BT Group's (BT) CEO Gavin Patterson on Q1 2017 Results - Earnings Call Transcript

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BT Group plc (NYSE:BT) Q1 2017 Results Earnings Conference Call July 28, 2016 3:30 AM ET


Carl Murdock-Smith - IR Director

Gavin Patterson - Chief Executive

Tony Chanmugam - Group Finance Director

Simon Lowth - New Group Finance Director

Clive Selley - CEO, BT Technology, Service & Operations & Group CIO

John Petter - CEO, BT Consumer

Graham Sutherland - CEO, BT Business

Luis Alvarez - CEO, BT Global Services

Gerry McQuade - Chief Sales and Marketing Officer

Marc Allera - Commercial Chief EE


Paul Marsch - Berenberg Bank

Dhananjay Mirchandani - Bernstein

Paul Sidney - Credit Suisse

Maurice Patrick - Barclays

Andrew Lee - Goldman Sachs

Stephen Howard - HSBC

Nick Lyall - Societe Generale

Robert Grindle - Deutsche Bank

Mandeep Singh - Redburn Partners

Simon Weeden - Citigroup

James Ratzer - New Street Research


Hello, ladies and gentlemen, and welcome to BT’s Results Conference Call for the First Quarter ending 30th of June 2016. My name is Grant McCarter and I’m your coordinator for today. Throughout the presentation you will remain on listen-only. [Operator Instructions] I’d like to advice all parties today’s conference is being recorded today.

And now, I’ll now like to hand you over to the Company.

Carl Murdock-Smith

Thanks and welcome, everyone. My name is Carl Murdock-Smith and I’m the IR Director for BT. On the call today, we have Gavin Patterson, Chief Executive; and Tony Chanmugam, our former Group Finance Director. In the room, we also have Simon Lowth, who’s our new Group Finance Director; and CEOs of our lines of business.

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

I’ll now hand over to Gavin.

Gavin Patterson

Thanks, Carl, and good morning, everyone. Turning to Slide 4, we made a good start to the year with growth in revenue and strong cash generation. The integration of EE is going to plan and Tony will take through this in more detail later, but we’re already starting to see the benefits from this acquisition as well as from the wider business reorganization which took effect at the start of the quarter. These benefits are perhaps most visible in the performance of our new mobile businesses. They contributed strongly to the Group both operationally and financially.

Our Group postpaid net ads up to 144,000 got the year off to a good start and it was especially pleasing to see this alongside a record low postpaid churn of just 1% in EU. This week we also made the BT Sport app available to EE’s postpaid customers too. On BT Sport, it was a record quarter with viewership up almost 60%. And finally we maintained a firmed focus on the future investing across the full breadth of our business whether it’s the superfast rollout laying the foundations for and FTTP, or extending EE’s already market leading network coverage.

Turning to Slide 5, I’ll look at our future investments in more detail. In total we’re investing £6 billion over the next three years in UK fixed and mobile infrastructure. As part of that, it’ll help take UK fiber broadband availability to 95% by the end of next year and we want to go further. We’re committed to further investments in ultrafast broadband with an ambition to bring speed of above 300 megabits per second to 12 million premises by 2020.

We’re also aiming to increase geographical 4G mobile coverage to 95% by 2020 from just over two-thirds today. Bringing important benefits to rural communities and made progress on building the emergency services network, this will support 300,000 members of the police, ambulance, fire and rescue another blue light services.

Turning now to Slide 6 and firstly to remind you of what we want to achieve at Openreach, better service better coverage and fastest speeds. As you’ve seen on Tuesday Ofcom published that proposal on the digital communications review. We welcome Ofcom’s view the structural separation would be disproportionate, meaning that Openreach will remain 100% owned by BT and Ofcom also recognized the need effective corporate governance such as the BT Board seeking the financial envelop for Openreach. On the same day, we published our plans to make Openreach more independent and transparent introducing significant changes to meet their concerns. Firstly, we will establish a new Openreach board with an independent chair and the majority of independent members. Openreach will also control the deployment of capital within an overall budget agreed with BT’s board. In addition Openreach will produce an annual operating and a medium term plan underscoring its greater autonomy.

There will be a formal three stage process to consult industry in advance on substantial investment decisions and the development to new products. Finally, while Outreach will continue to have an obligation to serve all its customers equally, this obligation will be included in BT’s of association supplementing the current regulatory undertakings. We’re encouraged by how much common ground there is between Ofcom and ourselves but there are still important issues to resolve and we will continue to engage with Ofcom over the coming months with the aim of reaching a fair proportionate and sustainable regulatory settlement.

Turning to slide seven, the other thing I wanted to spend some time talking about is improving customer experience. Firstly, we focused on doing more things right at time to improve the customers’ experience and to reduce the cost of failure. We’re ahead of all 68 of Ofcom’s minimum service levels and we’ve improved the number of folks prepared in two working days and 68% two years ago to 84% today. With reduced engineer missed appointments by more than a third since last quarter and in consumer all our customers can now expect repairs to be fixed 24 hours faster than before.

Secondly, we’re improved our network and are certainly extending the availability of fibre broadband and proactively maintaining our network to reduce folks but also recruiting engineers with 1,000 planned to join this year. And thirdly, we’re making it easier to contactors. We’re already taking on all EE brand postpaid calls in the UK and Ireland and we’re on track for 90% of BT consumer calls we handle in the UK by March 2017. We’re also improving and rolling out apps such as My BT and My EE to give customers more information at their fingertips.

I’ll now hand over to Tony who’ll take you through the financials.

Tony Chanmugam

Thanks Gavin, and good morning. Just before I go into the results, I want to flag a couple of statements. Firstly, we realized our lines of business from 1st of April to better serve our customers. So the results today are with new structure and compared against restated numbers. Secondly, we only bought EE in January with comparing of today’s results against pro forma numbers for last year in order to provide a more helpful like for like comparison. Turning to Slide 9, I’ll cover our quarter one results.

As Gavin said, it’s been a good start to the year. EE integration is going well and we’re seeing good financial and operational measures. Underlying revenue excluding transit was up 0.4% on a pro forma basis that’s after adjusting for £47 million favorable impacts from foreign exchange movements, and £14 million reduction in transit revenues. This growth was driven by consumer which saw revenue up 9%, mainly driven by ARPU. Offsetting this, business and public sector faced headwinds in a number of public sector contracts completed while wholesale and ventures faced a difficult prior year comparison and benefited from lower pricing revenues.

EBITDA was down 2% on a like for like basis, reflecting our launch of BT mobile handsets and the benefits of ladder pricing in Q1 last year. These headwinds contributed to a 1% decline in earnings per share. Normalized free cash flow up 342 million , reflecting inclusion of EE and smaller working capital outflows and finally our net debt was just under 9.6 billion up 3.8 billion in than last year reflecting the acquisition of BT. So a good start for the year.

Now slide 10, of life safety through the moving partial EBITDA. We included the impact of FX for handset launch on better pricing, will broadly level the quarter, despite the impacts of slides cost. The chart shows the work from fourth quarter number to quarter one last year to this year. Firstly we have benefitted from mild FX tailwind this quarter. Continually followed mobile handsets packages the material impact for our investments in the handsets and in marketing.

In Q1 last year handful inventories had a benefit from ladder pricing. So it’s a headwind this year. Adjusted to these three items gives a fair comparison on which the effects the quarter one performance. A new tougher set of price controls came into effect this quarter from the Business Connectivity Market Review will see an increase regulatory headwind from that. Within our business and public traded divisions we place the challenge of a number of contract completed. However outside of that company expect, we’ve seen solid growth. EE benefited this quarter from cost efficiencies, while Global Services also had a good quarter. We’re are seeing this good quarters EBITDA figure of 1.82 billion with reporting levels year-on-year our projecting for these three items on the left of the chart.

Moving on now to Operating Costs on Slide 11. Underlying operating costs excluding transit for the pro forma basis were up 2%. However excluding the impact of mobile handset modes this quarter and the task to the first season of UEFA rights, we saw a 1% decline. Within this we saw a 2% decline in merit cost. We continue to be absolutely focused on our cost information programs and I like to walk you through some of the areas we are working on.

So 20% trails we continue to make good progress on our cost transformation activities. We have commenced the project on improving the effect of our software development units by using new software to review our IT work as it is being applied. We so deliver annualized savings of around 16 million. In global services, we are rationalizing our in country support functions, to create regional centers. This is a limited savings of over £10 million per year. We are improving the current rates of this in life support services outside the UK. This will be our annualized savings of around £20 million. On contact centers we continue to onshore direct customer service activity to the UK, with targets to have a 100 lease and 90% of consumer customer service calls in the UK by the end of the financial year. It will be resulting around 1900 new roles in UK contact centers. We continue to consolidate our back office activities were in the BT service sectors in India, and we linked source 1400 above this year.

We continue to focus on improving the efficiency of the call centers by reducing the cost of failure and we deliver around 70 million of savings which will primarily be invested in improving customer service. These are just a few examples, but we have plenty of opportunities right across the business. We remained confident, we can continue to reduce our cost space and we still see well over £1 billion of growth cost saving opportunities over the next few years.

Turning to Slide 13, the integration is progressing well. We start to deliver revenue and cost synergies in both the business and consumer markets. This quarter consumer launched mobile handset plan benefiting for EE’s economy and scale enhancing procurement. Just this week with, we made the BT Sport app available to EE pay-monthly customers. It’s free for six months and then 5,000 a month on a rolling contract.

And lastly with in-sourcing a range of services but EE previously procure from third quarter doing them with our own people. For example within IT and networks, we complete to review of all contractors which will contribute to over £12 million of synergies this year. And in contact centers, we’re planning to endorse 500 back office growth in the next 18 months.

Finally our BT facility services teams are taking over the responsibility for managing EE office as in stores, delivering over 2 million of synergy and greater operational flexibility. So we’re very much on track to deliver our revenue and cost synergies targets.

Turning to Slide 14, I am going to touch on the pension. This quarter the IAS19 deficit has increased from 5.2 billion to 6.2 billion net of tax driven by increasing the liabilities. The last triennial review was on June 2014, as you know since that interest rate declined further to record lows. This reduces discount rate used for liabilities and therefore the increases the deficit.

As a reminder, the triennial evaluation is due to start in June 2017, following which Co. will negotiate with the trustee around the level approve with pride while lease of assumption and around recovery plan. And a key point here is that our cash flow and covenant have been improved by the acquisition of EE. We’re a stronger company with larger cash flow in 2014 with a more diversified portfolio which reduces risk.

Turning to Slide 15, evidenced by improved covenant then we’ve seen by the BBB credit rating agencies all have upgraded us to BBB+ or equivalent since the acquisition in February. Our Net debt and service of June was 9.6 billion down around 300 billion since March. We cancelled the EE facility while increasing our facility from 1.5 billion to 2.1 billion which remains undrawn. During the quarter, we repaid the 0.4 billion bond and we have 2.4 billion in term debt repayable over the next two years. With our strong cash flows creates an opportunity for us to reduce our financing cost in the next few years. So to finish, I’d like to remind you of our outlook for this year and makes some Slide 16 which were on track to deliver.

On that note, I’ll hand you back to Gavin to take you through the line of business results

Gavin Patterson

Thank you, Tony. I’ll now take you through each line of business. I will start with consumer on Slide 18. This was a good quarter. Revenue was up 9% mainly driven by acceleration broadband and TV which was up 21%. The calls and lines also benefited from the contribution of additional BT mobile customers. We continue to see a pickup in ARPU growth with the growth rate to 8% driven by broadband and TV growth with ARPU broadly tracking the growth in RGUs per subscriber. As expected, EBITDA was down this quarter. The Q1 declined 7% reflects the additional investment this year in our exclusive UEFA TV rights and the launch of our new pay monthly BT mobile handset contracts. Operating cash flow was up strongly benefiting from the strengthening of UEFA rights payments. The strong financial performance very much supported by solid operating stats, 79% share of broadband net adds follows on from 81% share last quarter and 69,000 TV net adds takes our total TV base above 1.6 million.

As you can see, on Slide 19, alongside the service improvement such as shown earlier, we’re also continuing to improve our product offering. BT mobile pay monthly handset range is available in three simple plans with addition to BT broadband households. We’ve been able to use EEs experience in mobile propositions to help refine their offerings and materialize the business and work together closely to generate the maximum market impact for the Group as a whole. Something I wanted call out is the launch of BT Smart Hub. It is a step forward for in home wi-fi coverage and ensures our customers get the most out of their broadband.

Compared to the measure UK broadband providers, the BT Smart Hub will always provide the most powerful wi-fi signal at any distance from the router. On test when placed two room away, it was almost twice as fast as the Sky Q router. Something you’ll appreciate even more when viewed overall for wi-fi signal is all reaction on BT Sport. The UEFA Champions League and Europe League finals both attracted audiences to 6 million apiece. And for the first time the matches were available across a wide range of digital platforms, something other broadcasters have now started to follow.

Turning now to EE on Slide 20. This was EEs first full quarter as a line of business within BT. Revenue was down couple of percent on a like-for-like basis, or flat if you take out the impact of regulation. It was an improvement on the recent trend despite the continued decline in the prepaid market. EBITDA however increased 11% on an underlying pro forma basis as the bottom line benefited from tight cost control. We expect the EBITDA phasing this year to be driven more by the timing of marketing and acquisition activity, which will likely to be different to last year.

Operationally, a good postpaid net add results of 244,000 along with the prepaid reduction for the mobile base for the Group overall to 30.3 million. It was also pleasing that our 40 base now extends to 16.7 million customers and EEs postpaid share was at the record low of 1%, reflecting our focus on improving service that I mentioned earlier. And to that end, we’ve now extended our 4G coverage to more than two thirds of the UKs geographic area and 97% of the population.

Turning now to business and public sector on Slide 21. As we discussed at the Capital Markets Day, the trend in public sector has worsened as a result of the expected completion of a number of sizeable contracts. As we said in May, the impact of these contracts will work through the business over the next two years. Elsewhere if you can see from the chart, we’ve had a good performance from both UK SME and corporate. I’ll also just remind you that in Ireland last year we did call out one off equipment sales with system growth.

And we’re seeing early evidence of revenue synergies from the integration of EE. For example, in the SME space, we saw record NetApps up more than 50% year-over-year on like for like basis. Overall it reflects EPS underlying revenue ex-transits to be down 4% like for like. Despite cost transformation activity which is not enough to hold underlying EBITDA which was down 5% on a pro forma basis. Operating cash flow 252 million in the quarter because this benefitted from the timing of working capital movements. Order intake was up 11% in the quarter was down 7% on a 12 months rolling basis. On this quarter we signed Pam London public sector procurements segments to provide a range of ITT products and services.

Integral services on slide 22, overall this is strong performance underlying revenue was flat which was helped by strong results in the UK the revenue was up 3%. Europe was up 2% underlying delivering seventh consecutive quarter of growth and depending how we robust our business is against backdrop of macro and certainty the growth throughout the quarter. Revenue was up EMEA, while Americas continue to decline due to the ongoing impact of the major customer in sourcing services. Our revenue performance translates into a 70% growth in underlying EBITDA.

Our operating cash flow and cash out flow of 283 million reflects the normal seasonality of the business and is very similar to the same period last year. We also continue to enhance a real source of product differentiation with our cloud and clouds preposition. This quarter we have added the share of access points to our global network. These offer our customers lower and better performance over secure internet connections. Our order intake was down 11% against the strong prior competitor but with the higher proportion of the business being new of growth.

And during the quarter we signed contracts with customers such as Michelin, who are buying a managed service religion connecting 216 sites in more than 40 countries.

Turning now to wholesale debentures on slide 23. Underlying revenue excluding transit was down 6% like for like of which broadly half was from the ladder pricing revenue we receive last year and which won’t be repeated going forward. We’re seeing good growth in Ethernet and continues strength in fiber broadband this quarter, but have also had declined in higher margin partial private circuits. Debentures revenues continues to face headwinds due to the ongoing decline of payphones and directory services. However the integration of debentures portfolios and division is progressing well. We are focused on the cross selling opportunities from brining these operations together and we expect to start seeing benefits in H2.

Underlying operating cost reported flat leaving pro forma EBITDA down 14% with the ladder pricing headwinds flow through along with deterioration in revenue mix. Order intake was down 7% in the quarter but included a 6 year deal with Daisy Communications for hosted centric services.

And lastly, turning to Openreach on slide 24. Revenue was flat with the bigger hit from regulation in the form of recent BCMR taking in total around 50 million out of the top line, which was offset by 33% growth in fiber broadband. Operating cost was around 1% as a result of our focus on service and higher leaving cost. Reflects Q1 EBITDA down slightly.

Looking at the operational stats, the physical line base was 59,000 lower over the course of the quarter with the sequential quarterly movements and slightly better than this time last year. Fiber on the other hand remained strong 333,000, net ads down on the prior year, but it’s a good result. Overall, Openreach’s fiber network now connects 6.2 million premises all served all on an open and equivalent basis.

And finally as I mentioned earlier, Openreach is currently ahead on all 60 of Ofcom’s minimum service levels, which was stepped up in Q1 as we’ve entered the final year of current Fixed Access Market Review. So in summary, we made a good start to the year. The integration of EE is progressing well and we’re starting to see some of the benefits to the Group. We delivered strong mobile KPIs and our market share broadband net ads were robust at almost 80%. BT Sport has gone from strength to strength this quarter, generating record viewing.

Cost transformation remains core to our strategy and there is plenty more to go for, and at the same time we remain focused on improving customer experience some that is in front and center of activities in all our lines of business. We also continue to invest tirelessly to improve the UK’s communication infrastructure with plans to invest 6 billion across the converged fixed mobile landscape in the next three years.

And just the call we move to Q&A, I’d like to put on record my thanks to Tony although we’re still heading from BT for the few more months. This is his last results call. Tony has been a long, he’s made a huge contribution to the business over more than 30 years, I think. And it’s been nothing short as outstanding and we’ll miss him very much. So on behalf of the whole company, thank you very much Tony.

And with, I’ll be delighted to take your questions.

Question-and-Answer Session


Thank you. Ladies and gentlemen, your question-and-answer session will now begin. [Operator Instructions] The first question is coming from the line of Paul Marsch from Berenberg Bank. Please go ahead. You’re live on the call.

Paul Marsch

I want to start with Ofcom and Openreach, the Ofcom said the key differences between themselves and BT is that they want the Openreach CEO to report to BT Group CEO; and secondly, they had some concerns about confidentiality for Openreach decisions relating to CPs. Do you agree that those are the two big areas of difference? Are there any other areas of difference that you see from your side? And do you see room for negotiation around those specific issues, or are they red lines? And I wondered if I could maybe just add a question about DPA. If you’ve got a view on what the cost per home passed would be for BT to deploy FTTP using, duct and pole access to 40% of UK households as Ofcom would like to see competitors to do, if you have a view on the cost of that.

Gavin Patterson

No, I think we’ve got two questions out there.

Paul Marsch

Sorry, thank you.

Gavin Patterson

I will answer the question on the BT. I am going to ask to Clive to give some comments on duct and access and we’ve been doing in that area. And so, on the BT, I am not going to conduct discussions and negotiations with Ofcom in public and we’ll be very clear about that. We were pleased that they chose not to pursue structural separation that is a very sensible decision, it would not have led to better outcomes for customers and it would have been a huge distraction over the next five, even potentially longer years.

In terms of what they ask is and what our proposal I think I made it clear there is a significant overlap between what they want and what we are proposing, but there are significant differences that we need to work through before we get to an agreement. And whatever that agreement is, it needs to be completely consistent with company law and reflect the fact that we will continue to be 100% shareholder of Openreach going forward. So, there is work to be done. I think that said, it’s essential set of proposals but we will work through the areas of difference and try to bring it to conclusion over the next couple of months. On DPA, Clive…

Clive Selley

So DPA we are required by Ofcom to open up ducts and poles. The fact is we actually did this five years ago, but we are evolving processes by which other infrastructure builders can use the ducts and poles. We’re in a trial period right now on a set of slicker processes and we are going to provide a network map of ducts and poles for the UK as required by Ofcom. In terms of FTTP delivered over that active infrastructure, I think, it’s almost the wrong exam question to ask how much does it cost. It costs very different amounts of money depending on the geography with the delivery fee.

So if you’re going through every rules like this, you would expect it cost a lot more than if you go to suburban places or urban places. So, the price to deliver that CP varies enormously, even the side of Openreach we’ve laid out a bigger ambition for FTTP. We have talked and we have a plan and we’re actually keeping on that plan to get to 2 million foot print by 2020. We have actually our deployment processes evolve those deployment processes and we have slicker ways of delivering FTTP right now, so we’re just going to focus on getting that plan and serving in particular business customers through FTTP where we think there is a significant demand for a superior products, and by that I don’t mean just high speeds I mean a superior service wrap that meets the needs of business customers, which is why you’re going to find us going to high streets and business parks across the UK.

And perhaps the one last focus area for FTTP will be on with multi-dwelling units of apartment blocks. And so we are very forensic in choosing the places for FTTP where we think demand will be particularly high combined with cost of deployment being particularly attractive, that’s our plan and that’s what we’re going at.


Thank you for your question. And your next question comes from the line of Dhananjay Mirchandani from Bernstein. Please go ahead you’re live on the phone.

Dhananjay Mirchandani

This is related to your portfolio of brands. So, currently, you have three if not four brands under your umbrella, how much room does your P&L have for these brands? And assuming that the EE brand stays within that portfolio, how do you expect to reposition EE and BT relative to each other in the medium term? Thank you very much.

Gavin Patterson

We made it clear when we announced the acquisition of EE and then we talked about this at the Capital Markets Day. We believe there is room for three brands in our portfolio going forward. BT, EE and Plusnet. We can realize a lot of the benefits in fact all the benefits in the network and systems submitted basis but we also need to reflect that customer needs ultimately may not well be shift from one single brand and certainly the dates are back stuff up, we can be considered by a significantly higher percentage of the market with three brands over any single brand and that’s not just true for our portfolio it’s true for anybody in the market. So, you can get the full benefits of conversions both in terms of from the cost side and the preposition side, but targeting the brands against specific customer groups I think is the right forward for us. So in terms of whether focus BTs hard run is the household and building outs the relationship from the household adding more family members through dual and triple play, and ultimately quad play type propositions through convergence. EE is hotline it’s fortunately a mobile and digital natives and providing access to that type of customer in to a wide range of products and services. And Plusnet is focused on smart value focused, soft serving customers and we’ve demonstrated I think over the last eight or nine years, where we’ve been the owner of Plusnet but we are able to grow BT and Plusnet simultaneously in the market.

Dhananjay Mirchandani

Thank you very much, very clear.


Thank you. Your next question comes from the line of Paul Sidney from Credit Suisse. Please go ahead. You are live on the call.

Paul Sidney

It’s just a question on the potential economy impact on BT going forwards. I saw your comments Gavin this morning that you’ve seen minimal impact from Brexit so far. But if the UK economy did worsen, which BT division’s do you think would be under most pressure, and actually which do you think would actually prove more defensive? Thank you.

Gavin Patterson

Good morning, Paul. I think it’s too early to draw too many conclusions on Brexit. It was interesting the only interest is not just over the period was on the day of demotic self, so it’s little cautious and then everybody is continued to buy the next day the ultimate particularly drop in demand in our consumer business. So, I think what the way we look at this is we have a balanced portfolio of businesses, we are not going to see strength in the UK but strengths in markets I think that are important to the long-term health of the UK itself. I’m assuming improving recessions if there is a recession on the UK over the next few years but the consumer business be that should BT where it is pretty resilient to make decisions our products and services are very, very important to the way people go about that fairly lives or run that businesses and they are not discretionary in many cases, so other things get cut before the corporate brand and lead by leads. In the business market there is a lot of change going on there I think we’ve seen in the past scripts employment in the can have an effective business market but I feel very confident that our competitive market position to be addition of mobile and the refocusing of our business around converting services and bundled services in business positions this very well and this is very fragmented market so I think there is a chance to maybe drive market share, even in a market that could decline in a recession. So, I think we’re well placed there, and of course global services, so more customers outside the UK then inside the UK we’ve got a strong business in Europe. I think sign of the confidence in some of our customers is that we signed a numbers of significant deals over the last few weeks. There when we talked in the press release Michelin [ph] and that was signed just a couple of days after the road to itself. And that is a French company serving 216 offices around the world and they chose also our office and it was delighted there was nothing in the Brexit vote that put them off. So I think with global services, we have the opportunity to grow in not just Europe but we’ve got a strong business in Asia-Pac and potentially we can get strong in the U.S. as well. So and we got plenty of choice and flexibility in our business model, not to say that we’re completely immune to it. But I think we’re very well placed.


Thank you. Your next question comes from the line of Maurice Patrick from Barclays. Please go ahead. You’re live on the call.

Maurice Patrick

A quick question on the process of the Ofcom strategic review. Sharon White said on the radio that she believed Ofcom had the power to impose separation if it wanted to. Do you think Ofcom has the power to do it? And if they do decide to impose legal separation on you and you choose to appeal, can you walk us through the process by which you could challenge, or look to overturn that, or elements of it? Thanks.

Unidentified Company Representative

I am not going to get into that Maurice, but good morning anyway. Look we’ve got a lot of common ground between Ofcom’s ask and our proposal. There are other issues to work through. I am not in denial of that. But we will -- we’ll attempt to find way forwards on the areas of that differ at the moment. We should always remain that the last time I look was we’re still part of the EU and Article 50 has not been triggered in any way. And as long as we’re part of the EU, we need to respect EU regulations and indeed depending on the type of relationship we want with EU going forward, if it is a Norway-style relationship, we will continue to need to respect European regulations and that is significant because it certainly our understanding having to broken and taken a lot of legal advice on this is that there is nothing within European framework mechanism and would allow a full separation of any company in telecom.


Thanks for your question there. Your next question comes from the line of Andrew Lee from Goldman Sachs. Please go ahead. You’re live on the call.

Andrew Lee

Could you just talk through the potential drivers of the slightly weaker Group fiber net adds you saw this quarter? How much, if any, was Project Lightning. How much was TalkTalk and Sky not marketing fiber as much? And are you seeing any rebound in the second quarter? And then just if you could speak on your BT retail fiber net adds, which were also modestly weaker. Is that a demand issue, an availability issue? Or is it just that you’ve quite high take-up of fiber across your customer base now? Thank you.

Gavin Patterson

I’ll make a couple of opening comments and perhaps ask Clive and John to give some perspective from those businesses. I mean overall 333,000 net adds within the quarter at an Openreach level is not shabby. As you know Andrew the market does have a seasonal factor what is out Q3 in our Q4 are the strongest quarters and the Q1 and Q2 are a little bit quieter. I think with respect to Virgin Media we’re seeing a little bit of impact around the ages, but not substantial but at this stage it’s relatively early in the rollout still. It’s around 500,000, maybe a little bit more within the next month certainly. So, maybe a little bit more in terms of the extra coverage they’ve built.

But ultimately still a pretty competitive market. So, Clive, from your perspective, what are you seeing?

Clive Selley

I think the numbers are reasonable, it is seasonal and so typically we see softer quarter into Q1 than in Q2. I think what we have to do in Openreach is focus on continuing to build the platform out. So there are more customers of the CPs that have superfast as an option for them and we’ve got a good quarter on that. We only have commercial build target. We’re only having the UK target and we’re improving service to the customers that can take the product. Mix deployments are down, time to repair is improved and I think as long as we do underlying things we build an ever more attractive platform for customers and for CPs to serve those customers for.

Gavin Patterson

And John, 79% market share, that’s not shabby, is it?

John Petter

No, it’s really taking a time really. I mean, the first quarter is normally is slightly slower quarter that’s been through this time. The driver of the fibre number is typically in fact just how much fiber regrade marketing we do. So the key difference versus the rest of the market, we haven’t really migrated that existing customer base from copper to fibre and this has been a very busy quarter for us, because there has been the launch of the Smart Hub, there’s been launch of handsets, there’s been the launch of change in fibre speeds for our existing fibre customers from 38 megs to 52 megs. So there’s been lots of stuff going on a slight difference in focus but no fundamental change in the drivers. The underlying consumer need to fibre and fast broadband remains incredibly strong I would say and that’s because consumers’ usage continue to increase.


Thank you. Your next question comes from the line of Stephen Howard from HSBC. Please go ahead. You’re live on the call.

Stephen Howard

I was firstly just wondering whether you had seen from Ofcom a cost benefit analysis of its proposals on legal separation, because I think that would at least help us to evaluate how the regulator is assessing the practical impact of those aspects of the current arrangements with which it is unhappy. And my second question is on rural. Obviously, a source of a lot of the criticism of Openreach is the quality of the rural service. Now, plainly, a lot of that just reflects the harsh realities of physics. But nonetheless, it’s a very contentious topic. The government and Ofcom seem agreed that a 10-megabit per second USO is appropriate. And so what I wanted to know is how quickly you think you might be able to get that done with your new technologies like Long Reach VDSL. In other words, how quickly can that very contentious topic be addressed?

Gavin Patterson

Let me answer the first question about cost benefit analysis and then I’ll pass to Clive on rural. The answer is no. Clive?

Clive Selley

So I was reading a report from I think broadband yesterday that says that superfast coverage of the UK is now actually launching 1% we are very confident that we will underpin the government’s target of getting us to 95% by December 2017, what we are deploying so we as underpin the government targets are confident on that one and we are very, very focused on a detailed plan for how we would deliver a minimum the 10 meg through the remainder loan reach BDA sale is course to the technology mix what we would use it’s been the trial in rotation in suffix the results are as we would expect fee based on the lot of experiments we are now enabling cabinets in various parts as the country in order to do a much bigger scale trial just approve that our scale was technology will meet the U.S. selling for a very large number of customers. My ambition is what we rely our plan that we’ve been and talked to government about the talks about delivering the same make and above promise and these are 10 megs and the bad promise.’

The idea was not deliver 10 megs to 5% of the population but to deliver that it was the minimum and we would and our exploration would be to do that as quickly as 2020 if we can get the right terms for that investment provident.

Gavin Patterson

And of course it’s not just about fix we are obviously the biggest mobile provider in the UK and the roll outs of the emergency services network contract will ensure that we get to 95% geographical coverage with 4G by 2020 and I think that will and I think that will help to address some of the criticisms that sometimes we get to hear.


Thank you. Your next question comes from the line of Nick Lyall from Societe Generale. Please go ahead. You are live on the call.

Nick Lyall

Just a couple please if that’s okay. On Stephen’s question there, if you’ve not got their cost benefit analysis, could you help us a little bit with your view on the costs? You’ve mentioned in the release today that a legal subsidiary could be disproportionate, so which of the costs of employee assets transfer, tax and pensions should we really think about? And if I just missed any out that you think is really significant in that. And then the second one would be on consumer, please. Could you give us a little bit of background on what seems like a good performance from yourselves, but maybe a weak market? Are you still seeing that continue; we’re only two weeks away from the football season, so is there a chance that there’s a materially lower marketing spend this time versus last time around? Thanks.

Gavin Patterson

I’ll let John comments on the consumer market in a second. In terms of the costs of the legal separation there are the costs around changing contracts, changing wide liens around systems and separating systems and of course there will be costs associated with people if we move from 32,000 Openreach employees into a separate legal entity. So, they are quite significant. And we would argue to Stephen’s earlier point that cost benefit’s analysis needs to really justify something like that. I mean the people costs, just for clarity, will be related to the pension, the addition pension, cost that we would expect the trustees to ask for at that point. So there is a bit of work to be done to get through these. Ofcom is very clear in the document and where in all briefing that they do not want to substantially increase BT’s costs and so we feel as though there is an opportunity to really talk us through them and help them understand that the cost benefits are not just the ultimately I am sure want to provide.

And then I was going to John for the consumer market.

John Petter

Yes, in terms of the market this quarter, we’re not really seeing very many substantial differences versus previous year, and there are some very aggressive offers out there. Sky are promising free fiber for life to customers to take Sky Sport to the new bundle from Now TV and that includes a 30-day contract. Virgin Media have got posters pretty much everywhere the talk about the benefit of giving BT Sport and Sky Sport from one base. So these are served pretty similar Sky to what we’ve in prior year and I don’t really see much for change out today.


Your next question comes from the line of Robert Grindle from Deutsche Bank. Please go ahead. You’re live on the call.

Robert Grindle

You flagged in the presentation the strengthening balance sheet; given the share price weakness, post Brexit, were you tempted to add more to the existing buyback program, which was more or less fully executed? I think you are allowed to do so within the agreement with the pension trustees. And then one for Tony, and by the way good luck and also to your successor. You’ve a lot to be proud of as your time as CFO, but any regrets? What would you have done differently, if you’d had your time again? Thanks.

Gavin Patterson

Nice, thank you very much Robert for that. Actually, I’ll ask Tony on both of that okay.

Tony Chanmugam

Robert, in terms of the buyback with primarily the buyback vehicle as a main because earning share valuation relates into employee shares in business, declared that strategy a number of years back from where we announced we’re not looking to move from that strategy. In relating to regret, I think potentially we may have done a bit more de-risking when the market was more in our favor in the nation to the pension deficit but hind times was a great thing.


Thank you. Your next question comes from the line of Mandeep Singh from Redburn Partners. Please go ahead. You’re live on the call.

Mandeep Singh

I really wanted to understand a little bit more about what’s going on. The order intake in some of the -- you’ve talked about the cyclical impact already, but order intake in a number of areas does actually look like its worsening. Are you just seeing a general slowdown, or which -- so nothing to do with Brexit, but just a general slowdown? Could you just talk about what’s going on, particularly the business and public sector looks quite weak in terms of order intake, global services? I know you’ve talked about some of the contracts are not being affected by Brexit, but just want to understand a bit more about the order intake dynamics, because business and enterprise is an area in some of the other telcos in Europe, TVC, KPN and some others which are seeing some big secular pressures, as we move from traditional services to new IP-based services. I’d just like to understand a few of the dynamics there, please.

Gavin Patterson

Sure, I am going to ask Graham and Luis perhaps to add couple of words. But from my perspective, I think what we’re seeing is on the corporate side, be it major business, SME or SOHO. Actually the business is strong. It is -- and the order book is pretty good. The order book does move around a little bit. It can be pretty lumpy depending on whether there’re big deals in the base line period, because that would come through at a regular rate. But if I look at the sense of the business and its predictability actually in all those markets it’s looking good.

The drag, and we called it out to the Capital Markets day, is the public sector business where the big contracts are coming to an end and we will work through that over the next couple of years. We’ve reorganized our business to take advantage of what we think will be the way procurement moves moving forward, moving more regional, looking to leverage the full range of products and services across multiple segments that we can offer in the UK, and taking full advantage of the integration of mobile as well. So I think we’re well positioned as the market turns. But ultimately that’s going to take a year or two.

So Graham, do you want to talk on UK domestic to start with the public sector and then Luis on Global Services.

Graham Sutherland

Thank you, Gavin. There is probably three things worth saying and in terms of the business and public sector division, we’ve had over the last couple of years, we’ve had a couple of very substantial reviews and they’re long-term five to seven year contracts and particularly no public filings. And so obviously don’t repeat on a regular basis. We’ve also lost or discontinued three public sector contracts that are very sizeable and therefore we didn’t have any reviews or audits from those. But if you strip out the actual underlying position is relatively strong and we’re seeing that particularly with public sectors we’re seeing with strong growth and those are actually in corporate markets, so underlying business is strong.

Luis Alvarez

If you look to a couple of years ago, we are around 20% above for two years ago against last year there is a little bit volatility because of what’s happened in last deal, which is quite the strong performance all at current regions. We are very pleased with our results I think that we’ve seen customers continue to be cost confident as we mentioned on some of the others is that we have announced today over the quarter. So I think that there is quite a good performance in terms of the order intake. And the pipeline looking ahead looks pretty solid for us.

Gavin Patterson

And Gerry anything from the hotel market?

Gerry McQuade

Yes, it is a tough comparison with the last quarter and the corresponding quarter last year with an EE order that’s commenced so there is a significant change there. But overall the pipeline and with the long-run is actually it’s not significantly different, I don’t think there is anything to concern there.


Thank you. Your next question comes from the line of Simon Weeden from Citigroup. Please go ahead. You’re live on the call.

Simon Weeden

I’ve got a couple of questions. One is whether you see scope for variations on what legal separation of Openreach could mean. So, for example, whether or not it’s binary, whether or not Openreach directly employs all its staff or directly owns all of its assets, for example? An on broadband, if I could add to the line of questions on that. We seem to be seeing a slowing in the market as a whole. The market share seems to be holding up quite well, but is this -- I know you’ve addressed this in different ways, but I think this is a different question. Is this slowing of the market something that is the new normal? And when are we likely to hear more from you on the deployment of Thanks.

Gavin Patterson

I am going to ask, Certainly Clive, John, I don’t know where you want to do anything on the market on broadband in a second. In terms of incorporation I’ll just repeat what I said would be in a good. Actually I don’t want to conduct negotiations in public around the future operational governments and I have Openreach. There is clearly a range of different variance of incorporation and off comments as I said would very clear delay do not want to significantly increase the costs but Openreach has to be clear because on like other industries we do not get to reclaim the patient payments but to repay the deficit in the charge control that we offer, so I think as a very sensible position we will discuss a range of different solutions with off comment and hopefully we get the opportunity of sensible pragmatic sustainable way for it. In market views Clive what’s you are sense?

Clive Selley

Underlying I do believe customers our decline will migrate to higher speed services. The reference points from these is idea so and I’m just in rough numbers all it depends only 60% of various out swing customers can receive 10 megs right. As customer you should afford that increases as applications demand higher bandwidth as the propensity to stream high definition video continues to increase I think what will be a next pressure to move customers to a super fast and ultimately and ultra fast platform so I think all the underlying reason why growth of the customer base on super fast there are all of our underlying regions are not going away, so I do believe we had build and continue to build and if you add to that our footprint is extending poor months 25,000 new homes every week can now benefit from the platform I think those underlying I think forces will keep the numbers moving in a healthy way. If I could then switch, if I may, to question and were really pleased with the results, when we drop from the early trials in kind of share in the Northeast at Gosforth and in South Wales at Swansea We’ve made our supplier selection. We’ve laid out what we term our pilot plans, These are significant scale pilots in Kent and Cambridgeshire. Our intention is to put in the platform footprint of 25,000 homes passed in Q3 of this year and to launch their after. So, were very positive about will achieve it is a mechanism for us to deliver and ultra fast platform at real pace to a very large number of people in the UK and the plan is on schedule to the data I’ve just given you.

Gavin Patterson

Thanks Clive. John, any other reservations?

John Petter

Just a couple of first is the household in UKs it’s pretty high already so at some point as the number of the new household taking broadband that was found to be start to slowdown really seeing us that we said and on quarters three and four are generally bigger quarters. But the real trend I would say is that as from the regional point of view some years this has been primary our switches market and the set of what BTs is running through several brands compete very well in the switches market through differentiation and through competing at price curves. And then secondly the point I made earlier in terms of the underlying trend that we see is the band that we just to increase both potentially year-over-year and this was Sky was saying that shows and the demands of better broadband or fiber broadband is extremely strong.

Gavin Patterson

And we’ve got time for one more question. This is the final question.


Thank you. Your next question comes from the line of James Ratzer from New Street Research. Please go ahead. You’re live on the call.

James Ratzer

Two, please. One is, we’ve now owned EE for six months. I was just wondering if you could give us an update on how you are finding the idea of cross-selling both in the business and also in the consumer market. And secondly, I notice leaver costs in the quarter were up quite sharply year on year. I was wondering if you could help give us a steer on how leaver costs should pan out for the rest of the year. Many thanks.

Gavin Patterson

Very good, I’ll ask Tony as his last ever answer on the BT -- he’s actually called to talk about leave cost Do you want to handle that first? And then maybe, Graham, a word on cross-sell in the business market. Luis, if you’ve got anything else on from your perspective. John and Marc, just a word, a couple of words on each.

Tony Chanmugam

The position on leavers is actually good news, because it means that we’re progressing well in terms of our of rationalization program. The 40 million we incurred is not, I wouldn’t go that number all the way through, I think we’ll have it obviously reduced because the time you get savings in early.

Gavin Patterson

Cross-sell in SME and corporate in the UK, Graham?

Graham Sutherland

Yes, I mean I think the early signs are very positive and we’ve obviously fully integrated the teams and improved our coverage and distribution, and we’re seeing increased acquisition and both on fixed and mobile, so early signs are positive.

Gavin Patterson

Best thing that they have to work and really accepting very well and they’re very supportive on using both. I think the broadband is really driving that and we have seen that both in the financial services sectors as well as some of their other spread and the increased use on data. I think is a quite important way of driving this cross-sell.

Tony Chanmugam

The price on cost of the consumer market is very much with the net effective brand up to the right customer and to typically after BT broadband customers and the approach is to cross-sell, the EE mobile network haven’t really used the BT mobile brand. I think you can see the postpaid net ads and through the broadband market share and that there is strong trailing momentum and there is once exception to that and that is the BT Sport being and given to EE customers now and I think that’s the strong offering that fits logically for consumers and it’s going to be a good thing for our business hopefully.

Marc Allera

I can say the highest profile example we’ve got, launched today, so BT Sport and EE are the great example and we’re learning a lot across the businesses on home and mobile as we share knowledge and that helping us to best practice in both areas.

Gavin Patterson

Very good. Well, thank you and that’s all we have time for today. So on behalf of everybody at BT, feel good at a chance to get a little bit of time off over the summer and we look forward to seeing you for the Q2 results.


Thank you. Ladies and gentlemen that concludes your conference for today. You may now disconnect. Thank you for joining. Enjoy the rest of your day.

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