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BT Group plc (NYSE:BT)

F4Q 2014 Earnings Conference Call

May 8, 2014 04:00 ET

Executives

Michael Derek Vaughan Rake - Chairman

Tony Chanmugam - Group Finance Director

Gavin Patterson - Chief Executive Officer

John Petter - Chief Executive Officer, BT Consumer

Luis Alvarez - Chief Executive Officer, BT Global Services and Member of Operating Committee

Clive Selley - Chief Executive Officer, BT Technology, Service & Operations

Joe Garner - Chief Executive Officer, Openreach

Analysts

Carl Murdock-Smith - JPMorgan

Andrew Lee - Goldman Sachs

John Karidis - Oriel

Robert Grindle - Espirito Santo

Nick Delfas - Redburn

James Ratzer - New Street

Guy Peddy - Macquarie

Jerry Dellis - Jefferies

Barry Zeitoune - Berenberg

Paul Sidney - Credit Suisse

Stephen Howard - HSBC

Steve Malcolm - Arete

Unidentified Company Speaker

Before we start, we need to draw your attention to the usual disclaimer on forward-looking statements. Please see this slide and our latest Annual Report and Form 20-F for examples of the factors that can cause actual results to differ from any forward-looking statements we may make.

Michael Derek Vaughan Rake - Chairman

Good morning, everyone and welcome. This has been an important year for BT, a year which we have continued to invest in the long-term sustainability of our business and have seen those investments deliver for us. Our fiber network now passes more than 19 million premises around two-thirds of the UK. Our rollout is 21 months ahead of target on budget are now expanding rapidly into rural areas. It is the only significant private sector investment that has been carried out during the economic downturn of the last several years. It is hugely important for the UK economy and we give the country a distinct competitive advantage.

Thanks to our investment, the UK now has the highest coverage of fiber broadband of Europe’s five largest countries. Of the G8’s countries, only Japan has faster broadband speeds. BT is completely committed to this investment, which supports one of the most competitive markets in the world. We are making it open to all with high levels of transparency around costs and returns.

This year, we also successfully launched BT Sport. We are pleased with the take up and the impact it’s had on business, both directly and indirectly. BT Global Services has continued to expand in the emerging markets. This has helped cement our leadership position for serving the world’s largest companies. We have made some important organizational changes too. We separated BT Retail into Business and Consumer, which will allow stronger market focus in each of these areas. And of course, Gavin took over as Chief Executive after Ian was stolen by the government to be Minister of State for Trade and Investment. Ian did a tremendous job in transforming BT. Gavin is a very fitting successor and leads a strong and exceptional team. I have every confidence that BT will make yet further progress under his leadership.

There will be now the changes to the board as well. After six years, Patricia Hewitt retired in March and I would like to thank her for the advice and service she gave during her time on the board and is our Senior Independent Director. But I am delighted also to welcome two new members to the board. Warren East, who many of you will know from his time as CEO of ARM joined in February. Ian, who is Chief Executive, Downstream at BP will joining shortly. And they both bring a wealth of experience.

You can see the benefit our investment in the results for the year. We matched or exceeded the financial targets we set. We have grown earnings per share and cash price, 7% and we reversed the decline in our revenue making good progress towards our goal of delivering sustainable, profitable revenue growth. We will continue to invest. There is still much more to do on fiber and we are excited about our prospects, as Gavin will discuss shortly in mobility. We will improve our customer service, which has not been good enough. And we will continue to drive our cost transformation programs, where there is still plenty of opportunity.

Our performance this year also reflects the hard work and commitment of our people. Our engineers, for example, have done a tremendous job working tirelessly around the clock to fixed faults caused by the widespread flooding. I am also proud and pleased that our people gave back in so many other ways. They volunteered more than 46,000 days of their time, helping over 1,300 charities across the world. In total, we raised over £85 million for good causes. I am also delighted that our employees have been able to share in the good performance of the company. 17,000 of them benefited from share option plans last year and many more would benefit again this coming year, a significant reward for much appreciated hard work. And of course, it’s important that our shareholder returns are strong and they are. The board is recommending a final dividend of £0.075, up 15%. This gives a full year dividend of £0.109 also up 15%. This growth rate is at the top end of our guided range reflecting strong cash we generated this year.

We are confident in our plans and our future cash flow growth and as such plan to align with the period covered by our financial guidance. We are extending our 10% to 15% dividend growth target to cover the 2015/16 financial year. We are also extending our £300 million share buyback for a further year.

In summary, our results show that our investments are delivering for the business. Our revenue trends have improved. And our cash generation is strong. We will continue to invest that over the long-term we deliver for our customers, communities, and our shareholders.

And I will now hand over to Tony who will take you through the financials before Gavin goes through the lines of business. Thank you.

Tony Chanmugam - Group Finance Director

Thanks, Mike and good morning everyone. Overall, this was a good set of numbers. The results for the year were in line with or ahead of the outlook that we announced in the start of the year and above the market expectations. It shows that we are making progress towards our goal of sustainable, profitable revenue growth. With Q4 underlying revenue excluding transit, up 1.2% our investments are delivering and more than offset the regulatory pressures of our business. Cost transformation continues to be a major part of our strategy contributing to 2% growth in EBITDA and 3% growth in free cash flow this quarter.

So, first of all, Slide 7. This shows how the full year results compare with the outlook we have given earlier. Growth in underlying revenue, excluding transit, of 0.5% compares to a 3.1% decline last year comfortably meeting the outlook of an improved revenue trend. On EBITDA, we said at the start of the year that we expect it to be between £6 billion and £6.1 billion. And we came in slightly above the upper end of that range. And lastly, normalized free cash flow of £2.45 billion has materially exceeded our outlook of around £2.3 billion. Although part of this reflects the one-off and I will explain that shortly. So, a good set of numbers right away across the board.

Moving on now to a brief overview of the quarter four results on Slide 8. Underlying revenue, excluding transit, was up 1.2%. This is an improvement compared with recent quarters, reflecting a strong quarter for consumer and solid results from both Global Services and Openreach. These offset a challenging quarter for wholesale and BT business, which had a strong prior year comparator. EBITDA was up 2% as the benefits of our cost transformation programs offset our investment in BT Sport and the continued regulatory headwinds. Our investment in BT Sport was around £130 million in the quarter. Excluding this are the non-cash increase in our pensions operating charge, underlying operating costs, excluding transit, reduced by 5%. This compares well with the 2% decline last quarter.

Below EBITDA, we continue to see the benefits of our focus in recent years on more efficient capital expenditure and debt reduction. These have had led to low depreciation and interest charges, which grow over 10% increase in our EPS. Normalized free cash flow was up 3% to just over £1.3 billion. We are still focused on reducing our net debt and it’s now £0.75 billion lower than a year ago.

Turning to Slide 9. Looking at the trend in our underlying revenue, excluding transit, over the past eight quarters, the improvement is clear. This is being driven by the investments we have been making, particularly in fiber and in sport. It also reflects a stronger performance from Global Services. As we flagged last quarter, quarter three this year was flattered by some contract milestone revenues, but even adjusting for that, you can see we have made steady progress.

Looking now at Slide 10, this shows a walk from last year to this year for external revenue, excluding transit. Regulation continues to be the largest pressure on our revenues. We will say more on this shortly. Underlying revenue for BT Business was down 1% this year as the legacy enterprises such as Payphones and Directories, continued to decline. However, this was an improvement on the 2% reduction last year. Wholesale revenues continued to be impacted by declining calls and lines revenue, as well as the migration of broadband to LLU. Managed solutions revenue in the second half of the year was also affected by the previously terminated Post Office contract that we mentioned last quarter. Outside of the high-growth regions, underlying Global Services revenue was lower this year, partly reflecting declines in the UK public sector. This was partly offset by higher growth regions of Asia-Pacific, Middle East, Africa, and South America, where our investments have helped us to see double digit growth.

Consumer had strong revenue growth, driven by higher broadband and TV revenues, reflecting the benefit of BT Sport. Excluding the impacts of regulation, Openreach has seen strong growth, driven by increasing demand for fiber and Ethernet. This largely offsets the regulatory impact. So overall, the investments we are making are supporting our revenue growth and offsetting challenges elsewhere. But the fact that we have seen revenue growth doesn’t mean we will be letting up on cost transformation.

So taking a look at BT’s costs in Slide 11, operating costs were down £25 million. However, excluding the investment in BT Sport of around £450 million and the non-cash increase in the pension operating charge, underlying operating costs excluding transit have reduced by 3% in the year. Cost transformation continues to be an integral part of our business strategy. By reducing the cost of failure, not only did we reduce our cost base, but we delivered improved customer service. Gavin will talk in more detail about this later. As you know, we have got a group wide restructuring program in place. We expect to spend around £200 million on this in 2014-2015, which represents the final part of the program.

Our cost transformation program is much wider than this. We are focused on improving end-to-end processes across the group as well as blending a number of new initiatives such as Starflick continuous improvement programs to complement our existing activities. So I would like to give you a taste of the cost transformation opportunities we have been working on in the recent years. Over the last five years, we brought in 10,000 jobs back into BT, this reduces the unit cost and allows us to reuse the people that we freed up elsewhere through efficiency improvements. We (indiscernible) our facilities management 18 months ago, bringing in 2,000 jobs into BT. But now getting a living wage rather than the minimum wage. As the efficiency is going up, we have managed to take circa £10 million over the cost base.

In our call centers, we are bringing some of the overseas jobs back to the UK. Part of this is about deciding which job is the best done by BT staff and which done by a third party. These changes may increase the cost of our overall call centers but we will be paid through improving efficiency and will allow us to provide a better customer service. As I mentioned last quarter, we are driving Global Services overseas cost transformation by applying the tried and tested methods we have used elsewhere in the UK. We are using a forensic approach to improve process efficiency, reduce the cost of failure and optimize the network and improve our supply value for money. When I last spoke to you, I said we had identified savings at well over £150 million a year. In fact, it’s now over £200 million, and we are making in-roads into this and delivered about £110 million in 2013-2014 mainly in Europe and Brazil.

Benefits across translation opportunities like this can be seen clearly on Slide 12. It’s allowed us to make investments like launching BT Sport this year, while still keeping our overall EBITDA broadly flat year-on-year. Starting on the left, you can see the effect of our £450 million BT Sport investment on BT consumers EBITDA. You can also see the impact of regulation on Openreach, which has been partly offset by strong revenue and cost performance. Global Services EBITDA has grown by £100 million this year, compared with £1 million decline last year, as the increased focus on cost transformation pays off. Cost transformation has also helped BT Business grow its EBITDA by £51 million.

Turning to Slide 13, but even with broadly flat EBITDA this year, our cash is up £150 million or 7%. The outflow of working capital this year has been largely driven by the payment of the UEFA deposit and the prepayment of sports rights. Delivering efficiency on our capital programs have allowed us to invest in the future, while continuing to reduce our CapEx year-on-year. Interest payments this year are lower as we paid down debt and due to the lower average interest rates. These two effects offset the working capital outflow. We also benefited from around about £60 million of customer receipts that we previously expected to receive in 2014-2015. But even adjusting for these, our cash flow came in ahead of our outlook mainly reflecting CapEx efficiencies.

Turning now to debt on Slide 14, we intend to continue our policy of reducing net debt and by targeting a BBB+ credit rating over the medium-term. Looking forward, out of a total gross debt of £9.5 billion, £1.7 billion is repayable in 2014 and 2015. At 31 March, 2014, the group had cash and current investment balances of £2.5 billion and available facilities of a further £1.5 billion, providing us with a strong liquidity and funding position. During the year, we issued around about £1.2 billion of U.S. dollar bonds, and we will continue to review our funding options with a view to maintaining our liquidity while minimizing our cost of carry. You can see from the chart that our maturities are fairly evenly spread over the next few years. However, the average coupon on our debt maturing after 2018 and 2019 is relatively high. We will continue to pick up pieces of this long-term debt wherever it’s feasible. But we will only refinance it early when there is a clear financial and commercial benefit to do so.

Turning to Slide 15, this year, we have been impacted by a number of pieces of regulation. This will impact us now and in the future. The overall regulatory impact for the group was £152 million to £200 million this year. The narrowband market review came into effect in quarter four, reducing the level of fixed core termination revenue. This mainly impacts wholesale and we will have a material impact on its revenue in the coming year. In terms of new regulation coming out in 2014-2015, the final statement for the fixed access market review is due shortly. From the draft statement, it appears that there will still be headwinds from the change in charge controls, but less so than in prior years.

Our fiber margin squeeze, Ofcom’s investigation into Talk Talk’s complaint is ongoing. But we are confident that we are fully compliant with all regulation and competition law in this area. On ladder pricing, we are currently waiting the Supreme Court’s decision on our appeal against the previous CAT ruling on ladder pricing. If you remember, this had determined that we shouldn’t have used ladder pricing for certain calls for mobile termination on our network. We already inflected the CATs decision in our numbers. So if our appeal is unsuccessful, there will be no further financial impact. And lastly, in December 2012, Ofcom published determinations on the Ethernet prices we were charged from 2006 to 2011. We have appealed this and are waiting outcome from the CAT. We are seeking reduction of up to £85 million in the repayments while the other parties are trying to claim a further £125 million.

Moving on to the pension on Slide 16, the IAS 19 deficit in March 2014 was £5.6 billion net of tax compared with £4.5 billion the year before. The increase in the deficit during the year principally reflects asset returns being lower than expected under IAS 19. This was partly offset by the £325 million deficit payment we made in quarter four and the higher real discount rates. As you know, we believe the more informative valuation methodology is the median estimate, which is BT’s best estimate. On this basis, the pension scheme continues to show a surplus which is around £0.5 billion at the year-end. We will be making the case to the trustees and since the last valuation, we are a materially stronger company and therefore a lower level of prudence is appropriate. We will continue to fund the pension, but we want to ensure that the level of funding is appropriate and we want to avoid overpayments.

Moving to our outlook on Slide 17, the new outlook here is highlighted in green. Our goal is to drive sustainable profitable revenue growth. In 2014/15, low levels of local government spend and our focus on only pursuing business in this sector that generates economic value is expected to impact revenue by around £100 million. We therefore expect underlying revenue excluding transit to be broadly level with 2013/14, but to grow in 2015/16. We continue to expect EBITDA to be between £6.2 million and £6.3 billion next year with further growth in 2015/16. As a result of CapEx efficiencies, we have upgraded our normalized free cash flow outlook to above £2.6 billion in 2014/15. This improvement is despite the fact that we have seen £60 million of cash a year early. For 2015/16 we again expect our cash to grow. As Mike has mentioned, we are extending the dividend policy and share buyback by an extra year.

Just before I hand over to Gavin, I want to let you know that on the 1st of April we moved BT Conferencing from BT Business into Global Services and also BT Security into Global Services. Both the Conferencing and the Security market offer significant opportunities amongst our global customers. So, these are key parts of Global Services growth strategy. Given these two moves, we will be publishing a revised set of historic numbers before we report quarter one results in July.

With that, I will hand over to Gavin.

Gavin Patterson - Chief Executive Officer

Good morning. Thank you, Tony. What I am going to do over the next 20, 25 minutes is a couple of things. I will walk you through performance on the line of business basis as usual. And then I will switch to talk a little bit more about our strategy and how we were refining it going forward. So, the line of businesses to start with and starting with Global Services.

Overall, Global Services had another good quarter. So, revenues were down 4% of the top line basis, but that was all down to FX effects. On an underlying basis, they were flat. Within that, you can see a couple of things, you can see the progress we are making in the high growth regions coming through where we have got double-digit growth rates and that offsets trends elsewhere in the business, including the one in public sector that Tony talked about earlier.

The EBITDA level up 8% reflecting the cost transformation programs across the group, very strong performance on cash, that was up significantly up 83% in the year, up to £389 million, although it did, just to reiterate include an early payment of £60 million. And the order intake continues to be strong, so at £2.2 billion, that’s up 12% year-on-year and across the year is up 9%. So, good quarter for Global Services building on the trends over the last few quarters.

On BT Business, now this is the first time we have been reporting on BT Business as a separate line of business. It’s a steady performance for the BT Business unit. The overall underlying revenues were down 2%. The key trend we see there is the switch away from traditional calls and lines towards IP services and VoIP-based services and they don’t have quite the same revenue and margin intensity as you can imagine. It’s worth mentioning our IT services business, because it’s down 7%. We referred to this earlier. It reflects a very strong comparator year-on-year. The underlying business we think is continuing to progress and you will see that going forward. EBITDA, up 1% within the quarter, 5% on the year, a pretty good performance there, and as I said, in similar way, to Global Services a strong order intake, up 12% in the quarter, up 3% across the year as a whole, so steady progress in BT Business.

Moving on to consumer. And consumer had a really strong quarter. In fact, I would say the best quarter for over 10 years. Revenue was up 9% reflecting a really strong performance on broadband and TV, up 24% year-on-year. It also you can see stronger points on our calls and lines business, which actually grew in the quarter 1%, which has been a long-term decline. In terms of the costs as expected, they are up 10%. That reflects the investment in BT Sport, which is over £130 million in the quarter. That doesn’t fully offset the cost transformation programs, but continuing to go in the consumer business.

But I am delighted at a profit level the EBITDAR is up 5% year-on-year, returning to growth after two quarters of investment. So, a really strong performance on consumer, and if you look underneath that, if you look at the physicals that drive the business, you can see the impact of our investments in BT Sport working. So, in terms of line losses at £49,000 significantly down year-on-year, a very positive trend, that was our best performance for five years. In terms of broadband, 79% share of net adds within the quarter, 170,000 adds, that’s pretty impressive, up on Q3, not quite as good as Q2, but significantly up on the running rates of around 50% free to Sport investment. In terms of fiber, we delivered 249,000 fiber adds in our BT-branded fiber products this quarter, again, a record quarter. And on TV, our TV adds were up 15% within the quarter, almost 25% across the year as a whole. So, you can see the halo effect working across our TV business as well, so Consumer, strong performance.

Moving on to wholesale. Wholesale is going through some challenges and we have talked about this in previous quarters, but in terms of the things we can affect outside the regulation in particular, I think the team are doing a pretty good job. So, the underlying revenue, excluding transit, is down 9%, EBITDA down 6%. But if you look under that, let’s talk about some of the underlying trends. Calls and lines are down significantly. That partly reflects the impact of the Narrowband Market Review that we talked about last quarter.

Managed Solutions are down 6%. Again that refers to the termination of the post office contract that Tony talked about in his segment. IP Services continued to grow, up 38% in the quarter and that’s a very positive trend. On costs, we continue to drive cost transformation, driving the self-help that can improve our profits. Ultimately, excluding transit, those are down 11% and that’s a decent performance. The order intake, while down at year-on-year, is still pretty healthy at £525 million. So, challenging conditions for wholesale, but within the constraints that we are able to work within, I think they are doing a reasonable job.

Which moves me on to the final line of business, which is BT Openreach, strong fiber growth, you can see that in the numbers offset by regulation. So, on a revenue basis, flat year-on-year, EBITDA up 2%. If you look at the revenue line, it would be growing 5% if it wasn’t for the headline – at a headline level, if it wasn’t for the regulatory effects of £70 million at a top line basis, which obviously feeds through to the bottom line as well. Fiber is the real standout trend in there, up 63% year-on-year in terms of revenues, although Ethernet revenues are also growing. Costs are down 3% as we see efficiencies coming through in the business. And our lines base is up as well. So, the lines base across the year is up 83,000, up 6,000 in the quarter as we continue to grow the number of customers that we serve across the UK. The final number to call out, of course, is the fiber connections, and this is fiber connections across all customers, 347,000 fiber customers in the quarter. That’s a record quarter for Openreach as well. So, good quarter for Openreach and really strong fiber numbers.

So, I want to change that a little bit now and talk about strategy. And just to frame the discussion, I want to remind you of the strategy we have been following for the last four years, which has served us very well. It’s built on three (tenets) customer service delivery, cost transformation and investing in the future. And those three tenets, we will continue to use moving forward. They are fundamental to our business. But we felt, we wanted just to refine the strategy. And to put a little bit more emphasis into certain aspects, particularly sustainable, profitable revenue growth. So this is the single slide we will be using going forward. It puts everything together in one place.

It starts with our purpose, which is to use the power of communications, to make a better world. That purpose is a very, very powerful one for us because it allows us to meet the needs of all our stakeholders, shareholders, customers, our role in society and the communities we operate in. We can deliver against all those stakeholders without compromise. In terms of the goal, our goal is about getting to a growing BT sustainable, profitable, revenue growth. We are not interested in chasing one-offs, we want recurring revenues business and services, that’s our core business.

If you move to the strategy segment, you will see those three tenets that we have talked about in the past, and we will continue to build on them. But we have enhanced it by building a strategy around broadening and deepening our customer relationships. What we want to do here is draw the fact that not only is the customer critical to our strategy going forward, but we want to prioritize our existing customers, that’s where we see the biggest opportunity. And just to illustrate that, if you look at our Global Services business at the moment. On one hand, if you look at the top 30 customers, we've got quite a healthy share of wallet there of 25%, but if you look across the base as a whole, so the top thousand customers that drops to only 80%. So selling more of our existing portfolio to our existing customers is the priority there. And that same insight exists in every single line of business and obviously, on the other extreme to our consumer business where we are trying to add broadband and fiber and TV and increasing mobility to our course in line to customer base. So it’s the same basic tenet focusing on increasing our share of wallet with our existing customers.

Now, in order to do that, we have got to make service our priority and still it has been a priority for us but customer needs are changing, they are becoming more demanding, and we must step up and step change our performance in order to respond to that. We have made progress, but as Mike said in his opening, we haven’t made the progress we want. And it’s not – there are parts of BT that are extremely good at service. So for example, Plusnet tends to win most of the service awards in the consumer sector and Global Services has a very good customer reputation. But it’s fair to say, we need to do more and we will be investing to make a difference here.

So I want to talk a little bit about what we have achieved so far in this section and then talk about what we are going to do in the future. So in terms of what’s been happening, over the last year, our key metric which is Right First Time has improved year-on-year. So we have improved the number of occasions, the number of transactions that we interact with our customers with. We have improved that by 1.5 percentage points year-on-year, reversing some the decline that we saw in the previous year. So progress, but not as good as we hoped for across the year. There are some mitigating factors, some of them self-inflicted. We were taken by surprise by some of the demand on BT Sport, that put some pressure on our contact centers. Another example is of course, the extraordinary weather that we had across the last 12 months that meant that delivering against some of the SLAs particularly where it required a repair the next day. You think about the flooding and the weather and storms that meant for a period it was extremely challenging.

With that said, we still need to do more and we recognized that. We have been adding extra engineers and extra people into our contact centers particularly in the UK. We have been providing better diagnostic capabilities into our hub. So we are able to identify what the fault is and I can send the right engineer who will solve that over the phone. And we can see the impacts on our business, complaints are trending down across consumer and business, and advocacy is up 6 percentage points year-on-year.

In terms of going forward, there are three areas that we really want to focus on. First of all, reducing the number of folks that we get across our network, we will be identifying the cabinets which have the highest fault rates and investing in preemptive repairs there. We will be providing our engineers with better diagnostic capabilities so they are able to reduce the number of repeats that we get in that area, and again bring it down to the reasons why people might call in the first place. The second area we want to focus on is delivering within the day. So making sure that actually when a customer phones or contacts us online, we are able to solve the problem first time without any follow-up. And that means reducing missed appointments, focusing on call backs, but also applying account management, a specific account manager for the most complex service inquiries.

And then finally, it’s really looking at the culture and the operating model, so really ensuring that we are investing in training and development of our people, getting the incentivization right, but also looking at the processes that underpin some of the more complex transactions through our business. Things like home movers, our new sites where we are connecting up developers who are building new houses, making sure that actually we improve those processes, which tend to be the source of disproportionate number of inquiries. So there is a lot to do on service. We are absolutely committed as a team to making a difference here and this is we believe critical in order to deliver on our customer expectations going forward, which leads me on to cost transformation.

Now, cost transformation has been something we have been delivering on for a number of years, indeed, we have saved over £5 billion over the last five years. That does not mean we are going to slowdown, we still see opportunities across the group as a whole particularly on an end to end basis, and it doesn’t mean that we are going to sacrifice service. The way we look at cost transformation is that cost transformation goes hand in hand in service by removing failure out of the business we can improve service at the same time, so cost transformation will continue to be important to us. It also frees up investment opportunities across the group. Money an oxygen for an opportunity to grow the business and there are five key areas that we are focused on to grow. I am going to talk about each of these for a couple of minutes.

So fiber, fiber is the biggest investment we are making. It’s a relatively young investment still. It’s critical for BT, but it’s also critical for the country as a whole. It’s been going very well. Our average speed is now the second in the G8 set of countries. So we have gone from being the laggards to number two only to Japan. Speeds are up 50% year-on-year and we have the widest coverage of superfast broadband across the five big European countries. These are Ofcom data, it’s not us, it’s been identified as independently verified.

As we said earlier, the rollout has been going well. We have now announced we have gone past 19 million premises across the UK. That’s roundabout two-thirds of UK premises. And we are drawing to the end of the commercial rollout at this point and we will be increasingly building up on the rural rollout program. And in terms of take up, that’s very healthy. So, we have now got over 2.7 million homes connected to the Openreach network, of which 2.1 million of them are BT Consumer and Business customers.

In terms of the future, we will continue to drive that take-up. We don’t see this as something that’s stopping at these sorts of levels. It’s clear there is real demand for it. It’s ahead of where we expected it to be in that respect. We will also be increasing coverage. So, we are rolling out now and we are gearing up on BDUK, the 44 contracts that we have won. Indeed, we have already connected 630,000 homes through BDUK. And we will look to bid for the funds around BDUK in order to extend the coverage even further. So, at the moment, we see coverage going to the early 90s. But the ambition is to go further than that. And I think the government ambition is to get to 95% and we will look to play a part in that.

In terms of investing in the product itself, we will continue to invest in new technologies that improve the competitiveness, things like G.fast, FTTP-on-Demand and vectoring, things of that, that I have talked to you about in previous quarters. So, fiber is the most important investment across the group. It’s going well, but there is still more to do. TV and content, this is all about driving our broadband business, particularly for consumers. So, on the TV side of things, we passed over 1 million customers now. We launched a new box, a much slimmer, cheaper, faster box in Q4, that’s doing very well. We have extended our channel lineup adding the likes of Discovery and Disney and Sky Movies. We have got over 140 channels now, 27 of them in HD. That’s going really well. And we launched buy-to-keep movies in Q4 for the first time, which allows us to get access to blockbusters at a very, very early window, sometimes before DVD release. So, really, I think it strengthens and opens up the choices for customers.

In terms of what we are going to do, going forward, we will continue to broaden that proposition with channel partners and distribution deals. I am very pleased that we have signed a new shareholders’ agreement on YouView. And this gives much more control over the roadmap and allows us to continue to invest in the product itself. And you will see some of those coming through in this next quarter. So, we are launching multi-room this quarter. You will see that in the next few weeks. There will be a new entry level, YouView box later in the year and of course we will be the first platform to have the new BBC Red Button Services before the World Cup.

One other thing to mention on TV is that we will be reducing the number of platforms we run. So, we will be shutting down the media room platform in Q1. Of course, we will be giving customers the opportunity to upgrade to the YouView platform, but there maybe a little bit of churn that you see coming through in that, but net-net, TV, big opportunity particularly to drive broadband. And then on content, content has been all about sport for us. It’s gone really well. We have got around 3 million direct customers now, only 10 months since we launched, if you include the customers viewing over cable, that looks like 5 million, which is a pretty decent performance.

In terms of the proposition, we have been adding content, such as rally content and Moto GP this quarter. We have resigned our deal for the Bundesliga and we have been making the channel available on other platforms. So, we are launching on Chromecast from Google as well.

Looking forward, I am delighted to say we will be continuing to offer BT Sport free to our broadband customers on any platform for the season ‘14/15 and we will continue to add to the content portfolio. So, from autumn, we will be showing the new European Champions Cup in Rugby, which is the successor to the Heineken Cup that will be over 35 live games, including the best pics from the Aviva Premiership, the first pics. And of course, as we have already told you about, we have got exclusive rights to show the Champions League in the Europa League from 2015 onwards. And that will strengthen our proposition even further.

Okay. The third area I want to talk about is mobility and future voice. Now, this we see as a great opportunity to grow going forward. The trends are moving in our direction, be that regulation, where the level playing field is now being established between fixed and voice, be it designed to use the Internet and data out and about, be it the combination of 4G and fiber, all these things mean that we are extremely well-placed to take advantage in this marketplace. Our vision is not just to have a quad play, where you link products together. Our vision is to have a seamless converged proposition that works wherever you are and creates the best possible connection and be that for a business or a consumer, we think we have got a great offer to provide them. We have got the right brand, we have got the channels, we have got the customer base, and I think we have got the right set of capabilities.

In terms of what our strategy is, our strategy to deliver that is an inside-out strategy. It leverages the wide range of customer relationships we have got around the whole of the UK. It starts with our MVNO arrangements. We have got a new MVNO deal in place with EE, which is much more competitively priced with access to all the key technologies. We supplement that with our Wi-Fi network, where we have got access, where we pride our customers’ access to 5.4 million Wi-Fi hotspots across the UK. On top of that, we will be building our own 4G core and we will be looking to do some small cell developed – deployment outside of the premise.

And of course, the final thing is access to our own 4G spectrum, which we bought in the auction this time last year and creating a hub that includes a Wi-Fi and a 4G cell, a combined router. Put that together and we will have a high capacity data rich network that will allow us – that will be very cost effective and positioned the right way, I think we can provide some really compelling services to customers who want access to the internet, wherever they are with a very high-quality service.

In terms of the timeframe, it will take two years. The best part of two years to put it all together, but we will be launching products and services throughout that period. And it starts in the next few weeks, where we will be launching our first services with the new MVNO in the business sector later this quarter. And later this financial year, we will be launching new services into the consumer market as well. So, mobility is a very exciting area for us and a real source of growth going forward.

Okay. The last two areas I want to talk to are all about our B2B customers and it starts in the UK and UK business markets. And within this, I want to talk about the range of opportunities right away from SoHo customers all the way to UK Corporates. We think we are well-positioned to grow in this market and this takes advantage of the strength and depth of our network in this – in the UK, which we don’t always have in all markets around the world. UK business was created as a line of business for the first time this year to really take advantage of this so that we could build propositions to meet the customers’ needs and really serve them better. It’s allowed us to simplify our structure, pull all our IT services businesses together into one delivery unit and be able to provide some bundled IT services propositions, but also sector-specific propositions and things like legal services.

We have also been launching an umbrella, new propositions in this area. So, BT MeetMe, with Dolby Voice which we talked to you about at the half year results, the initial demand from customers is very, very strong in that area. And of course, we have re-launched Plusnet for business, which allows us to compete at the bottom end of the B2B customer base and focus on price conscious customers, which exist in SoHos in the same way they do in the consumer market.

In terms of the story going forwards, right away, across this customer base, it’s all about growing our share of wallet, building on our strength in fixed voice and data, expanding into mobility and IT services. And you can see from this chart, we have got relatively small market shares and these are conversations that customers want to have with us and they want the services that are able to combine these together, particularly when we are building on IP.

Which brings me on to the fifth and final growth area, which is leading global companies. Now, this is a change of focus, more the new ones and it builds on the investments we have been making in high growth regions. But we didn’t feel that fully captured where we wanted to focus and prioritize our efforts, which is why we wanted to call out leading global companies. And if you look at the chart here, on the right hand side, you can see why. For the third successive year, Gartner has considered and assessed us as having the market-leading position in providing network service provision across global customers. So this is the third year on the chart we have had this position. And that’s what we want to build our business around. So we will continue to leverage the investments we have been making in high growth regions, but particularly why they are focused on global companies, we are looking to get a provider to provide over a region or across the world.

We will continue to simplify our business, reduce the number of networks that we are working and using with customers. And as Mike and Tony said, we are also bringing BT Conferencing and BT Security into Global Services to really realize the full opportunity of those units. These are two particular issues that certainly I have heard directly from CIOs and CEOs as being very much top of mind. How do you collaborate better with units across the world, which is exactly what BT Conferencing is focused on and BT Security, which has a deep high quality set of capabilities is an issue that in terms of CIOs and boards around the world produce really on their agenda. And it’s something that we need to really use to build our businesses. It’s a real opportunity for us. In terms of the future plans, this is all about share of wallet. It’s all about investing in things like account management for multinational companies to ensure that we serve the top of our customer base much better, but at the same time focusing on gross margin and cash.

Okay. I want to summarize now and pull all this together. So I think you have heard today, we are delivering and these are strong set of results. And we see this is a great platform to grow going forward. In terms of our priorities, we will be focusing on delivering superior service. We recognize there is some way to go here, we need to make a step change in our delivery. It goes hand in hand with our plans on cost transformation because on cost transformation, we are looking at simplifying our business and removing failure out of the business, which ultimately drives service. It also provides oxygen to invest in the business and there are five key investments fiber, building coverage and take-up, TV and content around triple-play and sports, mobility which is a great Greenfield opportunity across all lines of business for us. We see great growth opportunity in the UK particularly on the strength in the economy and overseas it’s all about multinational companies for us, rather than necessarily competing domestically.

All that, we believe will give us a great platform for sustainable profitable revenue growth allowing us to grow our cash flow over the long-term. Thank you very much.

Okay. We will open for questions. Hold on. Usual rules apply. One question each. I have (indiscernible) sitting in the front row including Joe Garner. Joe, do you want to stand up. Joe Garner took over from Liv in February. So Joe is available to take questions on Openreach. Right, I am going to do this in a sensible way. So, I will go right to left. Okay?

Question-and-Answer Session

Carl Murdock-Smith - JPMorgan

Carl Murdock-Smith from JPMorgan and maybe a chance for Joe to start even, I will ask on just you mentioned G.fast, if it were something you wish to pursue in scale, how much would it cost to deploy, either at the total level or on a kind of per house basis and over what timeframe may that kind of decision process become relevant? Thanks.

Gavin Patterson

Well, let me give some opening comments on this and maybe Joe, I don’t know whether you wanted to add anything if I miss something. But G.fast is very exciting technology. It allows us to get speeds of up to 1 gigabit per second. It builds on VDSL. It takes the fiber closer to the premise. And so effectively, you get a glass transmission closer to the premise, but not always all the way in. In terms of what we are achieving, the sort of speeds we are achieving are in pilot at the moment there. So it’s a couple of years before it gets expanded. But – so it’s too early to say how much it will cost per se. But we do see it playing a role within the overall state. It’s probably a couple of years away. In terms of what needs to be achieved, I don’t know whether Clive, do you want to just talk a little bit about the standards that need to be emphasized.

Clive Selley

Yes. So G.fast at the ITU achieved consensus at the back end of 2013 in December and we expect it to be ratified this year. And that’s a prerequisite of course for the vendors producing the silicon. So they can only productize G.fast once the standard has been ratified, but that will happen this year. That’s our strong expectation. And then probably, two years out from now we will get the first production units. And then we will run trials with those production units, and that’s when Joe will figure out the economics around the case for deploying (indiscernible).

Gavin Patterson

Joe, do you want to say anything.

Joe Garner

Sure. Thank you. First of all, it’s a healthy slam to join what is a great business in a really great time. I am struck by how much debate there is around FTTC, FTTP, vectoring, fiber-to-the-road now, G.fast. I think the point is it’s the portfolio of these technologies that enable us to work in different ways to deliver the ultimate speeds to the customers. And I think that, rather than say that it’s one single thing that’s going to make a difference, it’s the fact that we have got the whole suite of them that enables us both to do the BT UK deployment and to hit the ultimate outcome speeds that we are aiming at for our customer base. And I think the great strength is that we do have the full range of this platform.

Gavin Patterson

(Morris).

Unidentified Analyst

Yes. Hi, it’s Morris from Barclays. So on the line loss that you showed steady improvement, can you sort of talk about how much of that’s lower churn driving that improvement and how much of its improving gross additions?

Gavin Patterson

Well, we have seen churn come down significantly on both broadband and our calls and lines business. We don’t break it out, so it’s several percentage points. And that’s exactly what we were expecting behind the investment in BT Sport. Given that was such a short one, you can never set them.

Unidentified Analyst

That’s very kind. As a great follow-up, perhaps one for Tony, when Liberty Global talked about a VAT issue impacting their revenue outlook for 2014, any thoughts on whether that impacts BT or any thoughts on that generally?

Tony Chanmugam

No impact on BT. Our accounting is in line with the HMRC rules. We can’t comment on what other people are doing.

Gavin Patterson

Okay. Andrew.

Andrew Lee - Goldman Sachs

Thanks. This is Andrew Lee from Goldman Sachs. It seems the one question on your cost cutting guidance, just some clarity on exactly what that is, I think you mentioned above £200 million a year, is that on an underlying basis. And I wondered if you could just give us a view on the visibility for how many years can you see it forward?

Gavin Patterson

I think first of all, in terms of the future, I can see plenty of opportunities, opportunities that we got right now, that will deliver returns over the next three years. There is a – not a shortage in relation to that. In terms of the absolute sums, what you see here in the cost base is a net impact, net impact after investments. So the absolute sum of reductions that we made are materially higher. You are talking close to £1 billion a year that you see in reductions. But what you then got is investment, investments such as BT Sport, but also smaller investments that you don’t see, that we don’t call out specifically. What I remain confident on though is our ability to manage the cost base and deliver the long-term profitable revenue growth.

Andrew Lee - Goldman Sachs

(indiscernible) going to be driving this growth is coming down by £200 million a year?

Gavin Patterson

The underlying costs will be – the underlying costs, excluding the investments, will be going down materially higher than that, materially higher.

John Karidis - Oriel

Good morning. John Karidis from Oriel. Sky said that they spend less on broadband marketing this quarter. So, did you actually see a let-up in competition because of this?

Gavin Patterson

I would say something and then ask John to comment. I didn’t notice it to be perfectly honest. I mean, it’s – continue to be a very dynamic quarter, a very aggressive quarter all around. Sky, the number one advertiser in the UK and that excludes all the cross-promotion that they get across their own channel portfolio. We are the number three. I think our spending was down year-on-year a little bit in the quarter. So, in terms of share of voice, certainly it was round about the number that we typically get, which is about 20% share of voice. John, is there anything I have missed?

John Petter

Yes. Just two comments. Firstly, in quarter four, the cost of media is typically down anyway versus previous quarters. That’s just seasonality. It’s typically about 17% cheaper in quarter four. Secondly, Sky has been above the line, might have been down perhaps relatively marginally versus previous periods, but it was still about 100% higher than ours. So, yes, yes.

Gavin Patterson

I am going to go back this way. Yes. Yes.

James Britton - Nomura

Hi. James Britton from Nomura. A quick question on mobile, can you just clarify that the costs of the mobile launches are indeed included in the guidance you have given today? And can you perhaps give us some sense of what investments will be required in mobile this year? And then I do have a follow up on mobile as well?

Gavin Patterson

Do you want to answer that, Tony?

Tony Chanmugam

The question, the question was, are there investments in mobile included in our outlook, the answer is yes for that. I mean, in terms of the scale of the investments.

Gavin Patterson

Yes. I mean, what I would say here is that if you look at our outlook, we have got the – our base investment in mobile incurred in there. If we have to make something incremental on top of that, we will change our outlook, but we will change our outlook both in terms of revenues and profits as well as investments. And we will outline what we are doing much as we did with Sport to say. This is what we are putting in. This is the consequential impact. This is the gain that we will get from that.

James Britton - Nomura

Alright. And just a follow up on the mobile side, is it right that you are going to struggle to be competitive on roaming costs for the Enterprise segment given you are not part of a roaming group? That seems to be a feedback that I am getting. And does that mean that you will be more focused on the SME segment than the large corporate segment?

Gavin Patterson

I think we will be very competitive. I have no concerns about it. The deal with EE is a very competitive deal. We supplement that in time with our – access to our own spectrum and access to our Wi-Fi hotspots. We can be extremely competitive. And bear in mind, our propositions around bundling the services, yes, they are creating fixed and mobile converged propositions. It’s not about simply doing me-too vanilla type deals. So, I am very confident we are going to be competitive. We launched to start with in the SME sector, but there will be deals and opportunities in major corporates as well. Steve?

Unidentified Analyst

Thanks. I have got one-and-a-half follow-up on James’ mobile questions. I mean, in consumer mobile, given your experience in things like Fusion, should we assume that when you launch, you want to have the best devices available, multi-band iPhone, Galaxy, those kinds of things. And if so and I guess VoLTE as well, if so when do you think you can get your hands on those devices to make this launch kind of stick with consumers? And then as a small follow-up, have you looked to split contract to currency and is that something that we should think about as a way of maybe assuaging some of the costs, EBITDA and earnings of launching a mobile operator and the U.S. carriers are doing it. So it’s a great effect. Thanks.

Gavin Patterson

I will take the first half, but it was the split, the contract to country and I will pass that one over to my friend here. In terms of getting access to the right handsets, yes, we want to make sure that, that isn’t a limitation in terms of our proposition and we are confident we can do that. The issues with Fusion were frankly, we were the only people using effectively that technology at the time. So, there was only one manufacturer who was prepared to support us. And our propositions and the technologies we are using this time are effectively generics in that respect. In other words, they are available on a full range of handsets. And so I don’t think that’s going to be an issue per se. In terms of the accounting, Tony, do you want to…

Tony Chanmugam

Yes. Steve, the key is the cash and how we choose to account on the P&L in many ways is academic. We will follow whatever the industry does. But for me, the management of the cash and generating the long-term cash is what we are focused on. And that’s why when we look to the Global Services accounting, we said measure us on cash, don’t measure us on anything else.

Gavin Patterson

Okay, right. Robert?

Robert Grindle - Espirito Santo

Hi. It’s Robert Grindle from Espirito Santo. On the Global Services order book, is it about mostly about your entering new markets and having a good push there or is there any sign of life for the existing customer base, any particular product that’s picking up or any particular customer segment within the total enterprise, which is picking up with the economy perhaps? Thanks.

Gavin Patterson

Luis, do you want to talk a little bit about the order book.

Luis Alvarez

Yes, I think that the results of the order intake, it has been quite well balanced across the business. The good thing is that we have got probably best in class in the industry in terms of longer term deals. So, we have signed only probably more than five or six very large deals of above six years, which is probably nothing that is happening across the industry that easily. We have security that was just a great example. It’s a global deal. We have extended the services we were providing to them for another seven years. We have signed a new contract (indiscernible), which is supporting Apple, EMC, HP manufacturing and it’s our U.S. deal, but is also on Asia-Pac, because we have a large China rollout. And we have been able to secure a number of companies like Rexall, where we have 1,200 sites all across Europe, one of the leading players. We have been able secure some new pharma companies like Almirall, which is also a European one, Indesit in Italy, Prysmian is the leading cable operator, but also in Latin America with Nutresa, which is a new multi-Latinas regional player. So things are well-balanced.

And in terms of portfolio, it’s the same thing, right, some of these deals like the one-off cable which is 112 sites across 25 countries. They have the network infrastructure. They have also the interconnection of the data centers. They have the voice services on the top of conference and services and the security wrap around that, right. So, it’s a well-balanced portfolio, which is the risk and at the same time show the opportunity without having referred to about the growth chances we have.

Nick Delfas - Redburn

Hi, it’s Nick Delfas from Redburn. So another question on investments, really, I mean, Virgin is marketing actually double your top speed at 152 megabits per second. Your capital spend actually is falling every year. And I think Openreach is down 8% this year. And I guess within your overall CapEx, you have £1 billion of capitalized labor as well. I mean is it realistic to wait two years for G.fast and what’s really the difference in costs between G.fast and going all the way into the home. It seems like it’s a few tens of meters difference. So, I am not sure what the differences between going to fiber-to-the-home now and waiting for a new standard on G.fast?

Gavin Patterson

Well, if you look at our results, clearly, there is a demand for our fiber-to-the-cabinet based services, no question about it. It’s the – in terms of the take-up, it’s the fastest take-up certainly across Europe. We had our best ever quarter in these numbers. And it’s not just across the BT branded services, it’s our – there are other service providers picking it up as well. So, it’s clearly got demand. There is no question about that. We can see an ability to get more speed through things like vectoring and if we need or indeed customers are looking for further speed on top of that, we can deliver fiber-to-the-premise on demand after any of the cabinets that serve with FTTC and that would be completed across the year as a whole. So I think we are well placed to respond to the market and to do so in a very capital efficient way. In terms of the results, Virgin I think announced 40,000 adds in the quarter across all service providers including BT. They added, I think, 357, I think, fiber adds this quarter. So I think you can – the numbers I think make a very strong case on their own.

Nick Delfas - Redburn

Okay. Am I allowed one more?

Gavin Patterson

No, next.

James Ratzer - New Street

So Nick gave it to me so I will ask him instead. Yes. It’s James Ratzer from New Street. Wondering if I could ask some questions about probably your – the technical capabilities of the mobile network you are going to be building out at the end of the two year period when it’s built. So just trying to get an understanding of what percentage of customers’ voice traffic and data traffic you think you can capture on your small cell and Wi-Fi network. Also I mean you are going to have automatic authentication on the Wi-Fi built into your handsets and you are playing two things like voice over Wi-Fi as well within the network? Thank you.

Gavin Patterson

Well, in terms of what we can capture, I mean there are several studies that demonstrate the majority of certainly data usage on mobile is within the premise, I think 70% is the number that’s often quoted. And if you look at the extensive network that we have across a Wi-Fi base, both inside and outside the home, we will be able to access our 4G spectrum because we are going to build into the hub a cell that’s able to automatically switch over to our spectrum when you are close to it. So we think we are going to get the majority of people’s usage onto our network. And where we can’t, they will be able to roam seamlessly onto the arrangement we have got with the users. So I think it’s going to be pretty cost effective. It’s going to allow us to do some pretty compelling propositions we are seeing. In terms of the timeframe, it’s – the critical thing we have got to get right is the customer experience and the customer experience requires that the cells are able to self-organize and that is the piece that we are developing at the moment. We are very confident we will be able to make that work and that is the key technology step to get right.

James Ratzer - New Street

Voice-over-Wi-Fi at all?

Gavin Patterson

Yes. I mean it will be voice and data over the best available network, the right network that's available. We did voice-over-Wi-Fi today. Guy?

Guy Peddy - Macquarie

Thank you. Building on James’ question, it's Guy Peddy from Macquarie. Just wanted to understand this mobile network. Are you the only people that are trying to build a network like this or is there any evidence of people putting together these multiple technologies and it's one of the reasons why it's going to take two years because you are going it alone a little bit or again is this proven technology with how you amalgam all these things together?

Gavin Patterson

Well, in terms of whether we are leading edge or not, I am going to ask Clive to talk about this a little bit in a moment. But if you look at the way 4G and LTE has been rolled out. It's largely been by incumbents and they're following an outside in rollout. So, it's about creating a network, a macro network planning sites to extend that to ensure you've got indeed more coverage but getting on to fix network as quickly as possible. Build is the other way around. They recognized that they will ultimately have to do this particularly around small cells. So, it is going to be something that I think many are doing. Indeed others are doing it already now and that might be something that, Clive want to just talk to.

Clive Selley

So, small cells themselves are not a new thing. Femtocells exist. You couldn't buy them for 3G. They've been used to provide coverage where coverage from a macro network was not possible in the past. So, small cells themselves are not a new idea. What we have to crack are a few technical challenges. One of which is that we envisaged dents deployment of small cells. So if you imagine the streets at houses, we would like to have them to have cell within many of them. We've got to organize the cells or the inside of the cell, the technologies got to be able to adapt to the proximity of other cells in order that they don't interfere. So that's the technical problem that we have to crack and we're working with the key vendors, including the chipset vendors, to solve that issue.

And what I would say is that we're getting very full attention from the vendors because they see small cells as being much more important in a 4G world than in a 3G world, so there is a lot of R&D going in, in the vendor community. So it might be that we are early as adapters, but we are absolutely riding the wave of their investment in much more advanced small cell technology because that's what 4G will ultimately demand and not just from us.

Gavin Patterson

Very good. Go to the back at this point.

Jerry Dellis - Jefferies

Yes. Good morning. It's Jerry Dellis from Jefferies. Just a question on consumer retail, if I may, please, obviously, BT Sport seems to have delivered or having, more or less, in consumer line loss. Going forward, as we think about your guidance, do you assume that consumer line loss trends continue to improve and if so, where would that improvement necessarily come from? Or are you more focused on pricing up the existing base with no particular view on expanding retail market share?

Gavin Patterson

Well, in terms of the performance, certainly if you look quarter-on-quarter it's better than half, I'd say it's a two-thirds reduction year-on-year. So, we're pleased with that. In terms of growing the consumer business, we've talked about this in the past. We see the potential to grow RGUs and increase the share of wallet that we get from our customers. And so, that is where our focus will be. It doesn’t mean that there won't be the opportunity to increase pricing but we won't be as dependent on increasing pricing going forward. Yes?

Barry Zeitoune - Berenberg

Hi. Good morning. It's Barry Zeitoune from Berenberg. Just quick question on TalkTalk and Sky's announcement of rolling out a limited number of homes with fiber, I was just wondering if you could give us an assessment of the greater risk of a greater rollout from those two competitors. And where do you think that's a real risk or it's simply lobbying Ofcom? Thank you.

Gavin Patterson

Well, it’s clearly an interesting announcement but it's a joint venture, they talk about it being a pilot and hopefully they choose to expand the pilot, there'll be offering it up on a wholesale basis which of course will pull out networks up. It’s a very challenging business case. I think they recognize that. I mean, even in York, we have got 89% fiber coverage. A significant amount of it is FTTP. Cable I think has certainly 25% that would remain to maybe more coverage in York. So, being able to make the business case and getting the right adoption I think will be challenging, but we appreciate competition. We value competition. We certainly – we're not concerned about it in that respect, and we look forward to seeing the results in the market. Yes.

Barry Zeitoune - Berenberg

Sorry. Just as a follow-up, does that mean you don't really see the business case for a greater rollout?

Gavin Patterson

I think it’s probably something you should ask them rather than us. Yes.

Paul Sidney - Credit Suisse

Thank you. It’s Paul Sidney, Credit Suisse. Just a quick question on use of cash. I think you've stated in the past that BBB+ is consistent with getting to a reported net debt of around £6 billion. I was just wondering is that still the case? And once you hit BBB plus, how should we think about use of cash? Thank you.

Gavin Patterson

Michael?

Michael Derek Vaughan Rake

Yes. I mean, I think we've said previously that we do want to hit BBB+. We think it's a good discipline to move towards. I think if you take all of our debt and our pension fund and all of those issues, we need to be sort of 2 times EBITDA on debt, and that probably begins with a 5, something like that. I think that's conservative and sensible in my view.

Paul Sidney - Credit Suisse

And the use of cash?

Michael Derek Vaughan Rake

Yes. Well, I think we know the use of our cash should be in a series of issues. We want to invest for the future which Gavin's talked about. We want to ensure that our pension deficit is dealt with. We want to reduce our debt and we want to make sure we've got a sustainable growth in dividends for our shareholders. And we want to balance those issues, and that's how we want to use our cash we are having. And that’s why, as Tony said, we've got such strong focus on cash delivery, whether it's about accounting for rollout or whether it's about global services. We want to make sure we deliver that and can achieve all of those objectives which we're actually successively doing for the last four years and really trying to focus on that execution at that part of the business.

Stephen Howard - HSBC

Thanks. It's Stephen Howard at HSBC. It's been a couple of years since Vodafone acquired Cable & Wireless. And I was wondering if you could just summarize what you felt their impact have been over that time, and in particular, whether or not you have been surprised by either their aggression or their lack of aggression to date? Thanks.

Gavin Patterson

Well, I'll probably just say a few comments and maybe – I don't know if Luis you want to add anything that I missed. Clearly, Vodafone are, I think, beginning to utilize the Cable & Wireless investment. I think, from what I can see, they have to invest a little bit more than they thought they would originally. But they see the benefits and they see the opportunities around fixed and mobile convergence. So, we do bump in to them in the marketplace and we compete, I think, particularly in the corporate sector and even into our SME business that Graham runs. So, we are seeing them, I think, a little bit more active in the marketplace. I think from our perspective, we're very well placed to compete. And in terms of or fixed network, we think we've got a stronger proposition increasingly as we add mobility type services on top of that. I think we'll be able to offer the full gamut that allows us to actually increase the number of opportunities we can go for. So, anything you want add, Luis?

Luis Alvarez

Yes. I think that in terms of competing globally, clearly, our proposition is much stronger in most of their customers that we'll work with. They do need global presence and so on, so it means that they require the capability of integrate their fixed services with mobile services and global landscape. When you look to the UK in the corporate sector, and I think in Europe, we see that they are competent. I think that the investments we have been making in terms of having an integrated set of services from the voice to the data piece to the IT services, I think it's providing us a unique proposition. But it's also linked to vertical expertise, but I think it's an area where they should invest a lot to catch up where we are.

Stephen Howard - HSBC

(indiscernible) on price or breadth proposition?

Gavin Patterson

Not really.

Stephen Howard - HSBC

Neither? Thanks.

Gavin Patterson

Okay. One more question.

Stephen Howard - HSBC

Thanks. Just a quick question on TalkTalk's recent price increase, it seems to be quite material and Plusnet, this time, hasn't followed suit. Are you seeing an opportunity for Plusnet to be more aggressive at the lower end of the market? And I was wondering whether you could maybe just give us some stats on how Plusnet is doing and how it's contributing to your net adds? Thanks.

Gavin Patterson

Joe, do you want to talk about Plusnet?

Joe Garner

Sure. And the revenues for Plusnet are up 17% in the year, so Plusnet has had a strong performance in the year for consumer. In terms of Plusnet's future plans for pricing, we don't generally preannounce our pricing plans and I'm not going to this time. But I think you are right that TalkTalk's second price increase in six months will clearly have left some customers scratching their heads is to have them bought value brand or not.

Gavin Patterson

I think with Plusnet and I refer to it in my presentation. Plusnet is much broader and simply a consumer brand. They being able to create a business that is very lean and profitable but able to attract value and price focused customers in the business market is also an opportunity for us. And you'll see us continuing to focus on that.

Stephen Howard - HSBC

Just one follow-up is Plusnet actually growing subscribers more quickly than TalkTalk?

Gavin Patterson

Yes. I don’t know the number at the top of my head. Do you have it? Tony has it.

Tony Chanmugam

The guidance we have given is that Plusnet is around about 20% of our net adds or within that range. We gave about 15 months and what I'd say is it's coming in somewhat less in that 20% above certainly above the TalkTalk number.

Gavin Patterson

Yes.

Unidentified Analyst

(indiscernible) how does it go?

Gavin Patterson

Okay.

Unidentified Analyst

I mean, Tony, you made some comments, I saw on an interview this morning that your kind of had some discussions with Sky but it struggled to reach a potential price point on that wholesale agreement and if I look at your broadband net adds to what extent do you feel actually the offering you got at the moment is good enough to help continue to drive growth in your broadband business or do you really feel that you do need to push on and get extra content to try to accelerate growth further?

Gavin Patterson

Look in terms of BT Sport we are very happy with the performance over the last 10 months. It's performed really well to be able to get around 5 million customers in 10 months and to have the impact on our consumer business that it's have the impact on the way people look at us and perceive us as a brand is, I think, quite a remarkable achievement in that period.

In terms of the series or rights that we've got, we think we've got a really good set of rights particularly as you add Rugby and Champions League football going forward. So, we will continue to strengthen the proposition and build on the program and building on the interactive nature of the program going forward. We are a willing wholesaler. We've demonstrated that. We've got a wholesale deal in place with Virgin, a wholesale deal in place with Setanta in Ireland. We wouldn’t preclude doing one with Sky, but there is a price that they think is worth. There is a price that we think it’s worth and there is a gap at the moment. In the meantime, we will continue to drive our strategy because we still see this growth and we can see the impact it's having on the business. And we'll be financially disciplined about any additional rights that we add over and above that. Nick?

Unidentified Analyst

Just coming back to value concepts that John mentioned and wouldn’t BT's own brand you've obviously put through a big price increase on line rental and also started to charge for 2015, so that’s 15% increase I think in line rentals together. How many people are...

Gavin Patterson

3.5, check your numbers.

Unidentified Analyst

Which one? For line rental.

Gavin Patterson

For line rental.

Unidentified Analyst

Plus voice mail, which used to be free.

Gavin Patterson

That’s the different thing. We were saying 15% the line rental.

Unidentified Analyst

Yes. So, the line rental included voice mail that has gone up 13%. But how many people are now opting out and looks like it's going to have a meaningful impact so possibly on day one, 100% of people have it, how many people are leaving voice mail right now?

Gavin Patterson

Well, we don't break out the voice mail numbers in our KPIs. I think you got plenty of details from our business. What I would say is if you look at the performance of the consumer business, if you look at the reduction in churn, if we look at the reduction in line losses, you look at the share of broadband net adds, you can see the business is performing very well. So that's your answer. Robert?

Unidentified Analyst

Just looking at the Openreach net adds, very low number compared to the last three years. Is any of that due to the weather or does that also wash out by end of the quarter?

Gavin Patterson

John, do you want to just talk about the physical ads?

John Petter

Yes, I think on – so we did go through a fairly exceptional period, which I think overall was well-handled. But I think it is fair to say there was an impact on the net adds that certainly pushed things back a bit and may produce the overall numbers somewhat.

Gavin Patterson

Cost per year, of course 83,000 which was consistent with last year. Yes, John?

Unidentified Analyst

Thank you. On a three-to-five year view, how should we think about trends in depreciation and CapEx and depreciation relative to CapEx?

Gavin Patterson

You want to answer that?

Tony Chanmugam

Yes, sure. The CapEx number will trend down slightly, slightly. But not to be a material – you're not going to get the 3.2 to 2.4 reduction. In terms of depreciation by default, some of that will follow but the lives of the asset base is changing. And their lives are somewhat shorter. So I see a slight trending down in terms of CapEx, a slight trending down in terms of depreciation.

Unidentified Analyst

(indiscernible) the trending down in depreciation is slightly faster than the CapEx trending down?

Gavin Patterson

No, not necessarily.

Unidentified Analyst

Just a question on the long-term fiber penetration, I think you said it was 14% penetration with fiber at the moment, but then it can reach – I think you've talked before about a sort of 20% top figure. Do we still think that's where it stops or can you talk about where you think it could be now?

Gavin Patterson

Look, we are not going to be setting goals in terms of fiber penetration. We're pleased with 14%. If you look at any international comparison, that's a good number. And if you look at some of the parts of the rollout that have been in place the longest, we are over 20%. So, Cornwall, where I was a couple of weeks ago, that was celebrating 20% adoption. That's about 90% plus coverage now. So I think there is the potential to go further, but we're not guiding in terms of how that is and we'll continue to make sure that performing today and executing today is the priority.

Tony Chanmugam

And it's just worth adding we've gone from 9% last year to 14% this year.

Gavin Patterson

I am going to take two more after this.

Unidentified Analyst

Thank you. Just in terms of the developments of the entry level YouView box. Up to now, you've been very firm in terms of monetization of TV, requiring TV customers to actually pay you additional ARPU. I was just wondering if the developments of a cheaper box does change your mindset slightly whether you would consider monetization just through a longer contract period in terms of giving some a free box, a free cheaper box?

Unidentified Company Speaker

Two points in that. Firstly, we're not about to pre-announce our pricing for something that's been launched in several months' time. This does strengthen the overall economics. That's true. The service is already extremely cheap at just £5 a month, and I think our view is that a service that's completely free and has a completely zero commitment from the customer is typically not valued by them either. And so, if you go into e-Bay, you'll find lots of TalkTalk boxes.

Gavin Patterson

Okay. Let’s move on quickly. Steve?

Steve Malcolm - Arete

Hi. It’s Steve Malcolm from Arete. On the regulatory side, you didn’t mention the Court of Appeals' decision to throw out the – or to ask the Competition Commission to go back and look at the decision on the wholesale must offer decision? Of the original Competition Commission decision of Ofcom put in place an interim agreement which excluded YouView, do you think in light of the Court of Appeals' decision that it's possible that the interim agreement may change, that Ofcom may be differently minded in terms of whether it includes YouView in the interim solution which would solve some of your wholesaling issues with Sky, I guess?

Gavin Patterson

We have made an application to the CAT along those lines. That's – the CAT has to consider it as an interim issue, and we've made that application a couple of weeks ago. So, possibly yes, but we shall see. Last question. Guy, it has to be you.

Unidentified Analyst

(Question Inaudible)

Gavin Patterson

I know, that's why I chose you. No other reason.

Unidentified Analyst

Just a small thing on your – how you picture your numbers going forward, we're setting a picture here of potentially growing revenues, growing EBITDA, declining CapEx. That's a very contrarian trend to the rest of the global industry to be out to deliver all three of those simultaneously. So, I am just intrigued as to why actually do you think CapEx can go down given that everything we talk about is incremental investment. Why do we not think that CapEx should continue to go up to actually support the revenue growth and the EBITDA improvement over time?

Gavin Patterson

Well, I want to say a couple of things and then maybe you want to chip in. I mean, we're clearly focused on cash. That's the most important number for us. In terms of the savings that we see or the ability to save money and CapEx, there are efficiencies we can see already. We're coming towards the end of the commercial rollout on fiber, although we will be investing with BDUK, so there'll be some potential savings there. In terms of how we're building our network, we're finding new ways of creating more efficient networks, so if we have more time, I'm sure Clive would regale you with a new network orientation we put in place on broadband, which should significantly reduce the CapEx requirements as we go forward on broadband delivering with better service for a much better unit price. So, there are ways to improve. We don't necessarily have to increase CapEx to grow the business. If we needed to, we'll be compared to because the key number for us is free cash flow over the long-term. Tony?

Tony Chanmugam

Just one thing to add to that, the opening net ratio, our opening CapEx to revenue ratio is slightly higher than the industry norm.

Gavin Patterson - Chief Executive Officer

Very good. Thank you very much.

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Source: BT Group's (BT) CEO Gavin Patterson on F4Q 2014 Results - Earnings Call Transcript
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