BT Group plc F4Q06 (Year ended Mar 31 2006) Earnings Conference Call Transcript (BT)

May.18.06 | About: BT Group (BT)

BT Group plc (NYSE:BT)

F4Q06 Earnings Conference Call

May 18 2006, 5:00 am EST


Sir Christopher Bland - Chairman

Hanif Lalani - Finance Director

Ben Verwaayen - CEO

Ian Livingston - CEO of BT Retail

Paul Reynolds - CEO of BT Wholesale

Andy Green - CEO of BT Global Services


Mike Williams - Citigroup Smith Barney

Cyrus Mewawalla - Westhall Capital

Laura Mills - Merrill Lynch

Paul Howard - Cazenove

Chris Anderson - Nomura Securities

Nick Lyall - Morgan Stanley

Edwin Lloyd - Nortis Bank

Michael Juracci - Pal International

Richard Barker - Credit Suisse First Boston

Steve Miller - Ameritech Research

Damien Chu - ING

Tayjish Tallis - Societe Generale

Mark Cardwell - Sanford Bernstein

Stu Gordon - ABN Amro

James Harper - Redburn Partners

Sal David - JP Morgan


Welcome to the BT Center Auditorium. Can you please make sure that you have all your mobile phones and pagers switched off. There are no fire alarms planned for today, and, in the event of an alarm sounding, will you please leave the auditorium by the two fire exits at the front of the room.

Sir Christopher Bland

Good morning and welcome to BT’s results presentation for our fourth quarter and full year. This morning I will focus on the full year results and then Hanif will take you through the fourth quarter and the financials in greater detail. Finally, Ben will set out our strategic priorities, and share with you some of the key trends affecting our business.

First, I must draw your attention to the cautionary statement. I remind you that during this presentation we will make various forward-looking statements. Factors which could cause our actual results to differ materially from the results we currently expect are identified in detail on the screen and in your presentation packs.

This is an excellent set of full year results, delivered in a competitive and fast moving environment. We’ve accelerated the transformation of our business and our revenues for the full year have grown by 6% to £19.5 billion . Excluding the impact of the acquisitions of Albacom and Infonet, and the mobile termination rate reductions earlier in the year, our revenue growth was 3.4%.

In addition, we’ve grown profit before tax by 5% year-on-year, and earnings per share by 8%, reflecting ongoing operational efficiencies, lower net finance costs, a lower tax rate and an increased share of profits from joint ventures and associates.

We generated £1.6 billion of free cash flow this year. This is 8% lower than last year’s level because of the exceptional working capital performance in that year. But it nevertheless reflects very strong working capital performance in quarter 4 this year.

As a result, at the year end net debt stood at £7.5 billion, an improvement of 5% on the prior year. I’m also pleased to announce a full year dividend of £0.119 per share, 14% higher than last year.

The underlying increase in Group turnover of more than 3% was driven by an impressive 26% underlying growth rate in our new wave businesses. Traditional revenues have declined by 4%, driven in part by competition and regulation, but also by our strategy of migrating customers to new wave services.

New wave revenues now account for around one-third of the Group’s business, compared to just 14% three years ago. We’ve seen particularly healthy growth in broadband and networked IT services which demonstrates how successful we’ve been in transforming our business.

During the ongoing transformation of the business, we’ve consistently delivered progressive growth in our earnings. This is the 16th consecutive quarter -- the 16th consecutive quarter -- of year-on-year earnings growth. Over the last four years, EPS have more than doubled to £0.195, with a growth of 8% in the past year. This has enabled us to adopt a progressive dividend policy.

We will pay a final dividend of £0.076 this year, bringing the full year dividend to £0.119. Our dividend payments have grown nearly sixfold over the last four years, and that dividend represents 61% of our earnings per share this year.

As we continue to grow earnings and cash flow, we are focused on rewarding our shareholders. We’ve been returning an increasing amount of cash to shareholders over the years. In the past year, over £900 million has been paid as a dividend, and another £338 million has been used to buy back our shares, and this represents a growing proportion of our free cash flow.

We remain committed to our aim of a payout ratio of around two-thirds of underlying earnings by 2007/2008, subject to the Group’s overall financial position. We are still comfortable with debt levels of around £8 billion. Any free cash flow in excess of that required to pay dividends would be available to fund our continuing share buyback program, and for any M&A activity.

These results demonstrate we’ve delivered real value through transforming the business. Our strategy is working, and we are confident that we can continue to grow our business and reward our shareholders. I’ll now hand over to Hanif, who will take you through our quarter 4 numbers in detail. Hanif.

Hanif Lalani

Thank you Sir Christopher. Good morning. As Christopher said, an excellent set of full year results, rounded off by an outstanding quarter 4 performance. Revenue rose 7% year-on-year in the quarter to £5.1 billion. Excluding the acquisitions of Albacom and Infonet, underlying growth of 5% was achieved, our highest rate of growth in over four years.

EBITDA was almost 1% higher at £1.5 billion. This continued the improving trend we’ve seen over the last five quarters, and gives us our first quarter of positive EBITDA growth in the last 11 quarters.

Earnings per share rose 8% to £0.057, delivering our 16th consecutive quarter of year-on-year growth. We’ve generated £1.1 billion of free cash flow in the quarter, 1% higher year-on-year, driven by a very strong working capital performance.

So how did our lines of business contribute? BT Retail recorded another strong quarter. Revenues declined by 1%, an improvement on the trend we’ve seen in previous quarters. Gross margins of £613 million were 3% higher year-on-year, driven by successful margin management.

Reinvestment in new wave, an ongoing success in a very competitive broadband market, led to a rise in SG&A costs of 2%. EBITDA pre-leavers rose by 5% to £222 million, our third consecutive quarter of growth. Operating profit grew by 10% to £175 million.

For 2005/2006, full year EBITDA growth in BT Retail was 5%, and next year we expect to continue that growth. We continue to develop and roll out innovative services, but more about that from Ben later on.

At the same time, we’ll focus on improving margins and transforming our cost base. In particular, we’ve been repackaging and simplifying our services to reduce the volume of calls coming into our call centers, optimizing our pricing structures, reducing overheads and increasing the channel effectiveness by driving up the number of online relationships that we have.

Let’s focus on BT Wholesale. Total revenues rose by 2% to £2.3 billion, driven by strong growth in broadband with net DSL additions of 665,000 in the quarter. New wave revenue now accounts for over a quarter of our external turnover, driven by broadband and network managed services. Gross variable profit of £1.8 billion was maintained, with recent price cuts offset by lower unit costs. This resulted in EBITDA pre-leavers being marginally higher at £989 million. With increased leaver costs and depreciation rising £51 million as a result of 21CN investment, operating profit was £447 million, 10% lower than the prior year.

Having maintained our EBITDA in BT Wholesale this year, we intend to do the same next year. The new Openreach organization is now fully operational and well placed to deliver on its commitment. We will publish Openreach numbers separately from quarter 1 with a restatement of 2005/2006 available to you before then.

The preparatory work for the South Wales roll-out of 21CN is now complete. We are prioritizing our roll out in order to bring forward OpEx savings and deliver high bandwidth services earlier. We also have a number of business as usual cost initiatives within BT Wholesale. These include zero based budgeting, supplier rationalization and greater operational efficiency.

Let me now move on to Global Services. Continuing double-digit growth lifted revenue by £212 million to £2.4 billion. New wave revenue, driven by continued growth in our strong order intake, now accounts for 60% of the external turnover in Global Services. This quarter, EBITDA rose 5% pre-leavers, and the growth of new wave and NPLS more than offset the impact of the declining traditional business. A combination of higher leaver costs and depreciation reduced operating profit by £10 million to £143 million.

This year, Global Services grew its EBITDA by 3%. Next year, we intend to accelerate that growth further as we go through the year. BT Global Services is well on its way to becoming the network IT services provider of choice across the world. Operationally, Global Services needs to complete the integration of recent acquisitions and increase its ability to replicate solutions globally. At the same time, significant cost efficiencies will be achieved through removing duplication within the service, networks and marketing organizations, and also by moving to a global sourcing model.

Let me return to the quarter and our Group P&L performance. Group revenue rose £314 million while Group operating costs were £300 million higher. This was driven by higher payments to other operators and volume growth, which offset the cost efficiencies achieved.

This resulted in EBITDA pre-leavers rising by £14 million, or 1%. These movements, plus the £28 million rise in depreciation, reduced our Group operating profit by £14 million to £725 million. Leaver costs were higher than the prior year, due to greater take-up of our relief schemes in the quarter this year.

Finance costs of £101 million were £40 million lower than last year, as a result of lower net debt and a higher pension credit. So profit before tax of £562 million was slightly better than last year. Our lower effective tax rate reduced the tax charge for the quarter by £14 million, resulting in profit after tax growing by £16 million. This, together with the buyback program, delivered a 4% rise in earnings per share to £0.051.

An outstanding quarter 4 has given rise to an excellent full year position, with revenues, profits and earnings all up year-on-year. Depreciation was 1.5% higher than the last year, and we expect this to grow a little bit faster next year. Leaver costs were £33 million lower than last year. In total, over 2,000 people left BT as a result of our schemes. Next year, we expect leaver costs of around £160 million.

Net finance costs were £127 million lower year-on-year. Next year, we expect a further improvement of around £200 million as a result of lower average interest rate, and a higher pension interest credit. The effective tax rate for this year was 24.5%. We expect it to remain around this level in the medium term.

Free cash flow. Net interest paid in the quarter was £73 million higher than last year, as a result of the timing of bond maturities. Tax paid was £84 million lower than the unusually high levels of tax paid in the prior year. As a result of the preparation work for 21CN and demand for broadband, capital expenditure rose £57 million to £792 million.

Once again, the fourth quarter proved to be a very strong period for working capital improvement. At £697 million it was £77 million better than the prior year as a result of shorter collection periods, robust debt management and a more effective procure to pay process.

Total free cash flow of £1.1 billion in the quarter 4 even managed to surpass the very strong performance last year. As a result, net debt was £359 million lower than last year, and stood at £7.5 billion at the year end.

In the full year, free cash flow was 8% lower than last year, primarily due to a very strong full year working capital performance in 2004/5. As in every quarter 4, we had high levels of cash received from wholesale and major customers, and this often gives rise to an outflow of working capital in the following quarter.

Overall, we improved working capital by over £100 million year-on-year, despite the cash injections required in the initial stages of many of our network IT services contracts.

Let me move on to pensions. There is no additional insight in the funding tri-annual valuation at this time. Discussions continue with the trustees regarding the implications of the Crown guarantee. Our intent is to move to a position of clarity and certainty for all.

In the meantime, let me remind you of the IAS19 position and provide you with the underlying assumptions. The IAS19 deficit at the end of March 2006 after tax was £1.8 billion, compared to £3.4 billion at the end of March 2005, a reduction of around 50%. We’re assuming a rate of 5% to discount our liabilities. Pay inflation is assumed to be RPI plus 0.5% for the first three years, a rate we’ve been able to achieve over the last few years; and then RPI plus 0.75% thereafter.

Average life expectancy post the age of 60 is assumed to 23.8 years for men and 25.4 years for women. In addition, we have assumed a further improvement in life expectancy of one year for every 10 years.

In conclusion, EPS is a very good measure of a company’s success. In this regard, the actuals speak for themselves, 16 consecutive quarters of year-on-year growth. Our performance to date -- and in particular, this quarter’s performance -- demonstrate that the ongoing execution of our consistent strategy is working. With that, let me hand over to Ben.

Ben Verwaayen

Thank you Hanif, and good morning everybody. Four years ago, when we started to talk about the transformation, one of the first things we did was develop a strategy, a consistent strategy, and therefore, you have seen this chart many, many, many, many times. Many of you were kind enough to give us your feelings about how we’re doing, your concerns, your items. You talked about sharp corners in the road, some people even talked about cliff edges, and let’s see how we have done around those points in the journey so far.

If you look to the trends, and you look to the focus points, it’s an interesting lesson. The first point is remember, a long time ago; can BT grow as a business? Well, we have done nine consecutive quarters of revenue growth and this quarter, with 7%, was a very, very good one; a very strong one.

Remember that we talked about free cash flow, ideal free cash flow? Can we maintain that? Over the last four years we have £7.7 billion in free cash flow. And then people talked about, yes, but what’s happening in the market? Remember we talked VoIP? People thought we’d come to a standstill because of VoIP, or fixed to mobile, or people talked about, yes, but what happens to everybody’s habit around email?

All those things happened. We sign 5,000 VoIP contracts a week now. All those things happened, and new players in the market. People talked about Skype. People talked about Tele2. I believe they’ve left the market in the meantime, but all those things happened, and our dependency went down from 17% on calls to 9%; if you look to the consumer market, even less than 9%. Guess what, in the meantime, 16 consecutive quarters of revenues per share growth.

We talked about broadband, can you maintain the growth? The last 12 months, 58% growth in broadband take-up. This quarter has been the second strongest quarter, both for Wholesale and Retail in the take-up.

So then we talked about, yes, we’re going to transform the Company. A long time ago it feels, we talked about culture, remember? Can a telephone company do new tricks? Can we go and be a network IT services company?

Well, we signed over £24 billion, that’s a whopping number. We can also translate it into dollars probably; that's an even bigger number. In long term contracts, household names.

The latest was, of course, how are we doing on EBITDA? Well, go to this chart. This is familiar to you because five quarters in a row we used the same chart and we said, there we go: improvement, improvement, improvement. Guess what? We’re growing on the EBITDA.

I guess what I’m trying to say to you is, we understand the transformation is a thing we have to do in a very dynamic, competitive market, and no single issue, no single competitor, no single market segment in and by itself, tells the story; the combination tells the story of BT. Look to our revenues. This has happened to our revenues, and you can see a trend here as well; I think a strong underlying trend.

Now, let’s look to our segments. How are we doing with the various segments of our market? Because it is totally different whether you’re a consumer in the U.K. or a multinational in Singapore, if you look to BT. So how are we doing in those different segments?

Well, first of all, you have to ask yourself, what are the requirements of the specific customer groups? What do our customers want from us? Well, our consumers are very vocal. They want simple converged services. They want value for money, and they want very clear prices. At the same time, there are market trends, and the market trend is a lot of competition, a lot of different stories and there are a lot of people who try to bundle, which is great.

Now, our strategy is to become very much a broadband-centric service company. Services. If you bring services to the market that’s very sticky. We have 3.7 million customers on BT Privacy. We have 1 million customers now choosing for automatic adjustments on their Friends and Family. We have 0.5 million customers online.

Think about two other things. We have bored you to death to talk about the number of customers that are under contract; and yes, I’m going to bore you a little bit more. It’s up again this quarter, 67%. Our ARPU is up for the first time in 11 quarters. Our ARPU is up in a very competitive market, with all the things we talked about.

So let’s take a slightly historic perspective here, and let’s look to the broadband market. Because in a way, this is an astonishing story. 2002 was not that long ago, and in 2002 we had wholesale prices around £30. I remember a story from the Chairman that when he came in, the proposal was to even make it higher, to around £40. Today it’s £8, £8 and a bit.

Coverage is 99.7% which means that you have a very vocal 0.3% of the market. You have, of course, a take-up that has changed the landscape from a near 200,000 to 8 million. If you talk about speed, it’s from 512k -- well to be honest, we had a debate here in this same room about whether 126 was to be called broadband or mid-band or whatever band it was. We talk about 8MB now. We are going to build the largest national footprint by upgrading 5,300 exchanges, the largest national footprint of the highest stable speed in the world.

But that’s not the story. That’s not the real story. The real story is the last bullet. This is not about pipes. This is about services, and look to the change from a single email service to a whole portfolio of new services. This is the relevance of broadband. It is not the speed of the pipe, it’s what it does for you, and therefore this is a market that will evolve into a service market.

Now, let’s look to what happened in this particular market, because sometimes we may lose perspective a bit. So I’m going back in time. I’m going back to 2003. This is what happened in 2003. Cable was the big player in the market, with over 30% and our market share was approximately 25% and a bit.

Other players came to the market and had great offers and they were the talk of the day. So we had a time that [Thiscale] got over 20% of the market share. You know what? They had a very good offer at a certain period in time. Then we get the next one coming up and it was Wanadoo. They had 20% market share because they had great offers, and we talked about it all the time. It is a market driven by campaigns. Guess what? We had a few quarters and some of the other guys in one quarter had more than 30%. Then you know what? Then came AOL and they had great quarters, great offers, and over 20%.

What’s the constant in all of this? That is BT’s market share. Including cable, we have been stable around 25%. Over all the periods. A lot of movements in the rest of the 75% more or less stability around the 25%.

So I think we need to get some conclusions here. This is a very vibrant market. It’s an absolute vibrant market. It’s a market with more than 200 ISPs, and we should celebrate that. That means that people get a very focused offer, and some people have very different needs than others. This is not a game between a handful. There are 200 ISPs, and it seems to me that in the fluctuations in the market, ISPs tend to win market share from each other rather than from BT. Just look to the facts.

Second, yes, there is unbundling. Look to the footprint of unbundling. They focus on 70% of the market. It happens to be that 70% of the market has a big overlap with cable; and it happens to be that in markets where cable is strong, the BT market share is smaller than in other parts of the market.

I think we have a very, very good proposition. I don’t think the stability as I have indicated over time is based on one single item. It’s based on the combination of value for money. Of course, value for money is important, but it’s building on trust and most important, it is bringing it to the next level by new, exciting services.

Let’s look to the services. There’s a whole range of services here, services around communications, services around entertainment, and services around managing your life. It is growing. It is important that you keep growing those services because you address the very fundamental power of broadband, and that is to enhance capability for people.

Now, I don’t think that we have seen, for the last decade, innovation around VoIP but when Ian and Tim will come back to you in June with a whole range of discussions around the hub and the portfolio of the hub, I’m pretty sure he will show you this one. So I’m going to steal a little bit of his thunder, and show you a little bit, if you will listen a little bit, to the next innovation around VoIP.

“Hi, this is Chris, and you’re listening to me talking over a standard broadband line using VoIP technology."

"This is me now, talking to you using high definition sound technology. The quality of voice calls should be much better."

"This is what I’d sound like if I was on the mobile.”

So, BT Broadband only will bring you high definition VoIP. That’s a very important next step. So of course it is so much more than just communication that we talk about, and I know that a lot of people have a lot of interest in BT Vision.

BT Vision is so much more than just a TV experience. It gives you communications, it gives you all kinds of capabilities that you don’t have today. It enhances capabilities. It gives you the toolset to create your own content and share it with other people.

There is a lot coming, and it is a project that gets a lot of attention for a very good reason, because it’s an interesting project. It’s on time, so don’t worry about that. We’ll launch it in the Autumn, We’re getting stronger and stronger and stronger in our portfolio. Just look at this.

[Video Presentation]

So Dreamworks, available on BT Vision; contract signed. But it is more than entertainment. Now, let’s look to the facts. Broadband opens the world to you and you to the world, which means there is a positive side and a not so positive side.

The not so positive side means there are 100,000 viruses on the Internet. If you go online, you know what? Banking fraud has doubled over the last 12 months. A quarter of all credit card fraud happens online, so security is of absolute paramount. BT offers award-winning security as part of its package. Look at this.

[Video Presentation]

So, as I said, it is so much more than just the line. Now, let’s look to our SMB market. That’s a market also with a lot of change, because come to think about it, in the old days you needed it to be big, and have buildings in many, many places to be global. Nowadays you don’t need that. You can be a very small company and plant your suppliers in one part of the world and your customers in another part and the few employees that you may have in a third part of the world.

So you are going to live in an environment where communications and IT are coming together, which means for many, many, many of our SME customers -- hassle. And besides that, the employees that you do have become mobile, and need to go to other places, so the services they require from us are no longer standard services. That is a smaller market.

It is lines and calls less and it is services more. The good thing is that under contract, when you look to the voice market here in the SME part, 57% now. We started much later than the consumer market, so that's a good number. By the way, for those who are very much attached to it, if you want to know our market share in voice, it is less and less relevant, but in this particular market, no loss of market share here.

But more important is, do you have the answer for the new world? Do you have the capabilities to go to the SME market and say, we understand your needs, we can bring together your communication needs, your mobility needs and your IT needs.

I think we are. Virtual CIO is one of those instruments, and I think we will talk more about details of our SME market when we have a special half day on that.

What I wanted to say to you today is look to mobility, because convergence is really happening.

Let me again talk about BT Fusion and we are excited about the technology and what it’s done, and we’re excited about the ability it has in the consumer market, but I’m even more excited that it’s part of a family, a growing family of converged solutions, for the SME market, and now also for the enterprise market. We’re going to launch Europe-wide, in the palm of your hand, the same capabilities as you have on your desktop.

We have contracted Alcatel to build, based on the technology of convergence, that capability for the enterprise market. It is part of that convergence that’s happening, but not just at home, not just in the office, it’s happening in the cities as well.

Look at this, wireless cities. We talked about last time going to 12 cities. We had two under contract a quarter ago. Yesterday afternoon we issued a press release to add four more cities to it. We also said there’s much more interest in the U.K. We get flooded by cities who want to join with us, join forces, for a good reason, because it’s so much more than just opening up your laptop and being able to communicate.

Look to what you, as a community, can do, in a WiFi enabled environment. How you can bring the service to your citizens, much more focused and much more reliable on issues like security, and crowd control, and pollution and all kinds of new services that you can bring in a wired, enabled city.

I’m very proud to say that last night, Steve Anders and team were selected as the world’s best wireless broadband operator. It tells you that we’ve come a long way in this particular mobility part of the world.

Now carrier is a truly important part in delivering all of this, and we have talked about 21CN many times. What I want to do today is to make sure that we get a good feel where we are because as with other big projects, you get a lot of talk about it, and I think the facts are always better than the talk.

So where are we? Well, this chart, as you will find also in your packs so you can study it, basically says the following. We’re doing fine. We will start, as we planned, in Wales this year and we will roll out what we said we would roll out there, 21CN fully, in all aspects. Then what we will do is we will consult and test and work with all the other players in the market so we are ensured that the inter-operability is working in real time.

It’s one thing to go on a chart and have technicians work things out. It’s another thing to go to a lab and say, hey, suppliers, does my box work with your box? Take in the box; yes, it works. The reality is there are so many things happening in the real world and people have so many different things in their homes and their offices and as market parties, that we want to be 100% sure that what we give is inter-operability seamlessly, so we do what the market requires us to do. At the same time, we keep space and speed into what we do.

I’m very confident that we have now an agreement with the industry to understand which steps we need to take, and that is an agreement that does two things. First of all, it gives us the opportunity to get the efficiencies that we want, and we harvest them, and we do it in a way that is very workable for all the other players in the market, because if you come to think about it, what are the long-term benefits?

Of course, the core here is important, the efficiency. That’s how we have built the business space, on the efficiency. But there is so much more, because 21CN is not just a physical network. It’s not like a piece of hardware that you put in a building and connect it with fiber or with copper or whatever. It creates a layer of software around it, so it won’t not just be the BT innovator, but many, many more people around that may or may not even know BT that can innovate new services in an open architecture that surrounds the BT 21CN.

If we catch worldwide attention it’s not just for the physical aspect of it, it’s for the philosophy to create an open network environment and architecture. It allows people to innovate in weeks or months, not in years. So it will open the market. It will accelerate the speed to market, and what it will deliver for me, as an individual customer, is personalized services, all underpinned by efficiency improvements.

Now, one of the parts that we have to do is the equivalent. We need to guarantee the equivalent part of deal, that’s for the deal we make, and remember, there were two pillars under that deal.

One pillar was, you bring the equivalent in the systems and the rest of the stuff, and we have delivered it so far. I think we are in most cases ahead of our obligations. I think that we understand what we need to do, and we understand that we need to create a market, and we welcome that. I think we’ll do the 1.5 million LLU lines this year. As I said last time, that’s a good thing, and that’s totally within our own forecast.

At the same time, you know what? We get deregulation. We get true deregulation and the same focus and speed on that part of the agenda. So I think we’re doing fine on both elements.

Now the corporate world it is of course a story of growth for us, growth around the globe. What happened in the corporate world is basically, that it is no longer good enough to connect one with the other, and say hello, and that’s it. It is really to work on a global basis, so it is collaborative capabilities.

It is the capability for a financial transaction which depends on milliseconds, to take place wherever on the globe. Things we couldn’t do three years ago we can do today. So you are on the network, whether it’s Peru or Paris, you need to be able in the same millisecond to put your financial transaction through. That is the requirement, and you can look to a Visa transaction and you want to make sure that you have the same stability and capability. That’s the requirement.

If you look to a company that’s globalizing, like Fiat, that’s the requirement. Set me up wherever I want to be set up, and make sure that my financial system, my security, my HR systems, are all in safe hands wherever we are. That’s the capability we bring to the corporate world. We’re doing, I think, a very good job.

Now, we have enhanced our capability, the acquisitions. What we call the smaller acquisitions. These are very important ones. Guess what? We feel better in integration than we thought ourselves we would.

If you look to Infonet, how we’re doing there, Albacom is a true success story in Italy. Look to Altanet, that was within the Fiat deal. We have not lost a single customer there, or a single employee and we’re doing really, really, really well in getting into verticals, where you have to understand industries in depth. So we’re doing really, really, really well in using that capability across the world.

Look to what we do sometimes geographically. In Ireland we see additional capabilities that we got by Kara for example, where we have more than 60% market share in WANs and LANs. So these are being very, very good and helpful additions to our capabilities.

But I want you to look at this chart, because this chart tells you the story about BT Global Services. Just look at it.

Now, this is also a chart you can look at. Equally nice, a little bit more complex, but it’s a great story. It’s about a Company in transformation while delivering. I hope that what I have made come through today, is that I hear all the critics, and I hear all the cynics, and I hear all the stories. I’ve heard them for four years, and I understand them and I take them seriously each and every time.

But this is not a Company about a single story, about a single subject. This is a story about a combination. As technology is moving from a single, focused, type of technology where you could predict lifecycles of technology, translated into new services, this becomes a bouquet. We can have one bundle of roses or you can have a bouquet; different tastes and a different treatment if you want to let them flourish.

We are becoming a bouquet company in that respect, and why? Well, because we do have a traditional business still to take care of, and look to the trends. Now we could say this is a trend change. I’m not saying that; this is stable. This is stable.

We understand what happens in the traditional business. We have to take costs out, we are good at taking costs out. We did £400 million in the last year and we say in the coming three years we’ll do another £400 million every year. We know how to do that. We know where to get that.

As I said, if you look to the revenue and the dependency of that went down and down and down, you know what? That is what you want if you want to build from the old to the new.

In the meantime, this is going up and up and up and accelerating. I think that we can bring it together. We can bring it all together. I think we can bring the whole BT story together in one single slide. And the slide is very simple. It talks about a strategy. It’s a strategy totally based on convergence and innovation. Top priority is convergence and innovation.

It’s a Company about momentum. Facts support the momentum: 16 consecutive quarters of earnings per share growth, nine consecutive quarters of revenue growth, five consecutive quarters of growth in EBITDA. It’s a story about a Company that understands competitive markets and dynamic markets, and which is capable of winning and competing.

Look to what we have done on new wave, and look where we are as the supplier of choice in a business that we didn’t do four or five years ago.

Last but not least, this is the main question. Are you positive that you can continue the positive trends? The answer is yes. We think we have the ingredients to keep growing our top line, our middle line, our bottom line, and therefore, our dividends.

Sir Christopher Bland

Thank you Ben. Great, questions are now taken from stage right, center and left in sequence. Limit yourself to one, which effectively means two; but not three.

Question-and-Answer Session

Mike Williams - Citigroup Smith Barney

Thank you. I have two questions then. It’s Mike Williams here from Citigroup. Firstly, I just wondered very quickly what you’ve seen in the broadband market since Carphone’s big splash of five or six weeks ago?

Secondly, Carphone Warehouse have been typically very clever. They’ve used a product that they have no existing exposure to, i.e. broadband, as a hook to drive volume on established high margin products in the voice marketplace.

It strikes me that BT has a similar opportunity to emulate that strategy, but using mobile and video as the hook to drive broadband within an overall bundle. I wondered if you’d agree with that assessment?

Secondly, how aggressive you’re prepared to be --

Sir Christopher Bland

That’s more thirdly.

Mike Williams - Citigroup Smith Barney

How aggressive you’re prepared to be, and when we can expect a commercial offer. Thank you.

Sir Christopher Bland


Ben Verwaayen

Well, first of all, there are 200 players in the market and I’d like to make that point. This is not about PR, this is about the market.

Second remark, I don’t think that in the first month we have seen any change in the trends. But perhaps, Ian, you can make some more in-depth remarks here?

Ian Livingston

Yes, the trends in April and May so far look very similar to what we’ve seen in the quarter that we’ve just reported on. So we’re not seeing it coming through in the market share.

You’re right, it is a very clever offer. BT will continue to expand into some new areas. We’ve got clever things, but not just in marketing terms, but actually things that will really make life better for customers, will also appeal very heavily to the whole of the U.K., not just a portion of it.

So it’s competition. It’s what we expect. And so far the trends we’re seeing and you’ll see some interesting offers from us coming up.

Cyrus Mewawalla - Westhall Capital

Thank you. Cyrus Mewawalla from Westhall Capital. As you roll out 21CN, I suspect a lot of media companies are going to wish to freeload off of it, which brings me to the issue of net neutrality.

Now, my understanding of net neutrality, correct me if I’m wrong, is that the two parties derive an economic benefit from your network. One is me, the consumer. I get broadband internet access and I pay you for it. But one is a media company that competes with you like, let’s say, Google. They provide competing services. They don’t pay for it.

My understanding is that certain U.S. telcos wish to charge media companies, like Google, for high-speed access. Can you clarify your position on net neutrality and, specifically, can you clarify whether you will charge companies like Disney?

Ben Verwaayen

First of all, the U.S. is a totally different market than the U.K. We have always had the point that we had equal opportunity for people, that means equal opportunity for customers to get services, and equal opportunities to differentiate yourself because the world is more complex even than you have described. Differentiation is sometimes in quality of service, sometimes it’s about content and sometimes it’s about other aspects of the marketing mix.

I think the debate in the U.S. is a very principled debate in an environment where the telcos missed out on broadband in the first place, because that is dominated by the cable companies. It’s slightly the other way around here, and I think that we will see a different debate in the U.K. than what we will see in the U.S.

Having said that, there will be an element, over time, of cost. You can’t have an environment where we say the division of work is such that you take the investment and I take the profit. That probably is not a long-term perspective.

Cyrus Mewawalla - Westhall Capital

Would you consider charging media companies for use of your network?

Ben Verwaayen

Yes, we would. Paul?

Paul Reynolds

21CN is not just about bandwidth and capability on that bandwidth. Some of the things that you will start to see coming through, as mentioned in this chart, is the opportunity to create new markets. So we absolutely intend to provide open interfaces to 21CN and charge for them where people can innovate and provide new services on the back of that network. In fact, you’ll have to wait and see exactly what those services look like. So the answer is yes.

Sir Christopher Bland

I think there’s an underlying philosophical point too, and it’s both to your question and the previous question, which is that free is not a sustainable business model. You have to look at the small print of TalkTalk’s offer, and you have to look at who pays for the CapEx over the long term. Free does not.

Laura Mills - Merrill Lynch

Thank you very much. It’s Laura Mills from Merrill Lynch. Can I ask for a couple of clarifications on your guidance? I think Hanif commented that he’s expecting the leaver charge to be up a little bit in fiscal ’07 versus ’06. Should we expect EBITDA to increase both pre- and post-leavers?

on the EPS guidance, are you expecting EPS to increase in excess of the increase that we’ll see due to the reduction in the pension charge through the P&L fiscal ’07 versus ’06?

Sir Christopher Bland

Possible forecast you’re being asked for there, Hanif.

Hanif Lalani

I think what I said was we expect to see EBITDA growth. And if we translate that, EBITDA growth going down through the bottom line, we expect some of that EBITDA growth to convert itself into EPS growth.

In terms of leaver cost year on year, well, that varies depending on how effective and how frequently we deploy our cost-saving program. The key message here is that we need to take cost out of the organization. If we have to spend more on leaver costs in one quarter in one year, that’s what we’ll do because it’s the right thing to do for the business.

Paul Howard - Cazenove

It’s Paul Howard at Cazenove. Can you give us a bit more detail on the profitability of the IT services element of Global Services, and perhaps roughly what sort of operating margin the IT services business is operating at the moment and what the trends are in that business?

Andy Green

We will come out on investor day during the year to try and give you more granularity underneath the Global Services business. But it’s extremely important to understand that when you’re innovating, you’re driving a new type of business, a network IT services business. What people are buying from us are enterprise-wide IT service which are over our networks. What we sell them is a combination of those things.

So we will be able to show you by different type of customer group what those percentages are, and they all add up to 12% in the round, as you know, at the moment. But we won’t be able to show you is a separate services and products piece because it doesn’t make any sense. It’s basically not what we’re offering into the marketplace. Our large-scale contracting business, we will be able to show you the way that operates and the way that moves forward.

But we have always said, we intend to make profit. We think we do as well as anybody else in the industry. In that sense, the price and margins, those long-term contracts run on.

Paul Howard - Cazenove

Will we see the maturity of some of the older contracts that were signed that were quite --

Andy Green

Yes, we are starting to see the maturity of obviously a number of the older ones. We’ve had a huge contracting period over the last three years. We told you that some of those take up to four years to fully turn round at the last investor day. But that’s beginning to come through. That’s why we’ve seen 16 consecutive quarters of EBITDA growth as a result of that, despite going through that whole period. That’s why we’re talking about over the year an acceleration of EBITDA out of Global Services.

Sir Christopher Bland

And good renewal news.

Andy Green

Yes, very good renewal news. Unilever, this week, re-signed the contract. Edinburgh County Council re-signed the contract. That’s a very pure IT and BPO contract. Both those are very important for the way you have to adjust long-term contracts. You have profitability and the client gets business success as you go through them. I think it’s really good news to see two such critical contracts being re-signed. At the moment and extended significantly.

Chris Anderson - Nomura Securities

Chris Anderson from Nomura. Paul stole my question, but I’ll forgive him later. Specifically on Global, your EBITDA margin declined by 140 basis points. I wonder whether you can just give us some color on that? How much of that was due to full year available from Infonet? How much cost do you think you can take out of bringing those networks together and how much we can see of that in the coming year?

Hanif Lalani

I think it’s the two things. Firstly, costs will come out, as I mentioned, as we start to integrate further the acquisitions and complete that. The costs will come out as we remove duplication in service, network and marketing. All of that will help to drive EBITDA forward.

EBITDA margin will fluctuate. It fluctuates because we sign new contracts. As you sign different types of contracts, they have a different amount of up-front costs, they have different migration costs, they have different CapEx costs associated with it. They have a dilutive impact. I think directionally it’s heading in the right direction. We’re confident that the EBITDA growth will happen.

But it’s the life cycle impact of those contracts, and a typical S curve that needs to be applied. So there is a dilutive impact every time you sign a new contract that you have to take into account.

That sometimes is offset by the maturity of old existing contracts. It’s the blend of those that drives those trends. But there are cost opportunities. I highlighted those cost opportunities. If you combine those, it gives us confidence so we can continue to grow and accelerate the growth in Global Services EBITDA.

Chris Anderson - Nomura Securities

If we ex out the [inaudible] so we can compare like for like?

Hanif Lalani

I don’t have the information available. I think what we’re doing is we’ve integrated those acquisitions into our operations. To actually go and identify those operations as a stand-alone entity today is not feasible or possible. Those are being integrated. We’ve got people working on it. We’re launching their products across the globe and so on. So I don’t think that data is available.

But what we do aim to do is to increase the margin from where it is today. And we said we aspire to grow that to up to a 15% margin over time.

Andy Green

Just to be clear on all the underlying trends, all the decline in EBITDA margin, either as a percentage margin with a decline in EBITDA, it’s down to the traditional business in the U.K. Although we won market share and we’re doing very well, we’ve been under huge pressure. You can see how that’s been under huge pressure by the results of our competitors. That’s where the decline in percentage margin comes from.

Sal David - JP Morgan

Yes, it’s [Sal David] at JP Morgan. You’re clearly very excited about the new wave of the broadband services, etc, that you’re rolling out to clients. And I respect the fact that your market share of net adds has been quite stable, but it hasn’t been growing. Would you consider buying in market share to roll out those new services?

Ben Verwaayen

Well, we always look to opportunities. I think we are excited about what we’re doing in the market. I’m not sure what you’re talking about what we would buy? What are you selling?

Sal David - JP Morgan

Call on some bankers, I am sure they will be able to pull something together.

Ben Verwaayen

Alright. Well, so far, I think we’ve done outstanding on our organic growth there. If you look to a kegger of 85% in broadband, as a market.

Ian Livingston

I think if you look to buy, you’ve got to look at the capabilities. One place that we did make an acquisition is, of course, we bought which in particular the business space will improve our B2B side, where our market share actually is growing round about 50%. We have actually grown our market share. Including LLU it has gone up from 28% to 31%. Excluding it’s gone up by about 10 percentage points.

So we’ve made progress. But the hill’s got a little bit steeper. But we’re doing okay. You will see with stuff we are about to launch. So I think our real focus is on delivering those services for customers, that’s where it is. And if it is the same capability or something, then we might have a look. But we’re not desperate.

Nick Lyall - Morgan Stanley

Thanks very much. Nick Lyall from Morgan Stanley. Apologies not to ask an operational question, but just on the pension side, can you confirm that you’ve agreed with DTI your statement that three quarters of the liabilities in the pension funds are covered by Crown guarantee?

Following on from that, what do you think is likely to be the change in cash funding in the pension as a result of the review? Is it going to be the entire deficit over two years, or is it going to be a bigger smaller than that?

Sir Christopher Bland

Well, it will be either the latter or a figure smaller or a figure larger; it will be one of those. We’ll tell you when we’re ready. That will be some time in the autumn. Those are complicated discussions. They involve an interaction between ourselves and the trustees.

We haven’t agreed with the DTI. They don’t disagree with us, but the important thing is to establish to the satisfaction of both the companies and the trustees, the extent and the nature of that guarantee.

Now, it’s worth putting the guarantee in context. It only comes into effect if BT goes bust. We’re not about to go bust. We have no intention of going bust.

So the real value of the guarantee is for the 84-year-old pensioner who’s been having sleepless nights because of the journalist who can only write about pension deficits with the phrase ‘blackhole’. Well, the 84-year-old now knows that the Government stands behind the blackhole, if it is possible to do such a thing.

But that is the only significant value of the guarantee, other than the fact that it does reduce, in a useful but small way, our contribution to the pension protection fund to that amount of the pension deficit that we suffered. We think that’s of the order -- Hanif?

Hanif Lalani

Just over £2 million.

Sir Christopher Bland

But that’s worth having. So that’s why we may have to go to court for the trustees to establish this. If we do that, or when we get solid legal advice, we’ll publish the results.

Edwin Lloyd - Nortis Bank

Edwin Lloyd from [Nortis] Bank. I have one question and one request actually. The question’s on Openreach. I think the statement says that the separation of Openreach will be completed in the next six weeks. What will be the one-off cost of that separation? Is there an incremental ongoing cost of having it separate?

Then in terms of request, would BT please consider dropping this pre-leaver costs number? It’s very small. It’s not very lumpy now, and I’d like to think it would just help if we didn’t have footnotes to every page.

Sir Christopher Bland

I think the request is no. We will consider it, but we’ll leave it in. You can copy yourself, add it back. If you can’t cope with the footnotes, you’re in a bad business.

Hanif Lalani

Openreach, we’ve made a specific item of it. We took £70 million into our P&L, I think it was a couple of quarters ago. So we’ve provided for the one-off costs associated with the creation of Openreach. As Openreach moves into business as usual and it starts to operate, sure there are costs we’re going to have to incur.

That does of course become part of business as usual. We have to prioritize resources in the same way as we do in every other business. It has the same pressures of customer satisfaction, service and profitability. So, for us, I think that the creation of Openreach costs, one-off for this year, were provided for; next year it is business as usual.

Sir Christopher Bland

I think overall, we’ve seen real benefits, operational benefits, coming through the establishment of Openreach.

Hanif Lalani

On the cost issues, we don’t expect any significant incremental costs in this financial year caused by the establishment of Openreach. In fact, there is significant operational efficiencies become available to the BT Group through the establishment of Openreach.

In terms of our operational performance, clearly our job is to provide a level playing field for the market. But the bar is also rising in terms of our performance, our service performance in the last couple of months has shown some significant improvement, and we expect that to continue.

Michael Juracci - Pal International

Thank you. It’s [Michael Juracci] from Pal International. Back on the footnotes, as we were saying before, what is the revenue in EBITDA growth including the mobile termination rate? And pro forma? Because really that’s probably the most accurate underlying plan that we’re interested in. Mobile rate as part of the business.

And then a second question --

Sir Christopher Bland

We’ll take that offline.

Michael Juracci - Pal International

Can I ask another question? I had a second question if I may. You didn’t talk too much about Bluephone and Fusion. Is there something not going quite right? I was expecting WiFi coming up the next few months…

Sir Christopher Bland

We’ll now talk about it long enough to cheer you up.

Ben Verwaayen

I think I talked about it. But apparently not. Maybe, Ian, you can do better than I could?

Ian Livingston

No, it’s doing exactly what we thought it would. It is the start of a new generation of technology. I think it’s interesting that the mobile companies are now coming to talk about convergence. It’s now from being something of somewhat mocked by some of the mobile-only companies, are now saying well actually, this is the way forward.

We’ve got BT Fusion. We are going to have a corporate version with future announcements with Alcatel. We did talk about that. WiFi, absolutely, will be coming, probably September time. But we’re a bit in the hands of the mobile handset companies and getting the right chip sets.

So absolutely this is the start of a real growth, a whole generation of telephones and new services for customers that will give them far higher data speed transmissions when they’re in hot spots, that will give them a lot more convenience and that will really start to converge their home phone service and their out and about. So I think we’ve really started something quite big now.

Richard Barker - Credit Suisse

Thank you. It’s Richard Barker from Credit Suisse. Could I ask a two-part CapEx question? You obviously talk quite positively about your plans in mobility, and obviously you put a couple of releases out in the last couple of days. Just wonder if you could clarify over the medium-term time horizon what you expect to be spending, from a capital perspective, on mobility and mobile in general?

Related to that, on the non-mobility side, if you like, does your view of extending fiber out beyond the local exchange, has that changed in any way as a result of the increasing competition on price and various other things that you’re seeing in broadband? And some of the developments, from a regulatory perspective, that we’re seeing in Europe at the moment?

Hanif Lalani

I think if you look at our expenditure and say can you classify it into mobile, fixed and others, it’s very, very difficult. Because if you look at mobile operators, they actually use a lot of the fixed line infrastructure in the first place.

I think what’s very clear in our mind is that we have a strategy. If that strategy requires us to spend more on wireless, then we’ll do that. We have a target that we’ve got to keep our capital expenditure within our envelope around this year’s level, and that’s what we intend to do. We’ll prioritize within that. But to actually specifically identify separate expenditure is a rather difficult task to do.

Richard Barker - Credit Suisse

Does that mean you’re saying that if you had to spend an amount of money, for instance, on fresh spec promotions, that that is included within your £3 billion CapEx envelope that you’ve talked about, or would it be an incremental amount for that?

Hanif Lalani

I think if we talk about spectrum, I think that’s something completely different. I think if you’re talking about expenditure on creating WiFi cities, or talking about expenditure on creating wireless broadband, then I think those are capital expenditures that we would treat as normal capital expenditures.

Richard Barker - Credit Suisse

Thanks. And on the fiber?

Paul Reynolds

On fiber, we’ve completed some pretty exhaustive files on fiber both to the cabinet and straight to the homes, and we’ve got some very, very clear operational conclusions, and actually it is what you already know. But our greenfield site operation, it’s just as cheap, maybe slightly cheaper to build out in fiber, and it’s cheaper to operate.

So it’s good. So we see a real place for fiber in greenfield site situations. But, of course, for the vast bulk of our operations, is it on copper, it’s already there, it works fine, and there’s tons of upside with DSL technology still to come.

We see that in our plan. We’re on the 8MB DSL max at the minute. We go to DSL 2 plus. And we can do that on a nationwide basis. So the same for fiber, in a replacement for copper, it’s certainly not here in the foreseeable future. And the replacements is in our greenfield site and it works well.

Sir Christopher Bland

The copper network has proved remarkably resilient. When Ben and I arrived, we were told that BT authorities with no argument that 512 was the maximum, I think, with the law of physics that would go through the copper. Well BT changed the law of physics quite spectacularly and it’s moving in a very encouraging direction.

Steve Miller - Ameritech

Steve Miller from Ameritech. Two questions. One on the balance sheet and one on IP stream pricing. On the balance sheet, compared to most telcos, you now look pretty seriously underleveraged. There have also been stories, however fanciful, of private equity interest. Do we assume the Board is still happy with its £8 billion debt target, or should we assume it will be reviewing that in light of the completion of the tri-annual review in the autumn of this year? Would you consider more debt in the balance sheet, given the very low marginal cost of funding?

Second, on IP stream pricing, I guess you’ve got a lot of very anxious wholesale customers who are expecting a reduction in IP stream pricing to be able to compete with some of the more aggressive new entrants. When should we expect some visibility on those price decreases? Will it be when you go to 1.5 million LLU lines, or will you give them some sort of steer so they can set their prices to challenge some of the more aggressive new entrants?

Sir Christopher Bland

The private equity approaches we still await. The balance sheet and borrowing levels, we’re very comfortable with. The Board, as you would expect, reviews that constantly. It’s not written on a tablet of stone, that £8 billion. We need to review it in the light of market conditions; of interest rates, of the business outlook.

We started life five years ago with [29,000 million] when people like you weren’t saying you’re under-geared. Now it’s quite nice that you’re suggesting that we should put the debt levels up. An encouraging trend.

Paul Reynolds

On IP stream, you’re absolutely right. We’ve lots of anxious customers waiting for a move, and I’ve got a very anxious customer right beside me here. Ian is in the same position in that regard as many others of the 200 service providers whose business depends on IP stream.

We have a voluntary price freeze until we reach something like 1.5 million LLU lines. As we said in the presentation today, LLU’s going well. Our plans are 1.5 million in the year. So we’ve begun those discussions with Ofcom. I still expect to be changing IP stream prices in the year.

Damien Chu - ING

Hi. Damien Chu from ING. A question on BT Global Services, and specifically on revenue growth. I’m just trying to reconcile the 12-month order intake numbers which is roughly £5 billion or £6 billion, I think, excluding some of the lumpy bits, and your total revenue for BT Global around £8.6 billion. Can you just try to help me understand, is there a relationship between order intake and 10% revenue growth BT Global is delivering at the moment?

Andy Green

It is a complicated story but the order book we give you is the major contract order book. It used to be in [Cintegral] Solutions in the old world which was a big contract. That’s the only thing related to Sarbanes Oxley. We’ve been working all year to give you what the underlying rate, if you like, of those smaller contracts, around $1 million to $20 million contracts that have taken place all over the world.

A great deal of our growth is coming in that area, in that underlying contract base. So when we come out with the investor day, we’ll give you a track of what we’ve been able to get Sarbanes Oxley, and we will start to report that forward as we go forward.

The other thing you have to understand is that there’s a lot of traditional business in the mix there too, and that’s coming down. So overall, we’ve always said that the business in that space needs £5 billion or £6 billion is a perfectly comfortable range for it to continue to grow well, and we see the market continuing to do well. The underlying smaller contract base has been going extremely well across the world. And that’s what’s driving the revenue growth.

Tayjish Tallis - Societe Generale

Thank you. [Tayjish Tallis], Societe Generale. Just wondered if you could help us try and understand a little bit better of how much of BT Wholesale’s EBITDA is actually exposed to competition from unbundling in the U.K?

Paul Reynolds

Let me take it offline. I think if you want to pick up how much of the revenue is coming from the broadband space, then it’s about £200 million.

Mark Cardwell - Sanford Bernstein

Back to the high-speed question, your chart said you were going to do 60% coverage of ADSL 2 plus in ’07. Did I get that right? Can you give a sense of where the coverage can go, first of all, in the timeframe, to get to near 100 or where you think you want to take it?

Secondly, what speeds are you finding in the trial you can actually achieve? Do you get a function of this that we can add some people at 20MB and some people at 16MB? Can you give us a sense of what you’re finding there?

Related to the high-speed stuff, on the IPTV and the things you announced today on the content, can you tell us what you’re doing about packaging of content and where you’re going in terms of capability you’re building internally? So putting content together in the IP vision offers, how that’s progressed.

Paul Reynolds

On DSL 2 plus, we can take this everywhere. I’ll give you a very clear answer on the speed thing. We did with DSL Max, we’re very upfront when we finished the trials on the portion at 4, 6, 8 and so forth. We’ll do the same with that. We think we can get it across the country, but we’re going to go for massive roll-out second half of next year. That’s going to give us all this headroom. I’ll give you a table when we’re ready in terms of who’s going to get what.

It will be variable. But that’s the way DSL technology works. Some of the countries are going to get the higher speeds and some of the countries won’t in that type of technology, but lots of headroom for lots of new services.

Mark Cardwell - Sanford Bernstein

Will these be all in ’07 and ’08, or do these take longer to deploy?

Paul Reynolds

Well, as you saw on the chart, we’re doing 60 in ’06 and ’07. We’ll do more when in the year after.

Ian Livingston

In terms of packaging and content, Mark, we’ll be putting together a very effective set of films which a lot of people buy for 1,000 plus films, plus a range of TV series and things like that. The thing that differentiates what we’re offering from run-of-the-mill VOD offerings, as good as that might be, is the interactivity and the self-generated content, I think, will be a far better thing in the future and community-based content than it has been. And the ability to interact with the content and participate in it.

So I think what we truly intend to do is to use IPTV not to replace the broadcasting stream because, to be honest, broadcast does that reasonably well; but actually use IPTV to allow you as an individual to actually interact with the services you get and to do them on your terms, when you want, as you want and the relationship you want. That’s a very different sort of TV experience. That’s why we’ve called it next-generation TV. It really is a step beyond TV, not just replacing it.

Mark Cardwell - Sanford Bernstein

Should we look for BT to be a big brand then in packaging that sort of thing, or are you looking to put branded channels with branded stuff out there?

Ian Livingston

I think typically with the films where we are bringing together different film studios, will be under BT channels. There may be one or two things, like an individual music channel that’s got a great brand with it. But typically, this will be BT. And BT Vision led, and customers get the benefit of us as the aggregator.

Stu Gordon - ABN Amro

Stu Gordon from ABN Amro. Couple of questions. First one is that you’re always saying you’re comfortable and happy with 1.5 million LLU lines. At what position, in terms of numbers, do you become unhappy and very uncomfortable? Is it double that? Triple that?

The second one is obviously you’re talking with BT Fusion and other new offerings. Is it your intention to use them as a hook as wholesale offerings to other ISPs that would stay with BT for wholesale IP stream?

Ben Verwaayen

Well firstly about the state of our happiness, 1.5 million is what we have said will be the mark for change in the regulatory landscape. So that’s a pretty important number.

LLU customers are customers of ours. That point is very often forgotten, but I would like to remind you that they are wholesale customers and we are very happy to have them. At the same time, for some other parts of our business, this will open some opportunities after 1.5 million, and also to consider different models in the market as well.

So I’m happy with 1.5 million. I think it’s a good number. I think when I gave the numbers when I was over at your place, you may not have believed me, but there is not a space for 12 people to be very happy in the LLU market, there will be some consolidators. I think 1.5 million and a bit more is probably a space that the market will have.

Sir Christopher Bland

We might have time for two more questions. Yes, Paul.

Paul Reynolds

We’ve taken strategies, different strategies, depending how the market was. So with BT Mobile, that’s gone straight to the wholesale offering. Others we’ve taken where we think there’s real premium retail offering. But our minds are open to what we white label. So I expect us to white label some of the things that are currently retail products into the wholesale market, and we’ll just make a commercial judgment on the timing of that.

Sir Christopher Bland

Final question.

James Harper - Redburn Partners

Hi. It’s James Harper from Redburn Partners. Two questions please. First on the dividend. The IAS19 pension benefit is now becoming quite a large element of EPS for 2007. Can you just confirm that the payout ratio for the dividend will be based on reported earnings, despite this large non-cash item?

Secondly, a question for Ian. Just in terms of DSL, obviously we’re seeing competitive offers from TalkTalk, potentially from Sky, from Orange, maybe from Vodafone and O2, if you believe the press. What’s more important to you, maintaining market share or maintaining prices?

Sir Christopher Bland

The answer to the first question is yes.

Ian Livingston

We haven’t maintained prices for a very long time. Our customers keep on getting better deals. You shouldn’t believe everything you read in the press, by the way. It’s not a good idea.

But we see that we can offer our customers more for less and make more money out of it. That’s actually what we’ve done this year. Remember we’re further up into 100 million above consensus in retail, despite what is unquestionably a pretty tough market. So we think we can compete in that and that’s where becoming more efficient and offering better services you can then hold your market share and make more money.

Sir Christopher Bland

Okay. Thank you all very much.

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