BT Group Management Discusses Q2 2013 Results - Earnings Call Transcript

Nov. 1.12 | About: BT Group (BT)

BT Group (NYSE:BT)

Q2 2013 Earnings Call

November 01, 2012 5:00 am ET

Executives

Ian Paul Livingston - Chief Executive Officer, Executive Director, Chairman of Operating Committee and Member of BT Pensions Committee

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

Olivia Garfield - Chief Executive Officer of Openreach

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

Luis Alvarez - Head of Global Services Division and Chief Executive Officer of BT Spain

Analysts

Paul Sidney - Crédit Suisse AG, Research Division

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

Simon Weeden - Citigroup Inc, Research Division

Carl Murdock-Smith - JPMorgan Cazenove Limited, Research Division

Maurice Patrick - Barclays Capital, Research Division

Andrew Lee - Goldman Sachs Group Inc., Research Division

John Karidis - Oriel Securities Ltd., Research Division

Michael Robert Williams - Exane BNP Paribas, Research Division

Will Draper - Espirito Santo Investment Bank, Research Division

James Ratzer - New Street Research LLP

Lawrence J. Sugarman - Liberum Capital Limited, Research Division

David-A Wright - Deutsche Bank AG, Research Division

Stephen Paul Malcolm - Arete Research Services LLP

Operator

Good morning, ladies and gentlemen. Welcome to the BT Central Auditorium, and to BT's results presentation. Can you please make sure you have all mobile devices switched off. There are no fire alarms planned for today and in the event of an alarm sounding, would you please leave the auditorium by the 2 fire exits at the front of the room. Before we start, we need to draw your attention to the usual disclaimer on forward-looking statements. Please see this slide and our latest annual report and Form 20-F for examples of the factors that can cause actual results to differ.

Unknown Executive

The games at the 30th Olympiad 2012 are awarded to the City of London.

[Presentation]

Ian Paul Livingston

Hi, good morning. We thought we'd start off with that video for a number of reasons: one, it's a great video; secondly, of course, the Olympic Games was delivered in the quarter; and thirdly, as if you didn't need reminding, the company that really brings you the best sporting event in the world. But let's hear a little bit more about Olympics with just a short moment later. I suspect we should probably talk a little bit more about the financial results.

And the message overall is we've taken some hits, hits on regulation, hits on recession, and we'll go through what the actual underlying position is, because there's some one-offs in there. But the net result is, as a group, EBITDA was flat. Actually, it was marginally up, but we're not going to try and claim 0.1% up. And EPS up 7%; PBT up 7%; free cash flow, very much in line with expectations. We said it would -- there was going to be some timing differences in this quarter. And interim dividend, up 15%, that reflecting our confidence in the future of the business as a reiteration of our guidance for the full year.

Now because there's a quite a lot of one-offs, I thought probably the easiest thing to do was actually show you when you subtracted and added the one-offs, and the areas, there were some things that happened last year and I stress, that we were very clear with you when the depositives happened last year, they haven't suddenly discovered them. They were things we said last year, and some things that happened this year. Trying to say, well actually what's the underlying position. We've done it for revenue and EBITDA. First of all, on revenue, if you look in Q2, when you take off the effect of FX, disposals, and particularly in global services there were disposals, the effect of the accelerated milestone. If you remember, we were very, very clear last year, the accelerated milestone that actually gave us growth in Q2 last year, and the effect of ladder pricing.

Ladder pricing, Tony will talk about in more detail, but it was a Court of Appeal decision that causes us to have to reflect in the wholesale numbers, and so it's hit wholesale and we have to catch up from the beginning of this year.

The net result of all of that is that revenue was down about 3.6%. That's not a great number, but -- and it's slightly worse than last quarter, but that's the scale of it. And I would stress, we expect these numbers to improve in the second half of the year. We think there's underlying improvements in our trading and we're seeing a number of areas of investments we're making having positive effects and, of course, some of the one-offs also will not be in the second half of the year.

And the same story in EBITDA. When you get down to the bottom line, is EBITDA improved around about 3%. And that carries very much the trend. We've been 2%, 3-ish percent EBITDA growth for a number of quarters and very consistent. And the message there with the revenue -- with the challenges, we're still able to deliver on the bottom line, we still deliver and in fact over-deliver, I think, on the cost side of it. Because frankly, if the environment is more difficult, you've got to look to more self-help, and that's absolutely what we've done, whilst continue -- and I must stress this, whilst continue to invest very much in the future of our business.

And Global Services, obviously, in terms of the headline, the 13% decline, actually big item there, milestone, FX. If you look at their underlying performance, down 6%, previous quarter, 6.3%, very similar. The economic position hasn't changed. We're seeing double-digit declines in Spain and Italy. They are a difficult market. However we're seeing double-digit growth in the fast-growing economies. I'm encouraged, and I would point this out, by the order intake. Order intake at GBP 1.3 billion, up sequentially from the GBP 1.1 billion. Some good orders at BT, one of our biggest orders for quite a long time. New customer to us, taken from one of our competitors. But also renewals, for instance, with people such as Mars, extension with the EU, Surrey County Council, a good win. So we're pleased with that particular number.

Now on one hand, you've got the Global Services revenue, and the revenue is difficult because the environment is difficult. The other side of it is cost because, frankly, in a more difficult economic environment, you have to work harder. And there's -- and Global Services have been working harder, and underlying costs at transit, down 9%. However, there is a lot more that can be done with Global Services, the point I made before. And it's a point -- Tony will talk about some of the areas where we think there's real opportunity. In fact, Luis Alvarez, who's our new CEO. Luis, if you want to just -- so you all know Luis, and you can all go and pin him down later if you want to ask some questions. He knows to rush out the emergency door. But Luis and Tony will be working very closely together on delivering both, one side, I think, a continued improvement in a very competitive market and we're doing okay, I think, in that marketplace. But also on the other side, delivering some of the same efficiency gains that we've seen in other parts of our business, deliver a simpler, better quality business, but one where the financial results for Global Services are more consistent with the position of a global market leader. And Global Services is a global market leader.

Now we did see an improvement in EBITDA. Global Services, sequentially, is down year-on-year about sequentially. And one of the things, obviously, its cash flow is worse, but very much that's a working capital story. And you can see in the chart on your right, that's the working capital story. We just show EBITDA minus CapEx, and what you see for Q2, it's pretty similar over the last 3 years, and what's been the delta between last year and this year is working capital.

Now moving to our Retail business. Well, first of all in Retail, on costs, really following the point I made about Global Services. The chart in the left shows cost reductions in Retail. And what you see is 6%, 7% cost reductions quarter after quarter after quarter. Been doing this for a long time, and continues to do it, and we believe there continues to be opportunities. And that is despite some very substantial investments in the areas such as TV and in broadband.

Now looking at the individual parts of Retail, first of all, our consumer business, revenue down 3%, pretty similar to last quarter. It's the same story in the movement away from calls and lines. I mean as you see in the KPIs today, actually calls represents now -- is a much more part of our business than broadband is, and we're seeing that big change happening. And it's, I think, something that will continue. But we've seen the lowest level of the line loss for 5 years, still loss as we see it. Broadband, however, continues to go well, roughly 50% market share for the first half of the year, 47% in the second quarter. Very pleased with the progress on Infinity, fiber net adds of 160,000. Now we've got over 875,000 fiber customers, and so very encouraged by that. And that's been one of the key drivers after the growth of broadband in consumer ARPU, which is up GBP 5 quarter on quarter, and 6% for the year as whole.

And Virgin continues to do well. You've seen the Virgin numbers, you've seen Sky adds, and you see Virgin actually continues to do well against both of these competitors. And on the subject of Virgin, whilst we will give a lot more about what the proposition is, how we're going to distribute it, et cetera, much needed at the time that we're actually launching it because you can understand what we may have, our clear view of plans and what's likely to happen. And I think it's important that we save that nearer for the launch. What we are doing is we're building up in 2 key areas, content and people.

First of all in content, obviously, you know the English Premiership but we've added to that, football will be showing in Italy, we'll be showing the French First Division, which I think with the growth peel [ph] at PSG, and what they're doing, will be some -- are very exciting. And also Major League Soccer, so David Beckham will be there and also, Brazilian league, so you'll be seeing the Chelsea and Manchester United stars of the future there. Except they can't afford them.

But we also have, in addition to football, and the white football, and those leagues who just signed up, could give us the ability to show 1,000 games. So a lot of really high-quality content there. Rugby Union, English Premiership JPMorgan Asset Management 7s, also the French League. And also, as some of you may have noticed in the paper, some debate about European leagues. We have signed up with the English Premiership clubs that any European tournament they'll be a part of, we will show.

So the content's building up nicely. We've obviously -- to answer a question you're about to ask, we spent the live show money we're going to spend. We'll look at opportunities, we'll continue to add, but football and rugby are the most important things, overall, and they're the most expensive in the marketplace.

In terms of people, great hire as our key anchor Jake Humphrey, so if any one of you watch Formula 1, if you watch the European Championship, and if you watched the Olympic Games, you've seen him very much as the star of the BBC. So delighted that Jake's joining us. But also, our own content and people who've got real experience in producing sports content and great sports channels. And we actually do have about -- now about 50 people in BT Retail who have got deep experience of TV or sports. And so we actually are building on, but these are guys who have delivered the Olympics, they've delivered top Premiership games, and will bring a real creativity and experience, because what we will be delivering is a high-quality channel, make no mistake.

The other areas of Retail. First of all, business, I think the chart for business is summed up down at the bottom of that chart, which actually shows an improvement in the underlying position for BT Business. We've mentioned this issue of trade sales, really drops out the numbers in Q2. So trying to give a better, so what's happening in BT Business. And basically you see we've gone from being about 5% down year on year to about 1% down year on year in underlying excluding trade sales. We're winning -- in the marketplace, going to Ofcom numbers, we're winning market share. Ofcom numbers are a wee bit out of date, but we are -- no reason to think that has changed. We're growing well in the ICT market. So, the SME market remains difficult, no question about it, but we think we're doing pretty well in it. And I think the trend is now -- is in our direction, as it is with the consumer market.

In our Irish business, the quintessential example of a business where the economic environment is not necessarily going entirely in our favor. But, if you do the right things and you do them well, revenue up 1%, we've had some really good contract wins in the Republic of Ireland, big corporates, public sector, but actually also a very big win with Sky. We will be effectively providing them with the services to allow them to aggressively grow in the communications market in the Republic of Ireland.

And in Northern Ireland, which is the other part of our Irish business, we've got fiber is available to over 90% of Northern Ireland, and 100,000 people have taken it up. The real credit actually to the Northern Ireland executives, very early on, they decided to invest in fiber a few years ago, 2.5, 3 years ago, and we're seeing the benefits. And I think it's a sign for the rest of the U.K., what can be done both in terms of fiber delivery and also, a take up. So congratulations to them and to the Ireland team for delivering that.

And the other part of BT Retail's enterprises, a very important part of our business, it's down slightly. That reflects, on one hand, BT Directories and Redcare being slightly down, but also that our conferencing business which has been quite a good growth engine, it didn't grow as much in the U.S. We saw very, very strong growth in many parts of our conferencing business, but the big weight of conferencing has been in the U.S. and we didn't do so well. That wasn't a market issue, that was a delivery issue. And the new management team in that area, I know, are turning that round. So we'll do -- I think we'll make a lot more progress there. But also it reflects the fact that audio conferencing as opposed to video conferencing has become very commoditized, and it's very important for our business. And it doesn't just apply for conferencing, it applies across our business. Where things are commoditized, you've got to look at how do you make it better.

We've done that in broadband, I think is a good example. Everyone had said cheaper, we said better. And one of the ways we're going to do that in audio conferencing, a key way, is an exclusive agreement we've signed with Dolby. This is -- I'm really quite excited about this, because what this will allow us to do is, first of all, take away a huge part of the extraneous noises you hear where we've got audio conferencing, people on mobiles and things like that. But also, it makes the various participants sound like they're coming from different parts of the room, so it really enhances audio conferencing. And it takes it away from the only question of audio conferencing being, how much per minute, to actually being far more close that I think it will make a real difference. So we're excited about that, and something we expect to launch in Q1 on next financial year.

Our Wholesale business. Our Wholesale business was probably the one that can reasonably say, it had the biggest impact on regulations. Unexpected impact, at least. And that was the impact of ladder pricing, which I mentioned earlier. And actually, excluding that, we were seeing a leveling off in the -- we're seeing a much lower rate of decline, and the leveling off both in the revenue and EBITDA for our Wholesale business. You see that in the chart on the right-hand side, where the black line is EBITDA, the pink line is revenue, and we were seeing that leveling off.

And the reason we were seeing that leveling off was, on one hand, improvements in costs. And I think again, it's a sign of what we can do. The SG&A costs in our Wholesale business were down over 20%. Now SG&A represents quite a small proportion of Wholesale's overall cost base, a lot will fall in network costs and things like that. But it does show what can be done in the course of a year in terms of the change in the cost base. And that is whilst delivering much better service.

The other side to it is of course, the revenue side. As much as people may wish it otherwise or whatever, the technological trends of the movement to -- and regulatory trends in terms of LLU, in terms of movement from a traditional telephony to IP, they're happening and they're going to impact. So once you accept that you say, "Well what can you do?" The answer is, you change your business model. So good example. And we launched something, a couple of years ago, called IP Exchange. And this basically, we decided to invest early on in a platform, a global platform, that allows basically the exchange of IP traffic between telecoms operator. It is growing at a great rate, grew 90% in terms of minutes last year. And it's a business that we believe can be worth many hundreds of millions of pounds to us over the next few years. It is growing very, very quickly and the future is IP. And what we said is, rather than pretending it's not, let's actually be at the core of that. And I think we've got a decent advantage in that business.

And also just the other side is Managed Services and what we're doing and also the movements into 4G. So order intake of around GBP 300 million in the quarter, another good order intake for the quarter. And also and something we're proud to have done, we've been working very closely with the EE, on the launch of the 4G service. Working very hard and we like to do that, and we'll continue to work very hard with them. Because 4G, of course, means a lot of bandwidth. We're going to have to provide that bandwidth. And as the other 4G options come, of course, we'll be looking to work with the players in that sector to provide those services. So some opportunities as well as some challenges in our Wholesale business.

Openreach. Openreach was also hit by regulations, just we expected that piece of regulation. We knew it was going to be -- regulatory price changes were going to hit by about GBP 200 million over the course of the year, so about 40-ish million pounds this quarter. So we knew that would happen in the business. And in that context, I think both the revenue and the profit performance of broadly flat is a good performance. That part we've helped by net operating costs being down. Now that was despite the impact, we did have a lot more repairs, which -- over the course of the last quarter. Basically, it was incredibly an incredibly wet spring, and we had the wettest spell for 100 years. It meant the water table's a lot higher which meant we had a much higher level of repairs, particularly underground repairs. That had a couple of impacts on it, some higher costs, and we will see that again next quarter as we carry on bringing down the work stack.

But also, it had an impact on our provision volumes because, basically, we diverted resources that otherwise would have done provision, over to repair. So it meant that we did less provisions than we otherwise would have done. And that I think is probably a key, if not the key reason, that the physical lines came down by 38,000. Actually, they were up in September and they've been up again in October, and as we start to unwind some of the impact of that. And despite all of that, 174,000 broadband net adds is a good number. And it is interesting to reflect, if you look at the chart on the right-hand side, this shows over the last decade the overall position for cable against the BT network in terms of broadband. And if you went a decade ago, about 2/3 of all broadband was provided by cable. Today, it's down to about 20%.

So clearly, having an open, competitive network and in the quality and range we've got is a good impact. And you see there's been a really big change in the market dynamics there. And we continue to see strong growth on our broadband network and of course, the move to fiber will help. And on that very subject, delighted over 12 million homes now past. We've been adding at, very consistently, around about 100,000 homes a week over the last quarter. And that's the fastest rollout program, I believe, anywhere in the world.

We originally said, if you recall when we did the fiber program, that we expect it to pass 2/3 of the U.K. by the end of 2015. And I know, and there's a number of -- I'm sure nobody in this room, who said it would cost a heck of a lot more, and it would take a lot longer. It's within budget, decently within budget, and also, we're now seeing it's going to happen at least 18 months earlier. So I know it's a very unusual thing, a telecoms project that's both in budget and ahead of time, but that's one of these. And we're also very pleased about the performance for them. And one of the reasons we're accelerating it is: a, because it's industrialized and we actually can do it; but b, we're also very pleased with what we're seeing.

So we've got no -- we're close to 1 million customers now actually connected, and that's good. And actually, if you look at, for instance, the early first 5 phases, we're well above 10% in terms of the rollout in these first 5 phases, maybe with -- and these phases have been around for a couple of years. So we seem to be doing a little bit better than the original plan for fiber, so that's encouraging. But yes, it's still early days, but I'd like to have encouraging rather than unencouraging stuff.

And so that's the commercial rollout to 2/3 in the U.K. The other bit is BDUK, the ideal that will take us to over 90% of the U.K. We've done well in the bids, we've won 5 bids to date, and we won Surrey and North Yorkshire in the quarter. Actually, with North Yorkshire, we won it, and we had state aid clearance for it, so the next day, an engineer started doing stuff. And the first customers will be connected within 6 months of the contract being signed. That's what we mean by an industrialized process that delivers. Very much in contrast if you look at what happens with some other structures that have been done in South Yorkshire. Really delivering very, very quickly for customers. So encouraging overall on fiber.

And I did say I would come back to Olympics. London 2012 was a success. It was a big success not just for the U.K. but, we've got to say, for BT. We provided communications at 94 venues. All through the leadup to Olympics, we met or beat all contractual milestones. And I tell you, there's some very, very tough ones. We didn't have a single Severity 1 incident throughout the whole games, which was quite remarkable and a great credit to our people. And it was the most connected games. We provided the most connected game. There was 7x the bandwidth used in London than in Beijing. In just 4 years, an increase of 7x. There was more tweets in a day in London than there was in the whole period in Beijing. So it was highly connected. It wasn't just around about particularly in the stadium. There was the most dense application of Wi-Fi anywhere in the world, and that meant you could be watching high-def streaming TV, 25 megs, in the Olympic stadium. And it shows what can be done. And I think we've found that it was very successful for us in a number of ways.

First of all, we were the most recognized Olympic partner. There's a Nielsen tracking survey of these things and BT was recognized as the leading partner. And that's good because there's some huge names that go with that as well. So it's good in terms of brand perception.

Secondly, I think particularly among our big customers, it changed some perceptions of BT. One of the comments we heard from a lot of our big customers, both Wholesale and also, actually, Global Services customers was, "Actually, I didn't realize BT could do this sort of thing." I think it changed some of the perceptions. And that's something we've got to make sure that we follow up with. If we change perception, I think we change perception of what we can do for these customers, and the strength and width of the relationship with them.

And finally, and really importantly, internally. Now you won't see this in a number this quarter or next quarter, but we actually showed what we could do as a team. We delivered things that previously were thought undeliverable, and the efficiency and effectiveness which we work, the empowerment of our people and what they deliver, are lessons we are going to take from the Olympics and very much put into the rest of our business. And the people who have led the various elements of the Olympics, they're going to be doing other things in our business to take these learnings. For instance, you had the BT Conferencing had now delivery for Olympics, and I think it shows using that experience and expertise into our business. So lots of very, very good stuff with the Olympics.

So in summary, the bottom line is, despite recession, despite regulation, we delivered the bottom line. That's what we try and do. Cost efficiencies, I think were better than you thought, offsetting slightly weaker revenue. We continue to invest in the future of our business. It's absolutely critical that we do so. We think it gives a real opportunity, and we are pleased with the investments we are making so far and the results we're seeing.

Overall, in most of the lines of business, actually, despite the environment, we're pretty pleased with progress. It's tougher for Global Services. It's not doing badly in terms of its revenue in a difficult marketplace but clearly, it's got a lot more to do in that environment. And even more importantly, there is a lot more we can do in Global Services.

So it was a solid quarter overall, and we feel we continue to make progress. Thank you. Tony.

Anthony Everard Ashiantha Chanmugam

Thanks, Ian. Good morning, everyone. I'll take you through the second quarter financials in a bit more detail. As Ian mentioned earlier, regulation and, in particular, the court decision on ladder pricing, has had an impact on the results in the quarter. Given ladder pricing is quite complicated, I wanted to set out what's happened and explain the impact in our numbers in the quarter.

Ladder pricing links the termination fees we charge mobile operators to the retail prices that they charge their customers for calls of, for example, 0845 numbers. So if they charge higher retail prices, the termination charge goes up as well.

In August 2011, the CAT ruled in favor of ladder pricing. However, this was overruled by the Court of Appeal in July 2012. We'll be seeking leave to appeal this decision, while supported by a number of other fixed line operators. In the meantime, we're not recognizing any benefit from ladder pricing, and have had to make adjustments to our numbers accordingly.

We've been recognizing revenue in EBITDA from ladder pricing since 2011, so we've had to reverse what we recognized in 2011 and 2012 this quarter. This and the associated cash which has been repaid, have been treated as specific items.

We've also reversed the revenue and EBITDA we've recognized in quarter 1 in our quarter 2 results, which has distorted the trend. For the year as a whole, we've expected to generate around GBP 110 million of revenue and around GBP 60 million of EBITDA, and cash headwinds that we will look to absorb by doing the necessary things that we need to do in terms of cost cutting.

Let's now move on to the income statement. Headline revenue was down 9% in the quarter. This includes a GBP 79 million decline in transit revenue and a GBP 74 million negative impact from FX. Our main revenue trend measure, which is underlying revenue excluding transit, was down 5.5%. 1.9% of the decline relate to ladder pricing and the prior year accelerated contract milestones, which we've already talked about. Excluding these, the 3.6% decline reflects the tough conditions in Europe in the financial service sector. The regulatory price reductions impacting Openreach and the decline in calls and lines revenue has been a feature for some time.

EBITDA was broadly flat this quarter, however, excluding FX and disposals, underlying EBITDA grew by over 1% or by 3%, adjusting for ladder pricing and the prior year contract milestones. This was driven by a 10% decline in our underlying cost base, which I'll say more on shortly. Depreciation was down 4%, partly reflecting some additional depreciation we recognized in the prior year, but also due to lower CapEx in recent years compared with historic levels. Operating profit grew by 4%. With interest down 3%, profit before tax was up 7%. This drove a 7% increase in our adjusted EPS to 6p.

Let me now turn to specific items. There were a number of specific items in the quarter which came to a net credit after tax of GBP 95 million. The largest of these were ladder pricing, which I've already talked about, and GBP 121 million profit on disposal of a 14.1% interest in Tech Mahindra. Tax was a credit of around GBP 100 million, largely due to the impact of our deferred tax balances, from the change in the corporation tax rate next year.

Let me now turn to free cash flow. Normalized free cash flow was an inflow of GBP 316 million in the quarter, GBP 247 million down on last year. With EBITDA CapEx and interest all broadly flat, the decline in cash flow was partly due to higher tax, which reflects our higher profits, but mainly due to working capital which, as you know, tends to fluctuate by quarter.

As I mentioned last quarter, because the last day of Q2 fell on a weekend, this has had an impact on when cash payments from some of our major customers came in. We also saw working capital outflow in Global Services, largely due to the timing of contract related receipts.

Below globalized free cash flow, the GBP 2 billion payment into pension scheme we made in March results in a tax benefit of GBP 162 million in the quarter. This was the same as the benefit in quarter 1, and we expect a similar benefit next quarter. Free cash flow was an inflow of GBP 478 million or GBP 388 million after specific items.

We'll move on to debt. We ended the quarter with just over GBP 9 billion of net debt. This was after free cash flow of GBP 388 million and GBP 157 million of proceeds from the disposal of our stake in Tech Mahindra. Around 114 million shares under our all-employee share schemes matured during the quarter, and this resulted in GBP 81 million of exercise proceeds being received. This was broadly offset by the GBP 72 million we spent on our buyback program. Finally, we paid last year's final dividend in the quarter which totaled GBP 444 million. That means that, overall, the net debt position declined by around GBP 100 million in the quarter. It's worth remembering that while net debt is higher than a year ago, this reflects the GBP 2 billion we paid into the pension in March.

Turning to cost transformation. During the quarter, we reduced our total costs by GBP 435 million, taking total savings to around GBP 750 million for the first half. On an underlying basis, costs were down 10% in the quarter. Part of this reflects the costs associated with the accelerated contract milestones in Q2 last year. Excluding these, our underlying costs were down 9%, a slightly better performance than in Q1. I think it's worth remembering that, as a business, we're in a different stage of the cost evolution cycle. Within Retail, we're 6, 7 years into the process. Within GS, we're just starting that process in earnest. I think -- I'll talk more about the GS position in the next slide, but right now, the key is, can we continue to make the cost savings that we've delivered to date? And in my view, the answer is an empathic yes.

The reason why I think it's an emphatic yes is there's opportunities. So I'll give you some examples. So I talked last quarter about travel and subsistence. We spend GBP 115 million, just in excess of that. Last quarter, I said we'll save about 10%, and we'll save that money by buying more efficiently, being more disciplined in terms of what we do, and by using our own capability, such as conferencing, better. I talked previously about a 10% reduction. Well, that reduction will be now circa 12%, 12.5%. So we'll take well over GBP 12 million, GBP 13 million out of that cost base.

If I then look at terms of some of the things that we're doing, in terms of in-sourcing for example, now we in-source -- it's fundamental to all our cost transformation programs. We start off by improving the customer experience, reducing the cost of failure and reducing the unit cost as a result. So if I look at in-sourcing, over the last 2.5 years, we've brought in over 6,000 jobs into the company. Now the reason we bring those jobs back in is, we improve the quality of the service, we make some savings and we reinvest those savings to improve the quality of the service. It's a cycle.

Over the last quarter, we've brought in about 1,500 people into facilities management. And the net result of that will be, we'll make double-digit savings on that. You may ask, is it a core activity? Not necessarily. If we can make savings, reduce the unit costs and then put it out to tender later on, we'll do that. The reality though is, we're going to make the savings and improve the quality.

And finally, opportunities to do cross BTY programs. We've got about 1/2 dozen of these. I talked last year about something in relation to travel to resolve across the majority of the business, excluding Global Services. We have over 7,000 people in that process. We thought we could make savings of circa 25%. It was a 3-year program, we're 2 years into that program. We're well on the way of actually delivering slightly more than we thought we would do. And we will have the benefits of that program in the next financial year and the flow-through into the following year. We've got 1/2 dozen programs like that.

Let me now turn to Global Services. Global Services last year saved 1% on the cost base. Putting it bluntly, that was not a good enough performance. We're seeing that now manifesting itself in relation to the pressures that we're having on the revenue. Now this year, we ramped that and talked about a 6% reduction. That's a good performance, but it's the start of what we need to do. Now, Luis and I are joined at the hip. I'm not certain how ideal he thinks that is, but we are joined at the hip. And it's down to us now to reduce that cost base further, while continuing to invest in the business and grow our business in the emerging economies.

I think there are opportunities here. I talked about group-wide programs, I talked about travel to resolve. We haven't implemented that in Global Services. We are in the process of implementing it. Cost base is well in excess of GBP 300 million. We should be able to make the same levels of savings, and the commitment to you is, over the course of next few quarters, I'll talk to you about what we're doing about that. And the answer about that, it's a we. It's what Luis is doing, and I'm there to help from a group perspective to help Luis deliver his numbers.

The second piece really is opportunities by using consistent methodology. If I look at the way we do things within Global Services in LatAm, in Asia Pacific, in Europe, in the States, for example, in things like inventory management, we do it slightly differently. By taking a consistent approach, you bring in economies of scale, you replicate best practice and you can do things more efficiently. Which leads to the third type of opportunity that we've got which is about shared service centers.

If I look at, for example, the contract management capability. The contract management capability, at the low end of the business, to the low-end contract management doing things like moves and shifts, traditionally has been undertaken, all of it, within the contracts, and we've also outsourced some of that activity. Well, it's key and it's important, and we've started the process of actually making certain the activity is undertaken within BT, within a shared service center, so you can replicate best practice and improve the quality of what you deliver from a customer perspective, and that hinges on everything we do within the company.

Let me now turn to the liquidity and pensions. Just touching on our liquidity and pensions, we repaid debt of around GBP 300 million during the quarter. I have GBP 2 billion of borrowings repayable in the second half of this year. Given we had cash in committed facilities of round about GBP 3.1 billion, these repayments are well covered by a strong liquidity position. We will continue to look at refinancing opportunities in the bond market that make commercial sense.

In terms of the pension, the IAS 19 deficit was GBP 4 billion, or GBP 3.1 billion net of tax, at the end of this quarter. This may be slightly higher than some of you were expecting. The increase from March is mainly due to a lower discount rate, which increased liabilities. Market expectations for RPI came down during the quarter, which helped, but the assumption of the long-term difference between RPI and CPI declined, and this has impacted the value of our liabilities. Look, as you know, the IAS 19 measure does move around, but it has no impact on the cash that we actually pay out.

In relation to our outlook for the group, we've highlighted where we've updated the outlook. In the first half of the year, underlying revenue, excluding transit, declined by 4.4%. We expect the second half to show an improvement on this trend, helped by a better trading performance. However, for the year as a whole, given the impact of ladder pricing and the tougher conditions facing Global Services, we don't expect to see an improving trend.

In terms of EBITDA, as I've said, we're facing a circa GBP 60 million headwind from ladder pricing. In addition, the tougher economic conditions mean that Global Services won't grow it's EBITDA this year. Despite this, we still expect to grow EBITDA overall this year, which means our cost transformation programs will absorb and cover the headwinds. No change to guidance.

In terms of free cash flow, we continue to expect normalized free cash flow to be broadly level with last year. It's worth making this point, that this is despite the payment of the GBP 22 million Premier League rights deposit, and circa GBP 60 million impact from ladder pricing. No change to guidance.

There's no change to our outlook for 2014 and 2014 (sic)

. And our financial strategy in terms of our use of cash also remains exactly the same, no changes for 2014 or 2015. It's as is. We'll continue to invest in the business to drive future profitable growth and, at the same time reducing our net debt, supporting the pension fund and paying progressive dividends. The [audio gap] represents 15% growth at the top of the range, reflecting the confidence we have in the future of our business. Thanks for listening, we'll be happy to take questions.

Question-and-Answer Session

Ian Paul Livingston

Okay. As usual, there will be a mic coming around. If you can say who you are and you can try and limit it to 1 question, that would be great. Let's kick off.

Paul Sidney - Crédit Suisse AG, Research Division

It's Paul Sidney from Crédit Suisse. I was just wondering if you think physical Openreach lines can continue to increase going forward, especially as 4G gains traction? Clearly there's been some good underlying growth for the last couple of years. And just a slight add-on to that, what do you think's been driving the underlying growth in the last couple of years?

Ian Paul Livingston

Let me ask Liv to give some comments. But I think the answer is yes. I think if you ask them, mobile companies, they wouldn't see 4G as being a natural alternative to instead of having a fixed line. I mean, look, we recognize in terms of calls, that the calls market is declining, that won't change, but as people are using bandwidth more and more intensively, actually it puts a premium on fixed lines in a way that, I think, probably you couldn't have anticipated a number of years ago. Everyone said, look at telecom Austria, therefore 3G is going to mean that no one's going to need a fixed line. But the reason that people are signing up fixed lines is, one, is I think bandwidth and bandwidth is a lot, lot cheaper on fixed lines. And secondly, we will, in the long term, have household growth in the U.K. I mean projections for growth of population in the U.K. remain strong. I think people expect it to be 70 million in a decade, 15 years, and that contrasts a lot with continental Europe. So I think there's some geo-demographic factors, as well as some technical factors. Liv, do you want to answer that?

Olivia Garfield

Yes. There were 26,000 lines up over the last 12 months. Obviously we've not been able to get near, anywhere near as much of the provision activity during the summer. The wettest summer in 100 years is not my friend. So I think if you look at September and October, as Ian said, we've had good performance, we predict that to continue during the course of the next few months. So yes, I think it remains strong. When I talk to all of my customers, I don't get a sense that people are worried about the substitution impact of 4G. I think people want speed now everywhere, and that is becoming the dynamic. And that means that you want it in your house, it means you want a fixed line, and you certainly want it on the move, which means I'm sure we'll get more excited about on the move technology as well.

Ian Paul Livingston

Can you pass the mic behind you?

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

James Britton from Nomura. Can I just ask for an update on -- can you give us an update on demand and stability of the platform that you've seen to date? And then secondly, perhaps I can just ask if you are still looking close to get mobile spectrum? Looking close at mobile spectrum in the U.K. and if so, why?

Ian Paul Livingston

Well, I'll let Gavin talk about YouView in a second, albeit, we've been selling it for, I think, about 1 week just now. So I mean at the risk of -- performance is good so far. Probably extrapolation. I like that question, we're still looking at mobile spectrum. It does go back to are you still beating your wife question. We don't have ambitions to be a national mobile operator. If there's a base of spectrum that could help out our proposition, then fine, and that's what we will look to do. But I don't think top of my agenda list is trying to become -- replace the fact that they're -- a fifth operator in the U.K., don't think that's at the top of my list of agenda items. Gavin, do you want to talk about YouView?

Gavin E. Patterson

I don't have really much to add, I think. 6 days, not a whole week. So I think it's too early to draw any conclusions. And the marketing breaks in the next couple of weeks are marketing of the YouView box. But we're quietly confident that it'll be well received. Certainly the independent people who look at these sorts of things, like Hi-Fi for example, think the box is very good. So it's winning a number of awards, and we'll see what happens in the market.

Simon Weeden - Citigroup Inc, Research Division

Simon Weeden from Citi. I'd like to ask, it's a slightly technical question on the way that the changes you mentioned in the pension deficit.

The impact of the narrowing of the discount or the difference between CPI and RPI. You've obviously taken some benefit over the last triennial from moving down to CPI. Does this come back at the next triennial as being a slight adjustment back in the other direction? Or are we just in CPI land now and CPI is just going to be a bit higher? I mean, I'm trying to understand what the ramifications of that are.

Ian Paul Livingston

Okay. And I mean I think, as you know that if you're looking at the constituents of RPI, so there has been a narrowing of the gap. And actually, the Bank of England were predicting much higher differential than we were, and now that's come in a bit. But actually, what's interesting is with the real extensions [ph] of RPI, I think what you're going to see is a reduction in RPI rather than it being that CPI starts to narrow. So if you understand what I mean, the 2 things don't effectively come together. What you get is that you get the RPI number moving towards the CPI. And given that still a chunk of our pension scheme in place of RPI, actually that's good news. So it's not bad that there's a narrowing, because it's about 1/3 of our scheme is still RPI-related. So I'll be quite comfortable if that's the outcome. IAS 19 will, however, bounce around -- I've said that God knows how many years now -- that it will do double the corporate bond rate is an important factor. With quantum easing just now, I don't think any of these things, that, that represents a long-term sustainable, sensible rate. But it is -- you've got to use the numbers that are in the marketplace. And I think you see we've not made too big a thing when the debt -- the IAS 19 goes down and we're not making too big a thing when it goes up, because it doesn't affect the long term in terms of what we do in the pension.

Unknown Analyst

[indiscernible] Nicholson [ph] from Arica [ph]. Also on the pension, can you just remind us what your expectations are in terms of cash flow, talking about pension, for the rest of this year and next year, please?

Ian Paul Livingston

Well, we said it'd be about GBP 300 million a year to GBP 95 million, I think it is. The reason we said GBP 325 million, that was a bit lower when we finalized the pension scheme, so that's settled for the next couple of years.

Carl Murdock-Smith - JPMorgan Cazenove Limited, Research Division

Carl Murdock-Smith from JPMorgan Cazenove. Two questions, probably mostly to Gavin. In terms of the consumer environment you're seeing, at other operators who report churn you've seen pretty consistent churn reduction over the last few quarters. I was wondering if that's something you're seeing in BT Retail as well? And also last quarter, you said you didn't see huge scope for price rises. I just wondered if anything's changed regarding your view of the competitive environment in the market given the price increases that are now coming through in January?

Ian Paul Livingston

Gavin?

Gavin E. Patterson

In terms of the room for pricing increases, it's pretty much the same as we've said. I think there is some scope for it. You've seen, as announced, a price rise in January, and that's being received okay in the marketplace. Then on churn, yes, we are seeing churn come down quarter on quarter. We don't report it, it's not one of our KPIs, but I can tell you it is reducing quarter on quarter.

Ian Paul Livingston

I think when people look at pricing there's a tendency to -- partially because newspapers reported the stuff that goes up. I mean, I think if you look particularly like-for-like, broadband pricing's come down. Now because people are taking higher levels, you do get the ARPUs staying up, or actually increasing the ARPU. But customers are unquestionably getting a better deal, they're paying probably a bit more for the line, but the total package is very attractive to the customer. And U.K. remains a competitive market. But as said, some lying in price increasing, but broadband's coming in the other way.

Maurice Patrick - Barclays Capital, Research Division

Maurice from Barclays. Just a question around visibility of revenue growth, or revenues inside Global Services. Just a sense of, when you look ahead the next 12 months in Global Services, how much is contracted that you know about, how much is uncontracted, but likely and how much is discretionary, so we get a sense of how confident we can be, and how that's going to trend over the coming 12 months?

Ian Paul Livingston

I'll see if Luis or Tony wants to add anything. I mean, we do, obviously, have quite a bit of visibility, but it tends to -- you still have a big number that can vary at it. And I think we have been encouraged by the movement in, I think, the contracts between quarter 1 and quarter 2. But where you get to struggle sometimes is some of the discretionary bits at the end, where they -- they change management in orders, change control in orders, sort of come down, and that becomes a variability. But I don't know, Luis or Tony, if you have anything to add? Luis?

Luis Alvarez

Yes. I think that one of the things we are looking at is in terms of the underlying performance of the revenue coming forward. And for example, most of the business that we have signed in this quarter, the GBP 1 billion to GBP 3 billion, do increase that run rates to balance some of the pressure on prices. So I think, clearly, it's something we keep looking at very closely.

Anthony Everard Ashiantha Chanmugam

Yes, just maybe to help. The profile of the revenue streams, you look at the business, you've got big contract revenues and you've got product revenues. The big contract revenues, and general algorithm on this is that, at the start of the year, you should be able to pick up round about 85% in that revenue stream. The rest of it then tends to move in terms of change control, which Ian talks. The further into it you get, the greater certainty. The concern always is, a, the level of change control, and b, the level of hardware equipment sales that will tend to vary as customers' budgets change. So you have that degree. Now generally speaking, we try and keep the profitability on the change control activities in line with the profitability of the base contract because we're not, as a supplier, looking to exploit the customer, unlike some of the other competition who will do that. The second piece, on the product revenues, they will tend to vary based very much on the demand cycle and where you are. So it's not a straightforward algorithm because of the mix in the business that we've got.

Andrew Lee - Goldman Sachs Group Inc., Research Division

It's Andrew Lee from Goldman Sachs. Just some questions around fiber. I wonder if you could talk about the acceleration in fiber net adds you're seeing in terms of run rate today, as the provision problems have come down in Openreach. And then just secondly, the fiber demand from your competitors that you're seeing, I wonder how that's surprised you, either positively or negatively, and how you expect that to trend over the next 6 to 12 months.

Ian Paul Livingston

I may ask Liv to comment about fiber demand among her other customers, which I think she would describe them as rather than competitors. But the last 2 weeks in fiber have been 2 record weeks for fiber adds, which is encouraging. It's not -- we're seeing some impact of getting some more people in to help on fiber, but not particular a dramatic improvement in division backlog, actually. That's not really been the driver. But Liv, do you want to say a bit more about demand by detail?

Olivia Garfield

Yes. Categorically, customers not competitors. It did make me smile, though. Indiscernible] I mean, we see it consistently ticking up I guess. So we see the adds as we do more caps. As there is more of the country that is enabled, of course, you're going to see more people, them becoming connected. So you can normally follow some sense of take-up demand following how rollout goes. And as Ian mentioned earlier in his presentation, we see that it takes a while in terms of phases. So you have an initial rush, and then it slows down a little bit on the cab, and then gradually it ticks up. So the first 5 phases now being north of 10% is good news. Best 2 weeks, as Ian said. And I think I can't comment on my customers' strategies or what they're going to place orders on, on fiber going forward. But I suppose it's good to have all the big players in the market on board. It's good to have people actively marketing out there. That's a positive for us. And it's good to see that we get, really positive customer feedback from customers using the service. That is another very positive indication, we think, towards it being a continued good product going forward.

Andrew Lee - Goldman Sachs Group Inc., Research Division

Can you give us just an idea as to the absolute scale of fiber demand from your customers?

Olivia Garfield

No, I can't. No, that would mean total of fiber. So no, that's for them to share.

Ian Paul Livingston

Yes. I mean, in terms of weekly, what we are seeing is, whilst Retail continued to do better, is that you see more coming from the others. So Retail accounted for the vast, vast proportion of demand in the early days, when you had smaller CPs and some other bigger CPs testing it. Now, you are seeing orders in the many thousands a week from the bigger CPs. And that's -- and I think that's a trend that will continue, and it reflects actually customer demand. I mean, I think that's what they're seeing. There was some people who said there was no demand, and I think probably that's been shown not to be entirely accurate.

John Karidis - Oriel Securities Ltd., Research Division

John Karidis from Oriel. Actually, I have a related question to this. You've said in the past a number of times that the payback on your multibillion fiber investment is very long. Frankly, Retail, as you just said, is the one that tends to sell fiber much more aggressively than any of the other majors. Nevertheless, you have the confidence to allow BT Retail to increase the Infinity prices starting January. Is it possible just to talk around what gives you the confidence to do something like this? And then secondly, I know, Liv, you said you can't talk about your customers, but just to know from an Openreach perspective, whether you're going to charge the sticker price or the lower price if people have committed to a certain volume of lines in the future, have there been big customers that have committed to minimum volumes and, therefore, they're likely to pay you a lower price per line per month?

Ian Paul Livingston

I think it's -- we try to make a rule. It's not fair, I think, on other CPs who are also quoted to say -- because if I say yes to the second question, you'll go, "Which one is it," or "Which 2 is that?" And that's not fair. And well, we just wouldn't tell you. We very much respect their commercial confidentiality. So we do have a price if you want to make a commitment and a different price if you don't. And that's the situation. Some will take up one offer, some will take up the other. In terms of the overall, in the upgrades of speed and the value, I think we feel very confident in the value of the Infinity. But Gavin, if you want to answer that?

Gavin E. Patterson

Absolutely. As Ian says, over the last 6 months, we've doubled the speed that we offer through Infinity, and that's given us another kick in demand. And just to clarify, we're not putting up our prices on fiber on January 1. You'll still get the same great value if you haven't got it already. I can take your name afterwards and sign you up. So no, this -- the demand continues. We're not seeing it top off yet and even the most -- even in those early cohorts of exchanges that have been around for a few years. So I think this one's going to run for a bit yet.

Ian Paul Livingston

If you could get over to Mike Williams, that would be great.

Michael Robert Williams - Exane BNP Paribas, Research Division

It's Mike of Exane. A couple of quick questions. Firstly, I'd like an update, really, on progress with regard to multicast on both the Vision and YouView platforms, and how you see those platforms converging over time. And secondly, I just wonder what the next steps were with regard to the CAT ruling on WMO.

Ian Paul Livingston

On the second one, we're going to have to see. I think we feel that the decision made on the WMO was a very poor decision, Ofcom happened to think that as well. So we -- you can be assured that we are looking hard with our QC about what the best route is regarding appeal, and the guidance for appeal, because we just think it was a very, very poor decision. As much as however -- as I was remembering all these things and all the various decisions, there's been a couple of things that come out. One, in 1 decision, it says quite clearly the pay-TV market is not working. They might not have known the remedy for films, but they knew it wasn't working in totality. And secondly, that no one has debated the dominance of the leading pay-TV operator, and so -- and the right of Ofcom to intervene in the marketplace. And the losing on the WMO was on a very strange basis, and I think it came as a surprise to everybody, exactly the basis that discussion was. So there's the situation on that. In terms of multicast and convergence, Gavin, do you want to talk about it?

Gavin E. Patterson

We're beta testing and multicasting on the Vision platform at the moment. And all things being -- if that goes as well as we expected to, we should start offering linear channels after Christmas, I expect. On YouView, what I will tell you is it's in the plan, we expect it next year. And if that delivers on time, I would expect that to be our primary platform as we move forward. So I see these beginning to converge next year.

Ian Paul Livingston

Yes, I think pre the football -- pretty effectively, this [indiscernible].

Gavin E. Patterson

That was our intention, yes.

Ian Paul Livingston

-- would be our ideal. Pass it along a little bit, and then we'll go back to middle row.

Will Draper - Espirito Santo Investment Bank, Research Division

It's Will Draper of Espirito. A couple of things, one on CapEx, and one on fiber. CapEx was down quite a long way in Q2, and when you look at that, I can see you're continuing to spend on fiber within Openreach but other lines of businesses are quite heavily down, Global Services and Wholesale particularly. Why is that? And what can we read into that for the full year in terms of the CapEx split? And then on fiber, you alluded to Retail ARPU being up GBP 5, helped by fiber. Can you put some color around that? What happens when you connect a home to Infinity to usage, behaviors, spending, and ARPU, if you can say anything on that?

Ian Paul Livingston

Okay. On fiber, well, we did say in the press release that the -- on Global Services this time last year, they brought some assets into use that was actually related to the milestone and that impacted CapEx. I think the answer on CapEx, you shouldn't read anything terribly much into it. We are investing where we can. I mean we've done the big rollout on Wholesale in terms of 21C, the ADSL 2+, we'll continue to do that where we -- where it makes sense. And basically, we will invest in the future. I don't know, Tony, if there's anything you want to add?

Anthony Everard Ashiantha Chanmugam

Yes. Quarterly, CapEx numbers are going to vary by line of business. If you look and see in terms of where we are, and the levels are varied to talking about from the business as a whole, run rate would take you between 2.4, 2.5. Our guidance is around 2.6. You're not a million miles away. It's going to move by line of business on a quarterly basis.

Ian Paul Livingston

I think probably what it shows in this quarterly reporting is no related activity. Just on the Retail and the fiber, I mean, we -- the ARPU on new fiber customers is a number of pounds higher than it is on another customer, so we do see a kick up. There is quite a bit higher usage. Now, you've got to be a bit careful with the stats about higher usage because, to some extent, you get preselection. The customers who are more inclined to use it will be inclined to take fiber, as well as of course, if they are taking fiber, then you see better usage. Certainly, if you move over to fiber, you do see usage increase. I don't know, Gavin, if there's any more color.

Gavin E. Patterson

Yes. I mean the only other thing I would say is, 80% of customers who are taking fiber are taking the top tier. So you see we're able to up-sell to the top tier pricing bracket. And the churn is several points lower. As I said, we don't publish our churn numbers, but I think I'm safe telling you that.

Ian Paul Livingston

Okay, you can pass that.

James Ratzer - New Street Research LLP

It's James Ratzer from New Street Research. I'm particularly interested in the discussion you had about the cost base, particularly on Global Services, where I think you gave a pretty emphatic and positive message on what you're hoping to do there. Can you help us try to quantify that? I mean, your core business margins have gone up substantially in the last 5 years. What kind of margin improvement can we think about in GS? And does that mean that now, back in kind of the core business, that 6 year cost reduction program you talked about in Retail, is that now beginning to slow, or is there still a lot more you can do on costs in the core business? And a quick factual question. You've disclosed the cost of Premier League and rugby rights. All the other football rights you bought, how much is that in aggregate per annum as the cost for those rights?

Ian Paul Livingston

As a factual answer, we're not going to disclose that, but it's a lot less than the other 2, a lot less. And in terms of Global Services and the quantification, I don't think we will give you -- and I don't know if Tony wants to add any color, we won't give you at this point the quantum. I think it's best that we actually do it and deliver it and show you. And I think that's really -- and what we're trying to do is give you the color as we deliver it. But I think Tony can give you a sense of the number of areas we think we can do. The problem we're making in Retail was actually quite the opposite from what you said which is, well, you've done it for 7 years, therefore it's stoppage. If you saw that chart, it was remarkable in its consistency of roughly 6% decline. Now of course, there will be in Retail a high-level of investment going to sport, which will make the numbers look a bit different, but that underlying cost saving in the business effectively frees up, not just the money, but also people and the systems resources to invest in these other areas is critical and ongoing. And it's true for Openreach, it's true for Wholesale. And so as a business, we believe, as Tony said, we have a lot more we can do on our overall cost base. And Global Services, as Tony said, it was 1% last year. If you had put us -- and Retail was 6. The delta between these 2 numbers in an GBP 8 billion business is a big number, and I think that sets some of the objectives we have to look at in the medium-term for Global Services. But Tony, I don't know if there's anything you want to add to that?

Anthony Everard Ashiantha Chanmugam

Yes, just a couple of points. I mean, the point on Retail really is that -- and with that, we'll need to have a debate with Gavin about what his budgets are for next year. There will be cost reductions in Retail next year. That's a fact. And there's opportunities moving forward. In terms of the Global Services, I think it's worth highlighting. Look, we made progress on the business. We made a swing of circa GBP 600 million of cash, between GBP 500 million and GBP 600 million of cash, over the space of 3 to 4 years, so that's a good point. We know the base point is not good enough. We know that the level of focus on this has not been good enough, and the way that we've discharged has not been good enough. So there's a level of opportunity there that we can deliver on. I'm not going to give a specific target associated with it. Does it mean that we don't have a target? Yes, we do. We have a 1-year target, we have a 3-year target. Luis and I are joined up in there, we're committed to deliver on that. And you'll see that progress year-on-year, but we're not going to give individual targets.

Ian Paul Livingston

If we can go -- sorry, we'll do 1 more down there, and then if we can go there, and over to there.

Lawrence J. Sugarman - Liberum Capital Limited, Research Division

Lawrence Sugarman from Liberum Capital. Firstly, you've made an increase in the legal provision. I don't know if you can give any sort of color around that, and just whether that relates to potential issues on regulation.

Ian Paul Livingston

No.

Lawrence J. Sugarman - Liberum Capital Limited, Research Division

Okay. Secondly, on the Global Services performance from a revenue perspective, is there any particular difference in terms of success on potential new contracts between performance in the U.K. and in emerging markets? Or are you experiencing any change in momentum over the last couple of quarters in either marketplace?

Ian Paul Livingston

Let me ask Luis to talk in a second about momentum between the fast-growing economies and the U.K. The U.K. has had, obviously, some government issues. Although, I think -- and we've had some good wins in a lot of U.K. corporates, so we're feeling really reasonably happy. And the legal thing, no, it's got nothing to do with regulation. It's something that goes right back to 1990, and it's a very, very long, long-tailed thing, and we just reassess the potential costs associated with that. So not regulation.

Luis Alvarez

Yes. I think that those dynamics of the market where the main element has to do with some of the issue that are happening in some of the European economies where you can see some governments delaying some of the decisions or reducing some of the budgets. You also see clearly on the financial services industry a degree in, probably you know pretty well, consolidation of number of trading rooms or bidding rooms and the number of consolidations of several entities across the whole industry. So I think that those elements are elements that are like headwinds for us. On the other hand, well, you've seen that -- signing British-American Tobacco is a great example of a leading British company that is having worldwide [indiscernible] around that, house around that, and connections in 40 countries. We have also Surrey here in the U.K. But also, we have been able to expand the business. We're at double-digit growth in Asia Pac or in Latin America, where clearly many of the European companies are looking to these markets to expand their operations, and they are either closing down or reducing their investments in their home markets. And this is where our growth is coming from on the revenue front.

Ian Paul Livingston

And I think I'd add to that, it's interesting that the order values we've seen this year in these fast-growing economies have been in the early teens in terms of the proportion that have been in these economies. And that's a far higher proportion than actually our revenue. So we are seeing very much -- we said these are markets where we thought we could effectively double our business over the medium term, and I think that's -- the order book would tend to suggest that, that looks right.

David-A Wright - Deutsche Bank AG, Research Division

It's David Wright from Deutsche Bank. I just wondered, since the acquisition of Cable&Wireless Worldwide by Vodafone, have you seen any change in sort of in the proposition that is out there? Are they any better, are they more competitive? And when that decision was made, did that change your strategic thinking at all on whether you need mobile -- I guess, this perhaps follows a little to James' question over there, but when they did that deal, did that make you stop and think, maybe we do need to have a mobile proposition a little better than we currently have?

Ian Paul Livingston

I tend to say no and no, but I suspect you want a little bit more color than that. I think in the marketplace, I'm not seeing any impact. We've had some good wins in certain sectors, particularly in the retail sector against Cable&Wireless, so quite pleased with that. In terms of -- we've got access mobility. And we haven't found over in the big corporate customers, at the moment, that they are seeing that a mobile proposition is critical to their decision about network. Yes, it seems to be a different decision. And not least because we're talking here about global customers. And these global customers -- there isn't a single -- the biggest mobile company in the world can still only provide their own network solution in a tiny proportion of the 170 countries we cover in terms of our fixed network. So no. I mean, if there's a customer who has particularly a fixed mobile convergence or what -- or a machine to which -- what force type management and machine-to-machine stock, they're solutions we've got. And we have MVNO arrangements to provide these solutions. So we'll continue to do that, and I think there will be a growing convergence over time. In the SME market, it's different. And we've said that for a long time. That people will buy IT, mobile, broadband, fixed, all in one package. So I think that's the market, actually probably -- not the consumer, not the corporates, where we've seen that biggest convergence. And that's why we treated that as a market that we were going to really focus our mobile efforts on it. And we do it with an MVNO and that's fine, we're happy with that.

Stephen Paul Malcolm - Arete Research Services LLP

It's Steve Malcolm from Arete. Could I just ask a couple of questions on the fiber rollout and the early completion of that. Although, I guess spring could mean mid-August in BT language.

Ian Paul Livingston

[indiscernible] it means June 22, at the latest. You've never captured this notion when seasons start and finish. I think it's a Scottish background. You've never got the hand of spring, have you?

Stephen Paul Malcolm - Arete Research Services LLP

I'll have a reminder [indiscernible] for June 22, I'll give you a call. You've done it within the budget, and you've done it without sort of seemingly increasing your CapEx elsewhere, which kind of implies you've found savings to fund it. Is that the case? Or is it just doing the fiber rollout cheaper than you thought you would? Also, can you kind of elaborate on how you've got there? Is it just more fiber to the curb rather than fiber to the premise that's allowed you to get that much quicker? And then when you look at beyond June 22, 2014, you've got about 18 months where you would have thought you'd be deploying fiber to the other 10%, 15% of the country. How do we think about the opportunities that creates in deploying capital in going to other parts of the country, and your capital spend beyond that point?

Ian Paul Livingston

Yes. So the answer is, yes, we found savings elsewhere, but yes, we're also doing it within -- we found savings in the program. We're comfortably within the GBP 2.5 billion that -- some people thought that we would overspend by billions, comfortably with it. And we will continue to look for greater savings in that. We did more FTTC than we expected, but on the other hand, we're doing -- we've already upgraded the speed to 80 megs, which we didn't have in the plan, and we're offering the fiber to the premise on-demand products, we're doing a lot more. In terms of going beyond the spring date, and I thought your question might be, when does spring start, not when does it finish, in that question. And beyond the spring date, we expect to be able to -- we're effectively including the decks for BDUK to the extent we can. So what you're going to see is instead of finishing it 2/3, we're just going to carry on. Now we've said that we expected to -- if BDUK went to plan in terms of we won the awards, and what was available, we've got CE clearance, all that stuff, that we could deliver to well in excess of -- well, to in excess of 90% of the U.K. by 2017. So what you'll see is a continuation of the cost, but covering a much larger part of the country. Then when you get to 2017, the question is, what happens then? And the answer is, well, the fiber program probably largely stops, or slows down dramatically, and that does create a bit more headroom in the CapEx. But one of the things is we are continuing to drive CapEx savings. And whilst we've been doing some big programs, I mentioned earlier, the rollout of ADSL, we've been doing network investment in GS, particularly where we were spending ridiculous amounts on network that we should be doing ourselves. And so -- and we've been happy to do that. But we think there's still quite a lot of ability to drive future savings in our CapEx.

Stephen Paul Malcolm - Arete Research Services LLP

So implicitly, are you kind of assuming that you win more BDUK share than you would have done maybe 12 months ago because of the greater efficiencies you have in bidding for this stuff?

Ian Paul Livingston

I think we feel our ability to actually deliver and deliver at a really good price should give us an advantage. I don't know anyone else who's going to bid. But we've won every one so far. We've repeatedly said, we don't expect to win all of them, but so far so good. And the thing is, the more we win and the better we deliver, as we are doing in Cornwall, in Northern Ireland, in Yorkshire, and a whole load of places, I think the more it puts us in a strong position. But who knows, someone might decide that they're going to try and compete with us. But we've been investing a lot in this -- in doing this on an industrialized scale.

Okay. Any last questions from anyone? Okay. Well, thank you very much indeed. Thanks for your time, and we look forward to seeing you in 6 months and speaking to you in 3 months. Cheers.

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