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BT Group plc (NYSE:BT)

Q3 2012 Earnings Call

February 03, 2012 4:00 am ET

Executives

Catherine Nash -

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

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

Gavin E. 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

Olivia Garfield - Chief Executive of Openreach

Analysts

Nick Delfas - Morgan Stanley, Research Division

Andrew Lee - Goldman Sachs Group Inc., Research Division

Robert Grindle - Deutsche Bank AG, Research Division

Paul Sidney - Crédit Suisse AG, Research Division

Maurice Patrick - Barclays Capital, Research Division

Stephen Paul Malcolm - Evolution Securities Limited, Research Division

James Ratzer - New Street Research LLP

Saeed Baradar - Societe Generale Cross Asset Research

John Karidis - Oriel Securities Ltd., Research Division

Stuart Gordon - Berenberg Bank, Research Division

Jeremy A. Dellis - Jefferies & Company, Inc., Research Division

James Britton - Nomura Securities Co. Ltd., Research Division

Guy R. Peddy - Macquarie Research

Nick Lyall - UBS Investment Bank, Research Division

Carl Murdock-Smith - JPMorgan Cazenove Limited, Research Division

Fernando Delgado

Adam M. Rumley - HSBC, Research Division

Operator

Hello, ladies and gentlemen, and welcome to BT's results conference call for the third quarter ended 31st December 2011. My name is Buchandra. I'm your coordinator for today. [Operator Instructions] I would like to advise all parties this conference is being recorded today. I'll now hand you over to the company.

Catherine Nash

Thank you, and welcome, everyone. I'm Catherine Nash, IR Director here at BT. On the call today, we have Ian Livingston, Chief Executive; and Tony Chanmugam, Group Finance Director. Tony will start with an overview of the financials for the third quarter and then Ian will go through the lines of business. We'll then hand over to you for questions. In the room with us today, we also have the chief executives from all our 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 on Form 20-F for examples of the factors that can cause actual results to differ from any forward-looking statements we may make. Both the slide and the annual report can be found on our website.

And I'll now hand over to Tony.

Anthony Everard Ashiantha Chanmugam

Thanks, Catherine. Good morning, everyone, and thank you for joining our results call. I'll start by running through the financial results for the third quarter. We've had a reasonable quarter in a challenging economic environment, with results broadly in line with or slightly ahead of expectations.

Revenue in the quarter was down 5%. This includes the impact of transit revenue, which fell GBP 109 million in the quarter. For the year-to-date, transit revenue was GBP 345 million lower. In terms of our more relevant measure, underlying revenue, excluding transit, was down 3%. As anticipated, this was a weaker performance than in the second quarter, mainly due to around GBP 60 million of contract milestones in Global Services, which were achieved in Q2 rather than this quarter. It also reflects tougher comparatives from some of our lines of business as I mentioned last quarter.

For the year-to-date, underlying revenue excluding transit was down 1.8%, which is consistent with our outlook for the full year. We delivered another quarter of growth in EBITDA, which was up 3%, reflecting our cost transformation programs. I'll say more on these shortly.

Together with a small decline in depreciation and a lower interest charge, profit before tax grew by 18%. As a result, EPS of GBP 0.061 was 13% higher than last year. Free cash flow before specific items was GBP 65 million higher, and this contributed to a further reduction in our net debt to GBP 7.7 billion. This is a reduction of over GBP 900 million compared with a year ago. In fact, over the last 3 years, our net debt has come down by over GBP 3 billion.

Turning to free cash flow in more detail. Cash CapEx was GBP 31 million lower than last year, partly due to the timing of payments. CapEx in the fourth quarter is typically higher, so expect our CapEx to upturn in line with our outlook of around GBP 2.6 billion for the full year. Interest was GBP 67 million lower, reflecting our lower debt levels. This was offset by higher tax due to our higher profits and as we return to a more normalized tax position.

Working capital and other were GBP 4 million lower than last year. There are a number of moving parts within this, so I'll just highlight some of the larger ones. Working capital in Openreach was down after we paid later than contracted by some operators. This was largely offset by a better working capital position elsewhere within the group. Our regular pension contributions were also low this quarter. If you remember, we said these would reduce this year after we made some overpayments last year.

Overall, free cash flow before specific items was GBP 65 million higher than last year, with lower CapEx and lower regular pension contributions being the main drivers. Finally, we incurred a cash cost on specific items of GBP 48 million, which relates to Global Services restructuring and the property rationalization programs. The full year cash cost for these should still be around GBP 180 million. For the quarter, free cash flow, after specifics, came in at GBP 586 million, a GBP 71 million improvement on the prior year.

Turning to cost. We reduced operating cost by GBP 314 million in the quarter and by around GBP 700 million or 6% for the 9 months. Gross labor cost reduced by GBP 124 million or 3% for the 9 months. This was partly offset by higher leaver cost, which increased by GBP 32 million, as more people participated in the leaver schemes within Openreach and BT Operate. The amount of labor cost that is capitalized has come down, which meant that overall net labor costs reduced by GBP 51 million or 1%. Other costs have reduced by GBP 655 million or 9% in the 9 months, driven by low transit revenues and as a result of our cost transformation activities.

We're continuing to focus on improving the efficiency of our processes, driving procurement savings and managing our suppliers. For example, we have identified annualized savings of more than GBP 60 million from our reviews of our Consumer sales teams, the development processes for new products and the delivery processes for some of our more complex products. We made good progress in the first 9 months of the year and see scope for further reductions in the next quarter, enabling the right exit trajectory into the next financial year.

Given the progress we have made to date, I want to provide an update on our outlook for the year. There is no change to our revenue outlook, but on EBITDA, we now expect to hit our 2013 target of above GBP 6 billion one year early. We now also expect our free cash flow before specific items to come in at around GBP 2.4 billion for the year.

With that, I'll now hand over to Ian.

Ian Paul Livingston

Thank you, Tony, and good morning to you all. As Tony said, a reasonable quarter, and he took you through the overall numbers. What I would like to do is take you through the individual lines of business, starting off with Global Services.

Global Services revenue, excluding transit, was down 1%. As you will recall, last quarter, we highlighted a GBP 60 million milestone that was achieved in Q2 rather than Q3. And that's worth about 3% overall, and that explains, really, the movement between Q2 and Q3. Year-to-date, our revenue is flat in Global Services, excluding transit, and that hides a number of, I think, variations. We've seen double-digit growth in revenue in Asia Pacific region. We've seen 20%-plus growth in Latin America and the Middle East, so very strong growth in the emerging markets, of course, being offset by weaker performances in parts of Europe, which shouldn't be a huge shock given the overall economic situation.

Net operating costs were down 5%. I think it's more reasonable to look at the excluding-transit number, which was down 2%. And that combination meant that EBITDA was up 2%, and year-to-date, it's up 8% overall.

Our CapEx was up 9%. That number would tend to move around between quarters and reflected capital expenditure on some contracts that we were delivering. Overall, we expect to achieve the circa GBP 200 million of free cash flow for this year that we set out previously.

From an operational point of view, I think a solid order intake, GBP 1.6 billion. It's very similar to last year and better than the previous quarter. In terms of if you look at year-to-date, all of the year-to-date decline in order intake is due to renewals, with new contracts and growth contracts actually being very solid. We have actually seen a reduction in the length of contracts delivering that. And that has some upside, because it means, in fact, for any million pounds of contract win that more does flow into the revenue in a shorter space of time. I think, again, as with revenue, I'd like to highlight the progress we've made in Asia Pacific and Latin America regions, where we said we're investing, and the combined order intake in these 2 regions is up over 50% year-to-date.

Now turning to retail. In retail, Consumer revenue was down 6%. Now that hides a number of improving metrics I'll talk about in the next slide, but one of the reasons for that decline was actually due to the warmer weather. I always get nervous as the next retailer talking about weather, but one of the effects of the -- not having such cold weather is you do get less cold. And about 1/3 of the decline of 6% is actually due to change in weather compared to a very snowy period, in fact, in the last couple of years.

Moving away from the weather to our business, BT Business. Revenue was down 6%. Now all of that, bar a couple of million, was actually due to lower IT hardware sales. That accounted for pretty much all of it. And I think there's 3 reasons why we saw lower IT hardware sales. And that's hardware as supposed to services. One, of course, it’s economic. I think small businesses, it's one of the places first of all that they hold off on making capital purchases. But it's also an active decision by us to move away from very low-margin trade sales, and that impacted our business and will do so as we anniversary this for a few quarters. However, that doesn't change our strategy of seeking to sell to end user customers a combination of IT services, hardware, telecoms of various variety and communications, and that remains our strategy.

Overall, for Retail, continue to deliver operating costs, which have been very important. And the chart on the right shows we're sort of 6, 7 years now into program of reducing net operating cost. And that is coming out very much from efficiency programs, lowering the cost of failure in our business, and we will continue to drive that forward.

Now turning over to the operational numbers I referred to in Consumer. First of all, consumer line loss, active line loss -- that's people who have a line and make calls -- was at lowest level for 5 years at 93,000 reduction. The chart on the right shows that it's a continuation of a trend. Obviously, that's something we would like to continue. Broadband net adds, I think, its fifth consecutive quarter now of over 50% market share and 56%. That's about 146,000 net adds. And Infinity, we're very pleased, over 400,000 Infinity customers now, and we've seen the week-on-week rates in terms of net adds up 16% compared to quarter 2. So that's good, and we continue to drive that forward as the base grows. And BT Vision, another roughly 40,000 net adds on top of the 40,000 the quarter before, so again, doing well. And all of these additions together drives our ARPU. Our ARPU is up 5% year-on-year to GBP 337. So continuing improvement in the metrics in our Consumer business and I think, particularly on broadband, encouraging progress.

Now turning to Wholesale. Wholesale was very much as expected and as we've set out to you. Underlying revenue x transit was down 3%. That's really reflecting the migration to local loop unbundling. Of course, you see higher local loop unbundling revenues in Openreach. But also, this ongoing transition towards IP-based products, and take the Ethernet, and that does effect the margins and does have an impact on the profitability. So whilst the net operating costs were down 9%, if you exclude transit, they were flat. And that really is more efficiency in Wholesale offset by that change in product mix and also some network migration costs on some of our big contracts. Now the network migration cost should be finished in the next couple of quarters, but we will see the continuing effect of the product change for a bit more than that. So that is very much the same picture for Wholesale.

Operational metrics were pretty reasonable. Order intake, good at GBP 340 million in the quarter, and MEAS mobile Ethernet sites continued to increase. And one of the nascent businesses, IP Exchange, we mentioned before, minutes up 50%. So it's transition time for Wholesale, but that's something we can absolutely manage within the overall results of the group.

On the flip side, in Openreach. Openreach's performance, again, was strong. Revenue up 5%, the growth in LLU I mentioned earlier coming through. But also Ethernet, again, it's a flip side a little bit of what's happening in Wholesale. I'm delighted to say, for the second quarter running, mention fiber growth, because it is starting to make a material impact into Openreach's growth profile. Net operating cost up 3%. There were efficiency improvements, but there is a lot more activity going on in Openreach, particularly regarding provision activity and also relating to broadband.

Operational statistics. Well, fifth successive quarter of line growth, and I keep being asked well, why are copper lines growing? Well, there's a couple of reasons. I think, first of all, fixed line broadband is being seen as what people need, particularly if they’ve got high-intensity usage. And with video, you've seen higher and higher intensity usage. But the other thing, and I think it's something about -- let me separate the U.K. from a number of countries across Europe -- is population growth. We are seeing more household formation. And the population in the U.K. is expected to grow by around 5 million people by 2020, and that should help the overall line position.

On fiber, quite another quarter of a number of announcements, I think, on fiber. We have now passed over 7 million premises with fiber, and the speed of the rollout actually is accelerating. "Fiber to the cabinet" speeds, we expect this spring to double them to 80 megabits per second. And we also announced our new product, FTTP on demand. That's basically in "fiber to the cabinet" areas. Near the cabinet, we can actually deliver fiber for those customers who want and need it directly to their premises, and we think this might have some attraction for some business customers.

For most people, the 80 or in fact, I think in the future, "over 100 megabits per second" service we offer through fiber to the cabinet will be fine for a long time. But there may be some, particularly small businesses, who want faster services, and we're testing a "330 megabit per second" service, actually, in Cornwall that will help small businesses. And so we'll offer that on an on-demand basis, and it just really gives the best of both worlds in terms of that fiber to the cabinet and fiber to the premise.

Now over to pensions. On pensions, the IAS 19 net deficit was GBP 4.1 billion. Now that's gone up from GBP 2.5 billion from the last quarter. Now that is despite, actually, the assets rising. So the assets 3 months ago were GBP 35.1 billion, gone up to GBP 35.8 million. So you've had a GBP 700 million rise in assets. So what's happened on the other side? Well, there’s 2 things that have happened.

First of all, on inflation. At each year, we have to take the inflation rate in September and at the end of December in order to work out the pension increases. And there were some spikes in inflation, and that impacted it. But also, and this is the thing about IAS 19, we are seeing, historically, very, very low interest rates and very low corporate bond rates. And a lot of that has been caused by quantitative easing and the impact of quantitative easing. Actually, if you look -- and there's some estimates that say that quantitative easing has an effect of about 100 basis points or around that actually on bond yields -- that, in its own right, accounts for all the IAS 19 deficit. So I mean the real driver is actually the discount rate rather than what's happening on the asset side of the equation.

We have commenced the work on triennial valuation. You'll be expecting. I really can't add anything more about it at this stage. It's very early in the work. So I know lots of you will have lots of questions, but I won't be able to give you dates of when we expect to finish it or progress to date. So I'll say that in advance.

So in summary, as Tony said, it was a reasonable quarter. And I think it's encouraging that we've been able to not just show growth in profits and cash flow but also bring forward our EBITDA estimates a year forward and also raise the expectations on cash delivery. And the reason for this is despite the economic environments, that self-help remains the best help, and I think we're showing that in our business and our ability to deliver on cash and profit continues.

We are also continuing to invest in our business. I think you see some of the decent signs in Asia and Latin America, for instance. And also, I'm very encouraged by the fiber rollout, both in terms of the rollout itself and also in customer reaction and also, the way we're able to be introducing new technology that will further improve the service and the value of the fiber.

So we have made progress in the quarter. We're looking forward to making more progress. And as always, and I've -- will no doubt say it again, there remains more to do in our business but another reasonable quarter.

With that, thank you very much, and we'd be delighted to take questions so I'll pass it over to our coordinator again.

Question-and-Answer Session

Operator

[Operator Instructions] We have our first question. It's from the line of Nick Delfas from Morgan Stanley.

Nick Delfas - Morgan Stanley, Research Division

A few questions. Could you mention who the operators are who paid late? So it'd be interesting to know the ones who paid later than contracted. Secondly, specific items is ticking up a little bit to GBP 180 million. Maybe you could talk about why that is. And finally, on YouView, could you confirm when you expect a pilot and launch to occur?

Ian Paul Livingston

Okay. So what's the middle question, Nick?

Nick Delfas - Morgan Stanley, Research Division

The specific items number is going up, I think, a little bit to GBP 180 million. I think consensus was around GBP 160 million. So just interested to know why that is.

Ian Paul Livingston

Yes. I think we guided about GBP 180 million last time, Nick. In terms of who paid late, they know who they are, and they know that I think we will not take well to continued late payment. Tony, do you wish to say anything more than that? I think, at this point, they know who they are would be the best way to say. And we are not Bank of BT.

Anthony Everard Ashiantha Chanmugam

The one thing I'd just add to that is that, look, because it was a Christmas period, it made it more complicated, especially when the last day of the month took place.

Ian Paul Livingston

Yes. Okay. And hopefully that they won't find it as complicated at the end of the next quarter. In terms of YouView, middle of the year is the answer -- remains the answer on YouView. Gavin, anything to add to that?

Gavin E. Patterson

No, middle of the year. Thanks, Nick.

Operator

Moving on to our next question. It’s from the line of Andrew Lee from Goldman Sachs.

Andrew Lee - Goldman Sachs Group Inc., Research Division

A couple of questions. Firstly, on the macro impact you're seeing across the group. Are you seeing the macro pressure that you highlighted in small businesses spreading into the larger U.K. corporates that you serve in Global Services? Are there any other signs of macro strain in any other parts of your business? And then just secondly, on fiber pricing. Sky came out with a more rational fiber price than expected a couple of days ago. Whereas for Virgin, the only price it didn't take up yesterday was its "60 megabit per second" price. How do you see the U.K. fiber market pricing playing out in the medium term? And how do you think about your price position in fiber versus your price position in broadband?

Ian Paul Livingston

Well, on fiber, we said we were going to be aggressive in this marketplace. You can get fiber from BT for from GBP 20 a month. I think it's a very good offer, seems to be attractive to the customers. And certainly, by international comparisons, it's a very good price, and I think Sky has sought to match that price. In terms of Virgin, yes, it was interesting that their supposed free upgrades have suddenly turned out to be not free within a few weeks. So we think we're competitive, and of course, we have the BT Infinity offer at around GBP 20. Plusnet is at GBP 16 a month, so we're sort of hitting both ends of the market. At the present moment, we think it's a very, very good value offer on the fiber, and I think that's why customers seem to be taking it up. And they seem to really like the service, and as Ofcom speed test confirmed, getting really very good speeds, and that's before we do the upgrade. In terms of the macro business environment, I think there's-- clearly, the market, the environment is worse than it might be. That being said, I think corporates, generally, are in not too bad a shape. Their balance sheets are pretty liquid, but they are taking longer to make decisions. I don't think, particularly, it's a U.K. feature. I think it's a global and particularly western feature. And we've -- it's a comment we made in the previous quarter that getting contracts concluded was just taking longer. They tend to be a bit smaller. People are uncertain. That shouldn’t come as a shock. That being said, we're seeing, on a global basis, the places that are -- you expect to be stronger are strong in terms of Asia and Latin America. But Jeff, anything you want to add to that in the corporate sector?

Jeff Kelly

Well, I think you said in doubt and I think, sometimes, discretionary spend is the first to go. We are seeing some of that in the corporates. But I think it's also important to note that even the domestic markets in Europe, many of these corporations, the decisions made there and the investments, actually, in Asia and Lat Am, because they're expanding into those areas. So you can't look at it on a geography basis, because a lot of them are investing, just like we are, in these emerging markets.

Ian Paul Livingston

Yes. Thank you.

Operator

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

Robert Grindle - Deutsche Bank AG, Research Division

Just on the announcement on the "fiber to the premises" technology, what broadly is the innovation that you referred to this morning? That would be nice to know. And secondly, on the lower regular pension contributions. You've clearly flagged that before. Are you still expecting those payments to go up next year by about GBP 100 million? Or has the situation improved a bit?

Ian Paul Livingston

On the pensions, I mean, the exact payment will still to be settled, but I think that's broadly about right. On innovation, there's no one better to speak about innovation than -- so Liv, is it a new type of shovel? Or is it something else?

Olivia Garfield

No, there's no shovel involved. So basically, the innovation of it is -- as said previously, we used to have areas that were either FTTP or FTTC, so fiber to the premise or fiber to the cabinet, in an area, the innovation is the fact that now we can slice off the FTTP fiber and take it straight to the house in an FTTC-enabled area. So what it means if you're a small business, for example, is you're not thinking what type of area I'm in. Every single customer, should they have the desire to do it, would be able, in an FTTC area, to order for themselves FTTP speeds.

Ian Paul Livingston

And this ability to mix it in an individual area rather than saying we go one way or the other I think is a big -- the big difference. Thanks very much.

Operator

Next question is from the line of Paul Sidney from Crédit Suisse.

Paul Sidney - Crédit Suisse AG, Research Division

Yes. I just have a couple of questions please on the U.K. broadband market. If you look at your 56% of DSL LLU in fiber in the quarter, it suggests that the U.K. market slowed. I was just wondering, is there any reason for this in particular. When I say slowed, I mean the absolute number year-on-year. Any sort of seasonal impacts going on there? Or any changes in the competitive dynamics? And just as an add-on to that, where do you think broadband penetration can go in the U.K., ultimately, say in a 4-, 5-year view?

Ian Paul Livingston

Difficult -- I mean, broadband penetration continues to increase. It seems to be at the core. I mean, one worries, with the difficult economic times, that broadband penetration, actually, growth might stop. That's not happened. Ultimately, I would say if you take the longer term, it sort -- it seems like it's going to be such a core service that you are going to see long-term growth. It's difficult to call whether you might see some sort of S curve before it takes off again, very, very difficult to call that. But I think what's -- actually, the solidity of the broadband market has been, actually, if anything, the most interesting thing that we've seen roughly on 250-odd thousand customer net adds, a million per -- so 250,000 a quarter, about a million per year pretty much quarter after quarter. So I don't think, particularly, we see that as a slowing down this quarter. It seemed to be pretty much okay. And as I said earlier with more households, one might actually -- one expects that to be one of the drivers of growth of broadband. But there might be a quarter or a few quarters where it slows down. We've not seen it yet, but I think I said a year ago and 2 years ago that. And one day, I suspect that will happen, but we're still at penetration. Whilst it's over 70%, it's -- we still got some way to go, I think, in penetration in the U.K.

Operator

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

Maurice Patrick - Barclays Capital, Research Division

Maurice here. A couple of quick questions. First of all, on the additional copper additions that you're seeing, a sense of how many of those go straight to broadband or perhaps goes to analog first and then go to broadband afterwards. And then on the retail side of your OpEx, minus 7% in the quarter, was that materially impacted by the lower hardware sales, i.e. you've talked about the revenue, but was there a major cost element in that 7% number?

Ian Paul Livingston

I'll ask Tony to talk about the EBITDA. I mean, there were low-margin sales, but I'll ask Tony to add anything. In terms of corporate additions, I mean, the corporate additions, of course, are at an Openreach level rather, so it's difficult to tell. I mean, you see LLU going up. To be honest, we don't really look at it that way in terms of -- but you do see the broadband growing, and you see the broadband growing faster than you see the copper growing. But the good news is the copper is growing, but Liv, I don't know if there's anything you want to add to that?

Olivia Garfield

Well, we have seen a little bit of second lines coming back. So I guess during the heart of the recession, we saw people cancel second lines. We have seen a little bit of that coming back, I guess, during the course of this year but not enough to move the dial. So we just don't check it out in the same manner.

Ian Paul Livingston

Yes, I think it's just -- I think it's mobile-only households coming back a wee bit. But actually, net-net-net, the household creation is tending to flow through into lines. And actually, it's not growing probably quite as fast as household creation, so there's still -- if anything, we're creating more headroom, I would think, in the future in that respect. But Tony, do you want to talk about cost, EBITDA, et cetera?

Anthony Everard Ashiantha Chanmugam

Yes, sure. On the retail side, sure, the reduction in the low-margin hardware sales would have had an impact on the cost base. It would have affected the cost base by a couple of points. But underlying reduction was -- if you look and see, we took 7% of the cost out this quarter compared with 6%. So if you look at the overall trend across the year, it's still mid-single digits.

Operator

Next question is from the line of Steve Malcolm from RF Research [ph].

Stephen Paul Malcolm - Evolution Securities Limited, Research Division

I just have 2 questions. First off, financial one. You've got about GBP 3 billion of debt maturing in the next 1.5 years, but it's fairly low coupon. Can you -- are you more minded simply to retire that from cash? Or will you look to refinance a reasonable chunk of it? And then moving on to sort of rural broadband BT U.K., can you give us a sort of sense of what we should look to see in the BT U.K. tenders over the next 12 months? There's a number of lines coming up for tender. And also, related to that, maybe give us an idea of your working assumption as to when LTE might be a more credible broadband threat in markets 1 and 2 in particular where a lot of the BT U.K. lines will be coming up for tender.

Ian Paul Livingston

Yes. I think that was 3. I don't think that was an LT related to BT U.K., Steve. On the data [indiscernible] to say, but I mean, I think exactly what we do on the debt, depends on what we do on the pension. We are sitting on over GBP 1 billion of cash. Just now, we're generating cash, and actually, we got quite a long profile in terms of for when our debt comes. So I think our position looks pretty stable, subject to doing anything on the pension in terms of necessity to raise bonds. But Tony?

Anthony Everard Ashiantha Chanmugam

There's not much to add into that. We don't need to refinance.

Ian Paul Livingston

Yes. Yes. So -- and then on BT U.K. BT U.K. is -- I mean, there's a number of local authority bids that actually are sort of not quite in BT U.K. So you've got Wales and you've got Lancashire. They're sort of related to but not in the overall framework, and they're progressing very well. And I'll ask Liv to give a couple of comments on it. But just generally, we will bid, I think, pretty -- in most if not all the places. We won't win them all. I think it's -- that's unlikely that we'll win them all or beat the competition. I think the ability of some of the people to actually deliver the service, I think, is unproven at the moment. But given we have an industrialized machine now, and that's really what we've got. And it's how we're able to do 80,000 connections a week at the moment in terms of the -- sorry, 80,000 homes passed a week. And we've got some really good experience in Cornwall and Northern Ireland, and we've now rolled out to about 80% of Northern Ireland, which makes it one of the most fiber-connected regions anywhere in Europe. Cornwall is driving at a great pace. And I think the relationship in Cornwall is very good, and it’s doing a lot for the local economy there. We've now got a real track record. So I think we know what to do on it, but there'll be some competition. But Liv?

Olivia Garfield

I mean, I think, Steve, in answer to your question, we expect about 30 bids over the course of the next while. We think most of those bids will -- in terms of process, will run over the course of the next 12 months. Clearly, they will have different dates. So some of those will complete earlier than others, and I think we'll just have to see how that works in terms of each local authority and what their major driver is. Some will focus on businesses first. Some will focus on coverage first. So that's the kind of order of magnitude of bids that you can expect to see come out of BT U.K.

Stephen Paul Malcolm - Evolution Securities Limited, Research Division

Liv, Olivia, any color on how many lines that 30 bids translates to?

Olivia Garfield

Oh, we couldn't tell at the moment, because it totally depends on what each council chooses. Some are choosing to go for 95% coverage. Some want to go for 90%, some, 80%. We honestly couldn't tell you until the bids come out.

Ian Paul Livingston

Yes. So I mean, we go for a very high proportion. And I -- and exactly which areas they decide to cover or not cover remains a little unclear.

Anthony Everard Ashiantha Chanmugam

I mean, based on the bids that we've got active at the moment, the coverage tends to be 90% to 95%.

Olivia Garfield

That's true.

Ian Paul Livingston

So I think it will -- it's why I think we're saying we will expect post BT U.K. and the other initiatives, that the U.K. will end up getting more than 90% of the U.K. covered in fiber. That's really very consistent with that number. And in terms of LTE, I mean, I think you'll have to ask some of the mobile companies about LTE. We are certainly working with them and happy to. We've been trialing with Everything Everywhere down in Cornwall. I mean, in terms of how it relates to BT U.K., I think what we would look to do in areas is you do as much fiber as makes sense and then you look at other technologies, such as TV white space, as to what it can do and then see what other technologies, such -- including LTE, do they make sense to add. But we'll also look at the opportunity that maybe some of the rural coverage subsidies that are going to come up might offer and in terms of the fact that we are sort of a neutral and very capable wholesaler to the sector. So that's how we'll look at it, and we just have to see. We don't know exactly when the bid process is going to be, exactly who's going to bid, but we'll be delighted to help anyone in rolling out this network. And Nigel, running our wholesale business, is nodding vigorously, really delighted to help anyone. Okay. Thanks so much, Steve.

Operator

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

James Ratzer - New Street Research LLP

I had 2 questions please. The first one is just looking ahead to your revenue guidance for next year, the trend should inflect, x transit, to up to 2% growth. I mean, are you still happy with that trend of inflection going into next year, given what you're seeing at the moment, both in the business and from the economy? And secondly, on the cost side, clearly doing an excellent job on cost reduction. I mean, should we see the EBITDA upgrade for this year as bringing forward some of the cost reduction you might have had in for next year? Or do you think that mid-single-digit cost decline can continue into the next financial year as well?

Ian Paul Livingston

Yes, James. I mean, I'm not keen, at this point, to start giving forecast for next year. I think that's probably a job for a Q4 to give guidance to where we are. What I would say is we are -- the underlying trends in revenue are improving. The environment is more difficult, there's no question about that, but the trends are improving. And also -- and it goes to the cost reduction point. We've got a lot of self-help in our business, and I think we're driving -- we are pleased to bring forward our EBITDA number, and I think that shows our confidence going forward. But we'll probably give you more and better, I think, in Q4, in the context of the environment and the performance we've had in '11, '12 as a whole. Tony, if you want to add?

Anthony Everard Ashiantha Chanmugam

Yes. Bringing forward cost savings for this year just creates an opportunity next year to bring forward things that are going to take place in 2 years' time. So in terms of absolute terms, there should be no reduction in terms of what we're doing in cost reductions next year.

Ian Paul Livingston

Yes. Okay. That's great. Thanks very much.

Operator

Moving on to our next question is from the line of Saeed Baradar from Societe Generale.

Saeed Baradar - Societe Generale Cross Asset Research

Just one question. I want to know how you guys think about this issue. Given the very strong cash flows you have and once the pension triennial valuation is concluded and you've reached an accommodation with the trustees, I'm wondering are you likely to have a realistic re-basing of your dividends, say, by doubling it. I mean, this is a sector which everyone else is cutting, but obviously, you've got a huge room here, in my view, to up it. Or are you more of a proponent of more conservative step changes? Also, can you give me a time frame in terms of news flows? When can I expect to hear more about these developments here?

Ian Paul Livingston

What we said, we wouldn’t really look into dividend this side of sorting out the pension. I can't tell you, because I wouldn't be able to give you an update on when exactly to expect the pension. So regrettably, the answer to the second question is no and except till after the pension. I think one man's realistic is another man's not very well covered dividend. Look, we remain a conservative business. But as you quite rightly say, our cash flows are growing. They cover our dividends very, very well. We're generating a lot of cash. Our net debt year-on-year has fallen by over GBP 1 billion. So we have a lot of flexibility, and what we said is we'll talk to our shareholders. What we want to see is ongoing progression on our dividends whilst maintaining a position where we carry on paying down debt. And we think we can achieve all of these things, but we'll talk to our shareholders and see what our key shareholders, what they're looking for and what their mix of things are. But what -- that will have to wait till we know where we are in the pension.

Operator

Next question is from the line of John Karidis from Oriel Securities.

John Karidis - Oriel Securities Ltd., Research Division

Just a couple of them, please. Firstly, I'm trying to understand how successful BT Retail needs to be with fiber before the extra wholesale cost of fiber starts having a negative impact on margins for BT Retail. And then secondly, I'm keen to get a steer, please, on how much extra Openreach is likely to charge for up to 80 meg versus up to 40 meg? Is it a question -- is it the case of a few pounds or a few pennies?

Ian Paul Livingston

Well, on the second one, the tradition is we do an industry announcement. In fact, the requirement is we do an industry announcement. So we'll do that in the not-too-distant future in terms of giving an update as to what the likely cost of that will be. So I can't preempt that. In terms of the retail, I think -- it really depends on the mix between incremental. The thing is when you move people to fiber, a few things happen. One is you do get an uplift. And secondly, you get -- so you get an uplift which -- in terms of people going to a higher price band, so that helps in terms of the mix, and that's worth a number of pounds. Secondly, you get more customers. So that's good news. And thirdly, evidence is lower churn. People seem to really like the fiber product. So in terms of what the impact is, Retail will put their foot on the accelerator as much as they can. And there's, of course, a subscriber acquisition cost. But as you can see, we're managing that in overall numbers, and that's what we'll continue to do. And it would be a problem I'd be absolutely delighted to have, and we are seeing good net additions. And Retail's level of additions in broadband has been something that's pushed up over the last few years, and we've managed to manage that in overall profitability. Gavin, anything you want to add to that?

Gavin E. Patterson

I thinks that's a complete answer.

Ian Paul Livingston

Thank you. Okay, thank you.

Operator

Next question from the line of Stuart Gordon from Berenberg.

Stuart Gordon - Berenberg Bank, Research Division

Just 2 questions. Just on Infinity, I was just wondering if you could give us some guidance on the number of new customers to BT that are coming through from Infinity and also, if there's any way you could give us some color on what your market share in broadband of the covered area is of the 7 million homes. And the second point is on the pension, in the absence of the triennial review being completed, which I know -- we all know can take any amount of time, will you still be making the remedy payment under the previous agreement in the next financial year? Obviously, you've got a holiday this year.

Ian Paul Livingston

Yes. Well, the payment from the last time wouldn't be due to December anyway. So I would hope we'd have everything sorted before December. So -- and yes, if it wasn't, then yes, we would, but I would hope to have, without giving too much away, I would certainly hope that we get it done by this calendar year. In terms of Infinity starting, we certainly see a much better performance in areas where we've got fiber than where we don't and significantly better. And so it's a comment we made last time that the net adds in these areas are a lot higher than they are in areas where we don't have fiber, so it's very encouraging. And in terms, Gavin, of the proportion that's new. Of course, with broadband, you often get completely new customers sometimes, who are just setting up new homes and things like that. But do you want to say anything about high proportion of new customers coming with Infinity [indiscernible] broadband with BT?

Gavin E. Patterson

Well, about half are new to BT broadband, and about 20% are new to BT overall, so it gives you some color on that.

Ian Paul Livingston

Yes. Hopefully, that gives you an idea. As I say, you will have always some of them being new whenever they take a service, because they’ll be just setting up a new home. But a 1/5 new is, I think, quite an encouraging number. Thanks for that.

Operator

Next question from the line of Jerry Dellis from Jefferies.

Jeremy A. Dellis - Jefferies & Company, Inc., Research Division

Two questions please. Firstly, in terms of the "80 megabit per second" upgrade coming in the spring, I wonder whether you could clarify how quickly that's going to sort of take effect across the whole of the network. And whilst I appreciate you're limited on what you can say on wholesale pricing, I wonder whether you could comment about pricing at the retail level, whether it might be an idea to try pricing this product at a premium. And then secondly, just in terms of the March 2013 revenue outlook, again, I appreciate your comments from a little bit earlier, but I guess guidance remains in place, a flat to 2% growth in revenues x transit. So I guess, at the very least, you're endorsing the idea of getting to flat. And I wondered what you think the building blocks could be from the current sort of run rate of minus 2% to get towards that next year.

Ian Paul Livingston

Yes. Look, revenue guidance, nothing changes. We'll look at the year end. As I said, life is clearly -- the environment is clearly more difficult, but we are making improvements to the trend. I think some of the big changes you'll see is more and more impact of what's going on with fiber helping us. But also, some of the metrics show that the stuff that's declining is declining less, and that will also help, because basically, revenue growth is made up of 2 bits. It's how much you grow and what you don't lose, and it will really be a mixture. And I think maybe when we get to Q4, we'll talk in a bit more detail about where we are and also, frankly, what the environment is at that point as none of us are entirely sure of the environment. And certainly, the environment is worse than when we originally went. In terms of Infinity, in terms of the 80-meg product, when we do it, it will basically be available to the whole country. So it's a software upgrade, and it's something we're testing just now, and it will basically be available immediately. Liv, do you want to add anything more about its availability? Or does that say it all, really?

Olivia Garfield

Yes. So the only thing to add is you have to do an upgrade to the DSLAMs. All of that's completed, so it is literally a matter of the day that we decide and we’ll obviously give notice to industry. All the technical work's done, so we’ll literally go live across the entire base.

Ian Paul Livingston

Yes. And in terms of retail prices for that, as Retail don't know the wholesale prices, it'd be really rather difficult for them to come to a conclusion of what the retail prices would be. So I think, Gavin, in common with Jeremy Dareck [ph], in common with Dido Harding, would be wishing to hear from Liv as to what the prices that they expect are. And when they do, I'm sure Retail will make up their mind as to what great value offer they make in the marketplace. Thanks.

Operator

Next question from the line of James Britton from Nomura.

James Britton - Nomura Securities Co. Ltd., Research Division

I’ve got 2 questions, please. Firstly, can you talk about your ambitions for the BT WiFi division? And do you think WiFi becomes an increasingly critical part of the broadband offering for both the extend and mobile? And secondly, does BT expect the falling corporate bond rates to further reduce the WACC assumptions, which Ofcom applies in its final charge controls in the next few weeks?

Ian Paul Livingston

In terms of the second one, I guess the question -- I mean, certainly, compared to last time around, mathematically, it does affect the WACC. Now what you've got to look at is what you believe the long-term numbers are. So it will have an impact, but the question is will it have an impact compared to the last time they looked at this, because you've got to take this more on the spot rate, and that's absolutely what we were pointing out to them. And in terms of the WiFi, I'll ask Gavin to say a few words about it going forward. I think it's been very interesting, WiFi. We've made a bet a number of years ago on WiFi. And every so often, it helps to -- you can be right, and you can be a bit fortunate, and I think we got a bit of both there that we did -- we invested in hubs that could effectively create open WiFi and do it in a very safe and secure way. And they were more expensive, frankly, than not doing it. It's been a long-term investment but it’s the reason that we are now looking at 3.5 million WiFi hotspots in the U.K. as well as investment we made in the Openzone division. And I think one of the reasons we were able to do and wanted to do that was actually partially because we were able to focus on fixed line and broadband rather than having a bit of push me, pull me with the Mobile division. And it certainly has helped the U.K., frankly, not have the problems with the mobile network that a number of other countries have had as a result of data. And it's also given a very good offer to our customer base of taking their broadband out and about, and we think there is more possibility to drive WiFi further. But Gavin, do you want to say anything more?

Gavin E. Patterson

Sure. I mean, WiFi continues to be a critical part of our offer to our customers. We know that the customers that use it have lower churn and get a lot more benefit. So we'll continue to innovate, so there will be significant improvements around the customer experience we'll be bringing in, in the next 12 months. In addition to that, we've got a number of big contracts, particularly in the retail space, hospitality and, of course, the Olympics, that we'll be delivering as well. So there's a lot happening in WiFi at the moment, and we're very much at the forefront of it.

Operator

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

Guy R. Peddy - Macquarie Research

Just a couple of quick questions. Can we just confirm that there was no payment delays from a BT perspective into core? So and as a result of that, working capital should improve as some of your late payers pay in this quarter? And secondly, just on OTT services, there's been a lot of noise about it recently in the press, and I just wondered how BT Vision was going to pitch itself against some of these new entrants.

Ian Paul Livingston

Okay. Tony, do you want to answer working capital, given, of course, we've already given our cash flow forecast for the end of this year?

Anthony Everard Ashiantha Chanmugam

Yes. Well, look, we made a commitment that we will not delay supplier payments simply to meet quarterly cash flow targets, and that commitment stays. So we will get a kick-in in terms of the debt position as long as the people who didn't pay in Q3 pay in Q4.

Ian Paul Livingston

And they know who they are. And the other question was?

Guy R. Peddy - Macquarie Research

OTT.

Ian Paul Livingston

OTT, yes. On OTT, one of the things that's, I think -- the OTT services will add to the richness of services, no question about that. But one of the really important differentiators for Vision is not just the range of content they’ve got and the fact it is delivered to your TV, and we've spent a lot of time and money actually getting the connection into your TV set, is it's quality assured, and that means, for instance, if you take iPlayer, which -- iPlayer, of course, in an OTT service effectively. iPlayer on BT Vision, there's no buffering. And the buffering that happens with iPlayer, actually, usually has nothing to do with the access line. It's to do with the Internet. The Internet is a best-effort service, and what Vision offers is not a best effort, it’s an offer of guaranteed quotas. And so you get great picture quality, and that's why iPlayer has just taken off on BT Vision, because it's on the TV set, and there's no buffering. So we see what we're offering in Vision is effectively a higher-quality service, and I think that's the real differentiator we see versus the OTT services. But OTT, in general terms, will add to the general thing, because it's another reason for getting broadband. And we'll provide a range of services ranging from quality assured, and we'll look at other options.

Gavin E. Patterson

The only thing I'd add, Ian, is we see ourselves as a retailer, first and foremost. And particularly with YouView, we see the opportunities for many of these services to be provided on the YouView platform into people's homes. So I see them as another reason why they'll choose our offer over our competitors’.

Ian Paul Livingston

And also, video’s another reason why people like fiber, and particularly as they get to the higher-speed video. So I think it's the more, the merrier, frankly, broadband at the heart of people's homes. Thanks very much.

Operator

Next question from the line of Nick Lyall from UBS.

Nick Lyall - UBS Investment Bank, Research Division

There was a question on the fiber to the premise overview please. Just could you give us some idea, I mean, very roughly, of the cost to Openreach? Is it significantly different, because you're mixing in region between fiber to the home and fiber to the cabinet than maybe a direct fiber to the home connection might be? And do you assume it's just going to be ultimately too expensive for the mass market? Or is your comment about being interesting to us, I mean, more to do with the just capacity use you're seeing at the moment? And then second, on Vision, you've got YouView coming. We've mentioned it. It's been pretty strong. But could you mention any updates again? You've gotten pre YouView coming in, in the middle of the year. And is that going to be enough, do you think, to maintain the price premium that Vision has?

Ian Paul Livingston

Well, I'll let Gavin talk about Vision in a second, about what we've got planned that he wants to say about it at this point. In terms of the fiber product, basically, this will be a product on demand, and it's going to be -- yes, customers who want it. Understand, for most customers, the sort of speeds we'll be offering will be more than enough. And that's, I think, why we're saying that, actually, we're not sure how much demand we'll actually have, but there will be some people who -- multiple, multiple users, and that will tend to be SMEs who will want -- there are some of the people who would maybe want a private circuit just now, but frankly, a private circuit’s too expensive. And but I think we would recognize there's a capital cost involved there, and that will have to be reflected in the pricing structure of it. So I think net to us, we're not expecting a huge increase in cost, but we think it's a really good solution to the quandary of the fact there may be a small number of people who want fiber to the premise-type speeds. But actually, rolling out a whole area can be incredibly expensive, and it just takes longer. And it's far more disruptive to people's homes and gardens and things like that, and I think it's a really good option for -- those who want, can have it and those who -- and the vast majority who will be very happy with 100-megabit speeds, they don't need to pay for it, but I think it will be pretty well priced. And we'll have 80 megs coming shortly, and as I said, the 100 will be something, that when we do vectoring at a later stage, that we will be delivering. So no, I think -- and I think the interesting thing is just how much the fiber to the cabinet speeds have improved, even over the last couple of years, and customers are really getting those speeds. Okay. Thanks, Nick.

Anthony Everard Ashiantha Chanmugam

Vision.

Ian Paul Livingston

Oh, sorry, Nick. [Indiscernible] Vision. Gavin, about Vision. Sorry.

Gavin E. Patterson

Yes. Just to say we've got several innovations coming through this year. As Ian said, we've got YouView in the summer. Before that, indeed now, we're beginning to pilot Vision 2.0, which is the next generation Vision interface with much better search and recommendation capabilities, a more intuitive interface. That starts piloting now. And then later in the year, we'll start piloting streaming channels and multicasting. So we'll be able to extend our offer.

Operator

Next question is from the line of Carl Murdock from JPMorgan.

Carl Murdock-Smith - JPMorgan Cazenove Limited, Research Division

It's Carl Murdock-Smith from JPMorgan. Just 2 questions, please. Kind of touching on your answer to Guy's question on OTT, just about the kind of cross fertilization between Infinity and BT Vision. I was wondering if there are any data points that you could give us or your sense of kind of mutual uptake there. And then secondly, can I just ask, on the balance sheet and the investments that's building up, can you give us a sense of what those are invested in and also the liquidity of those assets?

Ian Paul Livingston

I'll get Tony to say something about it, about the balance sheet we're investing. But you should take comfort that the yields of these investments is very much sub-1%. So that shows the -- they're very high liquidity, very high quality. Tony, do you want to say anything?

Anthony Everard Ashiantha Chanmugam

No, I think it's just -- it's sub-1%.

Ian Paul Livingston

Yes. No, we're not doing the Greek bonds. And...

Anthony Everard Ashiantha Chanmugam

Well, I was going to add we're cognizant of what's happening in Europe. We need to make certain that those assets that we've got invested are reasonably liquid. And we've done that, but the returns aren't great.

Ian Paul Livingston

Yes. And that -- and there's a cost to carry there. We recognize that reflecting, but that’s because we've gone for very secure assets. In terms of Vision and fiber, there's not a huge -- except the fact that we see where people have sub-2 megs speeds, which is sort of the minimum you need for Vision-type services, we're seeing a much higher uptake of Infinity in those low-speeds areas moving to high speeds. And so that's, I guess, the only data point that -- I think more data points to follow. And of course, you've seen a very solid Vision performance over the last few quarters. And over the last 2 quarters, we've outperformed Sky, and we'll see Virgin's numbers this quarter. But certainly, in the previous quarter, we very much outperformed Virgin in terms of TV adds. Thanks. Thanks, Carl.

Operator

Next question from the line of Fernando Delgado from AKO Capital.

Fernando Delgado

It’s on Global Services. The first question is the contribution of Asia Pacific and Latin America to the overall revenues. And the second one is you mentioned the declining from this is due to renewals. I mean, what's driving that decline in revenues. Is it pricing, volume, competitive losses?

Ian Paul Livingston

Yes. What we -- referring to renewals was actually in orders, that the decline was renewals. It wasn't that we were doing less well in renewals. It's just we had less renewals coming up. It's a comment we made last quarter, that this year, of our top 20 contracts, only 3 were due for renewal. And I think next year, there's only 2 due for renewal. And the answer is the previous year, we've done a lot of renewals of existing contracts. So we expected that change, and that's what happened in that. In terms of the regional contribution, I think we're not going to give -- we haven’t given the regional splits. I think what we have said is we expect to double the revenue from Latin America and see substantial increase there over the next 5 years. And then we expect to see a lot of growth in our Asian business, and that's -- and both are going to be worth hundreds of millions of pounds. But I don't know, Jeff, any other color you want to add? No, Jeff's saying I've done it right, so thanks. Okay. Thank you.

Operator

It's from the line of Adam Rumley from HSBC.

Adam M. Rumley - HSBC, Research Division

Previously, I think you've commented on a 75-25 split in the fiber rollout between the cabinet and to the home. Given that you're upgrading the cap speeds from 40 to 80, and you're talking about this on-demand fiber to the premises product today, does it make more sense, therefore, to do the fiber to the cabinet roll across the whole of the targeted base to start off with, to make the rollout more -- to make the rollout quicker than it would be otherwise?

Ian Paul Livingston

No, it wouldn’t be the whole of the base. We're already rolling out fiber to the premise. We actually asked for volunteers for fiber to the basement for apartment blocks. So there's a lot of places we're already rolling out fiber to the premise. We were going to carry on looking at the mix and see -- look at relative demand and look at the fact, as you say, that we can have, in some cases, the best of both worlds in terms of fiber to the cabinet, fiber to the premise and also what happens in the BT U.K. bids. But we got fiber to the premise already available to about 50,000 homes. Is that right, Liv? 50,000?

Olivia Garfield

Yes, There's over 50,000 homes available now with FTTP and I guess a good few couple of thousand people actually live on it, so not just available but actually connected. So it will be part of our mix.

Ian Paul Livingston

Yes. We just -- the final numbers will really depend on what we see in demand and degree of difficulty and the other options.

But thank you for that, and thank you, everyone, for coming on the call. And because it's a Friday, I'll say have a very good weekend. Cheers.

Operator

Thank you. Ladies and gentlemen, that concludes your call for today. Thank you for joining. You may now disconnect.

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