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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Good morning, and welcome to BT's Full Year Results and Strategy Update Presentation. Presenting from the stage today is Jan du Plessis, Chairman of BT; Gavin Patterson, Chief Executive; and Simon Lowth, Chief Financial Officer. Also present are the CEOs of our customer-facing units.Before we begin, I need to let you know that there is no planned fire drill today. If you hear the alarm, listen for announcements and follow the instructions. The alarm consists of several short bleeps followed by a voice message. Trained fire wardens will assist with evacuation. Do not return to collect belongings, obstruct escape routes or try to use the lifts. If you require assistance with evacuation, please make yourself known to a member of the team.I would also like to draw your attention to the usual disclaimer on forward-looking statements on Slide 2 and our latest annual report, for example, 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.Thank you for your attention.
Ladies and gentlemen, good morning, and thank you for joining us for today's presentation.Now I was going to just say, as most of you would not have met me, I should introduce myself, but Mark has already done that. But in anyway, my name is Jan du Plessis, the new Chairman of BT since last November.As this is my first result presentation, I thought I would start by giving you some of my initial impressions of BT before talking about some of the things we've been achieving in the last financial year and also reflecting on our key priorities for the future. BT is in many respects an amazing, albeit complex company. We have a strong set of assets, with leading market positions in fixed and mobile networks, 4 powerful brands, proven world-class expertise in the rise of technologies and a robust balance sheet. Our leadership position in the U.K. reflects our long and proud history in this country, although credit must also go to Gavin for important strategic initiatives like the acquisition of EE, without which BT today would simply not have been the same company. Our history has, however, also made us a very complex and sometimes slow-moving organization. Competing in a demanding and rapidly changing market environment, connectivity sits at the center of most people's lives and has become critical to homes and businesses alike. Consumption of data and bandwidth continues to expand at ever-increasing rates, and at the same time, technology continues to evolve as we move from copper to fiber, from 4G to 5G and from analog to digital. As the U.K.'s incumbent provider, we are determined to lead this transition from old to new technologies. But in order to do so, our strategy will need to evolve to provide ever greater focus on our customers' experiences and on network investment, whilst transforming our operating model to become a lean, agile and modern organization.Gavin's presentation today will provide his vision of how our strategy is changing in order to deal with the challenges and exciting opportunities we face. This strategy will be implemented whilst carefully balancing the sometimes conflicting interests of various stakeholders, including customers, employees, regulators, pensioners, government and, of course, shareholders. This will not always be easy, but it is a strategy I wholeheartedly endorse. But that -- we should put the future on hold for the moment by looking first at the financial results and achievements of last year.After the events of early 2017, Gavin and his team have achieved a great deal in this past year. They delivered financial results broadly in line with the guidance, and an enormous amount of risk has been taken off the table. I will not go through everything on this important slide, but some of these achievements will make a real difference to the future of our business. For example, closing the final salary pension scheme and agreeing a deal to give our TV customers the ability to access Sky's premium sports and entertainment content. I should also recognize that the separation of Openreach gives much-needed clarity, both internally and for Openreach's customers. And finally, we have taken positive action to strengthen our control environment across the business.In terms of financial results for the year, I'm pleased to say that the team have broadly delivered in line with guidance and expectations. After a difficult 2017, this was a priority. Underlying revenue was 1% below guidance, impacted by explicit strategic choices to de-emphasize lower-margin business. EBITDA was within guidance, whilst normalized free cash flow was above the guidance range. Adjusted earnings per share declined by 3% to 27.9p.As Gavin will set out in detail later, we have a comprehensive transformation program in place to improve our operational and financial performance in what remains a competitive market environment. And we are increasing investment to drive convergence and sustain our network leadership. We have confidence in our strategy and the benefits we expect to achieve from the decisive actions we are taking to strengthen our competitive position. However, given the current market and regulatory headwinds and the step-up in our investment plans, the board has decided to hold the dividend for this year unchanged at 15.4p per share. The board also expects to hold the dividend unchanged in respect of the next 2 financial years, given our outlook for earnings and cash flow over this period. The board remains committed to our dividend policy, which is to maintain or grow the dividend each year whilst reflecting a number of factors, including underlying medium-term earnings, expectations and levels of business reinvestment.You will hear in today's presentation that we have taken decisive actions to improve our performance and are embarking on a transformation program, which will fundamentally reshape the organization. This is needed to maintain our leadership in converged connectivity and services and to ensure the continuous success of BT. We want to deliver differentiated customer experiences, putting the customer at the center of everything we do, and ensuring that customers have an excellent experience of BT from first contact and throughout their customer journey. Clearly, this would require us to deliver the best products and services in the market. We want to increase our investment in fiber and mobile to maintain our integrated network leadership position. This will enable us to take advantage of market opportunities that will arise from the continued strong growth in data consumption and speed requirements. And we need to transform our operating model to drive a sustained improvement in cost and productivity, becoming a lean, agile and modern organization, and giving us access to the right people and skill sets to deliver a sustained improvement in customer experiences.Successful execution of this strategy will serve the long-term interest of all our stakeholders and would ensure that we play our part in keeping the U.K. a leading digital economy. And above all if the team can execute all of this successfully and deliver operationally and financially, I'm confident that we will rebuild trust and confidence, and we will drive long-term sustainable growth in value for shareholders.Thank you for your attention, and with that, I will hand you over to Simon to go through the details of the results. Simon?
Jan, thank you very much, and good morning to all of you. I'm going to summarize our group financial results for Q4, which are broadly in line with our guidance and our expectations, and then describe the performance of our customer-facing business units before covering pensions, delivery of our cost-saving programs and our outlook for the year ahead.In the fourth quarter, you can see that reported revenue was GBP 6 billion. That's down 3%, although on an underlying basis, revenue was down 1.4%. Strong performance from our consumer businesses was offset by weakness in our enterprise segments, where we have consciously de-emphasized certain types of revenue. Openreach proved to be resilient, but it was pressured by regulation.Adjusted operating costs, before depreciation and amortization, reduced by 4%, reflecting our tight control of cost. I'm pleased that we held costs down despite investment in customer experience and sports rights and increases in the pension's operating charge and business rates. Adjusted EBITDA was GBP 2.1 billion in Q4. That is up 1%.And I'll now describe the key dynamics that drove our EBITDA performance in 2017, '18, and they will continue to impact our midterm outlook. As you can see, the development of EBITDA in 2017, '18, was shaped by the adverse pressures of regulatory pricing, cost inflation and some declines in legacy products, and these just offset the growth in our strategic products and our significant cost transformation.Moving further down the P&L, in Q4, depreciation and amortization was flat at GBP 889 million. Net finance expense was GBP 203 million, and income tax was GBP 150 million, with the effective tax rate in Q4 at 17%. Profit after tax and specific items was GBP 722 million. Our reported EPS was 7.3p per share, and our adjusted EPS was 8.8p per share, those both showing year-on-year growth.So turning now to cash flow. We recorded CapEx of GBP 844 million in Q4. That's down 7%, although I should note that across the full year, CapEx was up 7% due to the investments that we are making in our fixed and our mobile networks. Gavin will give guidance on CapEx later in today's presentation.In Q4, interest was GBP 148 million. And tax, excluding the cash tax benefit of the pension deficit, was GBP 206 million. Working capital increased by GBP 141 million. And this takes us to normalized free cash flow of just over GBP 1 billion in the quarter. That's up GBP 192 million from last year.I should note 2 other uses of cash in the quarter: firstly, we agreed to buy 40 megahertz of spectrum in the 3.4-gigahertz band in line with our intention to lead the market in 5G; and secondly, we made a payment of GBP 856 million into the pension funds, which I'll discuss in more detail later.So I'll now describe the performance of our customer-facing business units, and I'll start with BT Consumer. The business delivered revenue growth of 3% in Q4, driven by broadband, TV, sport and mobile, although partly offset by line losses. Revenue was helped by the January price increase, which was implemented successfully, drawing on lessons from the prior price rise through clear delivery of more-for-more benefits for our customers. ARPU increased by 5%, and RGUs per customer also increased by 3%. I'd note that RGU is still only just above 2, giving us confidence that there is potential for further growth.Across BT, we recorded slower net broadband subscriber growth of 2,000. However, our strategy remains to focus on higher-value customers, so we were pleased to have added 202,000 fiber broadband customers, reaching 61% of the base. And our investment in customer experience continues. Average call waiting times are 1 minute less than a year ago, and Ofcom complaints fell 18% for broadband. We're encouraged with these results, but there is clearly much more for us to do. BT Sport continued to deliver strong viewing figures across all platforms, up 19%. We're also pleased with the outcome of the Premier League auction, which allowed us to maintain our position in premium sport. In Q4, EBITDA was up 13% as a result of revenue growth. The rate of growth is not expected to continue into next year.So moving on to EE. Once again, revenue grew strongly. It was up 5% in Q4, and that's the sixth consecutive quarter of revenue growth. The drivers of this performance were increases of 6% in postpaid and 12% in fixed, partly offset by a 10% decline in prepaid. Across the group, postpaid ARPU was GBP 26 and down slightly due to customer mix, and churn remained low at 1.2%. We saw a seasonal slowdown in postpaid subscriber net additions, which was expected after the launch of premium smartphones and watches in Q3, and has helped EBITDA to recover strongly in Q4 and it brought annual growth to an impressive 17%. I should note we don't expect this rate of growth to continue into next year. Our 4G coverage is 90% as we continue to work towards our target of 95% by 2020. And we were pleased that, once again, our network was voted 1st in the most recent RootMetrics survey.This was a demanding quarter for Business and Public Sector. Underlying revenue decreased 5% in Q4, bringing the year to a decline of 4%. This reflected declines in fixed voice and legacy contracts and our decision to de-emphasize some lower-margin equipment sales. Positively, we recorded continued growth in mobile and in IP, and operating costs in Q4 were cut by 4% through lower voice input costs, lower legacy contract expense and also lower labor costs resulting from levers in the quarter. However, EBITDA still declined 7%. Looking ahead, we do expect an improved EBITDA performance in Q1 as the drag from the public sector lessens.Order intake was down 20% in Q4, but it was up 1% on a 12-month basis. We continue to see real benefit from convergence in the business market. For example, at the end of April, we launched BT broadband with 4G Assure. This combines the power of our fixed and our mobile networks to differentiate our premium business broadband service by providing automatic broadband switchover to 4G in the event of a fixed line issue.Global Services underlying revenue fell 8% in Q4. We continue to de-prioritize low-margin revenues such as IP Exchange and equipment and also faced challenging trading conditions. The order book was robust in Q4, up 12%, although over the course of the year, it fell 16%, reflecting a shift in buyer behavior towards shorter contract lengths and increased usage-based terms. We're responding fast to the changing market, increasingly offering digital services to our globally important MNC customers. So as an example, we launched an important new service, BT Cloud Connect for IBM. Our cybersecurity business continues to innovate. For example, we've launched a malware information-sharing platform for our customers.We also made good progress with the reorganization and the cost restructuring program that we announced in May 2017. EBITDA did fall in Q4, however, allowing for one-off items, EBITDA was only marginally down year-on-year.Underlying revenue for Wholesale and Ventures was down 6% in Q4. This was due to the continuation of declines in our legacy Managed Solutions data and broadband and voice businesses, partially offset by encouraging growth in Ventures of 6%. And within Ventures, I'm pleased to say that we installed 138 InLinkUK units at the end of the quarter. Order intake was up 47% in Q4, helped by a new 4-year deal with KCOM. EBITDA showed a slightly improved trend in Q4. It was down by 7% versus the full year decline of 10%.And turning finally to Openreach. Revenue was flat in Q4 and across the full year, but excluding the impact of regulatory price reductions, revenue would have grown 1.1% in Q4 and 1.8% over the full year. In Q4, we saw continued strong growth in fiber revenue, up 16%, and that offset the decline in copper line rental and regulatory-driven price decreases. We added 555,000 new fiber lines, taking the annual total to above 2 million. And we've now passed more than 1.5 million premises with our new ultrafast network, enabled by both FTTP and G.fast. And we've just added our 10 millionth fiber customer.We're proud that our investment in customer experience continues to bear fruit. We saw a further 4% reduction in copper network faults. EBITDA came under some pressure in Q4, falling 8% due to increases in the pension operating charge and business rates and our investment in proactive fault reduction, partially offset by efficiency improvements. CapEx fell slightly in Q4 despite increased investment in fiber due principally to lower BT U.K. deferrals, but it was up 5% over the full year.I'll now describe the progress that we've made in the management of our pension schemes. We're pleased to announce that we've reached agreement with the trustee on the triennial valuation. The deficit as of June 2017 was measured at GBP 11.3 billion, and this includes the cost of significant de-risking of the scheme. A deficit repair program has been agreed, which has the same 2030 end date as before. Before the next triennial in June 2020, we will make a substantial contribution of GBP 4.5 billion into the scheme. We'll make cash payments over the 3 years of GBP 2.1 billion, which is in line with the existing arrangement that we struck at the time of the 2014 triennial. In addition, we'll make a contribution of GBP 2 billion to the scheme, which is expected to be funded by the BTPS subscribing to long-dated sterling bonds issued by BT. And we're aiming to issue the bonds as soon as practicable. And all these contributions will attract tax benefits in the normal way.We have also supported a move of around 15% of the assets from growth assets, such as equities and property, to lower-risk investments, such as bonds. This provides a substantial reduction in risk for the scheme and for BT, reducing the future volatility of the funding deficit.As we've previously announced, we reached a fair and affordable agreement with our people over the closure of the BTPS-defined benefit pension scheme as well as making improvements to the defined contribution scheme. Members of both unions have now voted in favor of the changes. As a result, the pension operating charge for the year ahead will remain broadly flat, whereas this cost may otherwise have increased. And we've launched our appeal of the Section C indexation case and expect this to be heard in October. The IAS 19 pension position, at the end of Q4, was a deficit of GBP 5.3 billion net of tax. The reduction over the year is largely the result of deficit payments we've made and a refinement to the way we calculate the discount rate for the IAS 19 deficit better reflects the yield curve for corporate bonds.Our balance sheet remains strong at year-end. Our net debt stood at GBP 9.6 billion. And we're confident that our credit metrics to continue to be aligned with our medium-term target of BBB+. Our debt maturity schedule is long-dated, and as I mentioned earlier, we plan to issue bonds for the pension fund which will further extend our average maturity profile.And that concludes my section of the presentation, and I'd now like to hand over to Gavin.
Thank you, Simon, and good morning to everyone. Over the next 30 minutes or so, I'm going to tell you why I am excited about the future of BT and what we're going to do to drive sustainable growth in the value of our company over the next 3 years. I am going to cover how well we are positioned in the market, how the market environment is evolving, how we are evolving our strategy in response and the actions we are taking to improve the performance of BT.BT is really well positioned in its markets. After a challenging prior year, our focus was on disciplined delivery and risk reduction. In my view, we achieved this, and at the same time, we have evolved our strategy around leadership in converged connectivity and services. Our strategic priorities are to deliver differentiated customer experiences, invest in integrated network leadership, and transform our operating model to become a leaner, more agile organization and able to take advantage of market opportunities. We will put our customers at the center of everything we do and emphasize value over volume. We will maintain a disciplined financial framework, which enables us to underpin our commitment to the dividend.In terms of outcomes, this is what we will deliver over the next 3 years: a significant increase in the penetration of ultrafast products, and increases in ARPU and RGUs; continued improvement in customer service and customer experience metrics; increased converged product penetration and digital interaction; a reduction of around 13,000 roles over the next 3 years, and this, with other efficiencies, will deliver around GBP 1.5 billion of annual cash cost reductions in year 3 and an implementation cost of around GBP 800 million. This will be offset, however, by 6,000 new hires to support our network deployment and customer service objectives.As I mentioned, the events of early 2017, 2018 has been a year of disciplined delivery and risk reduction. We have addressed many of the uncertainties that the market had at the beginning of the year, and we've created a platform to deliver the next stage of our transformation. In this respect, I would like to say thank you to all the people in BT who've made this happen. We have improved our customer experience metrics, and delivered a financial outcome that is broadly in line with our guidance and market expectations. We've secured regulatory clarity in a number of areas, including WLA pricing, and delivered the legal separation of Openreach. We have confirmed our ambition of 10 million FTTP by the mid-2020s, with 3 million to be delivered by the end of the decade at lower costs. We've secured spectrum for 5G services, and we have also secured another 3 years of Premier League games at reduced costs and have reached agreement with Sky to allow BT customers to watch BSky premium content as an integrated part of our BT TV platform.We have delivered our cost-saving targets from the EE integration and across GS, TSO and group functions. We have also secured support to close the defined benefit pension scheme to future accruals and have concluded the triennial with manageable cash contributions. And importantly, we have improved our controls and governance. We have also simplified our organizational structure and strengthened our management teams as we build a lean and agile organization. With the bringing together of Business and Public Sector with Wholesale and Ventures, we will have 4 clearly defined customer-facing units for consumers, U.K. enterprise and multinational corporations as well as fixed access networks through Openreach. These are supported by TSO to own the architecture; design, build and operate processes across BT; a new strategy and transformation unit to develop strategy across BT and to drive transformation; and our corporate functions providing governance and overall management.In terms of the executive committee, I am pleased to have welcomed Cathryn Ross, who's joined from Ofwat, to take the lead on our regulatory affairs and our relationship with Ofcom. Michael Sherman, who has just joined us from the Boston Consulting Group, to lead our strategy and transformation team; and Sabine Chalmers, who joined us from AB InBev as General Counsel.BT has a strong market position from which to grow and deliver value. We have 30 million consumer relationships, over 1 million enterprise relationships, and deal with around 15 leading U.K. fixed and mobile access networks, with our superfast fixed infrastructure, providing greater national coverage than any other country in Europe, and our mobile infrastructure covering 90% of the U.K.'s geography. And we have the largest integrated core network in the U.K. and globally. We are the only truly converged player in the U.K. market, and have close strategic partnerships with leading content, technology, device and service vendors. And we serve our customers through multiple channels across consumer and enterprise markets, portfolio of strong and well-segmented brands.Against this strong position, it is worth quickly setting out the market context to demonstrate why we need to evolve. It would be no surprise to anyone in this room that volume growth in the telecoms market in the U.K. is slowing. However, as you can see from the chart, there is still increasing value in the market and the opportunity to differentiate as consumers want and indeed are prepared to pay for more data, speed and convenience with the latest technology, whether this is in the form of a handset or on-demand products and services.The impact of regulation is a continued headwind for our business. To put this in context, as you can see from the bottom of this slide, over the last 3 years, and just looking at the direct impact on prices, regulation has impacted BT by over GBP 500 million. The expected cumulative impact, over the next 3 years, could be more than GBP 1 billion, if we include the potential indirect impacts as well. However, while regulation has reduced our returns, with the result that the return on capital in Openreach is moving closer to its allowed return, this should mean that regulatory price intervention should be less significant in future market reviews, with more of the focus shifting to service and efficiency. This is the discussion we want to be having with the regulator.As a result of these changing market dynamics, we are today announcing an updated strategy, which is highlighted here on the screen. This is key to how we think about the future to ensure we maintain our leadership position in the U.K.'s telecoms market. Our purpose doesn't change, but looking to the future, our vision is, leadership and converged connectivity and services for customers in the U.K. and for our multinational customers. Our goal is to drive sustainable growth in value by enhancing returns on our invested capital and delivering returns above our cost of capital on new investment in differentiated assets, products and services. We will do this, centered around 3 strategic priorities: we will deliver differentiated customer experiences across all our brands, across consumer and our enterprise businesses and Openreach and put the customer at the center of everything we do; we will continue to invest in integrated network leadership across fixed and mobile; and we will transform our operating model to build a lean and agile organization to deliver sustained improvement in customer experience and productivity and be able to move more quickly to take advantage of market opportunities. To deliver these outcomes, we do need to reshape our organization. We need to renew our capabilities and culture, and deliver transformation that drives value for shareholders and that can attract and retain the best talent in the industry. This really is a pivotal moment for BT.Now looking in more detail at the core areas of our strategy, and starting with delivering differentiated customer experiences. To retain value in a lower-growth market, we need to differentiate ourselves through our products, through service and in the ease of doing business with us. We want to focus on customer retention rather than customer acquisition, and we will deliver more-for-more benefits and value for our customers. We want to retain the customers we have and then create the products and capacity to upsell, enhance the number of products that each customer takes and, hence, improve RGUs and ARPU. This is why customer experience remains critical to the success of our business. Now we are already making good progress in the area. As you can see on the charts, we continue to improve our Net Promoter Score and Right First Time metrics, and we are making improvements right across-the-board, whether this is in lower network faults, lower call waiting times, lower propensity to call and increased use of digital channels or indeed lowering of complaints. These all help to improve how the customer views us, and importantly, also lowers the cost of service.We will also evolve our product offerings that focus on convergence. Today, we provide simple product bundles through 3 modes of connectivity: fixed, WiFi and mobile. In a converged world, we will provide products and services across voice, data and content, seamlessly switching between networks across all devices wherever our customers are located. Our leading networks, brands, channels and strategic partnerships means we are well positioned to succeed and indeed deliver value from this new product category.Penetration of converged services in the U.K. today is significantly below many countries in Europe, suggesting strong latent demand for this new product category, which can provide a great experience for our customers and drive sustainable growth and value. Evidence from Europe suggests that customers who buy converged bundles are stickier, more loyal and have improved economics.Now looking at what this means for our customer-facing units, and starting with Consumer. Marc Allera's Consumer business briefing next week will give a lot more detail, but in our Consumer business, we will look to differentiate by leading in convergence offerings. This will build on our unique position in the market, putting together offerings that combine the best of everything we do in 1 place. It would allow us to leverage our partnership offerings, for example, in our super-aggregated TV platform, where we will be shortly be able to provide the most comprehensive TV package in the market, accessed through a simple user interface. We will also make better use of customer data and better use of digital channels for more targeted and personalized marketing, complemented by our nationwide retail footprint, allowing for a local and personal service.In the enterprise segment, we will improve customer experience while automating and standardizing processes to reduce costs to sell and serve along key customer journeys. We're going to protect and grow our core connectivity market share, focused on cross-selling of technology innovation, migrating customers from single legacy products to converged multiproduct offerings, including mobile, VoIP and fiber products. And our new 4G Assure product launched this month is a good example of this, so is BT One Phone that has been growing rapidly and allows customers to seamlessly combine fixed and mobile services. We will also create new revenue streams in complementary services, for example, leveraging our leading security proposition. While we have built this business to GBP 500 million in revenues from nothing 5 years ago and by utilizing Internet of Things, where we have transformed our own business to reduce costs and the environmental impact of our operations across our building estate, fleet and supply chain, and are now starting to see real traction from our customer base in these sectors.In Global Services, we will leverage our security offering as we will in our enterprise business, and we'll continue to introduce new software-defined dynamic hybrid networks and cloud services to the market and leverage our scale with major global partners, such as Cisco, Amazon Web Services, IBM and Microsoft, to deliver the best solutions for our customers. And of course, we'll continue to de-emphasize low-margin legacy revenue where we see little value for enterprise or GS.Now to support our ability to deliver differentiated customer experiences, we will need to continue to invest in integrated network leadership. This is essential to meet the significant forecasting growth in both fixed and mobile network over our business. In mobile, we will continue to build 4G to 95% geographic coverage by 2020 and intend to lead the market to 5G, looking to have a commercial product launched within the next 18 months. We have already secured a 3.5 -- 3.4-gigahertz spectrum for 5G and plan to participate in the 700-megahertz auction. In fixed, we will continue to expand and drive take-up of superfast within our footprint, and we will engage with [indiscernible]. We're taking a fiber-first approach as we believe that this delivers the best customer experiences and allows us to maximize the benefits of our software-configured network. We're positioning the business to deliver economically at scale and pace 10 million FTTP by the mid-2020s, and are working with all shareholders to ensure that this becomes a reality.We are receiving good feedback on our commercial deployments of G.fast, and we will continue to use this technology in non-FTTP areas to maintain a competitive position in the near term.To meet our ambition to fully digitize our network and to deliver seamless converged access across fixed, WiFi and mobile, we will build out our core and backhaul network to ensure that we can fully meet future capacity growth.Our longer-term aim is to deliver an ultrafast all-IP future, which we will deliver moving from 11 primary access points to just 3, from 5,600 exchanges with multiple setups to just 1,100 fiber points of handover, and from a world where today a physical engineering intervention is required for 90% of customers' moves or changes to a near 0 touch network, standardized exchanges that are primarily software-managed. This will allow us to lead the market in single order products, lower network faults, deliver real-time provisioning and allow us to close the end of life PSTN telephone network by the mid-2020s and will of course provide further opportunity to help us improve efficiency. [indiscernible] be disciplined on CapEx. Our CapEx has increased over the last few years, and this is primarily due to the increased capacity and network investment. We expect to further step up in reported CapEx for this year and next to around GBP 3.7 billion, excluding BDUK clawback and spectrum costs, due again to capacity and network investment. A transformation program will deliver significant CapEx efficiencies, allowing us to get more value from [indiscernible]. And finally, we intend to transform our operating model to build a lean and agile organization to deliver sustained improvements in customer experience and productivity. We already have a good track record of delivering productivity improvements, and our existing cost transformation programs are firmly on track. On EE integration, we have delivered a run rate of GBP 290 million of annual cost synergies at the end of the year and our restructuring program achieved GBP 180 million of in-year savings. The balance of these programs will be included in our wider transformation program that we have just announced today.Looking forward, Slide 38 shows the key actions we intend to take. Simplify our operating model, including fewer, bigger and more accountable leadership roles and delayer our management structure. We're going to drive productivity improvements in our core U.K. operations, including process simplification and automation to reduce cost. We're going to accelerate the delivery of digital GS. We've made a good start introducing digital products with a greater focus on our top global customers, but we need to accelerate the delivery, reduce capital intensity, manage our cost base and ensure that we maximize the value of our assets. We're going to focus on around 30 modern, fit-for-purpose sites to create a more collaborative and open customer focus working environment, reducing many of the inefficiencies that exist by being housed at numerous sites across the U.K. And as part of this, given our lower space requirements, this is the right time to move out of BT Centre in central London. We're going to be moving from buying to strategic sourcing, consolidating our spend from the current 18,000 suppliers, and we will design and standardize our products to meet market needs while reducing cost of ownership. We're going to drive deeper penetration of digitalization to improve customer experience and cost to serve, building on the fast take-up of the likes of our digital apps. And together, these activities will ensure that we build an organization that is fit for the future and delivers on our vision.So what does this mean in terms of outcomes over the next 3 years? A significant increase in the penetration of ultrafast products; increases in fixed and postpaid mobile ARPU; and an increase in RGUs from over just 2 today to around 2.4. Improved -- continued improvement in our customer experience metrics measured by a 15 point improvement in NPS and a halving of complaints. Increased [indiscernible] operating efficiencies that will enable us to deliver a reduction in around 13,000 roles over the next 3 years with a 4,000 reduction in the current financial year. This and other efficiencies will deliver around GBP 1.5 billion in cash cost reductions, of which GBP 870 million is reduced labor costs with the balance covering a number of areas, including procurement and energy efficiencies.With a cost to deliver of these benefits is around GBP 800 million, that delivers around a 2-year payback. Cost savings will offset regulatory headwinds and cost inflation in the near term and create capacity to invest and drive longer-term profit growth. This will be offset by around 6,000 new hires to support our network deployment and customer service activities, bringing the net figure to around 7,000 reduction. For the 2018, '19 financial year, our transformation program will not quite offset [indiscernible] one, we should start to see real growth momentum coming through as the benefits of transformation and improved trading offset regulation and inflation. So I expect underlying revenue growth to be around 2% year-on-year -- down 2% year-on-year, mainly as a result of the significant regulatory price reductions in Openreach, along with the possible consequential impact of non-charge control [indiscernible] businesses to be impacted by our decision to de-emphasize lower-margin products. Following the regulatory price reductions together with tougher minimum service levels for Openreach, adjusted group EBITDA for this year is expected to be in the range of GBP 7.3 billion to GBP 7.4 billion. As already mentioned, reported capital expenditure, excluding BDUK clawback and spectrum is expected to be around GBP 3.7 billion in 2018, '19 and then to remain at around this level in '19, '20 as the business increases network investment through Openreach's Fibre First program and further 4G and 5G mobile network build. Having delivered normalized free cash flow in '17, '18 at just under GBP 3 billion, almost 2 -- GBP 100 million above midpoint of the outlook, we expect normalized free cash flow in '18, '19 to be in the range GBP 2.3 billion to GBP 2.5 billion as we are impacted by the lower EBITDA, increased CapEx, cash tax from IFRS 15 and a lower working capital benefit this year. As Jan mentioned earlier, we've held the dividend unchanged for '17, '18 and our outlook is to maintain our dividend at the current level for '18, '19 and '19, '20. What doesn't change throughout this is our priorities for cash. Our first priority for the allocation of free cash flow is reinvestment in our businesses to drive long-term growth in value. Residual cash flow after investment is available to support our commitments to the pension funds and dividend and to maintain a strong balance sheet. As we have said before, we believe this provides appropriate balance between investment and the other calls on our cash. This is a major change agenda to ensure that BT can thrive in a competitive market and maintain its leading position. I'm really excited to be delivering the next stage of BT's evolution and have put in place the team to support me on these objectives. We have been working on this program for over 9 months now and have a sharply defined set of actions for each business area to ensure we move forward with pace. This is underpinned by a capital allocation and financing strategy to ensure that we can fund the identified initiatives and continue to support our dividend. BT is entering an exciting new phase in its transformation, and I look forward to sharing progress with you in future periods. Thank you.
Thank you, Gavin. We're kind of going to take your questions. I know there will be a really number of hands up there, Gavin. I suspect the number of hands [indiscernible] on the telephone lines [indiscernible] will be taking questions on the line as well from time to time. But I'm going to duck out and say as far as I'm concerned, this is Gavin's show, so Gavin, I think you handle the questions. Over to you.
Very good. Thank you, Jan. And as usual, I have the ExCo sitting in the front row here all looking very smart, and we will pass some of the questions to them as appropriate. And in a slight change, we're going to take some questions over the audio as well. So I'm going to do 3 questions in the room and then move to the audio at that point.
So given I'm looking straight at him, Maurice?
Maurice from Barclays. So you talked about investing in the future networks and driving for the growth of tomorrow. But do you think we've got the right regulatory climate to invest towards 10 million homes? You've talked about it as ambition, 10 million, rather than a commitment. You've talked about doing 3 million yourselves now, but is it 3 million, is it 10? Do we have the right framework? I think Ofcom had an event recently where they were talking about Kodak moments and other investors coming on board, so thoughts about that would be very welcome.
Thank you, Maurice. Yes, I do think we are increasingly getting the right sort of conversation with government and with Ofcom. So what I've talked about today is a reiteration of the 10 million ambition for the mid-2020s. Not everything is in place to deliver that today. But we're confident that we can deliver 3 million by the end of 2020. What I will say is, as we have got involved in the DCMS infrastructure review, as we've talked more to Ofcom, I am increasingly confident that there is a better understanding that these investments are not without risk and they are long-term investments with challenging economics and I'm getting a sense that that is better understood now. So if there's a change of emphasis today, it is not about the 3 versus the 10 per se. We continue to be focused on getting to 10, we're sure about the 3. What I would like to sort of emphasize is I think I'm feeling increasingly confident that actually, we are going to get the right set of conditions to be able to make a return on it, and that's got to be good for shareholders. Right. Michael?
Yes. Just 2 connected questions.
By the way, try and keep it to one because we've got so many questions today. So try to be disciplined, if you can.
Okay. The first question is the regulatory impact of GBP 1 billion. What is the split between your direct assumptions and your indirect assumptions? And then just so I understand Slide 40 correctly in that context, are you effectively saying that the downside case for EBITDA is no growth until FY '21?
Simon, do you want to describe the difference?
Yes. Certainly. So the -- over the 3-year period of the -- that Gavin indicated, the -- at least GBP 1 billion, the majority of that are direct impacts around pricing from BCMR, from WLA, from the cost measures on that, but also on retail price intervention as well. For example, solus voice. But we have also included in that an estimate of what we've termed sort of not direct impacts. So for example, impacts that then flow through to nondirectly price-controlled products. But the majority is direct, but there is some indirect that's within it. And the range down around that actually is the range in what could be the impact on the nondirectly charge controlled, okay? Shall I take the second question?
Yes.
So I think we set out very clearly the dynamics in the business. We've got growth from the strategic products of Mobile and IP, our security business. The premium end of our broadband business, we're seeing strong growth from those, and you saw that coming through in the numbers. But we do face some challenges from some declines on legacy products. But in particular, there is the regulatory impact and some cost inflation. As we've said in '18, '19, we don't expect those challenges to be entirely offset by the net trading growth or the very substantial cost transformation. But as Gavin, I think, made clear, by 2021, we see that reversing. We see the continued growth in our strategic products, and that's stepping up of our transformation driving growth into the midterm. Thanks.
Very good. I'll go to Nick and then I'm going to the phones.
It's Nick Lyall from SocGen. Could I just ask, could you say why you decided to keep the dividend at all? Was there a discussion about cutting dividend and what brought you to keep it? And if it was about confidence in 2021, why have you not felt the need to give guidance, a bit like a major shareholder would, obviously, a 3-year basis, which would maybe relax the market more about the guidance that you've given?
Yes. Look, can I say to you as Chairman of the Board, I think the board understands that dividends are very important to shareholders and I think arguably your annual dividend declaration as a board is one of the most important decisions you're going to make. So I will say as Chairman of the Board, the board had extensive discussions around the right way forward in relation to dividends. So this was a seriously considered decision to state the obvious, but I want to emphasize that. The board took the view and I was about to say this, we have absolute confidence that this is the right strategy. The stuff that Gavin took us through today are right. I firmly believe in it and I'm confident that we will deliver. In the meantime, though, as Simon has indicated, we face some regulatory headwinds, we face some competitive pressures, and we have to live up to those realities over the next 2 years, and that is why the board thought it is only right that our way of expressing that confidence is to say to people today we're going to maintain our dividend or we expect to maintain our dividend for the next 2 financial years unchanged at this level. I see that as a sign of confidence, companies to give effectively 2-year I would say more than guidance. This is an expectation, 2 years out. I suppose had we given 3 years out, you might have asked me what about the fourth year. So I'm not being nasty with you. But I think we've given you a clear confirmation of what we believe we can deliver for our shareholders in dividend terms over the next 2 years. And I think that's a statement of confidence.
Very good. Mandeep, what's your question, please?
I really just wanted to come back to the consumer pricing outlook. If we look at the sort of overbuild risk, relatively still quite small. It's mostly Virgin. But there's been some transaction and M&A activity from the fiber overbuilders. How -- if you could just sort of give us some sort of perspective of how you think the evolution will be between price and volume over the next few years. Clearly, volume growth is quite anemic. Do you think you have the ability to continue to raise price every year in the context of a growing overbuild risk? And the second question really was on -- just a follow-up in relation to that. Given the overbuild, the market was a bit surprised to see you take your CapEx up but not at the same time take up your fiber growth target. So could you sort of explain the sort of -- maybe what the market's thinking as a slight disconnect there. Why you did not announce an even higher fiber build if you were taking your CapEx up?
Very good. Well, I think the first question was around what are the dynamics in the consumer markets and how do we see price and value changing over time. The way we see it is the volume side of the market, the market growth per se, is beginning to flat. So the broadband market was, in terms of growth, was less than 100,000 within the quarter. And we've anticipated this because over the last couple of quarters, I think we've been very clear about it. Our focus is increasingly around value versus volume in terms of customers. We're looking to focus on the higher-margin, higher-priced products such as fiber, which is why we had, I think [indiscernible] and we see that momentum continuing to build. So we're not going to chase marginal customers and unprofitable customers simply to hit a volume market share within the quarter. When you've got very small markets within any one quarter, they could be extremely volatile. The right thing for us to do is switch towards value, focus on retention and loyalty. I think the ability to pass on more than inflation price rises to customers, I think we are not assuming that. Clearly, there is a wee bit more inflation in the market than there has been for the last few years and you can see that in some of the comments that Simon has made already. What's important for us is that we -- there is the potential to grow RGUs and we do believe, as customers move increasingly up from copper to fiber products and ultimately from superfast products to ultrafast products, that is all going to be good for the company, good for our brands and ultimately good for the customer as well. In terms of the fiber build and what we've said on CapEx, as I said, I think in an earlier question, we're absolutely committed to Fibre First. We're very clear that our ambition is to get to 10 million homes and businesses passed by 20 -- the mid-2020s. We've reiterated that today. Given that we only made the announcement 2 months ago, I don't think you would've normally expected us to change that over such a small period of time. But as I said earlier, what I'm increasingly confident about is that the conditions will be right to make that work. So if there is a change of emphasis per se, it is around that the environment, I think, is becoming more appreciative that these investments are not without risk. They are competitive and ultimately, if you want a solution for the whole of the country, you're going to need to look at different models between urban areas and rural areas. And that debate is ongoing, but certainly our view is it's becoming increasingly more sophisticated, and that's got to be good for investment. Within the 3.7, there is an increase in FTTP. I think we flagged that back in Q3. Early experience of laying FTTP, I mean, just to reiterate we are building while others are talking by the way. So Clive has now passed 500,000 homes and businesses with FTTP and another 1 million with G.fast on top. So we are getting the early experience of that. We understand what it takes, and certainly from our view, it is not capital that is going to be the controlling factor in this race. It is about execution, and we have the experience of building these networks over tens of years. We've also got the experience now of FTTP. We understand how to get things like the wayleaves process working to get access to the right buildings and roadworks. We understand how to get the unit efficiencies per cost per home passed, and I can tell you we are very encouraged by the early signs of that. So all in all, what I'm saying to you is we've got increased confidence that we'll get to the 10 million. It's not a sure thing yet, but we are going to make sure we do absolutely everything we can do that and make a good return on top of it.
May I just touch on the CapEx question. Just to be very clear, there are 2 primary reasons for the step up in capital investment. The first is the support of the ultrafast rollout that we previously announced, and we gave you dimensions of that, which would allow you to understand it's about half of that step-up. The other is the acceleration of the mobile coverage, and in particular, the move to 5G, which again Gavin also alluded to. I should also say that we've got a lot of very good projects in the core capital program that both supports the product convergence but also drives really meaningful improvements in energy efficiency across our estate, which is absolutely critical when you see the sort of data growth there. We're funding those through the efficiencies that we're delivering.
Very good. Right. I'm coming back into the room. John.
I guess, 2 questions please, maybe for you Gavin or Clive. I mean, you alluded to the fact that you're building, others are talking. But maybe you can help us understand a little bit the risk from the likes of CityFibre and TalkTalk. Will Openreach, for example, surrender Edinburgh to CityFibre? And if I may, in the context of Vodafone doing the Liberty deal yesterday, in the context of you retiring significant risk with what you did with pension and in the context of the stock being down 8% today, how much do you care about the share price of BT right now? And what plan do you have to do something about it? For example, would you consider a partial listing of Openreach à la Telecom Italia or what other plans do you have about this? Are you likely to remain passive about what happens to the share price over the next 12 months or so?
Okay. And that sounded like 2 questions, but I'm going to let you have them. Are we going to surrender Edinburgh? No. Categorically no. So, Clive, do you want to just talk about how you're building out your towns and cities plans?
Yes. Okay. So I'm deeply offended by the suggestion that we might surrender Edinburgh. Edinburgh is one of our first 8 cities. In a few weeks from now, we'll be at a build run rate of 1,000 premises passed in each of those 8 cities. And I am confident that we can build at a lower cost and a higher quality than any other newcomer. We've been, over the last 18 months, experimenting with new componentry and new build techniques, and we think we're very well positioned to build a high throughput, high quality and low build cost points. We're very confident, and we're not surrendering Edinburgh.
Very good.
Share price. Look, at the risk of turning the answer into too personal an answer, if you allow me for the moment to go there first. Anybody who cares to look at what I've done with my life will find that maybe with some luck, so I've got to be appropriately humble, but they look at what I've done, they will realize if I may say that in the 4 or 5 global businesses I have been involved in, every time we have actually managed over time to create considerable value for shareholders. And I think I'm allowed to say that because you can go and verify what I've done and you will realize I'm not bluffing with the process. So I think -- and I appropriately say maybe I was lucky. But I absolutely understand that at the end of the day, as Chairman of the Board, we are all here to serve shareholders and to create value for shareholders. But I also believe with a passion that you do not change big organizations like BT by looking at this morning's share price. Now can I say I have taken GBP 1 million of my personal money and put it into BT. So any one of you might say, do you care about the share price? Yes, I care about the share price. GBP 1 million of my money is in BT invested. Why? Because I want to make absolutely clear to all our shareholders and all our employees, I care about the share price. But we're not going to be successful in delivering the kind of wealth to our shareholders that are sustainable if we focus on short-term things. So you may not like me saying this, but I'm just being honest. Do I care about today's share price? No, I don't. What do I care about? I care about the stuff we've announced today and the things that Gavin took us through today. Those are the things we need to address, and we will address them. And I'm confident, I really am confident that we're going to deliver the benefits of this over time. And I feel that what we've said to people today is we've expressed clearly our expectation of the dividend for the next 2 years, which I consider to be an attractive return, whilst we do the things that we need to do to create a strong company for our shareholders. And so that's our focus. And we're not going to do things, which might have a short-term impact on the share price. This is not what will get us there. And if I may say finally, and sorry to be so on and on but I feel passionate about this. You do not build great businesses by being fussed about tomorrow morning's share price. This is a great company but we've got problems and challenges and we are going to address them, by focusing on the right places, by investing in networks, by investing in converged connectivity and by reshaping the organization the way that Gavin announced today. And I'm very, very confident when I hand over the chairmanship one day, we will have created value for shareholders. I am confident.
Thank you, Jan. Very good. Yes? Keep going. I'll go table by table, yes. Thank you.
Just a question, I guess, coming back to the dividend topic from earlier. Maybe if I can ask it in a slightly different way. If we look at the normalized cash flow of GBP 2.4 billion that you've guided to at the midpoint for this year, effectively that's all consumed by a normalized pension payment and the dividend. And I guess there's a number of other calls in the next few years in terms of spectrum and high upfront pension payments. So I guess the question really is, with the dividend cover tight, presumably you are expecting much stronger cash flow going forward, and that's what you're trying to signal here. So can you maybe help us walk us through exactly where you expect that to come from? Is it primarily this cost-cutting target? Is it about CapEx starting to normalize over time? What are the levers here that you're expecting to help support the cash flow growth that ultimately underpins the dividend? And then I guess, just a follow-up slightly linked to that on the guidance. If we take the revenue walk and the EBITDA walk from the reported numbers to the guidance you've given for this year, there's roughly a GBP 500 million drop in revenues, roughly GBP 150 million drop in EBITDA. You've talked about some proactive moves in revenues. Can you just help us understand some of the mix effects, without going too detailed on divisions? What's actually going on and how should we really think about it?
Simon?
Shall I deal -- well, I'll -- Jan, shall I tackle the question? Really it was more about the cash coverage. I'm happy to go on that.
Yes. Sure.
So let me -- perhaps if I can start with your second question first because it probably provides context for the cash flow. So firstly, on the revenue, if we go from '17, '18 into '18, '19, the 2 most significant impacts on the revenue line are the ones I think that Gavin called out. Firstly, it's the direct regulatory price impacts; and secondly, there is an impact from our explicit choices to pull back from relatively low, or in some cases no margin business in terms of some wholesale voice and CP. That's the main component. There is then a mix of some continued pressure on things like the fixed voice offset by strong growth in Mobile, IP, networking. But the 2 most significant components are regulatory price, which does have a margin impact, and then the decline in the Enterprise business, less of an impact on margin. If you then come to the EBITDA, the primary impact year-on-year, if you think about the regulatory price, is that dropping through principally into Openreach. If we look then across the CFUs, we've got a blend of growth in the strategic product set, some pressures on the legacy products, some cost inflation but some significant cost transformation sort of broadly coming out in the wash. But the big impact through to EBITDA from regulation through to Openreach. That's on the revenue and EBITDA. If we turn to the cash flow, the first point, I think, is the normalized free cash flow is there to service both some more -- not one-off but periodic investments such as spectrum and our restructuring charges and the dividend. One can think about the service of the pension deficit alongside the management to all of your long-term liabilities. What you put into the pension fund is essentially funded by debt and remains neutral to your balance sheet and to your credit metrics. So let's think about the calls on normalized free cash flow above the dividend line. You're quite right. Over this year and we indicated into next year some pressures on that, partly from the pressures on the EBITDA line. That's step up in CapEx. But do remember we've got 2 very significant cash tax effects in '18, '19 and '19, '20 from the implementation of IFRS 15 and the bring forward of the HMRC payments. Those dissipate in year 3, and that's several hundred million pounds of accelerated cash tax. The second, obviously, is that we've had some spectrum investment. We might anticipate the -- a further outflow on the 700. Again, that's over this 24-month period. We don't see those same sort of level going forward and obviously, we're making the upfront investment in restructuring early. But that dissipates and then we're getting the cash benefits coming through. Does that help in terms of how we think about that? Yes. Great. Thanks.
Right. I'm going to go this way, so Dhananjay.
This is Dhananjay with Bernstein. My question is related to your FTTP run rate projections through 2020, 3 million premises. I think that's unchanged based on your guidance today. How do you respond to those critics who suggest that you're effectively stonewalling the pace of your FTTP rollout to protect your cash dividend payout to shareholders?
Well, I'll let Clive comment on this as well, but I can assure you getting up to a run rate of 1 million homes passed on FTTP per year is quite a step up. And as I say, I think many other people talk about building networks, but there are really only 2 companies that have got really good experience of this in the U.K. I think our credentials are very clear, and I think Virgin are the other benchmark. And if you saw the Virgin results yesterday, you'll notice that they did about just over 100,000 on Lightning within the quarter. So make no bones about it, getting up to 1 million and a run rate of 1 million within a couple of years is a big step up. I'm confident we can do it, and we have the potential, we think, to go beyond that and kick on after 2020. But we'll see who's managed to get those -- to those sorts of numbers within the next 2 years. I know where I would put my money. But Clive?
Yes. I think what we're trying to do here very clearly is be disciplined in our rate of growth. So we want to go to the right places, we want to make sure that the cost of build is at or below our target number. We've got to hire people, train them, secure a supply chain. So there's a sort of natural ramp in throughput. To give you a couple of numbers, we did roughly 200,000 of FTTP over the last year, we'll do perhaps 3 plus times that this year. That is a very significant ramp-up. And then the following year, we'll ramp further. But it has to be disciplined because we have to get the quality right. We're absolutely focused on getting the cost point right. And it's a rapid growth trajectory, but it's a realistic growth trajectory.
Very good. Steve?
Yes. Can I ask a sort of 1 and 2 parts obviously? Just around your comments around the regulatory price impact in Openreach. And I guess, the follow-on price cuts on the 55 and the 18, 20 products possibly. It's really a question for Marc and for Clive. I guess for Marc, can you give us some color on the current mix of GEA within your base? And how big the impact is of that 40, 10 price cut on the competitiveness of your 55 and 18, 20 products? But I think the sort of price gaps going from about GBP 1 on the 40 to the 55 to about GBP 2.50 if you bake in NPS and WLR, and from about GBP 2.50 to GBP 4 on the 18 product. So what do you think the right sort of pricing premium on the higher [ FTTP ] product is to make you competitive? And then for Clive, since the price cuts have come through, what have you seen in terms of order volumes from the other CPs? And again, the question, what do you -- how do you think about that premium? And when you move into the 160 and the 330 products, what are the right sort of premiums on those products to drive the demand and drive pricing up long term in Openreach?
Marc, do you want to take the first one?
Shall I start? Yes.
Do you want to wait for the mic actually?
I've got a mic. I think the first thing I want to say -- first of all, let me give you a little plug for our business briefing that we are doing next week where we're going to go into a lot more detail and unpack the consumer strategy and it really builds on what we've been talking about this morning, which is differentiation. It's differentiation on network, it's differentiation using convergence where we're uniquely placed to lead in this marketplace. And it's differentiation in terms of customer experience and branding as well. So that's how I'm thinking about how we're approaching this market. We're certainly very keen not to get dragged into a very aggressive like-for-like pricing activity and really focusing on convergence where we've got an opportunity to lead and differentiate. That's what I'm focused on. We're obviously taking a look at the impact of the pricing changes and think about how we price our products. But I'm focused on differentiation and convergence.
Okay.
So we are very focused on maintaining the pricing ladder, the pricing ladder that goes with the speed ladder. We're not going to give you statistics, but be assured we're talking very closely with all of the big CPs about their appetite not just to move their ADSL base to the 40 meg product but their appetite to move up the speed tiers. And associated with moves up the speed tiers is a move up the pricing tier.
Carl, welcome back.
Two questions. Firstly, Jan, I can't ignore the carrot you've left dangling with your people who've looked at what I've done previously comment. At Rio, you had a 5-year LTIP based on long-term shareholder returns. As you were saying, you're kind of focused on long-term returns. Obviously, BT has a 3-year scheme which includes other metrics like normalized free cash flow, which as Simon was saying, has some oddities in the next couple of years. So how do you think about the incentive share plan scheme at BT and do you think maybe a lengthening and more focus on TSR makes sense? And then just a second clarification. On EE, strong EBITDA beats there this quarter. I was just wondering, is there some annual license fee reversal in there in Q4, as well as the lower handset SAC?
Yes. Look, I guess, it's the one question I wasn't expecting today, but to answer that, look, firstly, I'm not on the remuneration committee, as I'm sure you know, and I can also say to you there is no plan in the next 12 months to review the way we currently incentivize and pay our top team. So nobody's suggesting that in the next cycle we're going to be doing further work on this. I do not mind saying to you that I have always been a believer in long-term incentives. Because whether it's Rio Tinto where I come from the last 9 years, or whether it's a company like BT, a lot of what we want to achieve, frankly speaking, should be focused on the long term. And I actually gave the answer when I gave you the answer on share price. I -- can I just say, when I talk about long term, long term, it's not an excuse for short-term underperformance, it's not that we don't care about the short term. We do. But I think a company like BT, the things we're trying to do will pay out in 3, 4, 5 years' time and into the future and not in the next year or 2. So yes, I'm a real believer in a long-term focus. That is how I believe you create great, great businesses. And if it were my call, I would be genuinely supportive, and I'm speaking completely off the cuff here and I'm probably upsetting some people. But I don't mind saying to you if somebody were to say to me what do I think, I am a believer in longer-term incentives for executives rather than shorter-term incentives.
Good to know.
Shall I deal with just -- sorry, Carl. Your second question. The primary driver of the trend in EBITDA was the trading seasonality that I described. You'll recall we had a very strong, I think, for many of you, an unexpectedly strong trading Q3, which obviously meant we had a higher level of customer investment. Relatively that situation moved around in that we had a lower level of investment. That was the primary driver of that. Okay? Great.
Andrew?
Yes. It's Andrew Lee from Goldman Sachs. A question on B2B, primarily BPS with maybe a bit of Global Services. So I think you laid out really clearly in the presentation that you're well positioned, and you feel you're well positioned for -- on the consumer side. But on the B2B side, we've had consistent headwinds, and we see that across the sector for incumbents. And if I were to summarize how we see it, it's a B2B access part of the business where you've got competitors that have incredibly low marginal cost to compete and/or eating incumbents' lunch on a daily basis. And then on the ICT side, you have more competitors coming to the market with AWS, Cisco, whoever it may be. So the question is why are you not just very aggressively structurally challenged on B2B, which is going to provide just a consistent headwind to your ability to grow? Any color on that would be great.
Well, let me be very clear about it. Our enterprise businesses are as important to us as our consumer business, and we believe the prospects of growing the profitability of that business, the U.K. business and indeed even GS over the medium term is there. If I look at the current dynamics in the business of public sector unit today, as we've said, we've been getting to the end of 6 big public sector contracts. Those closed off at the end of March, and you'll see that begin to come out with the numbers going forward, and that has been a significant drag. I think we've also seen that the market has moved towards voice over IP and IP voice. We're well positioned. And I think one of my charts showed that in terms of the take-up of IP, which is well into the several hundreds thousands now. But it has different structure economics than the old voice business had. Now so we're going to have to manage through that transition, but if I look at who is best placed to do that for customers, nobody has this combination of fixed, IP, networking and mobile, the best mobile proposition. We're able to bundle it together for customers in the volume end of things, and we believe that is a winning proposition. So in many ways, it's a microcosm of the overall discussion we've been having today. There are headwinds in the short-term. These are competitive headwinds and market headwinds, but we're absolutely confident we can see through them, and we can see a growing business on the other side of them. On GS, some similar dynamics, some different. I think we've been really clear that we want to focus on multinational corporations, and we've reorganized the business to really put a focus on that going forward. We're simplifying the business a lot more in terms of modularizing so creating standard service components and standard products that remove the complexity out of the business. Better for customers, because they get better value; better for us, because it's a much more efficient way of running the business. And so we're about a year into that. As we said, we're about to accelerate even further on that as we go forward. And the key technology dynamic we see in the Global Services space is dynamic network services. So it is -- it's an ability to be able to control your propositions through software over MPLS networks, but increasingly over business-class Internet networks as well. So we can -- we're managing the transition. We've launched the first products in that market. Customers are getting their first experience, which is a positive one with that. And if you combine that with the real strength that we have in cybersecurity, which I mentioned as well, and the -- our ability to interconnect everybody's cloud propositions together and orchestrate that for customers, that is a really strong proposition. But again, it's about managing the moves in terms of market competition, less regulation in GS over the next couple of years. But we can see through those, and there's a really good business on the other side of this, and there is a real demand with customers. So we're confident that ultimately, the business will come through it.I thought you wanted to say something. Right. Is that Robert there? I thought I saw you over there earlier.
That was me coming in late, Gavin. And may I ask about rural broadband. You had your proposal that was rebuffed by Ofcom and then you mentioned that you're engaging on the USO issue. Is it the case now that rural broadband investments just of on-hold until you know what the USO is about, and I mean, it's logical that you would get it. If you did get it, would that impact your CapEx plans as outlined today, or can you do it within the plan?
Maybe I'll make a few opening comments, and then I'll ask Clive to give some perspective on this. We were disappointed that the government decided not to take up our offer on USO. It was, I think, a very good proposal, a fair proposal. It would've allowed the last 5% of the U.K. to have a broadband product of at least -- and I mean, at least 10 megabits per second by 2020 and do so in a way that allowed us to make a fair, not an excessive return, and it would be collected through charge control. So we made, I think, a very good offer. They decided not to take it. And as such, we've refocused elsewhere. So our focus is FTTP and G.fast and making sure that we're leaving the market there. That said, we have not given up on the last 5% by any means. There is going to be commercial build that addresses that. There is still BDUK projects, a 100 in Scotland. There's some more BDK (sic) [ BDUK ] money in Wales to bid for, and we will consider our options as those come to market. And we'll look to find different solutions for the last 5%. So one other thing just to mention, which we launched in Q4, was a wireless product on the EE brand, which allows customers to get speeds of 50 megabits per second but over the 4G network. It isn't a solution for all of the 5%, but I think it will play an increasing role in picking off cost-effective solutions across the country as a whole. But Clive, do you want to talk about your plans?
Yes. Just one simple point to register, which is that following the achievement by us in the main but others as well of 95% superfast coverage back at 31st of December last year, we are continuing to build in the rural U.K. So we are still executing on a whole range, a large number of BDUK contracts that are already contracted. So we're still out there in rural Britain building networks. Increasingly, because of the rural nature of those homes, much of that build is actually FTTP. So not only are we playing in that final 5%, but it is another contributor to delivering full fiber for Britain.
Simon, a word on CapEx?
So just to finish on your question on USO, the timing of that solution is likely in any meaningful form to be beyond the '18, '19; '19, '20. And I would also say that there will be capacity in our plan at that point because we're also, as you can imagine, as we're seeing this very significant uptake on our superfast platform. We're investing hard to create that capacity and the quality of service in the backhaul. We would anticipate that sort of easing back, creating that capacity. So I think it's not something you should be concerned about in the CapEx plan at this stage.
Very good. Right. One right at the back there. Can't quite see who it is, actually. It's Paul.
It's Paul Sidney, Crédit Suisse. We're seeing TV -- the TV base go backwards there for a couple of quarters. I was just wondering how does that sit with the significant spend on sports content? And is TV really important component of any fixed-mobile converged offers you launch over the next couple of weeks?
BT Sport is not just about BT TV. They're not synonymous, of course. So our sport investment is going very well. I think some of the inflation in the market has come out of it in the last few auctions. We've got good visibility on rights for the next few years, and we're beginning to monetize it in all sorts of new ways. So we've gone from free model to a charging model over the last 6 months. We've retained a very big customer base of over 5 million through that process. So that has gone well, and we'll increasingly look to carry our sports proposition over different platforms. And again, I'm in danger of stealing my friend's thunder from next week. So he's got much more than that to talk about, but he'll talk a little bit about it then. And by the way, the audience figures are fantastic. With -- it helps that we're doing well in the Champions League on many senses. But the cricket did really well for us as well. And I look at the quality of programming, and it's got real customer pull, consumer pull. On the TV platform side of things, again, this is a value versus volume thing. So we built up the business, and there was quite a bit of low-value, low-ARPU customers in there. We've gradually, over the last 6 months as we've consolidated on to a single platform, been moving people up not the tiers of products. And as part of that, there will be some customers that don't stay with us. Absolutely spot-on strategy. It'll stabilize and we'll see it growing over the long term. And it's critical to our proposition, particularly on the BT brand. Right. Going to take one more over here. It's James.
Yes. It's a question really on FTTH to go back to that topic. What can we be expecting in terms of news flow on this over the next 12 months or so? I am asking that if you had that consultation Phase 1 last year, Phase 2 was then replaced with your announcement to do 3 million FTTP, and DCMS has since started its own consultation. So should we expect a second-stage consultation from yourself? Should we expect an -- kind of an agreement to be announced between you and the government? Should we expect no incremental news flow over the next 12 months, which would be helpful to understand how you see the kind of roadmap on that FTTH debate? And just a kind of quick one, as we have another question on the pension. I mean, you've got lots of calls on your capital at the moment so you agreed to pay 40% of the deficit over the next 3 years. I mean, that's considerably higher than 3 years ago. Why were you willing to agree to such a high percentage in terms of deficit payments?
I'll answer the first question, and then I'll pass to you on pensions, if that's okay.
Sure. Yes.
So news flow and FTTH, what you'll get from us is a update every quarter on how we are building that network and Clive will give you color on how it's going as he delivers it across the whole of the U.K. We'll talk also about the take-up and the types of propositions that we're offering to consumers and businesses, but we're getting on and doing it. We're not waiting for something per se. We do want to get more clarity on things like the "fair bet" and some of the things the government can help with it. But as I -- to reiterate something I've said earlier, I'm increasingly confident that we're getting a much better quality of discussion around that, and they understand that they're part of the solution. So I'm more and more confident that we're going to keep going to 10 million by 2020 -- 2025 per se. In terms of the wider debate, the DCMS review is probably the key piece of news flow. We submitted in the beginning of the year, and we tried to submit by bringing together -- our submission tried to bring together the learnings from around the world that demonstrated that there is no silver bullet to this. You can choose one approach or another, but there are pros and cons to all of them. And what we can see is that there're benefits of having -- for the country, of having competition in particularly rural areas, and we can see the case that says we'll -- ultimately, maybe 3 different network builders can make the economics work, because the cost per home pass is so much lower. On the other end of the spectrum in rural U.K., and I mean this is obvious today from the superfast rollout, it's -- really, the only economic way of doing it is through 1 provider with some form of financial assistance, either through a levy or through government funding. But the costs, such a significant difference from urban areas that it just doesn't work on the same basis. And then there's the bit in the middle, if you like, which is the suburban areas where the current model of having 1 fiber and maybe cable looks as though it's the most economic way of doing it. So that's how we see it evolving at the moment. I know the government are going to draw some conclusions through this review before the end -- before the beginning of the summer. We will continue to engage in a proactive and collaborative way. It is in our interest to see a solution that works for the whole of the U.K. We'll make sure that Openreach plays a leading role in that, serving all of the market on an open basis and -- but we're prepared to look at different ways of building this network to make it as capitally efficient as possible. Pension?
Yes. Thanks. So we have 3 objectives in addressing the pension. One, we wanted to significantly de-risk the scheme and reduce the associated volatility so that we and, indeed, all our stakeholders could focus on the delivery of our business strategy and the value that it will bring. Secondly, we wanted to have an affordable funding plan balanced with the need for investment in the business and returns to shareholders. And thirdly, we wanted to get fair, affordable and flexible pensions for our people. We've achieved all 3 of those objectives. So we've closed the defined benefit scheme future accrual that de-risks the future, and we've provided a good defined contribution alternative. We have agreed with the trustee an appropriate de-risking program over the scheme, which will progressively take risk from the scheme. And thirdly, we've agreed an appropriate contribution, which is 36% of the deficit compared to just over 30% in 2014. And the additional contribution reflects our desire to take risk out of the scheme. It also reflects the -- it's now a mature scheme. It's now closed to any future accrual. And the final point I would probably say is that in terms of that contribution, it's structured as the same annual cash contributions from 2014, but we've also contributed an asset essentially into the scheme, which has got cash service well out into time, indeed, over 24 years is the longer-dated bond. So hope that gets you also thinking.
I'm going to go to Polo and then Stephen and then I'm going to come over here to Guy. How's that?
It's Polo Tang from UBS. Just really have a question on the cost savings, because GBP 1.5 billion per annum of cost savings 3 years out is a very big number. So could you maybe give us more color in terms of how that GBP 1.5 billion is actually made up in terms of the big buckets and some of the numbers, but more importantly, can you give us some sense in terms of how much of that is actually going to fall to the bottom line and help EBITDA going forward?
Simon?
So the gross cost saving about GBP 1.5 billion, I think you heard Gavin say something like GBP 870 million or so, a bit over half of it is in T&C so -- sorry, I beg your pardon, in labor cost. So where does that come from? Let's start there. Firstly, we have, through the integration of our consumer and our enterprise units, combined with a major program of looking at reshaping our organization to create a leaner structure, more agile structure, fewer layers, tighter spans, fewer, bigger jobs. So firstly there on the labor cost and the number of people is around the overall structure of BT. The second is that we're driving particularly in our U.K. businesses, bottom-up productivity improvement programs where we have systematically looked at our processes, we've looked at where there is waste and inefficiency, and we are targeting to take that out through a combination of process improvement, automation, investment in capability, movement from, say, subcontractors into our own workforce, which can be deployed more effectively. And then in GS, there's a very significant improvement in our service infrastructure delivery, which will also drive a reduction in our labor cost. Those are probably the main elements. If I move to the nonlabor cost, of course, some of what I've just described impacts nonlabor cost. But in addition to that, we've got a major program looking at tackling energy efficiency. I alluded briefly to it in the capital program. We also think there's a lot more and we can see real opportunity to drive more savings from our procured spend. I think Gavin again touched on that. And the final thing I would say is that we're looking very hard at the end-to-end procurement process so that we can take out inventory and waste in procurement. So those are some of the areas driving the gross cost reduction. It is founded in bottom-up plans owned in each of our units and gives us confidence in its delivery. To your next question, in the short term, the gross cost savings are helping to offset the cost inflation. We are in a somewhat more inflationary world. Secondly, the regulatory pressures that we've described, but also we're making some conscious decisions in the short-term to reinvest, and again, Gavin alluded to those. So that's in the sort of short term, but I think as we move out and particularly as we get to 2021, what we can see there is the combination of the cost transformation beginning to deliver into the bottom line, combined with the growth in our strategic product set. Hopefully, that gives you a bit more...
[indiscernible]
I'm not going to give you that. It's -- and then to some extent, it's a rather meaningless number, because there's a whole series of contributors driving the growth in the strategic products combined with cost transformation. Some of it goes to CapEx, but I think we've given enough to see that it's going to have a meaningful impact on the financial performance out in midterm.
Stephen?
So, Stephen Howard at HSBC. So a question, I think, for Gavin. I think some external observers might be a little perplexed to hear you say that you're detecting a greater understanding on the part of the capacity about what's needed to sustain FTTP build. And I just wanted to ask you to be perhaps a little bit more concrete there in terms of giving us some examples to give us confidence that, that's really the case. If I look at the speech that you gave at the Ofcom event a few weeks ago, it seemed to me that you still have the same set of 3 asks. Some of those asks, although I think in many ways are very reasonable, they are pretty complex, thinking there -- especially about things like copper cutover. So what confidence can you give us, the greater understanding is actually going to translate into some more supportive decisions? And a parallel question, are you getting any indications from the early G.fast deployment that there is any propensity to pay amongst customers for faster services?
I know, Jan wants to comment on this.
Gavin, kind of interval, and you pick up the detail. There's -- can I just make a generic statement on relationship with Ofcom and government, and I can maybe make that because we're, sort of, new to the business. And I will say firstly, look, when I joined the board or when I, sort of, was approaching to join the board about a year ago, the fact these relationships were a bit strained at times. There were some bruised egos around, and I think at that point in time, it was obvious to me that we really, really need as a company to reach out to Ofcom and to government to rebuild relationships which had become a bit strained. And I say that at liberty, because that's true and I think we might as well acknowledge that. I think we've come a long way. I think the work we've done in relation to the separation of Openreach and the government's regime, around that to convince government, be really serious about delivering on our commitment. And in numerous ways, we have all, including myself, signaled to Ofcom and to members of government, important members of government that we want to rebuild relationships, and we want to get away from the sort of having our disagreements in public, which I think doesn't help anybody. I would just say to you that even just me personally, in conversations with people whose voices I attach right to, I believe -- I really believe that people realize what we now want is a serious conversation about what we as a country, and I say at liberty, what we as a country need to do to provide the investment environment in which we as a country will end up having in 10, 15 years' time the fiber-optic network that I believe we need. I personally have been convinced if I spent 24 hours with Clive or in fact not that and I was convinced, the future of the world is fiber, and I'm convinced of that, and we all believe that. But I think what we need to do is there is some work to be done, and I believe that government is realizing that with us and others in the industry, we need to have an open conversation. And I think we're going to get there. I don't want to be any more specific. You can answer the rest of the question, but that is what I believe. I think we're getting there, and we're demonstrating our good faith to participate in that conversation the way that I think is sensible for the country but for our shareholders. And I want to emphasize ultimately, I am ultimately here to serve shareholders. But we can only do that if we also serve the needs of the stakeholders and the country of which we subsequently are a part.
Just to add a wee bit of color to the specifics, Stephen. The issues are not just about the economic case and the return on investment. But what I'd say about that, as part of the DCMS review, the engagement we've had both with the department, the civil servants, the politicians and Ofcom indicates they recognize that in creating a competitive market that is unregulated in urban areas creates another set of issues in suburban and rural areas, particularly around having a single price across the whole of the country. So I -- it's an indication that they realize there needs to be a range of regulatory mechanisms in order to build out the whole of the country, number one. Number two is in terms of practical next steps, the wayleaves busting program, the access to Street Works, there's real activity, real action taking place to make it easier to go down the street and deploy the technology. Now if I go back 12 months, there was a sort of a bit of a nod to that but no real action. But I think Clive will attest to the fact that there is real action to improve our ability to deploy this efficiency. That is a practical step that can make a huge difference in terms of getting the right unit costs into the market. So look, I don't want to oversell it. What I wanted to really indicate is I am feeling more confident that there is a good engagement now. And just to close by just emphasizing a point that Jan made, there's a little bit of a -- as the dynamics and the relationships change, there's a sort of seeing-is-believing aspect to this. So I believe we will benefit over time by demonstrating we're getting on and building the network to the first 3 million. We're committed to invest also and be at the forefront of 5G for the good of the country as a whole, and that we have lived up to our commitments. Everything we agreed is part of the DCR we're deploying. It's been good for the market. I think ultimately, it'll be good for BT as well, because I think it will allow us to show more transparently what is the cost of deploying networks so that our customers can really see that actually, we -- these are challenging business cases, and they will have a better understanding of that. So I think it will be -- ultimately, I can see it already being good for us. But it is happening, but it will take months and potentially even years to really move through.
Gavin, I know that it is your show but can I suggest you take 2 more questions, and then we close it off?
You are the boss. Very good. I did promise Guy, and then I will finish over there, if I may.
It's Guy Peddy from Macquarie. You mentioned in your deck here that you want to take a lead in 5G. Can you just qualify what that actually means, and what you're thinking from a 5G perspective going forward? And also, perhaps that might have answered my second question actually. Who is actually responsible for it in the new organizational structure, rolling out the network, especially given the first part of 5G, it might actually be a business application, so I'm just intrigued as to work out who is actually going to be the driving force behind it?
Very good. Well, I'm going to ask Howard to comment a little bit on this, because it's Howard's responsibility to build this network. Mike Sherman is the Strategy & Transformation Director who I introduced earlier will be responsible for defining what the strategy is and -- going forward. But in terms of deploying the network, Howard is the single point accountability across the business. Do you want to just talk about our early thoughts on 4G and sort of 4G to 5G?
Yes. Okay. Thank you, Guy. So I mean, the key thing in terms of deploying 5G is ensuring we have that great 4G starting point. And I think as we've talked many quarters, you can see how we've had success through EE in building up that growth base. Really pleased in our success in the recent auctions in terms of acquiring what will be the initial spectrum for 5G in that 3.4-gigahertz band. We're pretty confident that the first application will actually be enhanced broadband for both businesses and consumers, and we've built our case for 5G leadership essentially on the returns from that opportunity. Now the whole industry are talking about a few other facets of 5G, one is it reduces the overall cost per gigabyte per month for customers over time. So it's a great technology to deploy from that perspective. But of course, the other applications which is low latency and the ability to have hundreds of thousands of devices of a base station going up to millions, I think that's where there's the key opportunities that we've done quite a bit of research on over the last 2 years, some initial pilots on. And over the next couple of years, we'll start to develop the business cases for that. So we are gearing up. You can see as we've talked about in our new guidance on CapEx, there's a 5G element in that. And that is about getting the network ready to ensure that we're there at the start with 5G rollout.
Great. And the last question over here, please.
Karen Egan from Enders Analysis. If I could ask a little bit about your focus on converged products going forward. And on the mobile side, will that be primarily BT-branded mobile or will there be a combination of BT and EE? And related to that and maybe allow us to finish on a positive note, thinking about mobile next year, and there's been quite a lot of talk of slowdown in the broadband market and regulatory pressure throughout your business, on the mobile side, of course, you have regulatory pressures easing quite considerably. And under IFRS, you shouldn't have SIM-only dragging your revenue trends. You have a good price increase giving you quite a bit of tailwind there. And so will mobile be a bright spot in your operational performance next year helping to prop up problems elsewhere?
Very good. First of all, convergence, convergence is a strategy that we see is being critical to all brands, all 3 of our downstream brands. If you look at how the category has developed in the rest of Europe, it is something that all customers want to do, it's not whether you're a value customer or a premium customer. These products and services where you get the best of fixed and wireless together, you're able to share things like allowances across family members, you're able to orchestrate the products and services between fixed and wireless. You're able to get enhanced products. These, we think, are as relevant to EE as they are to BT customers. And that it's clear in the business market -- in the enterprise market that there's -- probably earlier in the development or further on the development than they are in the consumer market. So it's relevant to both. And then finally, on mobile, yes, we are -- our mobile business is doing well on each of the brands. We're really pleased with the progress we've made over the last 12 months. And we see that continuing to grow into '17, '18. We've got to make sure that we remain competitive in the market. You're right, SIM-only is an important trend, but through the BT brand or Plusnet or in the EE, we're well placed there. And when you've got the best network, we're investing in it to make sure that it's got the capacity to meet customers' data growth needs. We think we're very well placed not just with consumers but increasingly through the enterprise business, where we've got the reach, of course, in terms of our distribution and our customers. But only adding EE in the last couple of years, it means we've got still plenty of opportunity to develop and grow our business mobile offerings.Very good. And on that note, thank you very much.