BT Group plc F4Q06 (Qtr End 03/31/07) Earnings Call Transcript

May.17.07 | About: BT Group (BT)
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BT Group plc (NYSE:BT)

F4Q06 Earnings Call

May 17, 2007 6:00 am ET


Sir Christopher Bland - Chairman

Hanif Lalani - Group Finance Director

Ben Verwaayen - Chief Executive

Ian Livingston - Chief Executive of BT Retail

Paul Reynolds - Chief Executive of BT Wholesale


Paul Howard – Cazenove

Unidentified Analyst

Laura Mills – Merrill Lynch

Nick Lyle – UBS

Christian Maher – Investec

John Clarke – Brewin Dolphin

Steve Malcolm – Arete

David Wright – JP Morgan

Anthony Bolton – Fidelity International


Sir Christopher Bland

Good morning and welcome to BT's results presentation for our fourth quarter and for the full year.

Firstly, and in my case, lastly, or at least for the last time, I must draw your attention to the cautionary statement. During this presentation, we will make various forward looking statements and factors which could cause our actual results to differ materially from the results we have currently expected are identified in detail on the screen and in your presentation pack.

I joined BT a little more than six years ago and these are just some of the headlines that pre-dated my arrival, and it gave me a pretty good idea of the challenges ahead.

In 2001, three themes dominated the thoughts of investors in Telecoms and BT. First, the level of debt. We had debts of almost £30 billion and gearing with a huge (inaudible).

Second, would there be any revenue growth. The traditional bread and butter of (inaudible) called the lines were in secular decline, mobile businesses was the future, and we were about to (inaudible).

Third, was BT just a utility? Well it certainly had utility like characteristics, a call business that could generate steady returns, and could pay sizeable dividends. But with our international growth strategy of sales, many regarded BT as just another boring utility, and few were willing to invest.

My checklist of (inaudible) upon joining, therefore reflected what needed to be done, and has been rather beautifully written by somebody with a good italic script here, actually much more faded, and in so far as that reflected the strategy. The strategy was simple and crude. It was get-off our backs strategy. Get the banks off our back, get the newspapers off our back, and get the politicians off our back.

But we didn't have a clear idea of what needed to be done in the short term and we were the first (inaudible) in York to take decisive action to tackle the gearing issue head-on, and all the items on that list were addressed within 12 months, and the basis for transformation was no more than the basis we laid then.

Transformation requires a consistent strategy, a company willing to learn from its mistakes, easier to recognize the changing needs of its customers and its investors, and it required near (inaudible) execution.

Two very good examples of that strategy being carried through into delivery are network IT services and broadband.

Over the last five years, network IT services have grown with the compound annual growth rate of almost 20%, at £4.4 billion, as BT's largest single stream or revenue, exceeding those of other calls or lines.

And broadband is the defining new service of the decade. Back in April 2002, who would have thought that five years on, more than half of all UK adults would have a broadband connection at home.

A seven fold increase, corresponding to a 75% drop in price for that service. And today there are nearly 11 million DSL broadband lines in the UK, and BT is now the market leader.

The benefits of transformation started to come through initially in revenue terms and are now contributing to EBITDA's growth as well.

This is our fifth consecutive quarter of EBITDA growth and our ninth quarter of an improving trend, driving strong growth in earnings per share.

Having delivered 20 consecutive quarters, that's five years, for those of you who don't have the math, of gross EPS of 22.7 pence this year, has grown 16% and there's a compound annual growth rate of 20% over the last five years.

I'm very pleased to announce that the board has recommended the payment of a full year dividend of 15.1 pence, that's a 27% growth, and moving to our planned 2/3rd of earnings pay out ratio at year end. The final dividend will be 10 pence.

And as for further demonstration of our confidence, not only today, but also our confidence in the future, our operational performance over recent years generated a very strong pre-cash flow. We consistently returned an increasing amount per shareholders in the form of dividends and share buy back. In the last five years, we've distributed nearly £5 billion.

This management team remains focused on generating shareholder value, and this is reflected in our distribution policy.

Having reviewed the group's net debt, and a strong cash flow generated, we've also decided to introduce a new £2.5 billion share buy back program, while continuing to invest in the business. And an efficient balance sheet will further enhance shareholder value.

We expect the buy back programs will be completed by the 31st March, 2009, and we seek to maintain a solid investment credit rating.

Going forward, we expect to increase dividends, taking into account our own earnings growth cash generation of our ongoing investment needs.

Let's consider the three themes that have dominated investors' thoughts for our own six years ago: Debt, revenue growth, and utility characteristics.

Back in 2001, debt was an indeed rightly considered the burn, but today the balance sheet of many credit companies are inefficient. It's clear that BT's revenue growth will continue to be driven by new wave services, and the growing needs of customers for network IT services.

BT continues to grow faster than many of its peers, and is far less reliant on voice revenues.

Within the group, the regulated asset base have opened reach has attracted comparisons with those water, oil electricity companies. In addition, BT's strong free cash flow and increasing dividends combined with the share buy back program, are exciting shareholders. A utility, it turns out is no longer a bad word.

I take real pride in our achievements to date. There are a number of policies and long lasting legacies in place that benefit BT, the industry, and the UK economy such as regulatory certainties, financial stability, service delivery, local capability, and management stability.

Regulatory certainty, as a result of developing a most co-operative and open relationship with (inaudible), and that's created a business model that could well work in other countries too.

Our financial stability has seen debt reviews from nearly £30 billion, to a manageable level.

In 2003, the IAS 19 pension deficit reached £9 billion. As at the end of April this year, our pension scheme is (inaudible).

BT is now well on the way to becoming a services company with a clear strategy as an improving service culture, generating an increasingly higher proportion of revenues and profits from new wave services.

BT is increasingly a global brand, with well classed global capabilities, a vital ingredient in winning business around the world. And I am confident that BT's management team has the ability and the vision to achieve further success.

I am handing over a very good business to a very good successor, in an orderly and well planned transition. And we are even getting an increasing number of articles with positive headlines.

But there are some things that won't change. Service will remain king, customers and employees will remain the keys to unlocking real value for shareholders and for the company. And in bringing it all together, I can say that it is still good to talk, and today our numbers speak volumes.

Just before handing over to Hanif, I'd like to make some valedictory, case of valedictory thanks.

First of all, I'd like to thank you. I admit the price yearly (inaudible), that represents that I can always go to a good production (inaudible) in order to remind myself of what it was like.

But I think that the journalists and analysts have covered BT, first of all in great depth. I wish our models were half as good as yours, and I think that we've had both fair and very detailed coverage.

We haven't always agreed with it, we haven't always liked it, but I don't we've had anything to complain about during this time, from any of you. Actually, there are a few things…but I’ll se that it’s afterwards.

My second thanks is to the BT board as a whole. To the non-executive directors and to really good Vice Chairmen. I’m very grateful for them. I’m particularly grateful to our wonderful Chief Executive, Ben Verwaayen. He’s a real leader. He’s been an inspiration to all of us at BT, and his idiosyncratic use of the English language continues to astonish and please me.

Hanif Lalani has segued into the role of Finance Director with terrific skill. Ian Livingstone is a very good Finance Director. Every now and again he tries to re-create that role but he’s well on the way to becoming a really distinguished CEO of our retail business and we’re very lucky to have him.

Paul Reynolds epitomizes the vision and the innovation of the 21st century network and that lays the foundations for a truly revolutionary approach to providing communications in this century. Andy Green transformed BT Global Services, which was dead in the water when he took it over, into a global business generating cash and making profit, and it was by no means clear that that was achievable and certainly not with the speed and with growth that he’s delivered to BT Global Services.

Francois Barrault, his successor, is entirely worthy and brings a new dimension to the speaking of the English language that we’ve lacked since Pierre Denan left our board. And finally, Steve Robertson, though not on the board, has taken hold of open reach and created this as a really vibrant and interesting business. So thank you all very much and thank you.

Hanif, over to you.



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Hanif Lalani

Thank you Christopher and good morning. An outstanding quarter four meant another excellent set of full-year results, which saw revenue rise 4% to £20.2 billion, driven by strong growth and new-wave revenue of 17%, accounting for 36% of the total group revenue.

EBITDA of 5.6 billion was 2% higher than last year with EBITDA growing in each and every quarter. Earnings per share rose 16% to 22.7 pence, giving us 20 quarters of continued year-on-year growth.

We generated £1.4 billion of free cash flow this financial year, down 16% after making additional pension contributions of £520 million. And I’ll cover free cash flow in more detail later in the presentation.

The full-year dividend is up 20% and at 15.1 pence and represents a payout ratio of two thirds, achieved one year earlier than planned.

Let me look at quarter four results in more detail. This quarter saw revenues grow by 3% or £158 million to £5.3 billion, the 13th consecutive quarter of growth. This was mainly due to continued strong growth in new-wave revenue up 14% to £2.1 billion, more than offsetting the declining traditional revenue, which fell 3%.

EBITDA relievers grew by £39 million and at 2.6%, the improving trend has continued now for nine quartersith depreciation flat year-over-year at £773 million. Operating profit grew over 5% to £764 million, with the operating margin growing from14.1 to 14.4%. Profit before tax and specific items of £632 million was £70 million or 12% up on the prior year. This partly benefited from a £31 million net reduction in net finance costs. The effective tax rate was 24.5% and the net result was an earnings per share, before specific items, increase by 14% to 5.8 pence.

Let’s look at the results for each line of business. Starting with global services, revenue grew in the fourth quarter by 4% to £2.5 billion. New wave revenue up £2.1 billion surpassed the £2 billion mark for the first time, showing an increase of 9% year-on-year. This more than offset the decline in traditional revenue, which fell by 14% by continuing fault in dial IP and voice-related products.

This growth in revenue was offset by increases in delivery costs resulting in gross profit being broadly maintained at £754 million. During the quarter, SG and A costs were reduced by 5% as recent cost initiatives began to deliver EBITDA before lever costs increased by £18 million to 325 million a growth of 6% year-on-year continuing the acceleration for EBITDA growth we’ve seen in previous quarters

Operating costs pre-lever was down £4 million on last year at £135 million, as a result of higher depreciation from the London assets, which was successfully brought into use in the quarter. As new wave revenue continues to grow, the mix effect reduces and margins will improve.

The current mix in revenue reflects that we’re continuing to migrate customers from traditional to new wave services, which has seen EBITDA for new wave rise by 19% and taking EBITDA for the quarter to 13% and 11.2% for the full year.

The margin improvement will be further underpinned by sustainable cost reduction which includes procurement initiatives, global sourcing and also as contracts mature, that will have a positive impact on margins.

We’re also increasing the replicability of our solutions. And all these initiatives will move us towards the 15% EBITDA margin over the next few years.

Now let’s focus on BT retail. Another successful three months has seen BT retail generate the second consecutive quarter of revenue growth. In an increasingly competitive marketplace, this reflects the continued success of retail strategy of innovative core pricing and value-based propositions. This has been reflected in both the consumer and the (inaudible) market places.

New wave revenue was up 28%, driven predominantly by growth in broadband offsetting the decline in traditional revenue of 6%. Gross profit rose by 4% and the gross margin increased by one percentage point. This improvement reflects and enhanced product mix and the impact of margin management initiatives. Gross SG&A costs were reduced by £55 million and reinvested in new wave services leaving SG&A costs flat year-on-year.

All four units in BT retail grew their EBITDA. EBITDA before lever costs at £228 million was 11% higher than last year, continuing the strong growth we have seen in previous quarters. Operating profit before lever cost of £179 million, 7% higher than last year. From the retail investor day back in December, you’ll remember this chart, which shows EBITDA contributions for the different parts of BT retail. It’s now been updated to reflect this year’s current performance. And BT retail EBITDA grew by 18% this year. And the growth engines were BT business, which grew its EBITDA by over 40% and BT enterprises, which grew its EBITDA by over 30%.

Moving on to BT Wholesale. With strong growth in broadband more than offsetting the impact in lower core volume and lower regulatory prices, both external and internal revenue increased resulting in total revenue for the quarter being 4% higher at £1.9 billion. This growth flowed through to the gross variable profit, which increased by 4% to £946 million.

Despite greater 21 fee and expenditure, network and SG&A costs only increased by 2%, reflecting the benefit of cost efficiency programs. These sustainable savings were delivered by concentrating resources in value added activities, global sourcing where appropriate, reducing overhead and support functions and also widening the skill set of our network engineers in opening a more flexible deployment of resource.

As a result, EBDA before lever costs increased by 5% to £496 million. Depreciation has however risen by 15%, as legacy asset lives have been shortened to reflect the roll out of 21CN. This combination has resulted in an operating profit of £167 million down 10%.

And finally, OpenReach. Strong market volume growth has more than offset the WNR price reduction in prior periods, and increased revenue by 2% to £1.3 billion.

External revenue increased by £82 million or 67%, whilst revenues from internal channels declined by £56 million or 5%. Operating costs increased by 6% to £838 million, driven mainly by increased LLU volumes and continued investment in service levels and the effect of inflationary pressures, all of which have been partly offset by efficiency programs.

This resulted in EBDA before lever costs reducing by £22 million to £487 million. Depreciation reduced by £53 million due to the lengthening of the economic rise of copper and (inaudible) at the start of the year. Operating profit before lever is therefore increased by 11% or £31 million to £310 million.

From a group perspective the operational performance of all the lines of business translate into the fifth consecutive quarter of year on year EBDA growth at 2.6%, and the ninth quarter in an improving trend.

This is of course fed through into free cash flow which was a net inflow of £1.6 billion in the fourth quarter, driven by the strong EBDA performance, another strong working capital performance and a tax payment from HNRC. Capital expenditure for the quarter at £836 million was up 6% on last year due in part in planning differences and accruals.

Looking at working capital. As I said in season three, due to the seasonal cycle of wholesale billing customer year ends, our quarter for working capital experiences a strong pick up and this quarter four was no exception. £730 million pounds of improvement was a successful result of a continued focus of working capital right across the business.

Including the effective clearing of aged debtors and a timely collection of new debts effective management of supply payments during the year also continued into quarter four.

I’d like to talk about pension and tax in a little more detail. During April, we paid an additional contribution of £320 million to complete our funding for the next three years to 2008-9, brining the total amount paid into the pension scheme to £840 million.

The IS-19 calculation showed a pre-packed deficit of under £0.4 billion, that’s £2.1 billion lower than the end of the last financial year. The pension scheme assets have performed strongly and at the year end stood at £38.4 billion and it’s worth noting that as of the end of April under IS-19 is in surplus. The pension interest treaded for 2007-8 financial year will be the same as the year just completed.

Moving on to tax. The quarter for effective tax rate was similar to that of quarter three, resulting in the full year effective tax rate being 24.5%. In April, we received a remaining £504 million from the tax repayment and for 2007-8 we expect the tax rate to be between 25-26%.

And in the medium term we expect the rate to remain below the statutory tax rate. The impact of The Chancellor’s Project in March means that in from 2008-9, we expect a £50 million improvement in earnings each year.

However, the change in capital allowances and based on our future capital expenditure profile, means that we will pay out approximately £50 million extra per annum in cash term for full year starting in 2008-9.

Moving on to capital expenditure for the year, Cap-Ex expenditures for the full year were £3.2 billion, the level we previously guided to at quarter three. And we expect this level to be maintained over the coming year.

As you can see, OpenReach access capital expenditure was broadly flat, but legacy core networks spend has come down nearly 35% or over £200 million. This has enabled us to increase spend in key areas of systems and software which is up 56% or £350 million.

This has been driven in part by higher demand for LLU and further investments to make our commitments under the strategic review. In addition, Global Services New Wave also saw increased investments in the NTLS Global Network and in our Network IT Services Contract.

Our performance to date has demonstrated our continued successful execution of a consistent strategy that has led us to 20 consecutive quarters of earnings per share growth.

The momentum we’ve established in recent years in growing in new ways, implementing process improvement, (inaudible) margin management and driving cost efficiency, will enable us to continue to grow revenues, EBDA, ETS, and dividends, over the coming year.

This gives us the visibility and therefore the continued confidence to accelerate our dividend payouts, and to announce a new share buy back program of £2.5 billion, expected to be completed by the end of March 2009.

With that, over to you Ben.

Ben Verwaayen

Thank you very much. Let me borrow a slide from Christopher, because this slide tells you where we are today. Interesting, you can have a perspective about what it means, but we should talk about the relevance going forward.

So, we arrived here, now what? Now look at this one. I’ve said it many times, if you look to the trends, you’ll understand where the company’s going and these are important trends to look at because they tell a story that basically says, we have options, we have choices to make.

We could continue on the path that we have here and you can expect where the company will be quarter out, two quarters out, five quarters out. Or, you can take this opportunity and accelerate.

If you compare where we are, you could use this slide. You compare yourself with your traditional colleagues in the market. It’s a great slide to look at, to make it. But the question is, does this tell the story? I don’t think it does, because this is behind us.

It’s not the story about what’s in front of us. There is much more in front of us. And this is why we have built the capability within our organization and we have built a brand in the market that allows us to go forward more rapid than anybody else in our segment.

This is new wave business. It represents today, 40% over total revenue and it’s built from the components that we’ve discussed many, many times. And about each and every one of those components you have warned us what could happen, and guess what? They all happened.

So thank you for the warning. At the same time, this is the result. We have the capability to absorb the market results and to gain from that from strength to strength. And the question is do we have the capability to accelerate from where we are today?

Now in order to judge that, you have to look to what the market says about us. And I don’t mean the financial market, I mean paying customers. So let me walk you through what paying customers say to us. Where in the global services business they say that we like what you offer and we like it to the extent that we’re getting more than 200 new corporations this quarter joining the customer list of BT and you can see the a whole variety of customers here.

And I’d like to draw your attention to one of them, Anglo American, because it has written behind it in cooperation with HP. Now that’s very significant, because it tells you that we have to today take capability to work with partners and to go through market spaces and places we couldn’t go before.

And we have the capability to execute in a way in partnership that is more than is printed on a brochure. These are wins that demonstrate our capability to go from relatively small to the very large. £3.4 billion orders received in this quarter brings the year to a £9.3 billion orders received for global services. If you look to the trends, this has been our second best quarter ever. Even if you include the jumpy things like 1 billion more type of orders.

So there is a strong message here. Equally strong is the message if you looked in broadband, certainly a subject where people are seeing all things coming. Our last two quarters were our best quarters ever. And if you look to where we are today with 32% market share, 34% of install base. It tells you that we have a concept that is delivery. And it’s most delivery to our customers.

Now if you look to the market in total, it is a growing market and its still growing. And guess what; LOU is growing. Great for Steve and his business. We’re very happy with that. £2 million is a good number. And at the same time (inaudible) has grown as well. It is a growing market, and this quarter 800 thousand extra connections, we’re going strong quarter after quarter after quarter. Because it’s irrelevant what we sell to our customers. It is not just high-speed internet access, it is a platform for them to do all kinds of things they couldn’t do in the past. They can organize their lives and the benefits in social networking and sharing information in banking and do all kinds of things they couldn’t do before. It is relevant, it is affordable, and it is easy to use.

Today, we can tell you that we are the number one for market sharing. That’s great to say. I think it’s even more important to say, we are the number one for service and quality. Not because we say so, but because our customers say so, and institutions say that. So we are in a very strong position, based on a choice we made early on, that broadband is not just an access line. Broadband is a platform. And look to what you can sell to them. You can sell so much more than what you could do in the past.

Now if you look to this chart, it tells you two stories. People like to spend with us because they get true value, so the offer goes up. And the offer goes up in things that really matter to people. They spend money on services they recognize and they will build from there. So you can see here, that in a relative short period of time, we have 1 million plus home hubs in the UK. They are in stores, in houses, in homes, in places and we have access to those customers with all kind of new services with a simply software drop, allowing them to get all kind of new services.

We sign up to two thousand people a week with the home IT advisor, a service that helps them to manage their own hassle, because that’s what people want, get the hassle out. And what they want further, it to have the certainty that their live hoods, which is on their computer and with their computer, is safe. So look to the number for digital (inaudible).

We are more than from a line to a capability to a service. And we have done that based on the conviction that we have as an organization that we bring as a differentiation, customer service and capabilities. Now, I said to you, we’ll do 1 million more customers by June of this year. We do 1.4 right now. It’s great to talk about the numbers, it’s better to see how those numbers translate into the so watchful customers, what they can do with it.

And one of the exciting products, of course is BT vision, because it allows the TV to be something else than what it is today. It allows the ability that you have in the interactive reality of your PC to be translated to your TV. And we have been very open in how we start with BT vision. We’ve been open with you that we will hand hold our customers in the first phase. We’ve been open with you that we will ramp up, but in a managed way. And we promised that we would start, somewhere around this time, with our marketing campaign. I think we’ve kept all the promises, so far, which is good. So let me keep the promise to show you how we start our marketing campaign.

[Commercial being played]

Right, so BT business. A fantastic story, because today, BT business is able to allow their customer base, small business and not so small business, to focus on what they do best, their own business. And enable them to communicate in an e-enabled society, with everybody and everywhere, based on platforms that we build for them, hassle free.

So if you look to our portfolio, it’s not a lines and call business anymore. This is a business about e-platforms. This is a business, which allows the integration of hardware and software to become available to the business markets in the UK, in an unprecedented way. And what it is to have a web portal, what it is to have an e-commerce platform. Or whether we bring traffic to the website of our customers, it is all software enabled. And it allows customers to do what they do best, their own business, hassle free.

So this is a business, which is transforming as we speak. And you saw the financial transformation, which is taking place. If you look to the products and the relevance that we have for our customer base, it is a fantastic story.

Now (inaudible), are the stories for BT Wholesale and BT OpenReach. Let me start with OpenReach. The past year was a monumental task. They had to do two things at the same time, get started as a new organization, and at the same time, deliver on TSR, and deliver on customer service to their customer base that was expecting miracles around the corner. I think that if you look to the performance that OpenReach had, and the way that they have managed all those challenges at the same time, they have done a terrific job.

A TSR, which has more than 99% delivery on WLR, here it, is. A capability to bring the service levels up, while at the same time, really from scratch, redo all your processes, here it is. The capabilities to have a LOU market when the market is down. It’s the choice from customers how to deal with that market, and I think (inaudible) has delivered that. That’s a great promise going forward. And one of the interesting things that happened because of the increased ability for OpenReach to deliver, was the opening up of the market on the wholesale level while people would look to opportunities much more realistic and look much less in a friend or foe environment. And therefore, there is a whole new market established. Where on a wholesale level, you talk about what is for us, whoever you are, the best way to go to this particular market. It could be to assets, as you do in the LLU environment, or it could do the opposite, not our capabilities, but let other people run it as a wide level basis.

So the performance over reached on one side has opened up a tremendous opportunity for wholesale on the other side to serve a market because we have established the credibility that wholesale customers are serious, important customers for us, and therefore I am very happy to announce today, that last night we signed the biggest ever (inaudible) sale contract for BT wholesale with the post office.

And if you look, it's an important one, not just for the size of it, which is very, very big, but it is important for the depth of it. It allows the post office to differentiate itself in the market, while BT wholesale will do the heavy less important.

And I think it's a good model, it's a great (inaudible) and its underlying (inaudible) in this market and the growth opportunities they have out there for BT wholesales.

So, we are delivering for our customers, and I think we can make a great commercial, we can. But it is all about higher quality, it's about getting it simpler and faster, and making sure that we are more efficient in doing that.

So this could end the presentation, but it doesn't. Because we're going to listen to is what the investors tell us.

Now, basically what they tell us, very balanced of course, give us more cash, increase your returns and by the way these are the points we're looking at, and I could go one by one and say are were going to deliver, and for all of these elements, I think we have a great story to tell, because we agree with all those points and we're working on them, and we're delivering on them, and I don't think that on any of these points, we have a disagreement.

The question is, driven by customer service, driven by our success in the market, doing all these things here, what will it deliver? What? I think what we're going to do, is deliver more, because what we're going to do, is to take the journey that we had five years ago when we decided that we wouldn't no longer be a narrow band company and become a broader company, using that experience in our teleware.

And we have decided not to be what we are today, but us be something much more exciting. We're going to be a service provider with global reach and we're going to be absolutely the leading one.

And our strategic initiatives that we have taken and the cancellation of the sole one of that is what I would like to share with you.

So, first of all, one of the biggest elements in the performance of a service company is time, because time is money, is cost. And time is an element of your service capabilities to your customers. Are you capable of delivering at the time that your customer wanted, or are you organized to deliver at the time that it fits you, as the supplier, best?

The latter is the case traditionally, in the telephone world. In order to make the change where time is a cost element and an obstacle to an environment where time is a differentiator and a benefit, you have to prepare your service capability to the extent that the only thing you need is a push of a button. If you use a screwdriver, it will cost time. Somebody physically has to go out and physically has to do things with the likelihood that something will go wrong or not.

But with the push of a button, it's the drop of the software that if well tested, will mean immediate satisfaction.

So can we design ourselves, to an organization that (inaudible) to an organization of delivering minutes. That is number one task that's ahead of us, and as was said yesterday.

So the second important thing is, OK, are we global? You may have noticed something on this map, there are no dots on this map. Normally companies show on the globe with dots on it.

In the old days (inaudible) forward looking companies with their customers on the map with dots. Why have we no dots? Because we will go where our customers are. It doesn't matter, we will be there.

We will find the best suppliers wherever they are in the world, it doesn't matter where. We will have the global sourcing from wherever it's best placed, because that's where a (inaudible).

So, as a company, we will take the globe as our working space, and we will follow our customers wherever they may be, and wherever they are, and in the new environment we have that capability to serve them on the globe, that's not limited by our dots.

And the third element, is this one. The limitations of what you can sell can no longer be the limitations of your own innovation. If you truly, truly, truly want to deliver value to your customers, you have to accept that the value creation is made by clear parties. Sometimes by your own customers, they make their own content.

They may work with you, they make compete with you, with their own content. They may work with third parties and they make work with whomever they choose to. So you have to create a capability that's truly open, and we think we know how to do it, and make money, more money than we can make today.

We're going to build that neutral infrastructure, service neutral, we call it 21C, on a global basis, on top of which you will have capabilities that we can use over, and over and over again.

A traditional (inaudible) builds products and services in a (inaudible), built from the latest technology and of the insight of the product manager and of the insights of whoever works with it.

And those insights are great things to have, but limitations to combine with other stuff. In a very flat environment where you re-use and re-use over and over again, you make capabilities available to everybody. It's much easier than to build from there a software environment where everybody's idea and concept can be put on top.

So the three words that I want you to remember about our future strategy that will seriously deliver advantages for us are: Net worth, real time, or customer time, global in the real sense of global, and open, in the real sense of open.

And those things will deliver for us transformational tools that are truly important. Using those points, is as exciting a journey as the journey was between narrow band and broadband.

It will open a whole new dimension to our capabilities to produce results. It will enable, it will enable our customers, it will deliver right first time and it will enable us to, as a company, organize ourselves much faster, much better and much simpler.

And at the same time, what it will do for us, is look into the speed in which we serve the market, and it will reduce the cost rate with which we have to operate.

We're pretty good as a company on cost. We have done for years, approximately £400 million a year on costs savings.

Last year, last fiscal year we did five £500 million. It is safe to say this year we will do at least £100 million backup, and in 08/09, we should do better than that.

So, we have a capability to accelerate in our cost management to take off (inaudible) and create for ourselves the opportunities to choose.

And the story that we give here to you today is, there are exciting opportunities for BT ahead of us, because of the choices we have made.

To bring it all together, I think we have a strategy that works, and that's now refreshed that has no elements to it. We have an execution capability as a corporation to get it, and to get it fast. We have a momentum working for us and we have the confidence that we will deliver.

Thank you very much.

Question-and-Answer Session

Sir Christopher Bland

OK, questions I'll go right centre left, Sir.

Paul Howard – Cazenove

OK, great thank you for that. It's Paul Howard, Cazenove A couple of questions.

Firstly, it seems quite an upbeat message from you. Well you talk a lot about the acceleration and I don't want to ask you to give another profit forecast but are you sort of saying that you'd be disappointed if you don't see an acceleration in revenue growth in any EBITDA in the coming years.

And then in terms of relating to that term to the balance sheet, it’s probably fair to say the balance sheet is not as efficient as it could be and you’ve left yourself some significant headroom. Perhaps you can talk about what investment opportunities you see emerging over the coming years, whether organic or in-organic in nature.

Ben Verwaayen

I think I’ve been upbeat for a reason and the reason is that we have great opportunity in front of us. That translates into a better capability to reduce our costs, to accelerate where we think we are winning in the market.

And I think you have seen a direction that we have taken that gives us great confidence that we can continue the momentum that we have. If I look to the balance sheet, it’s kind of funny that today we announce a £2.5 billion share buy back, that’s always the start of a new discussion. I fully appreciate and understand that, but I think that the £2.5 billion share buy back is another point of evidence of our confidence that we have in our future.

Unidentified Analyst

A couple of questions. One, on the restructuring, maybe you can give us a sense of the composition of that and how much stealth there is to it, could it go up or down. And what are the kind of benefits you see coming from that, totally incremental to what’s been announced before.

The second question, which is on the unbundling subs, can you give us an idea of how many of these 2 million subs you’ve got on unbundling that are fully unbundled?

Hanif Lalani

The first question. On the restructuring, the £450 million incorporates a number of things. They’re about process costs, there are systems costs, there are lever costs in there, there are skilled transition costs in there, and it’s our best estimate of what we think is likely to happen.

In that context, I’m fairly confident today. If I look at that cost, I’d treat it like any other investment that we’re making in the business, and I expect that the pay back for that cash out flow. And we think that we can generate, and I’m sure we will do better than that, but we can generate a pay back within the third year.

If I look at the MPV of that it’s about £1 billion worth of MPV. Most of it is incremental. So if I take that answer and combine it with Paul’s question earlier about cost savings, I think what it tells you is that I’m expecting EBDA and EPS earnings to be upgraded.

I know some of you have, but bear in mind that we should move from some of the consensus figures.

Ian, second part?

Ian Livingston

The only significant crew unbundler at the moment is (inaudible) Warehouse and I think you’d be better to ask that number from their point of view. What we’d say, however, is we can see a significant acceleration in unbundling in the course of this year and as we get into the second and third quarter we’ll several of the significant players having aggressive unbundling programs.

Laura Mills – Merrill Lynch

I have two questions. First, on the new wave, we’ve seen over the last few years the tremendous success you’ve had in growing new wave revenues. Is there any sense at all of how much EBDA operating profit is now being contributed by those new wave revenue streams, just so we can get a sense of where to base our forecast from here?

And secondly, on the restructuring charge, I wonder if I could ask which of the business units we should expect to see the EBDA benefits coming through? Thank you.

Hanif Lalani

On new wave, I think what you’ll see is the fact that the order intake has been an excellent year, £9.3 billion. I think that that will flow through into revenue growth in the future. At the EBDA margin level for the whole business on new wave, I think what we have seen is an improvement on EBDA margins over the last three years and we expect that EBDA improvement to continue.

What we don’t want to get into is the game of diving on every line on a PNL but the margins on new wave have improved and are getting stronger and we expect that to continue.

Ben Verwaayen

I think there’s a three-fold impact. I think there will be an impact on every line of business to some extent. I think obviously with the creation of BT operate and BT design, there will be an element of investment in those areas in terms of the processes and systems to announce the quality of service and the resilience we provide.

But I think if I look at all four lines of business, I don’t think any one stands out compared to any other. I think it’s just a different kind of investment for each line of business.

Nick Lyle – UBS

Of the 21CN won so far, have any savings been taken in the savings for this year, the £500 million already you would have classed in the original £1 billion of savings of 21CN?

Secondly, you talk about efficient balance sheet, could you mention to us what sort of efficient net debt EBDA might be for BT now?

Paul Reynolds

I think you should see it as a big investment program. This year was approaching the peak of investment with the most capital, but benefits as well. So most of the product launches you see in the business are much more efficient product launches because they’re using energies and the capabilities that were built with 21CN.

So net net, you’re seeing the costing invest and the cost savings coming through, although they’re less. But over this year or next year you are going to see cost savings really accelerate and the benefits of that investment come through.

Nick Lyle – UBS

[Question Inaudible]

Hanif Lalani

We haven’t separated out but it’s in there.

Balance sheet. If I look at a balance sheet, yes, we are moving towards a more efficient balance sheet. A lower rate on average cost per capital and I think that it also allows us to retain a level of flexibility into the future.

I think the key thing here is that we want to remain a solid investment grade credit rating and I think that’s fine, I don’t look at other metrics. Thank you very much.

Christian Maher – Investec

Thank you very much. Firstly on the M&A strategy itself, is it with a new chairman coming in, do we await a new strategy if you like or do you expect it to remain (inaudible) in terms of size, mainly looking at level services in terms of broadband?

Second, it’s a little bit cheaty, but in terms of the extra cost cutting that you’ve announced, does that in any way allow us to think about an even higher than 15% margins in global services.

Sir Christopher Bland

First, I don’t think a new chairman represents a new strategy. Our strategy will continue to evolve and he will have an important part to play in that evolutionary process. He’s absolutely committed to and has been involved in (unaware of) the decisions that we’ve announced today.

Hanif Lalani

Second, it think it is a bit cheaty but I think we’d all be happy in this room if Francois gets us to the 15% in a few years time. So I think that that’s the key focus, rather than looking at anything above that.

Unidentified Analyst

So you’re talking about gross costs cuts accelerating this year and beyond. Can I ask you to go a little bit further than that and talk about your total operating costs? Are we talking about total operating costs actually falling over that period?

The second question, no results of the presentation would be complete without my word on Cap-Ex. Could you restate your position on fiber roll out and whether that has evolved? Fiber roll-out in the local industry and are you still intending to cut Cap-Ex by £500 million by the end of the decade.

Hanif Lalani

On operating costs we have to bear in mind that we have a strategy, which looks at traditional in new wave. So in the traditional areas, there’s no doubt in my mind, we are reducing the cost base. We are trying to enhance the margins we’re getting through them. And you would expect lower operating costs.

Now on the other side, which is new wave, I think it’s an investment case, and I’m happy to invest more, providing there’s a benefit and a financial pay back. And when you look at the group level you see the net impact of those two items, there is a benefit in the financial payback. And when you look at the group level, you see the net impact of those two items, netting out, or growing, or declining. So, I think looking at the group level and saying, we want your upgrading cost to do x, y and z, I think is a difficult way to guide anyone. What I do expect is traditional cost base to come down, new ways to grow, providing us clear evidence that there is a payback for it.

Ben Verwaayen

Let me first say, crystal clear, yes we are going to see our CapEx falling. That’s what we set, that’s the model and that’s the model that we are going to do. A separate issue is what do you do with fiber. I think we have a very dynamic, is probably the word to be used, market when you look to the ideas around fiber. There are people who think that that’s the end all for everything, and therefore you should bet the house on fiber, and there are people who say it is not going to be that way. I think we have been very very pragmatic. We do fiber work make sense. And in new builds and in those areas where there is a business case that you can make will do that. On the other hand, we’re just having carted our trial for 24MB on 21C network. So with 24MB you have a total different reality on popup. And don’t expect us to go out and radically change our forecast, what fiber will do. But we have an open mind to what the market will say.

Unidentified Analyst

Can you tell us what the headcounts you think BT will have in three years time?

Ben Verwaayen

Well, let me first say that I’m extremely proud of what we are doing in re-skilling. We had 3,000 people in admin jobs that are now revenue generating people in the IT area. So that’s a fantastic capability that we have in house. We have a strategy and we’ve talked about it for years now that says we are going to reduce our head count in the traditional, we’re going to expand in the new areas, and we’ll make sure that we make that transition as efficient as possible. Some of that has to do with our voluntary levers programs. Some of it has to do with retraining. Others have to do with re-skilling and global sourcing. And I think that that’s exactly the program we have in place now. So if you ask me, what is the headcount of BT three years out, I hope it’s as high as possible, because that means that we are growing in our new areas more even than we think we will do today.

Unidentified Analyst

Just rephrase it slightly. If this was BT sized now, in three years time, what do you think the headcount would be?

Ben Verwaayen

Oh, that would be less because we have efficiency. And we have great efficiency as we said. So without grown, of course the headcount would go down, and you’ve seen our programs. But the good news is that BT is not a steady-state company, it’s an exciting company, it’s growing in many different areas. So, therefore the question about total head count is probably a question you will see going up.

Unidentified Analyst

OK, thank you.

John Clarke – Brewin Dolphin

I’m just a little bit confused, as to the difference between the restructure associated with your setting up with BT Operations, BT, the other one sorry, I’ve forgotten. A better flavor of before and after, perhaps, to say what is actually going on there. And also, how much is cost-associated with the growth of the 21st century network. And second, perhaps, how do you think we ought to look at the quality of the pension earnings which nowadays appear as the credit of the profit and loss accounts and the boosted our earnings per share forecast to a lovely degree.

Hanif Lalani

BT Operations and BT the other one, BT the other one is quite a catchy title. We should latch on to that, now what was the question?

Let me the pension interest question first. As I said earlier, I expect the pension interest credits to remain flat this year to next year. And I think that, the key here, we moved from UK Gap to IFRS. And when we made the transition from UK GAAP to IFRS, we restated our whole P&L. And when we did that, we analyzed the previous year, the current year, and we said, look, if you look at ETS it stayed broadly the same. If I remember correctly, the difference was less than 0.1 pence. So it’s negligible.

Now what’s happened under the new accounting treatments, is everyone is focused on one line called the pension and interest credit line. Nobody ever talks about, what about the lease cost, have we gone above that line, what about the share option cost. So everybody is focusing on the down and not on the up. So I’d just remind everybody, when we transitioned from UK GAAP to IFRS, it was hardly a change. And some areas in the accounting world, you get a benefit on the P&L. There are other areas, you get movement going the other way. The benefit for us is on the intricate interest line, the things that have gone against us have been above the EBIDTA line. So that makes a negligible difference.

John Clarke – Brewin Dolphin

In terms of the (inaudible) question, what’s the quality of those earnings?

Hanif Lalani

Well, you could work that out yourself. But, you’ve got the take, you can’t focus only on that. If you took that on its own, you’d go to the accounting professionals and say, where you at? And when I used to be chairman of NFC, and 20% of our earnings were in the so-called pension credit, it was non-cash, and yet there it was. Now they’ve changed. But, you couldn’t have regarded those as high quality earnings. This is a bit different. But take it all in certain, you’d tell the accounting professional again, think it through. And blatantly, they’d need to, but they’ve got to think a lot of things through, not only that.

John Clarke – Brewin Dolphin

And just to re-track. The dividends are 16.1 pence for the full year for the full ETS number including the pension interest credit, and it’s a two thirds payout?

Unidentified Analyst

Sir Christopher, if it is the party you are leaving, what priorities would you have in your new piece of paper?

Sir Christopher Bland

Well, luckily, that’s why my breaks, he is working on his own piece of paper. And you should advise your successors and you certainly should advise your current colleagues. There is plenty to do at BT. I think that Ben and I would agree, the process of changing BT into a genuinely world class organization is still to be completed. We’ve come a long way, we’re very good in the UK, particularly when compared with our competitors. But we are not yet world class as a service organization. That is the first.

There is continuing opportunity to cut cost and precision presents that as a continuing opportunity to grow and innovate the business. I think that he’ll be able to work out his own list. There are plenty for BT going forward to do. And to continue to grow in the next five years as it has in the last five. There’s no doubt in my mind. BT is a really good, strong company, but it is not yet perfect. And in a sense, in those imperfections, lie opportunities to grow the business, to cut the cost, and to make it even better.

Steve Malcolm – Arete

Two questions, one on OpenReach and one on Retail, please. On OpenReach, one’s telling us that we’ve got a regulatory view coming up in the next 12 months, in which the current price cap will move to an actual regulated price. Can you just talk us through what you think the implications of that on the cost of copper, LOU and WLR, and whether that has any bearing on your BDSL plans and the possibility of taking some BDSL network build into the regulated asset base going forward. And second, on retail, can you just give us an idea of what you plan to do with your wholesale price productions. Will you pass it on to consumers, will you use a bit of it to fund TV, or will you just run with a little bit more profit? Thank you.

Hanif Lalani

All of the above. I think the regulatory place of you, which I think off common target getting half completed by April next year, is a big opportunity for us actually. Because at the moment, everything is being put up by products are completely ad-pop basis. And it’s very important to be sure of the regulatory framework for which it’s going to operate. We are at the very early stages of that…very early stages of discussing the dot com. But clearly, that’s going to be something that’s critical for the future. So what I should say is that we’re very aligned with dot com, in terms of the need to provide a stable environment for the market that’s emerging.

In terms of (inaudible) asset based, the future of VDSL in terms of is it going to go into cabinet or not (inaudible) is still an open question. You're willing to protect the technology just now but it is not something that we've got a conclusion on yet.

Steve Malcolm – Arete

Is it a bit fair to (inaudible) finance schemes, you couldn't do any of that until you've got the regulatory site sorted out and OpenReach which is going to take at least 12 months.

Hanif Lalani

Well I'm not sure about the (inaudible) finance schemes but maybe if you've got some ideas you can have a chat with me later

Ben Verwaayen

I think the interesting with broadband is actually it's managed to keep the (inaudible) new customers being connected is higher today than it was a while ago. And we intended to reinvest our money and obviously capitalize on the slight reductions in wholesales prices.

A little while ago so I've had a change to plan for that and you'll see it in terms of adding more and more volume into the package, so for instance option three is now unlimited broadband use.

We'll also do some kind of promotions and you'll see a pound or two off some of the prices. But we've actually done a lot of that and really what we're going to be focusing on is putting more and more volume into the quality of our operations. And that's stuff that just our competitors can't match

Sir Christopher Bland

Time for a couple more questions. Sir?

David Wright – JP Morgan

Two questions. One is on the buyback that you have announced. The generous buyback, whether that has been pre-cleared with the pensions regulator and whether there's any risk that it might not get cleared or slimmed down or whatever.

And secondly the OpenReach debate obviously apart from financing debaters also whether it might be spun off and not been happy with that concept. So I just wondered why you were given that (inaudible), philosophically why one wouldn't want to spin it off?

Hanif Lalani

The first question, the pension regulators does not yet run our business. I do not think he would like to. And the answer is that it hasn't been cleared. Given that we think our pension surplus at the end of April was around about £1 billion, we don't anticipate any violent kickback from any sorts.

On the second, we have not closed the door and will continue to examine all the options in relation to OpenReach. But what you generously described as “the generous buyback” of £2.5 billion, we are able to do without going through any kind of exercise on OpenReach.

And in parting it might be worth quoting the Financial Times which said it's odd, that banks would lend more and more favorably secured on the part of (inaudible) than on the whole. Well, the answer is under certain circumstances that's not impossible, but within what we think is a prudent amount to use for share buyback, which is £0.5 billion more than the consensus what we were going to do, we didn't have to go down that restructuring route.

But we'll continue to look at the OpenReach, we'll continue to look at the implications of regulation on OpenReach. In an earlier question I pointed out there is an interrelationship there, and there goes our shot.

Sir Christopher Bland

Last question at the back.

Ben Verwaayen

Before we do that, before you go to the last question. There's somebody else who wants to say a few things, perhaps we can do that now.

Anthony Bolton – Fidelity International

First of all I'm delighted to be able to take part in this, your last results meetings. Our paths first crossed when you were chairman of London Weekend Television and you invited me to dinner at the South Bank offices and that was the first time I met you and also Greg Dyke and we talked about London weekend television, we were big shareholders at the time.

Later on in 1994 the company was taken from Granada and I remember you were slightly upset some of the shareholders sold out without consulting you, which certainly wasn't the case as regards fidelity. You then went on after that to NFC where we were shareholders and also then a distinguished period when I had much less contact with you at the BBC. We also used to meet at this time, I remember well, on the touch line at Pilgrim's school in Winchester, where both our sons were at the time.

Now my approach to investment is a contrarian one, and I like to do what people don't expect and go against the herd. And I'd say that your move to share BT in May 2001 was certainly a contrarian and brave one at the time. The company had nearly £30 billion of debt, had big pretax losses of almost £1 billion negative cash flow, and a falling share price.

The first thing you did was to come in to oversee a £6 billion rights issue and I remember you coming in and I still had my notes in the meeting in May 2001 where you explained the reasons and you wanted to put the past behind BT and move on to a new future. And I remember you even had some reservations about the sale of Cellnet as it was then or O2 as it is now. But this was a condition that was agreed to before your arrival and therefore you couldn't change it.

Since then you brought in Ben and a new finance director. And I remember a very important dinner in my view that you hosted with Ben where, in September 2003 you went through the new strategy for BT with some of the shareholders and talked about different things including what's now called 21st Century Network.

Now the situation today is being completely transformed: £30 billion of debt is £8 billion and you're thinking about returning cash to shareholders, £1 billion loss is now £2.5 billion in profits, and the share price has been rising strongly for over 18 months and I think my only regret is that I didn't buy more shares after that key dinner in 2003.

Christopher, congratulations on what you have achieved at BT and my very best wishes for your future.

Sir Christopher Bland

That was the last question.


Thank you.


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