growth with a Full Fibre economy. It's beyond that. It brings people back into the workforce. It brings people who are may be economically unactive like carers and older people back into the workforce. It also helps in terms of digitally connected communities. You saw [indiscernible] being connected, it stops people moving into cities. So actually, if you think about some of the things you're trying to do as a government and in particular, potentially an incoming government, this is underpinning it. And I think what has happened is as we've had more labor engagement, as Clive said, the pennies dropped a bit about what could be impacted in terms of the potential investment and therefore, that productivity and other gains in the U.K. So certainly, the conversations that we've had recently with labor they have moved away from some of that positioning now. That obviously isn't necessarily coming out yet in terms of sort of new manifesto commitment. We'll hopefully see that probably in the new year. But certainly, in terms of some of these things they talked about, and the CPI or moving the ability to put the wholesale CPI increases, certainly, the conversations we've had, they've realized that they need to back us and back the investments. So we're pretty positive about the conversation.

We're on a round table with [ Kier ] and Rachel on the subject of U.K. infrastructure, and they're very focused on how do you incent investment in U.K. infrastructure. And we've explained very clearly why this sector is so successful. And CPI pricing is part of that. It's what generated cash to throw up the CapEx program. They're very impressive in terms of listening.

Robert from Deutsche Bank. I think Nick, broke the seal on the 2 questions, actually. So XGS-PON is my first question. And is that in your falling CapEx budget. Is it material? Are you planning for 10 gig symmetric out to the end of the decade? And One Touch switching. I think I asked you about that a couple of years ago and you were like One Touch what sort of thing. And you're right, it wasn't a big thing....

It hasn't arrived.

It hasn't arrived. Is it coming in March? Is there an opportunity for you to take share from cable as well as an opportunity for some of the others?

Okay. So I start on XGS and then you take the second question. Since the start of this year, all the kit that we bought, biggest supplier is Nokia is XGS ready. So we'll take [indiscernible] cards with G-PON ports and XG-PON ports in combination. So we are already in the network to support XG-PON. But the way I think about this is, Katie just launched 2 higher-tier products, all right, 1.2 gigs and 1.8 gigs. And one of the tests that I will apply is if they sell hot cakes and they're premium priced. Then I will know that the time is right to deliver even higher speeds using XG-PON and we will debate whether symmetric services are appropriate as well. But we're going to look at that as being an investment that needs to have a business case in its own right. I will need to see evidence that the market wants to buy multiples of gigabit. So we'll be very rational about that investment. The quantum of the investment isn't too scary either. In fact, we're just back from Nokia, in -- who is Nokia...

Antwerp.

Belgium, Antwerp. So we've been telling them what prices work for us. That's the way the negotiation works. We don't let them speak. That means...

On One Touch switching. So yes, we're all over it. We are supporting Ofcom and the industry and getting ready for it. I mean I think the thing about One Touch switching is it's not necessarily that new for Openreach and its CPs. If you think about it, we've got very clear switching. It's a very competitive market. We switch all the time CPs between our network, et cetera. And I think the thing for them is they're busy working out how they can use it to their advantage. I'm sure there'll be some puts and takes, but definitely now speaking to some of our CPs. They see it as an advantage absolutely on where you could maybe get from cable, but it will be down to them to work out how they optimize it.

Okay. I think there's an Online question. I'll take that and then come back to the room, please.

The question is coming from Jakob Bluestone with BNP Paribas.

I had a question on your CapEx and your labor costs. If I look at the slides for labor costs, it looks like there's a sizable step down in labor costs in FY '25. There's no number, but can you maybe just help us understand. What is it particularly that's driving that step down in FY '25? And then just a linked one on the CapEx. I mean I think you're guiding for sort of sub GBP 2.8 billion in CapEx going forward. And the consensus, I think, sitting at about GBP 3 billion. Would you confirm that, that consensus maybe looks a bit high.

Matt, please?

Yes. So first part of the question, as we talked, we started -- just started to see the benefit of reduction in headcount. So we passed our peak middle of last year. So what you're seeing in FY '25, you basically get a full year benefit of the headcount reduction that we're seeing coming through, whereas this year, you're not getting the full year benefit. I'm sorry, the second question, could you just repeat the second question?

It was about GBP 2.8 billion.

What was the specific question -- sorry, what was the specific question.

He was asking you whether GBP 2.8 billion was the most you were ever going to invest in a single year?

Correct. Yes.

It's Georgios from Citi. Maybe for [indiscernible] the question that Jakob has asked. When we look at the headcount reduction, I'm just curious, how much of that is OpEx benefit versus CapEx benefit? Because you mentioned CapEx may be lower than expectations. But it wasn't clear -- sort of headcount reduction, it wasn't clear just how much of that is capitalized labor versus noncapitalized labor and whether there is OpEx benefits as well? And then the second one, just a clarification on a second one...

The second one of the only ask 1 question...

So one clarification, so no questions, so clarification, it's around the switching that was mentioned earlier. Once we move to fiber and you have to switch from 1 CP to another, do you get lower cost of switching versus what you had before? And can you maybe give us an indication of how the revenues work between disconnecting and connecting...

Okay. I'll go first. So yes, roughly speaking, the reduction in head count and the overall reduction in labor cost is about 50% CapEx and 50% OpEx.

And then on the FTTP. So obviously, the first install, unless it's a new site where we already predeliver the ONT to the building or a multi-dwelling unit, of course, as well. The first visit drives, in essence, the truck roll, the cost of getting that customer connected. Then what happens is it's an open platform. And then our CPs can switch without a secondary engineer. So obviously, we don't have the level of cost, and then it's lower charging obviously, to switch between CPs. You can switch for a low cost between CPs remotely. The only problem always is if anyone takes it off the wall, whenever they decide to either move house or for whatever reason to disconnect it, they were looking at ways to either stop that or make -- in fact, Nokia was telling us about some folks who are making these self-installable. So there's always ways to find new innovation to see if we can reduce that further.

Yes. So. it is a [ trunk roll ] for the first install subsequent to that computer program does it.

Yes.

Right. Does the stop and does the start for the new customer or the new CP.

Yes. So there's very -- there's a low transfer charge for it.

It's Polo Tang from UBS. Very helpful. Just have 1 bigger picture question in terms of what is factored into your estimates in terms of competitive effects, I suppose there's a couple of different areas that you yourselves have actually outlined, for example, the PSTN switch off in 2025, that's 2 million lines. So is there not a risk of -- this is a churn event. Also, TalkTalk seems to be in an M&A process right now. So what do you think about the risk of losing them as a customer. You've never had Virgin Media O2 as a wholesale competitor, and they're building a near national network. So what was factored in, in terms of market share impacts and pricing impacts, but also in Ethernet, that's obviously been a very high area of strong growth. So of the GBP 1.1 billion of revenue that you have there, I think TalkTalk accounts for about GBP 300 million, but they're in the process of diversifying suppliers? So what do you see -- how do you think about the risks there too?

It was a very long list. Richard, do you want to kick off?

So I'll start, and Matt may wish to add as well. But look, when we look at our investments, we recognize that there's a wide range of potential market outcomes as you described. And so we test them against different scenarios in terms of how much is built by our competitors, how much is sold by competitors. Different outcomes in terms of the extent of wholesaling. Different outcomes in terms of consolidation and how that might play out. And there's a range of outcomes when we sort of look at our investment case against that, right? And we've guided to 10% to 12% is also the central range. There are some outcomes that are better than that. There are some outcomes that are worse than that, right? But we're really confident -- we're more confident as we sit here today in our returns because the things that are under our control, build cost, provision cost, the ARPU, the pace of migration on to the FTTP platform are ahead of where we thought it would be when we signed off the investment case. So when I look at our expected returns are stronger than they were a year ago. So we test it clearly, there's a range of outcomes. That's why the fair bet is important. But I think more confidence -- higher today than we were when we met 2 years ago. And Matt, if's there anything for you to add or?

No, nothing's worth.

And we've not so long ago refreshed that. We basically refreshed the business case every year. It's moving to the upside, not the downside, Polo.

Carl Murdock-Smith from Berenberg. First, and this isn't my question. Am I like to have a stab at Richard's [indiscernible] quiz. I think it's the beautiful [ cobbled city of Bath ]

I'm sorry, that's not the right answer. We started in Bath...

So many execs keep -- of our team keep guessing Bath, but it's not. There's still a price on offer for anyone who can guess it.

Anyhow, I've got 1 question in kind of 2 parts. So the first is Slide 15, talking about the headcount reduction. And yes, I guess this is mostly for Kevin. That shows a reduction of about 10,000. Obviously, at a group level, we've got a target for the end of the decade of reducing the total labor resource by kind of 40,000 to 55,000, and Openreach is the biggest division. So what does that chart look like if we drag out to the right and kind of includes subcon as well as just employees. And then the second part that [indiscernible] gets brought up is one of the numbers you've not updated on versus last time is on gender diversity. Two years ago, you talked about 25% of the senior management team being women by 2025. Where are we now on that? And that's a group Openreach level, you've got 12% target for 2025 and you are resolutely stuck at 10.3% for the last year. Just a bit of an update on what you're doing to increase gender diversity as well.

I'll try and answer all 3 there, Carl. Firstly, on the head count, you're right. I think in the context of Openreach, we account for about half of the total group number. I think in the context of where we're going, we are making good progress and as the slides suggest we are coming down. To give you some degree of confidence that we haven't gone into all of the detail, but if you take the Better Workplace program, which is a group-wide initiative around consolidation of the office estate. That program is for Openreach more than others by March, we'll have gone down from 650 offices, which is ridiculous number, we will be at 9. We have consolidated. We're working very closely with both trade unions we have a path. We have a lot of labor that will come out from third parties as well, clearly because a big proportion of our build is done by third party and that clearly will flow through as well. So in terms of context, working with the unions, we're pretty confident in terms of being able to get to the numbers we want to get to and bring our workforce with us. I think in the context of diversity, our senior management team, I'm pleased to say this year, we have increased our senior management group percentage, we're now at 30% -- just under 33% of our senior management group are women, and that's up from 29%, which was the exit rate last year. And it's something that we're paying attention to in terms of being able to attract talent into our organization. The overall number, we are going to struggle a little because we have stopped volume recruitment. So we stopped volume recruitment actually a little earlier than we'd originally planned. And that does mean it is quite difficult for us to turn that dial drastically when we're not recruiting in any volume. So we are seeing improvements. We are actually -- as part of our reductions we've seen more male colleagues leave than female colleagues, which is, in some respects, positive. So we are seeing that dial turn. Whether we will get to a step change, we've probably reduced our ambitions in terms of the number of people we were hoping to originally build when we set the target. So that will be a challenge for us.

It's Andrew Beale from Arete Research. I just wanted to come back to the GBP 300 or less than GBP 300 a passing number. And obviously, I guess there's been some contribution from prebuilding the Spine. There must have been a lot of process improvements because you had a lot of inflation headwinds to deal with. And I think going forward, you've got greater build distances between the premises, so presumably higher costs from that as well. So can you just talk about those main efficiencies and what you've been doing? And also, up to 2 years. I mean is that just the forecasting horizon? Or do you think that you've used up the prebuild on the Spine. And therefore, there is a bit of inflation. And what happens when the volume has dropped to 1 million, do the costs go up again?

Okay. So I introduce Matt, please, Matt Hemmings. He builds the urban footprint for FTTP and he also delivers Ethernet which is up to 400,000 circuits and they are everywhere in the U.K. So Matt, take the question, please, about what are the efficiencies?

Yes. I mean, we've had 5 years run at this. So we've -- over the 5 years, we've improved our systems, our processes, our tools and our techniques and obviously, we've been all around the world to find out the best components, who's doing it best, who's doing the cheapest and most efficiently. And we brought all of those tools and techniques back into Openreach. We've skilled thousands of people through our training schools, 11 training centers that we've reskilled existing capacity through. And we think we'll now be able to hold up that build rate and that build cost at sub GBP 300 for the next 2 years. But we've not been innovating and you'll see some of the innovation that we'll show you in the showcase and in my session on Ethernet. And really, the innovation is to continue to hold that unit cost as we try to go over more rural. So we're confident of the subs GBP 200 over the next 2 years. We're going to keep innovating in every way that we can try and hold up build cost for as long as we can.

And the horizon of 2 years is because you're coming back in 2 years, right? So that was the horizon I wanted to major on, right? We're very confident in holding the build cost. It will get each year a little bit more challenging. So as you said, Spine lengths will tend to get longer. The mix from overhead to underground, will change a little we understand all of that. We've been doing this long enough. We've done 12.5 million. So our modeling on this is really good. And we have tremendous confidence in our ability to innovate technically. I'd love it if you stayed for the little 2 of the techniques we're using in build and provisioning, right? We can do this.

We think that's our biggest differentiator. We've got the innovation capability and the direct labor resource to innovate that complexity away. And we think that's 1 of our biggest differentiators there.

Okay. Can we go over here, please?

It's Adam Fox-Rumley from HSBC. I had a question on subcontractors, please. Because in the past, we've often spoken about the in-house resources being an advantage to Openreach. And I think if I read your charts correctly, you will grow your dependence on subcontractors over the time period. So I wondered if you could talk a bit about the performance, the controls you have over the, I think, you mentioned improved contract terms as well as part of your presentation. So if you could talk around that subject, please.

Yes. This is back to Matt's answer from earlier. We've been at this for 6 years. We know all of the contractors, all of them. We even know their parents like [ Circet ] in France and [ Visabeira ] in Portugal and we have evolved our method of working with subcontractors. And it just gets better all the time. And we've now refined the arrangements for working with subcontractors, and we just know how to deliver. Matt here uses subcontractors to a very high degree in urban U.K. and that model works for least cost. Andy here builds in rural U.K. that has more direct labor in the mix, still subcontractors, but more direct labor. So we figured out where to deploy our people where to deploy subcontractors, and we just got better at it. And they know us. They're sort of in the same way as Sky sort of embedded in the provisioning process. So our chosen subcontractors, and we have got rid of quite a few actually. So our chosen subcontractors are just sort of more entwined with us in our processes. Anything to add to that...

Again, we spent years now refining our contracts. So we know it's important to the partners, and we know what's important to us. And we also know the right blend. So how do we do direct labor delivery versus third-party delivery? Where do we supervise. Where do we not? Where do we help and support, where we don't we? Where do we provide them with innovation versus they can innovate themselves. So we've got -- I think we've optimized our model now to a point over the last 5 years where we've landed on the right model in each geography to build at the lowest possible cost at the highest possible pace. And our partners like it because they really feel like partners rather than just contractors. We wrap our arms around them and we deliver together.

So we've got a question online from Andrew Lee from Goldman Sachs. He has asked, you have reduced your build costs for homes passed, however, you haven't reduced connection costs. Why have you been able to shave costs from one both and then the other?

Okay. Well, usually the first thing to say, please, the first thing to say is that we are at GBP 300 -- after 2 years of rampant inflation we're still at GBP 300 pounds, right? So we have offset huge inflationary headwinds. So I introduce Surinder. Surinder Khatter who runs all FTTP provisioning and is now operating at 35,000 provisions per week, visited -- in addition, and when you visit her in her showcase, she'll tell you about the automated provisions, which give you a total of 50,000 a week, right, automated plus visited. Would you care to take the question?

Yes. I mean the GBP 300 on the face of it, it looks like it stayed flat. But if you visit the showcase, what I'll show you there is the figures that have been inflation adjusted. We've absorbed 19% of inflation. We need to remember that of the GBP 300 of provisioning costs, nearly 80% of that is capitalized through the innovations that we've been driving over the last few years, and we will continue to drive and again, you'll be able to see some of the things that have yet to come. that will help us keep our costs down. We're striving every day to bring the cost down, and that's what's helped us thus far. I expect that going forward, our cost will be at or around the same. Obviously, Clive is going to push me to bring those down. So you'll see some of the things that we are doing to bring those -- bring the prices down. But every day, we are focused on automation, innovation and using AI to help both our customers get the best possible service from us because that's what matters to them. The cost that our CPs have as well and actually consuming our services is something that we are very, very focused on. So we're not just fixated on our own unit cost, but we're actually fixated on what it costs our CPs to be able to consume the service from us to deliver the best possible service to our customers.

Surinder, is the 1 last question or should we go to the showcase. One last question, Matt. Real quickie.

Is it a trick question and is it [ hurdle ].

Very well done. Right, so we're done on that, and it's great to finish on a really high note with Matt winning what is he going to win, a KitKat or something. Right, yes, throat lozenges. Openreach won. Matt, those are rare because we've only got 28,000 of the big ones, and they're much coveted. Right thank you very much for your questions, everybody. And thank you very much to everyone who joined us online. That's the end of the session for those online. What I really want you to do if you can spare the time is invite you to a bunch of deep dives and demonstrations relating to. [Audio Gap]