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BT Group plc (NYSE:BT)

Q1 2012 Earnings Call

July 28, 2011 4:00 am ET

Executives

Gavin Patterson - Executive Director, Member of Committee for Sustainable & Responsible Business, Member of Operating Committee and Chief Executive of BT Retail

Jeff Kelly - Member of Operating Committee and Chief Executive Officer of BT Global Services Division

Unknown Executive -

Anthony Chanmugam - Group Finance Director, Director and Member of Operating Committee

Ian Livingston - Chief Executive Officer, Executive Director, Chairman of Operating Committee and Member of Pension Scheme Performance Review Group Committee

Olivia Garfield - Chief Executive of Openreach

Analysts

Jeremy Dellis - Jefferies & Company, Inc.

Andrew Beale - Arete Research Services LLP

Jean-François Paren

Steve Malcolm - Arete

Guy Peddy - Macquarie Research

Stuart Gordon - Berenberg Bank

Wilton Fry - BofA Merrill Lynch

Adam Rumley - HSBC

Chris Alliott - RBS Research

Simon Weeden - Citigroup Inc

Paul Sidney - Crédit Suisse AG

Robert Grindle - Deutsche Bank AG

Andrew Lee - TD Newcrest

Maurice Patrick - Barclays Capital

Nick Delfas - Morgan Stanley

James Ratzer - New Street Research LLP

Nick Lyall - UBS Investment Bank

Unknown Executive

Thanks, and welcome, everyone. This is Damien Molotov [ph] of BT Investor Relations. On the call today, we have Ian Livingston, Chief Executive; and Tony Chanmugam, Group Finance Director. Tony will start an overview of the financials and Ian will then go to the lines of business. We will then open up the floor for questions. In the room with us today, we also have senior management from our operating lines of business.

Before we start, I'd just like to draw your attention to the usual disclaimer on forward-looking statements. Please see this slide that accompanies today's call and our latest annual report and Form 20-F for examples of the factors that can make -- that can cause actual results to differ from any forward-looking statements we may make. Both the slides and the annual report can be found on our website.

I'll now hand over to Tony. Please go ahead.

Anthony Chanmugam

Thanks, Damien. Good morning, everyone, and thank you for joining our results call. I'll start by running you through the financial results for the first quarter.

Starting with some revenue on Slide 4, headline revenue declined by 5% with underlying revenue excluding low-margin transit revenue down 3%. Remember this is the revenue line that we provided our outlook on. EBITDA grew by 3%. Together with a small increase in depreciation and a low interest charge, profit before tax grew by 20% to GBP 533 million. As a result, EPS of 5.2p was 18% higher than the prior year. Free cash flow before specific items of GBP 308 million was 33% lower than last year and I'll explain shortly what the main drivers of this were.

Of the cash-specific items of GBP 61 million, free cash flow came in at GBP 247 million. This contributed to a further reduction on our net debt to around GBP 8.6 billion (sic) [ million ].

Turning to Slide 5, which focuses on our revenue and EBITDA. Transit revenues declined by GBP 109 million to GBP 300 million and we continue to expect these to decline by around GBP 400 million in total for the full year. Of the decline, GBP 79 million was due to the impact of mobile termination rate reductions. The 3% decline in underlying revenue excluding transit in the quarter has been driven by the continued decline in calls and lines revenue in both retail and Global Services. In particular, the quarter was impacted by additional bank holiday. This not only meant one less working day, but also resulted in less business activity around that time. Most of the impact from this was within retail.

For the year as a whole, we remain on track for our outlook of underlying revenue, excluding transit, to be within the range of down 2% to flat. EBITDA grew by 3%, reflecting the results of our cost transformation programs across the group and I'll say more on this shortly.

In the quarter, we saw a weaker performance from BT Wholesale but this was offset by continued good performances at BT Retail and Openreach, and we'll go through this in more detail.

For the full year, we expect these trends to continue. Our outlook of EBITDA growth for the full year remains unchanged.

If you turn to Slide 6. This sets out the detail of free cash flow in the quarter. Cash outflow from CapEx in the quarter was GBP 618 million, broadly in line with the prior year. We expect this to increase in subsequent quarters to meet our outlook of around GBP 2.6 billion for the full year. Interest was GBP 81 million lower, reflecting the lower level of debt. This was partly offset by a slight increase in tax payments.

Working capital and other were GBP 237 million lower than last year, which has included the receipt of around GBP 200 million relating to the major customer contract. Together, these contributed to free cash flow before specific items being GBP 151 million lower for the quarter.

We've made progress since moving our cash flow profile. Remember, only 2 years ago, quarter 1 free cash flow was negative, with quarter 4 providing 50% of the cash flow for the year.

As I've said before, there remains some underlying volatility in the timing of our cash flows due to the nature of our business. And our free cash flow still tends to be weighted towards the second half of the year.

Our outlook remains unchanged, which is for free cash flow before specific items to be above the 2011 level, this year and next. Finally, we incurred cash-specific items of GBP 61 million relating to Global Services restructuring and the property rationalization program. We continue to expect the full year cash cost for specific items to be around GBP 150 million.

Turning to Slide 7. We reduced our operating cost by GBP 269 million or 7% in the quarter. There has been a continued reduction in the level of POLO costs driven in the main by transit decline. Excluding transit, our operating cost reduced by 5%.

Net labor cost reduced by GBP 58 million or 5%. Leaver costs increased by GBP 18 million to GBP 28 million due to increased take up of the leaver schemes in both Openreach and BT operate. This will help us deliver sustainable reductions in our labor costs in the future.

Other costs reduced by GBP 75 million as we continue to drive efficiency across the group. We expect to continue to deliver further reductions in our cost space driven by productivity improvements, process reengineering and a continued focus in driving value from our suppliers.

Turning now to Slide 8. Depreciation increased by 1% due to the impact of short-lived assets in Openreach. For the full year, we expect depreciation to be broadly level compared to the last financial year. The lower interest charge reflects a reduction in net debt and the repayment of higher coupon debt in the second half of last year. This reduced the average rates of interest to around 8% compared to over 10% last year.

S&P's upgrade of our credit rating should release our interest cost by around GBP 6 million per year although the benefits of this will be seen more next year, due to the timing of rate resets and coupon payments.

The effective tax rate in the quarter stood at 24.1%. This is consistent with our expectation that the rate would trend towards the statutory rate. UK Finance Bill will change the corporation tax rate from 26% to 25% from April 2012. We therefore expect to recognize the tax credit of around GBP 80 million on the remeasurement of deferred tax balances in the second quarter, which will be included within specific items.

The IAS 19 pension deficit stood at GBP 1.8 billion after tax. This is reduced by GBP 3.9 billion compared to a year ago mainly due to the move from IPI to CPI and the payments we have made into the scheme.

Thank you, and I'll now hand over to Ian.

Ian Livingston

Thank you, Tony, and good morning to you, and thanks for coming on the call, particularly, I realize it's a very busy day for telco results. If I could ask you to turn to Slide 10. This slide goes through the line by line summary of performance and I will go through the overall -- the individual line of business performances but, just, I thought I'd give you my view overall.

I think, first of all, the performance of the business is very much in line with what we -- with where we thought and very much in line with the goals we set out. At the end of July, the business level, I think Global Services results were very much in line and reasonable. Wholesale was clearly a few percentage points weaker than we thought and we'll go and talk about why that was. However, more than balancing that off, I think the stronger performance is from Openreach and retail. Meaning, as a group, we did somewhat better than expectations in the quarter.

In terms of actual cash flows, Tony mentioned on a quarterly basis for the group, they do tend to be very volatile and even more so at the line of business level. So I won't really focus much on going through individual line of business, cash flow numbers. But to reiterate what Tony said, we are comfortable with overall cash flow forecast for the year.

So turning to Slide 11. On Global Services, underlying revenues excluding transit was down 2% against revenue, down 5% overall. Net operating cost continue to fall down 6%. Excluding transit, that was down 3%. What we've tried to do now in each slide is show, not only the financial performance, but individual growth indicators. Effectively, the milestones we talked about in our strategic plan to grow the business. And so you will see, as we go through each of the line business, how we're doing.

So firstly, in Global Services and those growth indicators. The 12 months growing order book, up 8%, 2% in the quarter. Now we have seen a mix in the change of the order book. In the quarter, we've seen more new orders rather than re-signs and that's the specific intention to, I think, focus on particularly the new orders. They will peak through to revenue more quickly. So you will see a change in the mix of the order book over the course of the year.

Within their individual regions, we've seen a good increase in the pipeline for Asia Pac, about an 8% increase in the pipeline. Of course, these have to be converted into orders, that's encouraging.

In Latin America, we recently announced our largest ever contract with the Brazilian Post Office. So not only are we a provider of services to the post office around [ph] mail in the U.K. but also in Latin America. And I should mention, because we don't turn to books that much and this is in the U.K. In the U.K. Global Services we unquestionably have seen better performance. We've seen some big contract wins, for instance, with Lancashire County Council. We've also seen revenue trends improve and profits in the U.K. Global Services have improved. So whilst it may not be a great environment in the U.K., we do feel we are starting to win and we're winning back a number of customers. So a pleasing performance in the U.K. is worth mentioning.

Now turning over to retail. First of all, financials to retail. Revenue trends are pretty similar to what they were last quarter with consumer down at continued lower calls and lines revenue. Some improvement in some of the metrics there. Business was flat despite fewer working days.

I think a general future, and Tony mentioned it, is that April was unquestionably a difficult month and May and June was better. Over the course of the quarter that's pretty immaterial but we definitely did see the effect of what was some long holidays in April.

In terms of net operating cost, down 6%. We're now 7 years into our cost improvement program and then you still see some pretty reasonable numbers coming through. And that meant despite very significant investment in the business in terms of marketing and, actually, subscriber acquisition costs, because as you'll see shortly, we did acquire a lot of customers in the quarter, EBITDA was up 1% in retail.

Now moving actually within retail to the growth indicators. Consumer ARPU continues to grow, up 5%. The main driver of that consumer ARPU growth is very much broadband, broadband growth, and we saw 56% share of net broadband adds that's DSL. We don't normally report the numbers including cable, because we actually don't normally know the cable numbers by the time we report. In this case, we do. And so to give you the number, actually the share was 59% including cable and that is actually the highest ever retail share. So that's encouraging in terms of overall performance.

And there's a number of factors behind that but one I'd just like to drive is the traction of bundles. Somewhere in 9 out of every 10 new broadband customers now taking a bundle from us. And it wasn't so long ago that BT retail was not able to sell bundles. And I think it does go to show that if one is able to compete on a level playing field, what can be achieved by our team.

Another factor that's certainly helping our broadband performance is performance in BT Infinity. We have over 200,000 now of Infinity customers. The rate of net additions in Q1 is 50% higher than it was in Q4 and around about 1/3 of BT Infinity base are new to BT retail, so we're obviously gaining customers.

I think one of the interesting sides of that is actually what's happening in Market 3, the Ofcom Market 3, which is the most competitive market. These markets -- Market 3 will tend to include a lot of local loop unbundlers and usually cable as well. And actually, we're seeing a significantly better, about 50% better, growth in our broadband base in Market 3 areas with fibre compared to Market 3 without. So it does seem to have a differential effect on retail's performance where we've got fibre. So that's encouraging for the overall fibre story.

BT Vision. Well, BT Vision continues to grow solidly. It's up 24% year-on-year. Over 600,000 customers. We gained TV customers in the quarter and I know some other people are talking about this as a seasonally weak quarter and, I guess, it is in some ways, but we did add over 20,000 BT Vision customers in the quarter.

Moving away from consumer. Our BT business, this sort of stable revenue position is very similar to the last quarter, continued growth in IT services and mobility, up 7% overall, a bit less than it was last quarter, but I think we're starting to see also an improved performance in the traditional business in BT business.

So when one talks about growth, it's about 2 bits. It's about very much sustaining that which one has, as well as growing into new and it's doing both of that.

Now turning to Wholesale. Wholesale -- underlying revenues grew in transit was down 1%. So reasonably stable. I mean, we did see the effect of things like broadband lines migrating to LLU and that affected revenue. But I think the issue very much is the EBITDA, which was down a few percentage points more than consensus. And I think we paired [ph] our expectations.

Now why was that? Well, first of all, there was an impact from some regulatory decisions covering -- there's a number of small ones, but it pretty much all went to the same direction. And that's not very much we were aware of but it has affected the year-on-year profit.

Also the rate of broadband migration to LLU was quicker than we had expected. And you see some benefit of that in Openreach, but it, particularly, year-on-year basis has a significant effect on the Wholesale business.

And also the managed network services contract. The migration costs are a bit higher and taking a bit longer. Now I want to be clear, again, these are still profitable contracts, but we are, in cases, running 2 networks -- or expensive underlying services. So there's due running costs there, which is costing us a bit. And we do expect issues, as we've mentioned, to have an impact on wholesale for most of this year. But as we said earlier that will be offset by, I think, stronger than expected performances in the other parts of the business.

Now turning away from Wholesale, over to Openreach. Openreach revenue was up 5% and that actually -- I think for the first time ever, both internal and external revenue in Openreach group, and that's the highest overall rise since formation in Openreach. I think this is a sign the investment is starting to deliver. Bear in mind, this time last year, was a lower quarter, so that does flatten the numbers. But I think it's a very solid growth number.

Net operating costs were up 4% and that reflects a lot of engineering activity to do this particularly on provision. Also, I think some higher leaver costs. So that balances it out a little bit. And in terms of growth indicators, very pleasing to see, another quarter of copper lines growth. The chart on the right-hand side, we show -- actually shows the 12-month position for copper. And now, we're at the stage for over the course of the year as a whole, copper has grown, 3 quarters running now. And now, that offsets the decline we had in 9 to 12 months ago. And if you look at that chart at the extreme left-hand side, quarter one in 2009, '10, we actually saw almost 500,000 decline in copper, so that's a big turnaround and it does really show, I think, about the way that people are valuing broadband and valuing fixed line broadband.

And I think they'll value even more with fibre. And we went through 5 million premises now passed with fibre and in terms of overall take-up, I think some encouraging signs. It's still early days. But 500 cabinets, and the cabinets represent, of course, a fairly small area, but now where are seeing over 500 cabinets with over 10% fibre take-up. So it does show, it does have absolutely an attraction. That attraction will build over time and very much, both from a cost and delivery point of view of customers, going pretty much according to our plans.

So in summary, in our view, this was a pretty uneventful quarter overall which given, I think, some of the tribulations in the sector, is not a bad thing. We said for the year to expect 0% to 2% revenue decline. And so therefore, you can take from that, we expect revenue trends to improve through the balance of this year from the minus 3% underlying in this quarter.

In terms of line of business trends, as I mentioned earlier, I think I expect some of the same trends, somewhat stronger performance and the rest of the group offsetting a bit weaker in Wholesale.

But overall, and this is the important thing, the Q1 results very much adds to our confidence in delivering our outlook. And that outlook is to get to 0 to minus 2% on revenue, underlying revenue, to improve EBITDA, to improve cash flow. But as we always say, no presentation from BT nowadays would be without it, there is always more to do. And for the rest of the year, we'll absolutely be doing that.

Thank you very much. We'd be delighted to take questions, but I'll return you to our coordinator.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Andrew Lee, Goldman Sachs.

Andrew Lee - TD Newcrest

I've got 2 questions, one on Global Services and one on retail. In Global Services, you talked cable [indiscernible] was but it's has had weak results in the U.K. corporate market and the latter blames more aggressive BT pricing than expected. Why do you think you seem to be currently winning in this apparently difficult market? And are we missing that you've reduced your cost base significantly which is enabling you to price more competitively? Any color on that will be helpful. And then on retail, just earlier, Talk Talk was highlighting on their call that customer churn is starting to significantly reduce. Are you seeing any impacts on your customer intake?

Ian Livingston

Right, I'll pass to Jeff about U.K. corporate in a second. But just to give you my overall view in that, we're doing better. I mentioned, however, our profitability is increasing in the U.K. So it's always strange the way people sort of want to blame other people for things. We think most of life in business is about self-help or self-harm. And in our case, we weren't as good as we could and should have been, I think, in the U.K. a few years ago, we lost some business and we're starting to win it back. And so I think we're doing better. I think our propositions are stronger and we're doing a better job, not as well as we intended to do going forward. But Jeff, would you want to talk about the U.K.?

Jeff Kelly

Yes. I think probably to mention #1 is we are more focused on certain aspects of the portfolio, U.K. products being one of those because it's our core business. Cost improvements there have helped us, I think, in the competitive situations, where we price more aggressively. We've also changed the sales plan this year. We have implemented new sales plans to emphasize TOV less and revenue growth year-over-year and new acquisition of business in the U.K. more. So you might see a mix in our TOV there. But we're for all intent and purposes, we're going after revenue growth and gaining back share that we've lost. I think also some of the infrastructure improvements that we're making in the U.K., we're also bringing that for our product portfolio and that's helping as well.

Ian Livingston

Yes. And we are driving -- and the aim, as with all our business, drive profitable growth and this is good so you'll get profits increase. I'll ask Gavin if he wants to say anything about U.K. broadband market. Bear in mind, guys, it's 4 weeks since we reported the results. So we're not going to comment on what's happened in the last 4 weeks in the marketplace. You'll just have to wait and see the joys of the next quarter as to how we performed. But, Gavin, do you want to say or address the market just generically?

Gavin Patterson

Yes, sure. I think the Talk Talk comment mentioned towards the end of their quarter that's seen an improvement in churn. We haven't seen any an impact on our ability to acquire customers be it from Talk Talk or anybody else in the market. Acquisition remained strong through May and June on both brands, both BT and Plusnet.

Operator

Next question is from the line of Robert Grindle from Deutsche Bank.

Robert Grindle - Deutsche Bank AG

The trade pass has suggested you are upgrading your network to cope with broadcast IPTV. Is that right? And would you be able to get rid of the digital terrestrial multiplex at some point? And then secondly, please, what is the latest on the duct and pole trials and the prospects for any agreed reference offer anytime soon?

Ian Livingston

In terms of -- Multicast is absolutely on the roadmap as we said, doing that instead of DTT. I think that's as well as -- I think the main broadcast channels probably will be best run as broadcast but there'll certainly be other channels, linear channels which we provided over wires effectively. And it gives us real optionality and, in the fact, the optionality to combine different types of offers. What we've seen generally among customers is things that they don't have to watch live, more and more they're not -- they're watching on-demand when they want to. But clearly, things like sports and sort of events like X Factor, they want to watch live. So I think the U.K. is in a very interesting position. It seems and I've talked to a lot of technology companies around the world, they see the U.K. in this way, which is that combination of DTT, fibre, coming together. And it's one of the reasons they're very interested in the new view. On duct and pole, I will ask Liv to comment in a second on it. I mean, we are working hard to on the duct and pole trials. I think it's-- I think the question is, can we come to an agreed reference of -- we will raise our pricing off our cost base. And we've already said our pricing is better than European average. I can't speak necessarily for whether that fits into our other business plans but what certainly our reference offer cannot do is to solve other people's business plans under economic. But Liv, you want to say how it's going?

Olivia Garfield

Yes. So what we said we'd do is that we would for people to trial with us. We've got 3 parties signed up to trial and we're going to actually receive the terms from most here than recently. We've got those terms and we're waiting for them to begin the actual dig. So they're surveying. And as we've said all along, the state of duct in the U.K. is not exactly perfect. And some of the early surveys shows blocked up to people now surveying new roots. So that's happening at the moment. We would hope that they would begin to do the actual physical dig activity maybe even averted over the next couple of weeks. And as soon as we've got early results, we will issue revised prices as we've always said. So I would say, certainly not before September but I would imagine early September is when we'd hope to have the results from those trials and we would then issue some revised prices.

Operator

Next question is from the line of Paul Sidney with Credit Suisse.

Paul Sidney - Crédit Suisse AG

I just have 2 quick questions please. S&P recently raised you to BBB. I was just wondering then how should we think about how that impacts your thoughts on distribution going forward and how should we think about any particular timing on any communication you make on distribution following that announcement? And secondly, very hypothetical question. But if the triennial review on pension scheme at the end of the year decide that your scheme is in surplus? Could you just confirm that the tougher payments would stop immediately from that point?

Ian Livingston

The danger with hypothetical question is you might give real answers. I think it's too early to speculate as to what might happen on the triennial. We've got to see what happens there. In principle, we'd won't pay additional contributions into a surplus scheme under that share of valuation. I would find it difficult to understand why one would. But I think as you said, we're talking hypothetical questions at the moment. So that deals with that. In terms of the BBB grade, I don't want to tell you what I think of that. We are expecting to receive it at some point. We never should have gone down in the first place. And our rate remains to be BBB, BBB+. It's positive that S&P recognizes, I think, the financial strength of the company. But it doesn't really change what we said in May, which, people can look forward to progressive dividend. We also have to be clear on the pension. But we have a very well-covered dividend on one side and we recognize that and we're very confident of our future. We recognize that. And we'll also be prudent, prudent guardians and et cetera. But the shareholders certainly, in the meantime, whilst we get clarity on some of these points, can look forward to progressive dividend. Tony, anything you want to add? No. Tony is nodding and saying, he fully agrees to that. So we'll take the next question.

Operator

Next question is from the line of Wilton Fry, Merrill Lynch.

Wilton Fry - BofA Merrill Lynch

I have 3 interrelated questions, if I may. Well, all on the same subject. If you can give us some color on the amount of overlap between your fibre rollout and the cable footprint? Secondly, do you expect yourselves as a BT retail and annual wholesalers to ultimately take shares from cable given what it does to effectively to speed and price relative to Virgin? And thirdly, can you give us an update on any conversation you're having with Sky around wholesaling fibre?

Ian Livingston

Right. On the last one, I don't think it is very reasonable for us to give an update on another company's discussions with us. And I believe Sky are announcing tomorrow, so best ask Jeremy. I'm sure he will be far more willing to give you an update on his company than I should. And on share, I don't want to predict the future but we can look at last quarter and that's exactly what did happen. We did take share from fibre by the lot. For every customer fibre lost in broadband, we gained 20 on our network. So that was a pretty clear net gain. And effectively, we're seeing that happening over quite a long time. Who knows what's going to happen in the future? We recognize cable is going to be a difficult competitor. But as I said, we are gaining share from cable and quite well last quarter. In terms of fibre and cable overlap, Liv, anything you want to say about that?

Olivia Garfield

I mean, we went to 3 different areas, if you remember, in our early fibre deployment. We decided to try some rural as well as just urban. We also went to some of the big urban city areas. And then we also said, we'll try to market towns. And I think, so what you can expect in our early phases is where we're typically in the urban areas, there's very strong crossover, and in terms of dense populations. Clearly, when we're trying out places like market towns and more rural locations, then it's just us. So it's a bit of a mix for the early days. As time goes on, as we build up towards the 66%, then we've taken learnings from that. And I guess, we announced as you know, kind of about 1.5 years in advance and have used the fast-forward for the announced phases, there is a higher crossover going forward with some of the cable areas, it's by no means a perfect match, because we believe that we can take different customers on a different journey and that's the path that we're on.

Ian Livingston

Yes, I mean, it wasn't an apology. But I think I used the word fibre when I meant to say cable in terms of relative market share. I saw the look of aghast around the table, so I must have used the wrong word. But I'm sure that you knew what I meant.

Operator

We'll take our next question. It's from the line of Nick Lyall from UBS.

Nick Lyall - UBS Investment Bank

Just a couple questions on the consumer situation, please. Because the Sky's comments and also a weak consumer, have you seen any notion at all in your churn or any of the numbers, that pricing may now be difficult to increase for the retail business? And secondly, on the consumer, any effect at all on the fibre plans or take-up? It doesn't look like it but given the extra price of the product, have you seen any effect at all?

Ian Livingston

Customers are looking for value and they see value in the BT product. It would appear as they should do because what we've done is put a lot of value into our product. One of the things I want to be really clear about, because I know some people seem to have misunderstood this, that Plusnet represents well under 1/5 of our net adds. So whilst prospect is a very good, very price worth, cheapest standalone product. Actually, we're seeing the vast majority of the increase in our base coming from BT Total Broadband and the numbers speak for themselves on fibre. And we are pricing fibre very aggressively, quite intentionally, because we want to get people on fibre. We make a better ARPU from fibre because people are choosing the higher levels. So what you're seeing is sort of pricing fibres is very comparable with a top range of DSL. But actually because of the mix, we're seeing an increase in ARPU. And of course, people are choosing bundles and you can see what's our summer sale offer just now, Gavin?

Gavin Patterson

GBP 16 for broadband and all-you-can-eat, of course.

Ian Livingston

So a bargain and those things are tough in the city. So GBP 16 for fibre and calls -- for broadband and calls. That's one to go for and in all seriousness, these sort of promotions where bundling things together seem to be having an impact for people. And they also like, I think, to see the price certainty that comes with a lot of these things. It includes things like 0870 and 0845 calls unlike a number of other players, and I think that's also playing to our strengths. So thank you.

Operator

Next question is from the line of Steve Malcolm from Evolution.

Steve Malcolm - Arete

I will just go for 1 question if that's okay. On the cost base, I take on Tony's points about process reengineering and other stuff that's driving cost control. But I guess that biggest driver is still the number of people you employ and what you pay to them. And the sort of standout cost number to me was the direct cost, which should be running sort of flat year-on-year. And they were down 6% this quarter, which is clearly a very good performance. Could you just give a bit of color into how you achieved that? Because as far as I can see, there's no composite on the scheme. You have 3% waived settlement, you've got rising NI contributions, I guess offsetting that, you've got some pension cost reductions. So if there's a little pension shift it's going to be helpful just to understand the dynamics behind that cost reduction.

Ian Livingston

There is an element of which the indirect and direct sort of numbers bounce around a little bit depending on whether we've got temporary people in to go and help with wax that and things like that. And I think some of the underlying performance last year in direct was somewhat hidden by increased pension costs for instance that aren't the case this year. And 2, I'd like to agree with you. We like to look at total labor cost when we look at things. We did pay people more, I should add. So it's not wage reduction, quite the opposite. But it's that greater efficiency. But Tony, do you want to talk a bit more detail?

Anthony Chanmugam

Just a couple of things, I think. If you look at our total -- our gross direct labor cost, they go down between 1% and 2% each quarter, sequentially. It will, as Ian said, bounce around because in some instances, we're insourcing work from our indirect labor. In some instances, we're renegotiating rates on indirect labor and passing that through in terms of direct labor on transfers. But I think the key point though is, and Ian said this directly, if you improve the customer experience by improving the way with providing customer service, taking out the cost of failure and reengineering the processes, there are plenty of opportunities. And the key point here is retail has been doing it for 6 years. And Gavin and I have a number of discussions, there are still further opportunities within retail. And while we're not into targets hitting now, you see, he's nodding his head here. The reality is these cost reductions will continue, but don't get fixated by direct labor costs. Don't even get fixated by labor costs because they will be swing items between the different headings.

Steve Malcolm - Arete

Yes, but I mean, is it just absolute number of people in the business going down? Is it a mix thing? I mean, you've obviously got the headwind of the salary increase because it feels like the lever cost last year was down very sharply. The rate of reduction should be kind of slowing, but yet you're clearly delivering very good numbers though. Is that -- I mean any more room there?

Anthony Chanmugam

Look, there will be continuously further reductions on our total cost base. The key piece here making about direct labor cost is we're not fixated about the number of people in the business. The key piece here really is the value of what those people are providing, value for money. So we're focusing on ensuring that the people that we've got within the business deliver value for money without focusing specifically in terms of the number of people. In terms of your question, is this going to continue? We will continue to reduce our total cost base. Don't get fixated by direct labor.

Steve Malcolm - Arete

What you're saying is kind of mix. The absolute numbers may not reduce much, but there's people that are not producing that there maybe high cost to coming out. Is that fair?

Anthony Chanmugam

Yes, absolutely.

Operator

Next question is from the line of James Ratzer from New Street Research.

James Ratzer - New Street Research LLP

I'd ask 2 questions, please. The first one is just regarding your overall revenue target. You said in Q1 that you are running a bit below that target. And you've mentioned that the bank holiday had a bit of an effect on that. I was wondering what other areas you could talk about that gives you confidence that the rate of growth is going to accelerate through the year. What kind of specific items we could be looking at to drive that? And the second question I had was just regarding your Infinity net add. It clearly had a very strong performance in the quarter. Are most of this adds coming on at your new discounted packages of GBP 18 per month. I'm just trying to get a feel of whether Infinity is actually accretive to your existing ARPU at the moment.

Ian Livingston

It is accretive to our existing ARPU. We're seeing quite a bit higher ARPU on Infinity. A number of pounds higher per customer. I will give you the number just yet, but suffice to say we're very comfortable with that. So Infinity is fine. In terms of revenue, we're expecting improvements. I think Global Services -- I think as we said to you because I think some of the stuff into revenue and the way some of the contract recognitions happen. Q1 is very consistent with what we expected so it's not -- from our point of view, Q1 numbers are no great surprise in terms of revenue. And actually, they are no great surprise in terms of pretty much bang-on consensus. So this is very much our, as stated, initial goals, very much expected, and we would expect to see through the course of the year an improvement. And, of course, you would want to see that as well. And I can't guarantee that means it's absolutely smooth quarter-by-quarter-by-quarter. But you would absolutely want to expect to see that because the following year, we're moving to 0% to 2% plus. So you need to sort of have your exit run rate going in the right direction. But Tony, I think -- so no, it's very much stated goal. The one other thing you got to look at with all these numbers when you talk about year-on-year numbers, you got last year and you got this year. And within a quarter, you can get some volatility in trying to get these things down to the nearest 0.5% as a degree [ph] of accuracy that I think all of us probably would struggle with direction of travel is absolutely right and we're very comfortable with the guidance we set out.

James Ratzer - New Street Research LLP

And do you think the driver of that improvement would come from Global Services?

Ian Livingston

Well, certainly, it'd be one of the drivers of that improvement.

Operator

Next question is from the line of Carl from JPMorgan.

Carl Murdock-Smith

Carl Murdock-Smith from JPMorgan. Just a quick question on YouView. Last year around this time, there were lots of Sky Sports adverts from your sales, advertising a BT Vision package. And the message was very much that you are going to be here, year in, year out, for the long haul. Is 2 weeks until the permanent shift [ph] starts the advertising has definitely been more muted this year. I was wondering if a conscious decisions to kind of hold off until maybe Sky maybe start regulation and until you have YouView? So any color around that will be great.

Ian Livingston

I think we're holding off overall with Vision. I think that's an important thing. We did have to establish ourselves as being someone who offered sport, and that was important. I think as we talked about last year, we didn't think that the necessarily that the execution was probably outstanding in there, but we did have to establish ourselves as really capable, which we did. Critically, what was important was the overall Vision and in fact actually overall broadband. And a really big tick in the box for broadband mean, as I said, this quarter, including cable, best ever. In terms of Vision, it'd be very solid 24% growth and that compares very nicely with other TV companies. I think you're going to see continuous steady growth. New propositions coming in, which we're advertising for some new essentials package. There's going to be further enhancements to the service. As you see when YouView comes in, that will -- I think that will present new opportunities. And though we have huge amount of marketing spend effectively from the YouView partners as well. One of the things always been tough with Vision is the degree we're on our own in terms of explaining to customers what it is and what it does. When they got it, they really like it. But with YouView, you have BBC, ITV, Channel 4, Channel 5 all in the mix, and that's been very encouraging, very much in the way it has been for YouView. But Gavin's right, I think. That's pretty much what we are. So continuous steady progress is what we are looking for to YouView coming around.

Operator

Next question is from the line of Andrew Beale from Arete Research.

Andrew Beale - Arete Research Services LLP

You saw a decline in unbundled loops this quarter. Can you talk about the drivers of that trend change including, obviously, how you see Infinity impacting your competitors?

Ian Livingston

Yes. Well that trend change is made up of 2 factors going in different directions. The big factor that caused the trend change is that Orange have moved on to wholesale to run their broadband service. And I think you're seeing significant improvements in service as a result of that. So that's the changes going on at the moment. Against that, actually, we've seen continued quite strong movement to LLU by other providers. So it's sort of ex-Orange, you will see slightly different, and of course, the other factor I should mention in terms of overall numbers is the success of BT retail. So actually what you've seen is the key non-LLU companies, business doing particularly well. So I think that's the key changes overall in the mix.

Andrew Beale - Arete Research Services LLP

And how much was the Orange effect and the LLU numbers this quarter roughly?

Ian Livingston

I'm not sure. We're going to add -- we're desperate to give individual companies. But actually, it was a big movement. I mean you know the Orange is not a base and most of the base has now migrated. So it is quite significant, measuring some hundreds of thousands in the quarter, a few hundred thousand in the quarter.

Operator

Next question is from the line of Guy Peddy from Macquarie.

Guy Peddy - Macquarie Research

Just a quick follow-up question to earlier. So how many of your 200,000 Infinity customers are getting the high-speed broadband for the first time? And secondly, a bit cheeky one. On the Global Services, I mean, you talked about new business sign-ups being actually accelerating the revenue trend. Can you talk about the margin profile of new business relative to retention business?

Ian Livingston

In terms of Global Services, that's a good question. All business we've got goes through a clear return processes, and I think it's one of the strengths of our processes now that new business we're taking on is, we're very clear about. So I think there's not particularly any contract we can give at that. In terms of Infinity, how many are new to high-speed broadband? Well, I think most of them have been new to high-speed broadband on the basis that unless they were one of the very few customers that are actually on Virgin's high-speed network, they'll be new to it. But I think too many of those on Virgin's networks, so I could guess that almost all of them are going to be new to high-speed broadband. And they really like it and they're seeing very high speeds, particularly one of the things we're not seeing that they're particularly liking is upstream speeds. The fact that they're getting upstream speeds, 10 megs plus, is actually a bigger multiple than lots of downstream speeds. And the world we're in today is becoming a lot more symmetrical. But in terms of being new, what your question was, are they new to us overall? We said about 1/3 of the customers now coming onto Infinity are new to BT retail.

Operator

Next question is from the line of Simon Weeden from Citigroup.

Simon Weeden - Citigroup Inc

You mentioned earlier back on the fibre questions really that you see 50% better growth in areas with fibre, but not within Market 3, I think that was my understanding of what you said you. Can you just clarify what you mean by growth there? I presume you mean gross adds. But I'm not sure if that's...

Ian Livingston

Net adds. So if you said that we grew, let's just say, on average by 5% of our customer base in Market 3 in that particular quarter, it will be 7.5% in the areas with fibre. So that's what I mean. I'm sorry. I apologize I said that clumsily, but you got exactly what I meant.

Simon Weeden - Citigroup Inc

That's great. And the related question was just -- I just wonder if you could describe in broad terms without obviously giving out away any commercial secrets quite what your marketing process is. I imagine there's a point in which a neighborhood is fibre-ed up and that fibre is released to the marketing division by the network. What's the marketing process there and would you say that your retail marketing folks have learned how to sell fibre against cable over the last -- for the few months of practice and how would you describe that?

Ian Livingston

Well, we've actually been running -- if you actually look at our net adds on the base of fibre that existed, last quarter, I commented actually pro rata. We were selling 6x as many fibre connections pro rata as cable were. So I don't think it's the case of learn [ph]. I think we've been doing a good job from day one. And in terms of our marketing, I think a couple of layers, I just say, is first of all creating an overall brand for Infinity is important and we've been investing for a while into brand building. So we find customers asking us for Infinity now. It's a bit like -- it's become the generic name for lots of fibre and that's important. That was a very conscious decision. You can get fibre from anyone. You can only get Infinity from BT. And I think that's kind of great [ph]. And then what we overlaid out with the mixture of direct mail, local marketing to reflect and things like pure pre-registering and showing their interest and just general advertising. I think it's very much a multilayered approach. And word of mouth is also effective because tell you, when one person has it, they are talking to others. We're still in early days so be clear. We're talking still a fairly small proportion of our base, but what's encouraging is the rate of growth has increased and it certainly seems to make an overall impact on our overall market share in our retail business.

Operator

Next question is from the line of Chris Alliott from RBS.

Chris Alliott - RBS Research

A couple of quick questions for me. Firstly, in wholesale, I wonder if there's any chance you could give us an indication of how big those migration costs currently are at the sort of total cost base, I guess in the quarter about GBP 700 million of cost base. I wonder what those migration cost might be in terms of percentages, just thinking about how that plays through for the rest of the year. And then secondly, just in terms of your confidence on the top line. I'm just thinking about how that sits against sort of concerns of a weaker consumer and a weaker economic environment. Do you feel pretty insulated against that weaker environment to give you the confidence on the revenues?

Ian Livingston

On wholesale, as we've discussed [ph], one thing's you got to bear in mind doing, we're talking about differentials of a few percent here against expectations. So the answer is there's some million, single-digit millions high than we expect it per quarter and it will carry on for a few quarters. We're not talking just low-single digits of that. That's one of the things when we're talking about year-on-year movements and whether you're talking about, I think, consensus or something like minus 7% on profits and we came in at minus 9%. It's fairly small parts of it and, of course, it's only 1 part of it. So it answers low-single digit that will carry on for quite a few quarters. In terms of top line, I think it's very dangerous for any CEO to say the economy has no effect in our business. Some of the countries we operate in, we see, it absolutely creates more headwinds. But what is important for BT overall and remains absence of meltdown is what we do ourselves. And if you take something, take areas of our business, particularly we've got low market share, enhancing our market share and creating new products and services is more important than just the market growth. So are there headwinds? Yes, there are, but also we do expect headwinds. We're not banking on a massive wonderful economy, but we think we're exposed also to some high-growth areas both in terms of product and also in terms of global areas that we operate in. We'd love to see a better economy than we are. But in the meantime, we get on and run our own business better and self-help as I said is really important.

Operator

Next question is from the line of Jean François from Crédit Agricole.

Jean-François Paren

A very quick question. Just currently looking at your net debt-to-EBITDA level, which is extending at first, 1:1, 1:6 now something around that for the last 3 quarters in a row. I'd like to have your views on where you would expect, are you comfortable with that level or is it something that you think you should further improve?

Ian Livingston

Yes, I think that when you look at our net debt-to-EBITDA as the rating agencies look at it, you got to remember we've got some operating leases and also pension as we added on. To be honest, we're not particularly targeting a net debt-to-EBITDA level. It's very much more we want to be BBB, BBB+, and we know full well with the rating agency, different environment sets at different levels. We will see our debt reducing overall. I mean if you look at the cash we're generating and you look at what goes into pension schemes, payout dividends, there's a decent difference. So I think we will have a lower level of debt. But actually, we got lots of room, we keep on saying this given the confidence in the future cash flow to pay increasing dividends, to continue sort of strong investment profile we've got and continue with the pension scheme and pay down debt. So it's not an either/or in any of these things. But I think we're a pretty conservative management and you'll see a gradual, if you look at long-term trend, I think it will be a gradual decrease in that ratio.

Jean-François Paren

Does that mean that the main variable that may affect that level is actually the situation on the pension scheme?

Ian Livingston

It is one of the inputs. I was just making a point you can't just look at pure debt-to-EBITDA and so on. You have to look at some other factors. Something you just want to add, Tony?

Anthony Chanmugam

Yes, the rating agencies, as Ian said, add to the debt number, the operating leases, as well as the pension deficit. The range they want to try and operate on, and they calculate it differently, is probably about between 2 and 2, 2.5:1 to try and get a rating between BBB and BBB+. We'll operate within that range, which means there're still further things that we need to do in terms of improving our ratio. And that will be basically in terms of improving the EBITDA as well as reducing the debt.

Ian Livingston

Yes, and as Tony said, that one of the best ways to improve the ratio is to improve EBITDA, and that's what we also said we would do.

Operator

Next question is from the line of Jerry Dellis from Jefferies.

Jeremy Dellis - Jefferies & Company, Inc.

Two questions please. First one on retail revenues. Consensus has got an improving revenue trend on retail, minus 3% penciled in for full year this year, minus 1% for next year. Given that you've been tracking in the range minus 4% to minus 4.5% for the last sort of couple of quarters, I wonder whether you're still anticipating a sort of an improvement in that trend and what quarter do you think we could start to see that kick in? And then the second question is just on Infinity. I'm wondering about the sort of 70,000 adds that you posted in the last quarter. Do you feel you're fulfilling all the demand that's out there or is there a constraint on your ability to sort of connect consumers in volume. And if there is, I just wonder whether you could sort of explain what that might be and when that constraint might loosen up.

Ian Livingston

There's no, over time, a big constrain on Infinity. And so I don't think that's the major factor. I'd love -- I look forward to there being constraint because that means we're doing a lot more. But certainly, we are -- if we have a sudden surge in demand that could be an issue. But I think over a long -- over any sort of 3-month, 4-month period, you can react to pretty much same demand level. So for the moment, no, I think we're in pretty good shape in terms of being able to meet. If there was much higher demand for fibre, generally across our network, then I'm pretty sure would have to react, but we're not going to carry lots of spare engineers. We don't need it. But I think with the notices submitting what we can do. In terms of the company trends, individual level for LOBs against consensus I think, as I'm being told by my Investor Relations man on my right, it would be inappropriate for CEO to give further guidance over and above what we have done. We said the trends are going to be improving, and that remains the same.

Operator

Next question is from the line of the Nick Delfas from Morgan Stanley.

Nick Delfas - Morgan Stanley

I wonder if you could give us an idea when do you think the first BDUK tender will take place and if you have any indications who maybe interested in that besides yourself? And I don't think you got it on the call, but have you got any updates on YouView launch timing?

Ian Livingston

YouView launch timing, I think we'd be looking at spring. So that's under a year, not the standard answer, but under a year. So we're making progress and I think [indiscernible] chairman has certainly helped drive that forward. On BDUK, a little bit of that is -- we'll see but I'm sure Liv can give a little bit more detail because there has been some real progress in BDUK in funds being allocated but you want to talk about some of the dates. And I mean in a little bit, you may have to ask BDUK who the competitors are, we could probably only speculate out of guess.

Olivia Garfield

Yes. So I think there's 2 that are advancing quite well from BDUK and one that's kind of slightly outside the process, but it's becoming badge to BDUK and that's Wales. So then the 2 that is bouncing at speed anyway is the North Yorkshire bid and the Cambria bid and both of those are -- they're in dialogue. They're beginning to have financial conversations with the various business. And as I understand it, there are properly 4 to 5 bidders being selected moving to the PQQ stage for each of those. Wales is probably the one that was outside of BDUK that has now has, as you know, that GBP 50-ish million handed over or allocated over the course of the last couple of weeks. So I think it's becoming badge, probably the fifth of the early pilots and the decision making there is expected before Christmas. So it's kind of like I'll-leave-it-to-Christmas decision making situation.

Ian Livingston

I mean I would say generally with regional bids, I mean, one of the things you see as a big difference in our performance for instance in Northern Ireland and Cornwall in terms of speed of the actual delivery compared with a number of other areas in the U.K. where money was put in, another people will step forward and claim to do the same. And frankly, the exits is not benefiting. They're not getting service and I think people are seeing that. With that being said, and I'll just say it right now, I don't think we'll win every BDUK bid. I just think that is the way of things. But we think our ability to deliver is clearly very superior and we've been doing this for a while. Some of the stuff is not straightforward. And the experience and capability and comfort will count for quite a lot in delivery. So we'll bid, looking for it. But I think just to be practical, if there is a dozen bids, we wouldn't win all of them.

Operator

Next question is from the line of Stuart Gordon from Berenberg.

Stuart Gordon - Berenberg Bank

A couple of questions. First of all, you spoke about improvements to your network that could double the Infinity speeds and there was a few processes that you had to go through. Could you give us an update how they are going? And secondly, just kind of a follow-up to an earlier question. Clearly, chasing revenues and Global Services, now you do say that processes are in place to ensure that they meet to return hurdles. But the same could be said about Global Services when you were growing revenues aggressively in the past. Could you just give us some guides on what process changes you've made to ensure the same pitfalls don't befall those revenues this time?

Ian Livingston

I'll ask Jeff to comment on the -- clearly, we're not clearly chasing revenue. We're clearly chasing profitable growth. That's for sure. And maybe I'd ask you to look at our profit and cash flow performance of the group to give you a general feel for maybe a change in BT and how it delivers. But Jeff, do you want to talk about some of the processes we go through to deliver profitable growth?

Jeff Kelly

Sure. The process we use is a, it's a blend of EBITDA performance and cash flow performance. What areas of the business we're selling into, whether it's geographic, the overall risk profiles, and we look at deal quality in those parameters. Over the past 2 years, we've implemented common solution centers. We have 3 of those around the world. And what you get out of those in the more complex deals, and they all go through that, are more consistent solutions that we can rely on and that have a less risk profile to them. And then an account start-up unit that gets us more consistent coupled with what we call an IRT team that looks at deals once we implement them and it's an independent review team. So all that comes together in what we call our overall risk management approach when we implement deals. And I'd have to say I can sit in here, there's probably 3 that I can remember off the top of my head where we chose not to pursue because those things didn't come together.

Ian Livingston

Thanks, Jeff. On the van pan [ph] chain, first of all we have to agree this with industry and we're making good progress on that. It's still being assessed in the industry. Then we have to test it, roll it out and be able as we say in our terms consume it. All of that, we have a good degree of confidence and lessens the major problem we haven't expected so done by the end 2012. And so I think it will be -- you'll see next year, we'll be looking at not just downstream speeds going up to 80 megs, but I think also very important, upstream speeds going 20 megs and maybe even slightly higher than that. And that would be a multiple, for instance, of the cable network going upstream speeds. And we are seeing, as I said earlier, customers find that very important. So I think we've got 2 more questions so we'll take 2 more -- take 3 more questions -- 2 more questions. And we'll take those 2 more questions, then we'll be done. Okay, penultimate question.

Operator

Next question is from the line of Maurice Patrick from Barclays.

Maurice Patrick - Barclays Capital

We focused a lot on cost reductions, whereas in over-mix this quarter, your cost went up by 4%. Just curious to understand whether that's all fibre related, the element to which the cost increases is external or internal cost. And also where we are on the cost time to install on the Infinity base?

Ian Livingston

Yes, let me ask Liv to comment why our cost went up. It's actually a small volume, particularly engineering volume as being the key thing. Also some elements of clearing we did, we have been bringing down of what's back and that's been important. And yes, we have -- we are doing a lot of Infinity. But Liv, do you want...

Olivia Garfield

I mean the other dynamic is the extra levers, so we just lost-track some lever payments during the course of the quarter. And that we feel that it's just as well, and that would definitely help us going forward. But I mean the volume is a major increase for us. That's a good new situation. So if you're going to grow copper, you're going to spend more volume and it's a combination of those couple.

Ian Livingston

I don't know -- I think you've got the honor of last question.

Operator

Next question is from the line of Adam Rumley from HSBC.

Adam Rumley - HSBC

I just wondered if you could comment on the progress you're making with fibre to the home. I guess you're now about 1/3 of the way through the complete roll out of fibre. I just wondered the kind of timescales you think you have at the moment.

Ian Livingston

The answer is we are making progress, as Liv -- and it's tough, tough going. I've got to be clear with that. But we're making progress and more areas being rolled out. And clearly, as we go on fibre to the home, we'll represent a bigger proportion of the mix than it does currently, but, Liv you want talk about the rollout areas and how many areas we're rolling out to and, et cetera?

Olivia Garfield

Yes. So what we decided to do when we're doing fibre to the home is we could have just gone for one type of area and we could have probably got some high numbers on the board quite early on. But what we've realized is that our view is if you're going do $0.66 of U.K. and beyond, ideally, it will be in the BDUK bid as well. Then clearly, you need to have a formula that you can do at scale across U.K. in every different type. So we chose to go for different private areas, so York, Leytonstone, Cornwall, St. Austins. They're all very different places and that gives us a chance to see what FTTP looks like in different parts of the U.K. It looks different, but it looks tricky I guess in lots of 'til you begin to work, have the perfect process. And I think we're still working out that perfect process, we've made tremendous progress over the course of the last 6 months, I would say. We're working it out. At the same time, we're making sure that we're clear on the fact our customers want and speed fibre now, which is why we've been making sure that we can get back to ETC as quick as possible across the U.K. A couple of recent innovations we've made is, and these might sound not very exciting for the rest of you, but they're very exciting to me, is that we've got a new spade. And this new spade allows us to dig just literally next to a pole and it means if you're doing a pole version of FTTP, you're actually able to do it much quicker because you don't need to do a separate civil dig. It can be done there and then by the same man. This special spade can cut through concrete and is a genuine innovation in the marketplace. So that's one I highlighted as a highlight of my quarter. And the second there, I think, we've worked out is you can also do the same areas, you can do a very good mix for FTTC and FTTP. And originally, we would like to provide one or the other. We've worked as a much clearer, much more efficient financially and effective process for this operation to be able to do quicker fibre in areas by doing a mix on a street-by-street basis. And we're doing that in Cornwall right now in conjunction with the deal we've got down there. So there are a couple of innovations for you.

Ian Livingston

Well, that just goes to show how quickly someone can move from the strategic [ph] director to her special spade. And I think I'd also say, you've got to remember, of course, with FTTC, bringing fibre in fact within about 400 yards of a home. And that also presents some future opportunities that we will see, we will see that greater mix.

So with that, thank you very much everyone for the questions. Thanks for being on the call, a busy time. And can I just finish by wishing everyone a very good holiday if you've not been on holiday. And if you already have, well, tough. But thanks very much and I'll speak to you...

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