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Good morning, and welcome to BT's Results Presentation for the year ended March 2019. Presenting from the stage today is Philip Jansen, Chief Executive; and Simon Lowth, Chief Financial Officer. Also present for Q&A are members of our Executive Committee. 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 examples of the factors that could cause actual results to differ from any forward-looking statements we may make. Both the slide and the annual report can be found on our website. Thank you for your attention.
Good morning, and thank you for joining us today. I'm delighted to be here for what many of you all know is my first results presentation as the CEO of BT. So the way we're going to do this is that I will make a few opening remarks and then hand over to Simon, who's going to run through the progress we made last year. I'll then come back and talk more about some of the key challenges and opportunities facing the business and how we are thinking of building a better BT for the future before we open up to a Q&A. So in terms of managing expectations, I've been here 3 months, and whilst I have some very strong points of view, have indeed already made some decisions and have a clear direction of travel in mind, I have not completed the task of plotting out all the details of the future plan for BT. So at a high level, what do I think? Well, first, I have confirmed what I thought before I joined. BT has over 30 million customers and is, systemically, an incredibly important company to the U.K. and society at large and has a very strong brand presence across the globe. From our products and services, employment and training, right through to taxes paid, we make a vital contribution to this country's success. And we do these things in a very challenging market. Competition, regulation, technology changes and a general lack of confidence in the U.K. economy are all factors that we need not only to contend with but also, hopefully, to conquer. But despite these challenges, overall, the business is in good shape and we are really well positioned in the market with strong brands, an excellent customer base and a good start to our convergence propositions. Supporting this are the solid set of results that we delivered last year, which Simon will take you through in a minute. We've also made great progress against each of our core pillars: customer experience; building the best converged network; and creating a simplified, lean and agile organization. But we do need to do more in each of these areas. The world, as you know, is changing around us. Technology is advancing, copper to fiber, 4G to 5G, software-defined networks, AI, machine learning and robotics. They're all with us today and they're changing our world. Now BT as a company, it is too bureaucratic, it is too slow moving and it is too inflexible. And in general, our people are not empowered enough, and therefore, are unable to be decisive enough. So what this means is we need to increase investment in a disciplined way in each of our core areas. We need to invest to improve our customer propositions and competitiveness. We need to invest to stay ahead in our fixed, mobile and core networks, creating the best converged network. And we need to invest to accelerate the overhaul of our business, to ensure that we are using the latest systems and technology to improve our efficiency and become ever more agile. We have made a good start but in my view, we need to be bolder, we need to be smarter and we need to be faster if we are really going to differentiate and future-proof our company to ensure that we remain successful and drive sustainable, long-term value, not just for a few quarters but for decades to come. I will tell you a bit more in a moment but, first, I will ask Simon to update you on our results.
Well, thank you, Philip, and good day to everybody. Over the next few minutes, I will first summarize our group achievements and financial results for the full year. These were in line with our guidance and expectations. I will then describe the performance of our customer-facing units. I'll update you on the significant progress that we've made with our cost transformation program before revealing our capital investment in the year and our year-end balance sheet position. I will conclude with an outline of how we expect IFRS 16 to impact the group and with a preview of some changes that we will make to segment the reporting in this '19/'20 financial year. So we delivered solid financial results in '18/'19, in line with the guidance that we issued in May 2018. And we made good progress against the 3 key pillars of our strategy. We significantly improved customer experience, in terms of both differentiated product propositions and core service delivery with further increases in the group NPS. We've been very encouraged by the strong launches of our first converged offerings, that's BT Plus and 4G Assure. Openreach launched its commercial offer to incentivize its CPs to encourage the faster migration of their customers onto higher-speed broadband services. This offer will see the vast majority of the U.K.'s homes and businesses upgraded onto superfast and ultrafast broadband within 5 years. In addition, Openreach accelerated the pace of FTTP build, doubling the footprint in just a year and taking the total number of premises passed to 1.2 million and exiting the year on a build rate of 1 million homes passed per annum. We continue to win awards for the superior quality of our mobile network and we've been working hard to ensure that we will be the first to launch 5G in the U.K. And we expect to do so imminently, starting on the EE brand. The cost transformation program that we announced last May to create a simpler, more agile business, remains very firmly on track. We formed and swiftly integrated the enterprise unit. We've transferred 30,000 employees into Openreach Limited. We've delivered a gross reduction of 4,000 roles through organizational simplification and productivity improvement. And we've increased our annual procurement savings through more strategic sourcing approaches. This has helped to offset near-term headwinds, especially in our enterprise businesses. Lastly and critically, we believe that over the year, we've developed and continue to strengthen a more constructive and collaborative relationship with our key external stakeholders, including Ofcom, government and our customers. In short, we're successfully delivering our plans. We have got good operational momentum and a strong platform from which to drive the further actions that Philip will shortly describe. So let me now turn to the financial results. Adjusted revenue for the full year was GBP 23.5 billion. That's down 1% on a reported basis and down 0.9% on an underlying basis. Growth in our Consumer business was more than offset by regulation in Openreach and declines in our enterprise businesses that's largely related to the strategic reduction of low-margin activity such as equipment sales. Adjusted operating costs reduced by 0.4%, mainly driven by cost savings from our transformation programs, partly offset by our investment in onshoring customer service and in the recruitment and training of engineers to support Openreach's Fibre First program. So this resulted in EBITDA of GBP 7.4 billion. That's down 2% year-on-year but at the top end of our guidance range. I should note that much of the GBP 80 million loss of other EBITDA in Q4 related to a number of one-off items. The drivers of the year-on-year movement in EBITDA in '18/'19 was similar to the prior year and in line with the guidance that we provided in May 2018. While we delivered growth from our strategic products and cost transformation, these upsides were insufficient to offset the pressures from regulatory pricing, cost inflation and declines in our legacy products, such as traditional voice telephony. Working down the P&L from EBITDA, D&A of GBP 3.5 billion was up 1% on last year. Our adjusted net finance expense for the year increased 13% to GBP 617 million. That's driven by the increase in net debt, which was largely due to the issuance of long-dated bonds to the BT pension scheme. The adjusted tax charge was GBP 619 million, reflecting an effective tax rate for the year of 19.2%. We expect a slightly higher rate in '19/'20. This resulted in adjusted profit after tax of GBP 2.6 billion. Specific items after tax of $452 million comprised restructuring costs, regulatory charges and a net interest on pensions of GBP 139 million. Reported profit for the period after specific items was GBP 2.2 billion. Our reported EPS was 21.8p per share and our adjusted EPS was 26.3p per share. Turning now to cash flow and starting with the adjusted EBITDA of GBP 7.4 billion. Interest, tax and changes in working capital represented a cash outflow of GBP 1.3 billion, resulting in cash available for investment and financing of just over GBP 6.1 billion. I should add here that we now expect '19/'20 normalized cash tax to be some GBP 200 million better than our previous expectations. This reflects both lower tax rates in '18/'19 and '19/'20 and improved cash tax phasing due to changes in the forecast geographical mix of taxable profits and accelerated tax depreciation. Reported CapEx increased to GBP 3.96 billion. This includes a 21% increase in network investment including an increased provision for BDUK gainshare. Cash CapEx was GBP 3.6 billion, resulting in normalized free cash flow of GBP 2.4 billion. That's down 18% but in line with our guidance. The net cash cost of our specific items was GBP 598 million. Specific costs associated with restructuring were slightly lower than expected this year due to the rephasing of cash payments on some of our transformation activities into '19/'20. We expect restructuring charges to increase this year. Reported free cash flow was an inflow of GBP 1.9 billion. I'll cover the pension and our debt position after I've described the performance of our customer-facing units. The Consumer business grew annual revenues by 3% to GBP 10.7 billion. The growth was driven by the continued increase in handset values, a further increase in the SIM-only base across all 3 brands and the benefit of price increases in Q3 partially offset by regulation. Fixed average revenue per customer saw a small decline in Q4, reflecting the intense competition in the retail market. Postpaid mobile average revenue per customer, as expected, continued to decline due to the mix effect of SIM-only. We're encouraged to see Q4 mobile churn fall to 1.1% following improved retention processes and successful device launches. Fixed churn was flat at 1.4%. EBITDA for the year was up 7% to GBP 2.5 billion as the revenue growth was only partly offset by increases in customer investment and sports rights costs. EBITDA was down 1% in Q4 after a strong prior year comparator. CapEx growth of 8% was driven by our increased network spend as we prepare an imminent launch of 5G. Normalized free cash flow was GBP 1.3 billion. This was down on last year because the increase in EBITDA was offset by the increased CapEx and the settlement of the dispute with Phones 4u relating to the retail trading agreement. BT Plus now has around 1 million subscribers since its launch last May and takeup of its latest chapter, BT Plus with complete WiFi, has been encouraging. Consumer continues to invest to improve customer experience with encouraging results, including an 8% reduction in service contacts compared to Q4 in the prior year. The business also continues to drive growth in digital engagement with My BT app registrations up by 1/3 and My EE app now being actively used on a monthly basis by about 1/4 of the EE mobile base. As outlined in our Q3 results, we do expect Consumer to be impacted by several regulatory headwinds in '19/'20. These include increases in annual spectrum license fees, mobile spend caps, international calls regulation and automatic compensation for fixed customers. As Philip will describe, we're taking decisive action to further strengthen our competitive position to respond to these short-term pressures, and indeed, the longer-term opportunities. These actions include increased investment in new customer propositions in enhanced service and in fair, predictable and competitive pricing, including, for example, moving to annual CPI price rises for our BT-branded connectivity products. Revenue in the enterprise business decreased 7% in Q4, resulting in a decline of 5% over the year, driven by an accelerating decline of fixed voice, continued reductions in other legacy products and lower equipment sales, the latter reflecting our strategy to deemphasize low-margin revenue. Growth in IP voice, mobile and networking only partly offset these declines. Messaging volumes in Ventures also grew encouragingly. Operating costs for the year were down 6% as a result of the lower revenue but combined with reduced labor costs from the strong delivery of the unit's cost transformation plans. However, the lower costs were insufficient to offset the revenue declines resulting in EBITDA down 3% for the year. Within the main segments, our major & public sector business reversed the declines of recent years to grow its EBITDA over the '18/'19 year. Enterprise EBITDA declined 6% in Q4, above the rate for the year as a whole. And this reflects a tough comparator following a strong EBITDA performance in Q4 of the prior year as well as a slightly steeper decrease in higher-margin fixed voice revenue in the quarter. We expect this to continue into '19/'20. BT's 4G Assure product for business is performing well in the market with half of new SME broadband customers taking this service, and this product underpins the growth in retail broadband ARPU. Customer experience continues to improve with enterprise NPS registering an increase in each quarter of the year. Retail order intake decreased 15% to GBP 2.9 billion for the year and the wholesale order book declined 22% to GBP 1 billion. Both these declines reflected some large contracts and the re-sign timing in '17/'18. Global Services revenue fell 6% in the year, reflecting our continued strategy to de-prioritize low-margin activity, and to a lesser extent, the impact of divestments. The reduction of low-margin activity, combined with strong delivery of our restructuring program, reduced operating costs by 8%. Together with some one-off items, this drove a 17% growth in EBITDA to GBP 505 million. CapEx was down 12% for the year, reflecting ongoing rationalization and our strategy to transform to a more asset-light, lower-risk, higher-return business. Total order intake on a rolling 12-month basis was GBP 3.3 billion. That's down 15% year-on-year but only down 3% in the quarter at GBP 1 billion. This reflects the continuing shift in buyer behavior, including shorter contract lengths and increased usage-based terms. Global Services NPS scores increased by an impressive 39 points compared to the '16/'17 baseline, reflecting our actions to improve customer experience in areas including account management, quoting and service delivery performance. Our Security business generated 19% revenue growth. We continue to be seen as a trusted partner of choice to solve our customers' security challenges and are confident in the growth prospects for this business. Openreach revenue was down 4% to GBP 5.1 billion, driven by regulated price reductions, the volume-related commercial offer, a decline in the physical line base and a one-off accounting benefit in Q3 last year. These headwinds were partially offset by robust growth in FTTC and Ethernet volumes. Excluding the impact of regulatory price reductions, revenue would have been flat year-on-year. EBITDA of GBP 2.4 billion declined 11% due to the revenue decline combined with increased costs, only partially offset by an efficiency savings from our transformation programs. The increased costs relate to the recruitment and training of engineers to support the FTTP build, investments in reducing network faults and improving customer service and increased business rates. CapEx increased 22% over the year to GBP 2.1 billion, predominantly driven by the ramp-up of our FTTP program. Openreach continue to build at the lower end of the GBP 300 to GBP 400 cost range and the business successfully scaled up its build rate through the year. Our ultrafast deployment of G.fast and FTTP now exceeds 3.2 million premises. We delivered another record quarter for fiber connections in Q4 with the base growing 687,000 to 12.2 million connections. More than 50% of our total broadband base are now connected via fiber to the cabinet or premise. Openreach met all 42 copper and fiber service minimum service level measures set by Ofcom and delivered a record service performance for voice and broadband products in Q4. The levels of missed appointments where Openreach was at fault was maintained at an all-time low of 1.7% over the quarter. That's 1/3 fewer than last year. And our proactive maintenance program has continued to reduce the number of faults in the U.K. copper network, delivering a 2% year-on-year reduction. Fewer network faults, combined with improved operational planning, has helped increase on-time repair performance for voice and broadband products from 81% in Q4 '17/'18 to 86% in the same period in '18/'19. We're pleased with the progress we've made in the first year of our 3-year transformation plan. We remain firmly on track to achieve the targets we outlined last May, specifically GBP 1.5 billion gross cost savings with restructuring costs of GBP 800 million. In the first year of the plan, we have delivered a gross cost saving of GBP 875 million with restructuring costs of GBP 386 million. Organizational restructuring, in particular to reduce middle-management and back-office roles, combined with broad-based productivity improvement programs in each unit, have delivered a gross reduction of over 4,000 roles in the year compared to our 3-year target of 13,000. Every unit delivered efficiencies through organizational simplification, waste reduction, process improvement and automation. Global Services made significant progress in its journey to a more digital unit with standardized products and processes requiring fewer people to service our customers. We announced in November 2018 that we would be outsourcing our U.K. and Republic of Ireland facilities management teams as part of our strategy to focus on core activities and to leverage the scale and capabilities of specialist external partners and we completed this initiative on the 1st of April, impacting approximately 1,900 employees. For clarity, these outsourced roles were not included within the 13,000 gross role reductions that will be delivered from our transformation programs. In addition to the transformation savings, our strategic sourcing program delivered a step-up in our annual procurement savings with the benefits largely deployed to offset price inflation and the increased volumes associated with our CapEx plans. We reduced our number of suppliers by 1,000 during the year and we will continue to rationalize our supplier base in order to leverage our scale and reduce risk. We are progressively securing better-value, multiyear deals by building longer-term partnerships with our major suppliers. CapEx for the year increased to GBP 3.96 billion. Reported CapEx, excluding the BDUK clawback, was GBP 3.8 billion. That's slightly ahead of our GBP 3.7 billion guidance due to our decision to accelerate network investment. Our network investment, excluding the BDUK clawback, increased by 16% to GBP 1.9 billion, largely due to incremental FTTP build. The other elements of our CapEx program, including customer-driven investments, systems IT and non-network investment, were up 5%. Now several of our current CapEx programs will scale back over the next 2 to 3 years, notably the ESN build, investment in VDSL capacity and installation of energy-efficient cooling in our exchanges. As we previously explained, this will create the headroom to fund our current FTTP build rate of around GBP 1 million per annum, even as build costs and connection volumes rise over time. However, as Philip will explain, ramping up our FTTP build rate beyond our current plans of around GBP 1 million per annum, will require increased annual CapEx. For example, accelerating our build rate to achieve 4 million homes passed by March 2021 will require additional CapEx of about GBP 100 million per annum. The IAS 19 pension position at the end of the year saw an increase in the deficit to GBP 6 billion net of tax compared to GBP 5.7 billion at the end of March last year. The movement primarily reflects an increase in liabilities, resulting from the real discount [Audio Gap] by around 40 basis points during the year, partly offset by deficit contributions and positive asset returns. In October, a High Court judgment involving the Lloyds Banking Group's defined benefit pension scheme was handed down, impacting most U.K.-defined benefit schemes. The judgment resulted in us recognizing an additional liability of GBP 26 million to equalize benefits between men and women due to guaranteed minimum pensions. This compares favorably to our initial estimate of around GBP 100 million. In December, the Court of Appeal upheld the High Court's ruling that it is not currently possible to change the index used to calculate pension increases paid in the future to members of Section C of the BTPS from RPI to another index. We are seeking permission to appeal the decision from the Supreme Court. Our net debt position at the end of the year was GBP 11 billion, amounting to an increase of GBP 1.4 billion compared to the 31st of March 2018. The increase in net debt was driven by the issuance of GBP 2 billion bonds to the BT pension scheme, combined with dividend payments of GBP 1.5 billion, partially offset by normalized free cash flow of GBP 2.4 billion. Group issued about GBP 900 million of 5- and 10-year Eurobonds in September 2018 and a further GBP 1.1 billion of dollar bonds with similar maturities in December 2018. These bonds will be used for general corporate purposes, including repayment of term debt. Our balance sheet remains strong and our debt maturity schedule is long-dated. We're confident that our credit metrics continue to support our through-cycle target of BBB+. So in closing, I will outline how we expect IFRS 16 to impact the group and I'll preview some additional segmental changes that we'll be making in this '19/'20 financial year. Adoption of IFRS 16, the new leases accounting standard, was effective for the group from the 1st of April 2019. This standard requires us to recognize a right of use asset and lease liability on the balance sheet for all leases. While we are still calculating the precise impact, we currently expect to recognize lease liabilities of between GBP 5.6 billion and GBP 6.6 billion. We're not changing our definition of EBITDA on the adoption of IFRS 16. EBITDA will increase because the operating lease expense will be replaced by an interest expense and depreciation. Profit after tax will fall in the periods immediately following transition because the interest expense charged in respect to the new leases is front loaded compared to prior straight-line operating lease expenses. Leases will not be included in CapEx, so our CapEx measure will be unchanged. The aggregate treatment of leases in our normalized free cash flow will also be unchanged. We will include our lease liability as part of our net debt, which will, therefore, increase on adoption. Separately, we've completed a review of our internal cost allocations. Starting in '19/'20, we'll adjust our allocation methodologies for internal shared costs that are reported within EBITDA. The revised methodologies will allocate costs across our operating units to reflect both the recent creation of the Consumer and Enterprise units and the formation of Openreach Limited and the relative movements in the scope and scale of our units. In addition, we will transfer the ESN contract from Consumer to Enterprise to reflect the fact that network build has largely completed and that the major customers for the ESN network are served by our public sector team in Enterprise. There will be no impact on a group basis from these changes but they will impact segmental results. And lastly, as we announced at the Global Services briefing, we will be refreshing the Global Service KPIs to improve visibility of the underlying drivers of the business' operational performance. We'll be reporting on this new basis from Q1 '19/'20. And during the quarter, we'll issue pro forma financial information for '18/'19. So that concludes my section of the presentation. I would now like to hand you back to Philip.
Thanks, Simon. As Simon has just summarized, we took some significant strides forward last year in executing our strategic plan and we're definitely heading in the right direction. What I want to do now is talk a little bit more about the market context and then have a deeper dive into each of our 3 core pillars. As I do this, I hope to give you a sort of feel of how I see BT today, some of the risks and opportunities and where we need to focus going forward. As I said earlier, I can't give you the whole picture. But you should come away today with a good feel for the direction of travel for the company. After that, I will then translate how this impacts our guidance for this year and finish on the dividend. So if we start with the market. The first thing to underline is what you already know. This is an extremely competitive market and I think we all recognize that the U.K. has always been particularly competitive. But it does seem to me that over the last 6 to 9 months as if competition has stepped up in fixed and mobile and across consumer, enterprise and international markets. We think this is driven by a number of factors, including regulation, technology, product penetration, new entrants and the fact there is very little connection growth in the market itself. But regardless of the reason, the reality of the market is highlighted by the pricing dynamics brought to life by the chart on the right-hand side of this slide. At the same time, the amount people and business are willing to spend on telecoms has declined. And as you can see from this chart, over the last 5 years, revenue across the industry was down GBP 3.2 billion or 1.7% a year. Despite customers paying less, demand on our networks is going through the roof with the recent record set in March at 12.2 terabits per second with the new issue of Fortnite and the Man United playing PSG in the UEFA at Champions League. Total data usage is growing at around 40% per annum and increased amount shows absolutely no signs of slowing. Many applications are moving to the cloud, requiring increased bandwidth. And the number of connected devices being used in the home and for business is expected to multiply 3x over the next 7 years, creating an increased reliance on connectivity and convergence. So the need for investment in our network is clear, in order to maintain competitiveness and allow us to grasp the opportunity this demand presents. As you know, we continue to face some headwinds as a result of regulatory change. This chart on the left will be familiar to many of you and shows the consequences of changing regulation over the last few years and the estimated impact over the next 3 years. In total, looking forward, we still face over GBP 1 billion of negative revenue effects through to 2022. But once we're through this, the returns on our regulated products will be a modest spread over our regulated cost of capital. Meanwhile, we are actively engaged in discussions with Ofcom and government and believe that our dialogue is both positive and constructive. The industry can see this through the government's Future Telecoms Infrastructure Review and more recently in Ofcom's consultation on promoting competition and investment in fiber networks, which proposes some helpful steps in support of investment, such as indexation of Openreach copper product prices, support for a managed retirement of the copper network and signals around fair bet, which encourage investment in infrastructure for all players. So while quite rightly, given our market position, we remain highly regulated and there are many details still to be worked through, we believe that the relationship with Ofcom and government is on an improving trajectory, particularly with regard to network infrastructure investment. So despite the somewhat uncertain market context, you should remember that we are uniquely well positioned and a clear leader across the U.K. consumer and enterprise markets and with major multinational customers across the world. We have really strong brands with good customer consideration. And we have the best fixed and mobile network positions, which are a real source of competitive advantage. And we have unrivaled sales and service capabilities across the whole of the U.K. through multiple channels to suit customer needs. So despite a number of obvious challenges, the business is in good shape, has strong strategic market positions and is delivering solid results. We have very good foundations from which to build a better BT for the future. To start to give you a feel for how I see things from here, I will use our core pillars, the first of which is to deliver a differentiated customer experience. Again, this will be another familiar graph to you. Now as I'm sure many of you will recognize, moving NPS forward for 11 consecutive quarters is no easy task. And I think it's more evidence that the business is improving and heading in the right direction. But we have to go faster because this chart brings it all into perspective, i.e., versus our competition. BT simply needs to do better here. We need a step change in how our customers and our colleagues feel about our brands, our service and our propositions. We will need to invest in it to ensure that BT is once more in the top league for customer experience. To do this, we need to improve customer loyalty. We need to further invest in our service capability. We have already made good progress here, including onshoring of call centers, which we plan to accelerate and better training of our people. However, we must also make better use of technology to tailor customer propositions based on their usage characteristics, to make customer journeys more automated and to give customers choice in how they interact with us, whether it be in person or self-serve, through apps or online. We also need to invest in our products and our propositions, and very importantly, how we compete and in particular, on our convergence offerings where we have a competitive advantage and can differentiate. Again, as Simon said, we have made a good start here with BT Plus and 4G Assure in enterprise. But I want us to go further and I want us to go faster and really think about the products and services which make our customers really, truly better. So do expect some new product launches later this year and beyond. On pricing, BT really needs to be and will be more competitive but it will also be fairer. Overall, we continue to focus on great value for money for our customers but in addition, we are introducing fair pricing principles, and let me give you 2 examples. First, we have moved our consumer BT landline, broadband and mobile propositions onto annual CPI pricing, providing greater transparency and predictability for our customers. Second, we will now accelerate ADSL copper customers onto superfast wherever possible so they are receiving the very best possible broadband experience. These initiatives are in keeping with our customer-first approach, putting the customer at the heart of everything that we do. By improving service capability, strengthening our customer products and propositions and focusing on value for money, we can increase customer loyalty, increase RGUs per customer, reduce churn on risk and create a better, more competitive and more sustainable business. Now let's move to our next pillar, creating the best converged network. Our network is the biggest differentiator between us and our peers. We own the best fixed and mobile access infrastructure. We own the most extensive WiFi network, and we have the best core network. Some of these assets are shared or wholesaled. But others where we differentiate, we will protect. The slide aims to show our network principles. Sitting at the heart is our intelligent converged core, robust, secure and very high in capacity. From here, we have our access networks. On the fixed side, we are mostly copper-based today, but FTTP, over time, will become the default and serve as the backbone to serve the increasing future demand for consumer and enterprise communications and connectivity. On mobile, we are the very best with 4G today, but again, over time, 5G will become the primary mobile solution to deliver BT's commitment to provide the best mobile network in the U.K. 5G will serve millions more devices on our network to support emerging solutions, for example, in connected cities and for immersive gaming and will provide assurance capabilities for our fixed access. As usage of our network evolves, so will the ways by which BT can attempt to monetize this new demand. And we will offer edge computing as a service to provide low latency and fast access for high-performance access needs, such as AR, VR and cloud. Sitting above this will be our unified access for our customers, combining all technologies to deliver a secure, robust and reliable experience when and wherever people and businesses need it most. Looking at each of these in a little more detail. Today, we essentially run 3 different core networks: fixed through superfast; mobile through 4G; and then we have our 5 million-plus WiFi hotspots. It's fairly complex to switch between networks. We have inconsistent coverage and speeds and different usage allowances. But over the next few years, this is all going to change as we introduce our integrated smart core network, combining fixed, mobile and WiFi. This will mean that consumer and enterprise customers will be seamlessly connected wherever they are. They won't need to log in or change their settings or worry about how they are connecting or on what devices. This network will be more agile, more flexible, more capable, more reliable and have lower operational cost than anything that came before. It will be truly converged and it will be truly differentiated. Now obviously, we have some work to do before we get there, to extend our digital voice platform, to enable numbers and identities to move seamlessly across multiple devices, to upgrade our WiFi estate as well as start the move to 5G and all-IP. But we should be there around 2022. This is the base of our best converged network. Next comes FTTP. Now I'm really encouraged by the progress we are making with FTTP. You've already heard that the Openreach team is scaling up operations and doubled their FTTP footprint this year to hit the target of 1.2 million premises passed, and very importantly, at the lower end of cost expectations. We have always been consistent that for FTTP, we are making a significant long-term investment. But the BT Group is taking the full investment risk of price, takeup, technology and construction costs. And therefore, to expand the program, 3 things need to be confirmed: first, that Openreach can build FTTP at pace and scale and at the right cost points; second, that there is demand for the end products; and third, and absolutely crucially, that the regulatory framework is in place to enable us to receive a fair risk-adjusted return on our investment for our shareholders. I think we are making progress in all these areas. On the first point, the Openreach deployment rate increased in quarter 4 to an average of around 20,000 premises passed per week. We continue to deliver at the lower end of our GBP 300 to GBP 400 cost per premises passed and have increasing confidence that we can pass around 50% of U.K. premises within this range of cost. On the second point, encouraging CP takeup of Openreach volume-related pricing deal has started to move customers to faster speeds and will, over time, increase the penetration of ultrafast, including FTTP. In addition, we are seeing new products being launched in a market that require higher bandwidths. For example, streamed gaming. And finally, we welcomed Ofcom's recent consultation on its approach to access regulation from 2021 to 2026, which is a positive step forwards towards laying out a clear and predicable long-term framework to create the right conditions for investment in the U.K. digital infrastructure. This really is an encouraging development and we will keep working with Ofcom and the rest of the industry on a framework that facilitates investment whilst delivering quality and choice for customers. We are also working with government on key enablers to cover business rates and barrier busting. Again, key to efficient delivery of FTTP. Based on our increased confidence that Openreach can deliver at pace and scale and at the right cost points, that there is demand for faster speeds, and very importantly, as I said, that Ofcom and government deliver the required enablers: we are today announcing that we are increasing and accelerating our FTTP investment to now deliver 4 million FTTP premises passed by March 2021, up from 3 million previously. And next, if the conditions are right, especially the regulatory and government policy enablers, we will then further increase this pace to build to deliver 15 million FTTP premises passed by the mid-2020s, up from our previously advised 10 million. Right, moving to our mobile network. As I said earlier, we already have the best position in the U.K. with 84% 4G geographic coverage using Ofcom's definition. And RootMetrics have ranked us as the best mobile network in the U.K. for 5 consecutive years. So this really is a great place to be. But we need to and we want to lead on 5G. We're looking to accelerate our plans, which will be -- include supplementing 1,500 of our 4G sites with 5G across 16 cities this year with the first 6 cities going live imminently. As I said earlier, 5G will eventually be central to our best converged network, bringing increased speed, a lower latency, greater efficiency and important business applications from network slicing. You should expect us to be an active participant in the spectrum auctions next spring. And finally, on delivering the best converged network. We will build our network leadership position through the future of all-IP and all fiber. This will enable further simplification of access products, our exchange estate and the reduction of manual intervention for provisioning. The shift to all-IP -- the shift to an all-IP world will be a critical catalyst for improved productivity. So that brings us to our last pillar, to create a simplified, lean and agile organization. Since joining BT, I've been around a number of our key locations covering in total probably around 40,000 colleagues. I've taken the chance to talk to as many people as possible to understand and hear from them their front-line perspective on some of the day-to-day challenges that we face. I have been a bit dismayed by the complexity of our systems and processes and how difficult this makes it even to get some of the simple things done. And this is not a new problem for BT. But given some of the new technologies available today, it is something we should be better able to address in the future. This spaghetti chart on the left side starts to give you a feel for the scale of the complexity. This is a single process for consumer broadband provision. You're not supposed to be able to read it, by the way. It involves multiple hands-off between Consumer, Wholesale with Enterprise technology and Openreach, with manual intervention needed with systems that don't always talk to each other. And then we do the process slightly differently for each brand. Obviously, there are huge opportunities here for improvement but it is extremely complicated. We will have to massively simplify our processes and our own product portfolio and increase the use of robotics and automation for repetitive tasks, ensuring that our people can focus on value-added work. And we aren't just looking at this for customer-focused tasks, but looking across other areas such as finance and HR, again with the aim to improve productivity. If we get this right, the prize is significant. We will improve customer experience and Net Promoter Scores, drive incremental revenue, have happier and more satisfied colleagues and significantly increase productivity by reducing waste and rework. Now to be clear, so far, we've only looked at a few of our processes from end-to-end and there are hundreds, if not thousands, of them. We know the potential is there, but realistically, it will take us some considerable amount of time to fully scope in terms of cost of implementation and expected benefits. Now there are a whole bunch of historical reasons why BT is not efficient and I could take, and I'm sure you could as well, any number of metrics to measure how we do this. But I've used revenue and EBITDA per employee to give you a feel for the scale of the challenge that was facing BT back in 2017. And this was the reason why we launched our transformation program last year and you've heard from Simon about the good progress we have made on this initiative and the momentum that we are building. This program, though, is primarily focused on organization structure and procurement efficiencies. And the GBP 1.5 billion of savings in a year -- in year 3 is the gross benefit and the majority is offset by headwinds, regulation, inflation and legacy declines. Narrowing this productivity gap presents us with a must-do opportunity to build a better BT for the future. It does sound a bit boring but believe me, process simplification and system simplification are some of the biggest challenges facing BT. This will be a major program of work, which if we get it right, will increase our capacity for investment and add significant value to BT. To finish, I would like to give you a sense of what the financial implications of these strategic plans are and give you some detailed guidance for 2019/'20 before making some final observations. What I've laid out over the last few minutes is how I see the business and some of the things we will do to ensure that we differentiate, remain successful and drive sustainable growth in value over the long term. Recognizing the short-term market pressures as well as the longer-term opportunities, we are taking decisive action now to further strengthen our competitive position. If I summarize these actions, specifically, we are increasing our investment to, number one, introduce new customer propositions at an unprecedented pace, including new structures on BT Plus and 4G Assure in enterprise with many more coming later in the year. Number two, deliver fair, predicable and competitive pricing, including, for example, moving to annual CPI price rises for our BT-branded connectivity products. Number three, accelerate significantly the migration of our customers to superfast broadband from copper ADSL, where available. Number four, drive the next step change in customer experience, including an even faster move of service teams to our U.K. contact centers to improve complaint handling and response times. Number five, ramp up our FTTP build program to 4 million homes passed by March 2021 with the ambition, if the conditions are right, to further increase the pace and to pass 15 million homes by the mid-2020s. And lastly, number six, accelerate our 5G rollout to deliver market-leading coverage to ensure that we remain the U.K.'s leading mobile network. So obviously, there will be some short-term impact on our financial results to create the capacity for investment in these longer-term benefits. So in the current year, we are guiding pre-IFRS 16 adjusted revenue to be down around 2%. Along with the flow-through of lower revenue, we expect the increased OpEx investments to result in adjusted EBITDA in a range between GBP 7.2 billion and GBP 7.3 billion for this year. And then a similar flow-through to next year, although we do still expect the '20/'21 EBITDA to be above that for '19/'20. For CapEx, we are increasing the range to between GBP 3.7 billion and GBP 3.9 billion, excluding BDUK clawback. And on normalized free cash flow, we expect to be between GBP 1.9 billion and GBP 2.1 billion. Although our plans are still at an early stage, we are very confident that the [Audio Gap] I described will deliver good returns over the medium term. Separately, we are very keen to accelerate the pace of our FTTP rollout but will only do so if we are confident that the right enablers are in place and that we're able to generate an appropriate level of return on our investment. The capital commitment of increasing FTTP to 15 million premises passed by mid-2020 is significant. We will be investing to create long-term strategic assets which, even with the right enablers in place, is reflected in the pay-down profile we can expect. This would, by definition, put pressure on our cash flows in the initial investment phase and we will have to make a decision about how best to finance that. That will be a matter for the Board at the right time. We will only proceed with the investment if the returns are sufficiently attractive for the risk that we will be taking. So whilst I'm clear about the challenges we face, I'm equally confident in the opportunities we have to strengthen the operational and financial performance of BT over the next few years. Finally, we are holding the dividend flat at 15.4p per share for last year. The Board also expects to hold the dividend flat in respect of the current financial year, given our outlook for earnings and cash flow. So in conclusion, BT delivered a very solid operating and financial performance last year, which has demonstrated our ability to execute our plans and has generated good momentum. We are very well positioned in the market across our consumer and enterprise markets despite the current competitive environment. However, we have a lot more work to do to improve our competitive position, our efficiency and our productivity. We have robust plans in place but we need to be bolder, smarter and faster if we are really to ensure that we remain successful and create a better BT for the future, while delivering sustainable long-term value to our shareholders. This will require further investment across all areas of the business. We need to invest more in service, more in propositions and more on competitiveness. We need to invest more to maintain network leadership, and we need to invest more to accelerate the transformation of our business. These investments will be undertaken in a thorough, disciplined and thoughtful manner. Our focus will be making BT a better business in the long term and delivering sustainable long-term value to all stakeholders. But rest assured, top of our mind is ensuring our shareholders, who provide the capital, earn an adequate risk return, on the decisions we take. Thank you very much for listening. I'd now like to open it up for questions. I have my whole executive team with me in the front here should an additional perspective be required. Let me take my seat, and I'll come to you.Right. Who would like to start? Yes, sir? Please.
It's Nick Lyall from SocGen. Can I ask 2, please? Firstly, on fiber, what's happened that allows you to think you can move to 2.2 million per annum rollout? And would it be possible? Simon, that guidance on the incremental CapEx was very interesting for the 4 million. I don't think you'll give it, but any chance of telling us how to get to the incremental CapEx to reach the 15 million in the phasing, if at all? And secondly on the divi policy, why keep the dividend policy as it is now? It seems almost pointless given you're telling us you're about to invest. How should we think about recalculating the divi if you do move to the 15 million, please?
Okay. Look, Simon can do the FTTP. Maybe I'll handle the dividend, if that's all right?
Sure. So on the FTTP, I mean, the -- firstly, in ramping up from 3 million to 4 million, that really is a reflection of the great pace that Openreach is demonstrating and as we mentioned, we're coming in a sort of lower end of our cost points. Our plan was to get to actually a little bit over 3 million given the combination of the towns and cities program and BDUK and the new sites. So moving to 4 million steps up the rate a little bit, but also within the sort of lower cost point. So that helps you sort of -- guide you to the GBP 100 million-or-so that I estimated for annual run rate to get to 4 million. To go beyond 4 million to 15 million, I'm not going to speculate on the cost for that at this stage. You're quite right, we'd need to ramp up to the sort of rates you described in terms of number of homes passed per annum. But we'll have to see, as we continue to build out, what happens to the cost profile as we develop the program. Rest assured also, that my colleague, Clive Selley, we'll be doing everything he can to keep at the lower end of his cost points. Won't we, Clive?
Come on, Clive. And I think that sort of links now to the dividend point. We feel very comfortable with what we announced today in terms of the dividend, reaffirming our thoughts for this year. Obviously, it's an important decision for the Board. And as you look forward, things can always change, right? Circumstances may change. And what Simon has referred to is this ambition of 15 million homes is a very significant decision. We're not at the point of actually confirming the detail of how we're going to do that. There are loads of things that need to be confirmed around enablers from a regulatory point of view and some things I mentioned around the government point of view. If at a point when we are approving that business case, by definition, the Board will have reached the conclusion there are great returns to be had and it's an appropriate decision to make. At that point, we then think about how do we fund it. And I would not go straight to dividend because we'd look at every option that we have and you'd have -- you could increase lending, there may be more transformation benefits. You might reprioritize capital. And then as part of that, you'd look at the dividend. Of course, you have. But it's way too early to speculate on that at this stage. As Simon says, we've got a really clear plan. We're ramping up build to full capacity now. We're pushing Clive to go even faster and to get to sort of a 2 million-plus build is what we'd like to do. But we're at -- sort of 1.2 million next year, hopefully. That make sense? Okay, can we -- where's -- I'll follow the mic, actually...
You tell me. You point and I'll...
I don't really mind. In the front here.
I'm Maurice from Barclays. I mean, you talked about in your comments about investing in loyalty and also about the need to be more competitive on pricing. How much of that is front book pricing and back book pricing? You've clearly got the announcement from the CMA around the loyalty premium, talking about sort of 20% discount off between new customers and existing customers. So when you think about your pricing, how much investment will go in that this year? Is that significant in the context of the [ growth ] decline you've given this year?
I mean, the investment is across a broad range of things, both front book, back book but also on the propositions. So it's all connected. So we're talking about making a major leap and change in one particular price point. What we're saying is we're focused on great value for money. There are certain cases where there's some anomalies and we'll iron those out. The sort of stranded copper customers I referred to, we'll sort those out and I think we maybe weren't treating those customers in the way they should have been. So that's -- rectify that sort of particular issue. In terms of being more competitive directly with others, I think what I'm trying to get at is, we are delivering converged propositions which are fantastic today, right? So BT Plus, 1 million subscribers, going really, really well. You're going to see more converged stuff and we're going to make sure that where we have to compete on pure price, we will. We're not going to suddenly change and go after loads of new customers just for the sake of it. We're going to look at the overall value proposition. What I'm really getting at is expect us to invest in the totality of it. Some of it is price up and down, some of it is propositions and combining the converged prepositions for the future. Thank you. Man's got the mic?
Yes. Stephen Howard from HSBC. So a question about the regulation. I understand that there have been some encouraging moves. But to be blunt, are they sufficiently encouraging, even to raise the aspirations at this stage? If you look at Ofcom's fiber consultation, it includes dark fiber. And then still more flagrantly to my eyes, you're being potentially denied pricing flexibility on a regional basis, which I think is, from an investor standpoint, really pretty upsetting. So is there sufficient grounds at present to say that the environment really is sufficiently encouraging to raise the aspirations? Or are we misjudging the economics? Obviously, in your presentation, plenty of information, evidence supporting the fact that customers want to consume more data. But is there actually evidence that customers are prepared to pay more for FTTP?
Look, really good question. Look, what I'd say is you're right to point out there are some elements that are being discussed as part of the consultation that we wouldn't entirely be happy with. Of course, that's right, okay, and you mentioned 2 of them. But if you look at the progress that has been made, the decision around copper indexation, help with switchover from copper to fiber, some of the commentary around fair bet and linking it back to the kind of returns that we saw in FTTC. So 15% IRR and recognizing from Ofcom that the FTTP business case is actually more risky than FTTC. I think those are very helpful moves in a very strong direction in favor of investing in infrastructure for FTTP. Do I think dark fiber and some other things you mentioned need to be lobbied for? Of course, and BT is putting its point of view very firmly in that to make sure that in the round, there's a package of things that make sense. What we're confident in is, what we're voting right now in terms of the numbers we talked about, going for 4 million makes total sense. I believe that hopefully we'll get a package of stuff in the next 6 months to 12 months that makes sense, and therefore, then we'll commit hopefully to the 15 million. There's a lot more work to do there.On your point on misjudging the economics, I mean, that's the key point right here, that the really important thing is we all recognize that we're putting some of this investment in the ground before the full demand is there. And therefore, I think what everybody believes is there will be strong demand for that capacity in the future. And the problem you don't want to be is you don't want to be behind the curve. So we're trying to work that balance through. So it's build at the lowest possible cost, know that the volume is going to come at some stage and make sure that the regulatory enablers make sense for us in the short term as well as the long term. Simon, do want to add anything to that?
No. I mean I think the only other 2 things would be that we are genuinely pleased with the progress we're making in terms of the operational delivery of fiber build. And I think it is fair to say that our perspective on cost today is more favorable to the business case than it might've been a couple of years ago and I'm sure that we'll continue to work at that. I think the second thing is that where customers get our latest generation FTTP product, they genuinely see the benefit from it. And we are -- we do believe that there will be genuine market demand for that product as we scale it up. But I think Philip's made the key that it's, as you well know, it's the package of regulatory enablers that are really going to be critical here.
We'll come back to that table. We'll do that one, then come back. Table at the back, please.
It's Polo Tang from UBS. I have just 2 questions. The first question is just on Openreach. So what are your thoughts on structural separation or selling a stake in Openreach? If you look at fiber assets currently, they're achieving quite attractive multiples for private equity. So do you think you can create value by spinning off Openreach or selling a minority stake? Second question is really just about the U.K. broadband market. You talked about intense competition. So can you expand on this? Who's been the most aggressive and what are you seeing specifically from Virgin Media and their Project Lightning rollout?
Sure. Let me give you a sense, then Simon can speak. I mean in terms of Openreach, I mean, Openreach is a really important part of BT. I mean at the heart of BT, we are a network business. So -- and I think as said before, there are lots of reasons why that would be extremely difficult to separate it, but that's not the main reason for keeping Openreach. Openreach is a strategic asset. It's doing a great job. And I think as an anchor tenant, I think it makes a huge difference when you're looking at the kind of things we talked today. And I think the -- setting out an ambition to deliver 15 million homes by mid-2020s is not easy to do as an independent company. And I think having BT and the strength of BT behind it, knowing that you've got a retail unit that will take up a big part of the demand, I think, is really, really strong. So no, we're not looking at that at all. In terms of the U.K. broadband market, I think what we're referring to there, and it sort of links, again, to Openreach and Openreach is delivering great service to all its customers. And you'll know about the [ 1 12 ] deal which has changed some of the wholesale prices and that has an effect on the retail market, which we expected. And therefore, it's not a surprise that there's a bit more competition. I mean everybody's competing in their own different ways. And I think what I feel like is BT has done really good job. What I'm really saying is, it's going to get a bit harder and we need to make sure we're on the front foot and that's what we've really announced today: we will be. Can we go to the back table there, please?
It's Michael Bishop from Goldman Sachs. Just 2 questions, please. Firstly, Philip, you talked about, at the beginning of the presentation, moving bolder and faster. So I just wanted to try and narrow down which areas are top of mind. Is it more about changing the top line mix or is it more about improving productivity? And then just as follow-up, how do you think about the longer-term potential in terms of narrowing the productivity gap beyond the GBP 1.5 billion transformation savings that we've already communicated?
Yes. Good question. Thank you. I think what I was trying to give, I wasn't actually being overly specific. I was trying to land a concept, which is BT just needs to be a bit faster. It's a slow-moving organization for all the reasons we say. It's full of brilliant people, right? Trying their very, very best, but sometimes we're a bit slower than I would like. So we got to be faster. I think we need to be a bit bolder and lead a bit more because we are the market leader and that -- the announcements we made today demonstrate that. And the smarter point is we've got lots of really great things going on, BT, and people don't always see those things. So the thinking around the smart converged network that Howard is the architect of is fantastic. So there's an example of those -- in each of those words, they are concepts that we're going to lose -- use internally rather than externally. In terms of the longer-term potential, I think of transformation. I think it's massive, right? But it's going to take us a long time to get to grips with it and because it's not about -- and people talk about, let's reduce head count . It's not about that. It's about reengineering of the processes and then automating. You can't automate a poor process. So we've got to work through all these different processes and then automate it and then use digitization and robotics and all those new technologies that are coming. That will have massive benefits for BT, but it might take us a long time to get all those things. So I'm really optimistic about what we can do here. I just need to be realistic. Having done a bit of it before, it takes a lot of time to get this done really well. And what I don't want to do is be pushed into by anybody, least of all the management team, of making changes that end up being suboptimal. And therefore, we've got to get the work done first. Does that make sense? Thank you. Can we go over -- we go there and then we come over to the gentleman there, please.
It's Sam McHugh here from Exane. Just 2 quick questions, first one just a clarification. I think when we sat here a year ago, we talked about this EBITDA bridge out to 2021 and having EBITDA of kind of above GBP 7.4 billion. So above the FY '18 level. I'm not sure I heard you say earlier that the FY '21 EBITDA would now be above the FY '20. So the GBP 7.2 billion to GBP 7.3 billion, so just wanted to clarify that. And then secondly, on the top line, clearly, the 2% decline is not where you want to be. Should we think about phasing through this year? Are there any things that are getting better/worse near term, longer term? And as we exit this year, do you see a return to stable revenues at any point in the next kind of 2 to 3 years?
Yes, I'll let Simon do that.
Yes. So the dynamics that we set out a year ago are indeed the same dynamics playing out and our view of those has not materially shifted. We explained that we faced some significant regulatory headwinds. We faced a number of cost inflationary pressures, not just normal sort of inflation but energy business rates in particular. And of course, we face the pressures on legacy product declines. We saw those essentially weighing down revenue and EBITDA in '18/'19 and then through into '19/'20. But we then saw the growth in our sort of strategic product portfolio, and of course, the mounting impact of cost transformation seeing some growth out into 2021. And really, that remains our view of the overall dynamics. What has changed is we're obviously stepping up our OpEx investment and that has an impact in terms of bringing our expectation for EBITDA down this year and we've also indicated we'll be making those OpEx investments at the next year. But essentially, that's a step in OpEx but the dynamic of those strategic products and transformation coming through remains in '21.The other things I would say forward, just to reinforce this point, is that we've been working through a period of quite significant regulatory price reductions through the WLA and the BCMR. And of course, those run off into the '21 year. So the price pressure in '21 is actually considerably attenuated relative to '20. And that means that the great work that's happening in Openreach in terms of the growth in faster products, the stronger portfolio in Openreach comes through into the bottom line without the attenuation of regulatory price impacts. And we'd also, I think, want to see continued growth in the new -- in the growth products into '21 as well. So I think that gives you a sort of flavor of the overall dynamics. Broadly very much where we were a year ago. Good progress in those levers that are in our control. Some ups and down in those things externally, which are not. But on top of that, the investment in the 6 areas that Philip described, which will undoubtedly strengthen our competitive position. It will undoubtedly give us more strength going into the mid to the longer term.
Great. Thank you. Yes, sir. Please?
It's Robert Grindle from Deutsche Bank. Welcome aboard, Philip.
Thank you.
May I ask a question about the rural -- well, not the rural, the broadband universal service obligation that's fast approaching 600,000-odd homes, less than 10 megabits per second. Can the cost be socialized within the existing CapEx budget? I know Clive's busy upgrading rural as well as urban. Is 5G an option for that obligation? And then may I ask about Plusnet? The customer complaints in the latest Ofcom data spiked quite a lot last quarter. I wondered whether there's anything going on there. Was it a temporary blip?
Okay. I'm going to pass that over to Clive. Do you want to do the first? And next, do you want to do Plusnet, Marc?
Yes. So talking to USO, as you pointed out, we are deploying fiber solutions and it is now mostly fiber to the premise solutions in rural U.K. through the BDUK program. There is more public money being made available. So particularly in Scotland, through the R100 program, which will be adjudicated late in the summertime, more public money to support us and perhaps, others, building fixed line infrastructure. And I'm going to pass to Howard, I think, to talk about the role of mobile to serve the USO as well, please.
Yes. Thank you, Clive. I mean we're already seeing good results where we've deployed the EE 4G home route solution. I do think in the near term, it will be more of a 4G opportunity than a 5G opportunity. But we do see -- and it's sort of linked to rural mobile. And as we've been leading the industry, not least through the deployments associated with ESN, it just puts us in quite a good shape to use 4G fixed wireless access as part of a sort of holistic USO offer.
So I should probably add, I think -- part of your question, that the solutions in a combination of sort of wireless-enabled solutions and some rollout in Openreach is included within our capital sort of view. Clearly, if we can do less mobile and required to do more on the fixed side, that would have an impact. Yes.
Go, Marc.
Just on Plusnet briefly, I mean, Plusnet have had a long history of high customer satisfaction and won some awards very recently for it. It was as a result of a billing system upgrade, a very considerable one. It was a very small percentage of customers impacted. But understandably, that did mean that complaints did spike. The team are getting on top of the issue. I would expect over the next 2 or 3 quarters, we'll get back down to the levels that we've enjoyed previously. Thank you.
Right. Can we go over -- just try over here a bit, please, if that's all right.
Carl Murdock-Smith from Berenberg. Two questions, please. Firstly, just in terms of funding the 15 million and you say we shouldn't necessarily jump to thinking about dividend cut. You mentioned additional lending. I'm just trying to square that with the comment that you want to achieve BBB+ rating through the cycle. Obviously, you're at BBB today. If you're saying additional lending, is that effectively admitting that you might not achieve BBB+ for, say, the next decade? And then the second question, on BDUK. I think H2 is the first period where we've actually seen the BDUK gainshare provision decrease. So we're now seeing that provision actually being spent. Just a question, given that, that money isn't in your CapEx guidance, how much should we be expecting of that remaining GBP 600 million to come next year?
Okay, I'll just give you a quick sort of response on the 15 million funding and then maybe I'll ask Simon to talk about the rating and the BDUK chart question. Look, you raised a very good point, okay? So I think, hopefully, we've been pretty clear today that we've got the capacity to, in the short term, to increase the build for FTTP. We can cover it this year, next year, no problem. As we look forward, we can see that the regulatory and government enablers could fall in a particular way, whereby we go ramp-up really fast and we look to Clive to build more than 2 million a year. If we get to that point, which is going to be a little way off, then we'll have to reevaluate what we're doing. We're just not there yet. So I don't want to get pinned down to how we're going to do that because we just don't know. What you will get reassured by, hopefully, is that when we get there, the Board will think about it. If the Board decides to go up to that level of build, 2 million to 2.5 million because that's the math of getting to 15 million, clearly, we're going to need some more money. The question is how do we fund it? And all I'm trying to say to you is you don't leap to dividend automatically. We will have 3 or 4 options like all companies and lending is one of them. The dividend is, yes, one them, but so is reprioritization of other capital. And who knows whether we have other transformation benefits coming onstream by then. So we have to balance all those factors together. We're just not ready to do that right now. So give us a bit more time. When the plans are a bit clearer, we'll come back and articulate it to you at the right time. If you can comment on the rating?
Sure. So Carl, you're quite right that our target is a sort of 3-cycle BBB+. We're confident that we can achieve those metrics through the cycle. But as you know, we're currently traveling more in a sort of a strong BBB sort of zone and we're consciously prepared to do that because we got high-quality investment opportunities and we're prepared to run with that metric in the sort of short term.Going back to Sam's earlier question, given the dynamics in the business, we do see improvements in cash flows we get out over time. Hence, sort of recovery back towards BBB+. If one thinks about the ramp up to get to 15 million, you're not going to jump up to 2.5 million in a year. It's going to be a phased build and as we ramp up the build, so we'll be moving into a period of, we would hope, improving cash flow. So we'll look at the rating in that context, which is why it's a very -- it's one of multiple levers.On your second specific question, the gainshare provision was about GBP 640 million, I think, at the end of the year. Through the contracts, there are various ways in which that, essentially, provision gets repaid and cashed out. It's typically actually over a sort of 5 to even 10 year sort of period. So you'll see it run down gradually over the next few years and typically, flows through in our working capital. Okay?
Yes, please?
It's David Wright from Bank of America, and welcome, Philip.
Thank you.
I'm actually just curious. You've obviously chosen to come into this industry. It's not an industry that's necessarily covered itself in glory from a return on capital perspective and I see many scarred analysts here as evidence of that. What did attract you to this industry and BT in particular? And what do you think are your first perspectives of what the industry, not necessarily BT, but what the industry does well and maybe not so well? And then perhaps your perspectives on how BT fits within that thought process?
Yes. I mean look, I came here because I think BT, as I said earlier, is systemically hugely important to the U.K. and has a strong presence across the world, as you know. I believe, philosophically, that the U.K. needs brilliant digital infrastructure for the future. I think that there are going to be massive changes in technology and the impacts of those probably could well be, and many people believe them to be, bigger than what we've seen in the last 30 years. So when you get AI, machine learning, automation, AR, VR, all those kind of things, connected devices, the world could be very, very different in 10, 15, 20 years' time. If the U.K. doesn't have brilliant digital infrastructure, we're going to be in trouble. And if BT doesn't do a good job, we won't get it. It's as simple as that. So that's #1 motivation. Two, I think the fact that we've got 100,000 people who are dedicated to that cause is something which I think is really exciting. And those people are -- I've met many, many as I referred to before, I knew they were committed and I think we can do great things along that particular line. What do I think in terms of the industry structure? And obviously, it's not ideal, right? I think one of the challenges here is the way it's been set up and there are lots of different elements to it that aren't helpful and you know what those are as well as I do. It would be great if some of those things were able to change and we'll see what happens, okay? And it could be down to a number of operators in mobile. We know that in Europe, some of the changes that have taken place. There were -- maybe the number of operators coming down is now more acceptable. That would help. And then many other examples like that where it's not actually helping and you're destroying value fundamentally. I do think that. The other most relevant point looking forward though is the last time there was a huge increase in capacity and delivery from the telecom sector, everybody else made hay on the back of it and we didn't. What I'm determined to do is at least attempt and find a way to participate in the next wave. And that's the way in which we really could end up being very successful. I think we'll be successful. The question is how successful and that's really why I have come because I think it's a tremendous challenge and we can do great work here as a company, as a group of people and feel really good about making a contribution to society at large as well.
Okay. If I might add a question then. It very much does dovetail into my second question, which is going beyond the sort of the provision of access into actually participating, as you've said, into maybe various other verticals or whatever that might be. What has been your first view on content and BT's participation in content? Obviously, the renewals of various rights are probably not due for a short time. So there's a little bit of breathing space here. But it's been a contentious decision, I think it's fair to say.
Yes, yes.
How do you consider that? Obviously, I welcome your participation in the football over the last few days. That's been fabulous to watch.
You're asking me a question about sport after the last 2 nights? Let me just talk about the provision of access point. I think there are things that are a strategic decision, which are very hard to make in terms of should we/shouldn't we. What I'm not hesitating on is we have to do fiber, right? Now the question is what's the pace and sequence. And if the enablers aren't there, we will come up with an alternative. But fiber is a no-brainer, assuming that isn't the case. 5G is a no-brainer. All-IP is a no-brainer as is investment in our own technology and systems and processes. So those are sort of strategic decisions that sound like they're big but -- and they are big, but I'm pretty confident we're heading in the right direction there. And what you're driving at there is a bit more complicated. What are we going to do in the future for Enterprise and for Consumer that are a set of applications and services that can hang off that technology, which are differentiated, that our customer value and we can get return on? And now we're looking at those things. A part of it today is content. And it's quite an important part for us for just sport. We are not going to go into more content at all. Of course we're not. However, sport has played a key role. I've looked at it very carefully and it's been successful in what it was aiming to do, no question about it. Are we going to expand it? No. We've got a great product. The team do a fantastic job and it contributes to the BT company, the BT brand in many, many ways. And actually, last night is a classic example. The number of people who were interacting in a sort of converged fashion was extraordinary. I was in a restaurant late at night. There were 3 people on their apps with 1 on the phone and 2 on iPads, so -- and I was one of them. So I think it shows how the future is going to be, multiples screens, converged products, that kind of stuff, but we're going to be very, very disciplined as we have been, we'll continue to do that. So no expansion on content. We're very happy with what we've got in sport. We're not going to do anything major, extra on sport. We'll be very disciplined when we bid for the UEFA for Champions League rights, which is the next one that is coming up, all right?
And welcome from me as well, Philip. So my name is John Karidis from Numis. I have 2 questions, please. One is a rather simple one. What sort of bodies of work, what investments are coming together to allow, I guess, it's both Consumer and Enterprise to launch new services at "an unprecedented rate." So some more color there would be good. Secondly, respectfully, after today, we know directly and indirectly what the likely costs are going to be over the next couple of years. But it when it comes to returns, we only got adjectives like massive, very good. So if it's possible, please, to be a little bit more specific in terms of dates and the returns that you're expecting from this. Because as evidenced by the share price movement to date, nothing's really happened. And I'm really concerned that we go back, we put the costs in, OpEx and CapEx, and then when it comes to year 3, we just increase everything by 1% and we don't really know what the returns are. So if you can help us there, that would be really good.
Yes, okay. Both good questions and the last one, very fair. On the investment together and the unprecedented pace, there's 2 points there. One is to alert you to the fact that I would like to see BT delivering more innovation more quickly. And I think we have got lots of great plans and you're going to see more of those coming to the marketplace in the coming 12 months. Specifically, what are they? I mean, there's a multiple -- multitude of things across the 3 divisions. If I give you -- probably the best hook is converged products, right? So if you look at BT Plus, the next chapter of BT Plus, version 2, and we can see version 3 and maybe version 4 are really exciting and they're significant leaps and they're differentiated. The 4G Assure product, the same for, within Enterprise and One Phone are good -- at the moment, great converged products. They're going increase and get even better. So you're going to see more and more innovation and sort of version upgrades all the way through so we're staying ahead. So that's what I meant by that. But I think you'll see a new pace of those kind of things. I'm going to pass part of the question to Simon on returns and I just want to record, I fully accept what you say. The challenge is, as I've come in, I know we have to do these things. They are non-debatable. So when you look at where -- I showed you the graphs on MPS and where we sit versus competition. I care about the future of BT in the long term and making sure that we are competitive and that we have sustainable business dynamics for the long-term future. So things I've laid out are effectively no-brainer decisions in my mind. We just have to do those. I'm confident they will deliver good returns. I just don't know exactly what they are, right? And that's the problem. So I'm being totally transparent about it. Of course, we have a plan, but it's a consolidated plan. So I'll let Simon give you his perspective on the sort of returns. And I fully understand what you're saying about the massive, exciting. We'll demonstrate those, but they're not in a set of numbers that you can see.
Yes. So let's think about the investments we're making, split them into probably 3 categories. We're making investments in the transformation plan that we set out a year ago, in particular, to improve the productivity and to restructure our organization. And we made pretty clear at the time that, that had something like a 2-year payback. This is rapid payback on an investment to restructure and improve productivity. We're well on track with that program and it's delivering the paybacks that we'd expected.The second category are investments that we make in improving customer propositions and service. Many of these are OpEx-led investments. Some though, run through our systems and IT. We typically demand something like a 3-, 5-year type of payback for those projects. And so we're investing in OpEx now to deliver our sort of cost of capital plus returns over a 3-, 5-year period and you'll see that coming through in the performance of our growth products over the course of the next 3 to 5 years. And that gets back to my comment about OpEx in the -- with improvements in EBITDA over time.The third type of investment are investments we're making in our network. We're a network-based business at our core. These are long-term projects. Many of them, Philip talked to FTTP, 5G. These are investments that carry a fair degree of risk, and therefore, we charge those with a higher cost of capital. And the sorts of returns that you saw Ofcom allowing us on FTTC are certainly the sorts of returns which we think are warranted for this sort of investment. So for example, ramping up our FTTP investment, those are the sorts of returns we demand. But they will come out over time because it takes you 10 years or so to get those returns. So we look at that in that portfolio way, if that helps.
Can I just add one -- you have follow-up question, do you? Can I add just one thing, just to make sure I cover what I'm saying on some of the shorter-term stuff that we're doing, not the FTTP program? But we -- I just feel very, very strongly that the business needs to move forward on things like customer service even faster. We just have to do that. Almost whatever it cost us certainly because you can't keep letting customers down the way that we are. We do amazing things many, many times over for many, many customers. But we do let them down too often. The NPS scores are improving. We're doing really well. You saw it, 11 consecutive quarters. But we're nowhere near where we need to be. So we have to invest in that kind of stuff. And there are some anomalies where certain customer cohorts are stuck in the wrong place and you know what they are, right? They're in legacy-type businesses and therefore, whilst we're not going to flick a switch, those that are in the wrong place and need to be moved into the right place, we'll do that quicker rather than slower. That's what I'm meaning what I'm saying they're not hard decisions to debate. We just got to toughen up and get on with it. We're going to come over here. We're going to do one more here and then we're going to come over there, if that's all right. And I'll come to you then afterwards. Thank you.
Great. It's Akhil from JPMorgan. I've got 2 questions, please, the first one links back to one of the earlier questions we had around infrastructure. You were quite clear around your view around Openreach, but I guess I wanted to ask a similar view around mobile infrastructure. Mobile infrastructure. And we've seen Vodafone and O2 with Cornerstone articulate a view that they could be open to selling a stake in infrastructure in the mobile space. I guess I'm just keen to understand your views there. And I guess, linking to what you've said, Openreach, you've argued quite clearly is a differentiated asset base, arguably mobile less so given there are many mobile operators. So how do you think about the relative merits of doing something on that front? So that's my first question. And I guess, the second question is on consumer fixed line. I'm trying to understand your thoughts around how you create a structural growth story in that business. And I guess, background here is that obviously the story of the last few years has been value over volume for many of the larger players. And I guess that strategy is softening in terms of delivery and we've seen that in terms of your KPI trajectory. I guess just keen to understand how you think about that. I mean you've talked about being keener on pricing. You've talked about the importance of NPS. But despite your very good NPS, maybe the adds are still disappointing. So how do you think about holistically, when you put all of that together, what you think are the key building blocks? And do you think the performance we saw in the last quarter was the bottom in terms of revenues? Or do you think some of the measures you've taken forward could lead to further pressure?
Okay. Thank you. Let me make a quick one on mobile and then I'll ask Simon to just give a perspective on that. I'll then pass part this to Marc, if that's all right, to give your perspective and then I'll make a quick comment. So on mobile, I think it's a really interesting point. Obviously, if there are ways that we -- we're open-minded is the answer, right? Because for all the obvious reasons, it makes sense if there are places where we can avoid stranded capital, then we should do that. So I don't know if you want to make additional comment on that.
No. I mean I think that we clearly do look at our assets and understand whether there is value to be created through an alternative structure to fund them. If one simply takes a bit of infrastructure that's dedicated to our company and asks someone else to own it, it's a simple back-to-back financing transaction. It's very unclear why there would be value in that and -- it might be useful if you're in dire need of some expensive short-term cash sometimes. However, there are cases where there is infrastructure where other owners partners are in a better position to generate additional sources of revenue streams onto that infrastructure by sharing it and that creates genuine value that one can share. There are selective opportunities for us, but do bear in mind most of our mobile infrastructure is already shared and that gives us competitive advantage. So other opportunities, yes, but they are in quite specific areas.
So I'll make a quick comment before I pass to Marc. On the volume versus value and the sort of fixed line activity. What I'd say is we're not changing that in a philosophical way. Where I'm trying to drive it is we're now going to be focusing more on lifetime value and the question about RGUs, which is basically bundling more and more things together in a converged world. And I think what I'm really trying to send a message is, we want the most valuable, the most loyal but also the most satisfied customers. And what we're not going to do is fight for the customers who are just looking for a deal and will switch in a nanosecond. That's not our core business. So see -- expect more and more of us doing the kind of things that would apply to those 3 elements rather than anything else. And Marc, do you want to comment on that?
Yes. I think just to build on that. We're still relatively early in our journey of the creation of the Consumer unit, bringing EE and BT together. And there is a big shift in the, I would say, operating model of how we are transitioning the BT brand from a promotional pricing acquisition-focused brand to one that focuses on retention and loyalty. And my -- the biggest KPI I'm looking at is churn and we've returned that to more normalized average levels. But we want to be much better than average and get that churn rate down. Moving from a Solus broadband and landline-focused brand to a converged brand, we've made good strides already. In just a year with BT Plus, 1 million customers, many of whom have converged services with us, not just mobile, and we're looking to build that base. And the way we've structured our pricing and customer propositions on Plus really structures us well for the future because we have our existing customers getting better pricing. The new -- no out-of-contract price rises. And all of those things that drive dissatisfaction have been addressed with that proposition. So we do want to drive that harder. And on our next chapter of Plus, I'm really excited about. We're not going to announce it here today. You're going to hear it over the next few weeks. We've got some really exciting plans on where we take the Plus proposition further, as we bring our networks together, as we bring mobile and broadband together. And we're going to move from a low satisfaction, low NPS brand to being best in the industry. Now these are things that don't happen in a couple of quarters. That's a 2- to 3-year journey, but we've made good strides already. The other thing that I think we're all really excited about is where the big -- we shouldn't forget, and we talked to this earlier, we are at the beginning of not 1 but 2 technology infrastructure step changes happening, both with 5G and FTTP. And both of those create opportunities for network brands like ours to create new propositions, create new services, and ideally, drive revenue growth as well.
Great. Thank you, Marc. Can we get with -- over this side, please? Yes, please?
Yes. It's Jerry Dellis from Jefferies. I've got 2 questions, please. Firstly, related to your discussions with Ofcom on what would constitute a fiber fair bet, an adequate fair bet settlement that would permit you to push ahead with the 15 million target. In the course of those discussions, could you describe to us what your fallback position would be? So in other words, if they fail to give you the enablers that you think would be acceptable and that will permit the Board to push ahead, what's your negotiating position? What fallback position would the business adopt? And then the second question is on dividend. Clearly, when you reiterated the policy this morning, flat dividend for the year ahead, maintain or grow beyond that, that was based on very extensive due diligence on the businesses' prospects having come into BT. Could you perhaps tell us whether the decision to maintain the dividend policy was, therefore, a sort of a tight one? Is there stuff going on within Consumer or Enterprise that made this as sort of a close shave when it came to reiterating the dividend policy?
Sure. So again, 2 really good questions. Ofcom, I mean, it's -- what we're going through now is a consultation period and so they've set out some of their proposals and now the whole industry is responding to those. And through that process, we can see some of the things I referred to earlier. So -- and some will reveal themselves more as time goes by as Sharon, for example, speaks at various conferences and some of you guys as well, I think. So if you take the specifics of the fair bet, it's obviously absolutely crucial, right? And therefore, I'm encouraged by what I hear so far, which is there's a recognition that 15% IRR is a number that people feel comfortable with, a; b, that they feel that the FTTP business case is more risky than FTTC. And so you put those 2 things together and the fact you get the sense that you can be having 2 charge controls, i.e., 10 years, where you've got a full run of it, I think that sounds like a good place to be. Is it done yet? No. It's not like a negotiation in that regard because we can't influence everything, right? And therefore, it's an industry thing. So this applies to the indexation for copper and the switchover obviously is more important for BT than others. But this is important for the whole industry to get right so that people invest and are investing in a way which is fair but also allows people to get a fair return. What's the alternative is what you'll keep driving at. The alternative is one we don't want. I think -- what I said earlier about one of the motivations for coming here is I want to build a great fiber proposition for the U.K. economy because I think it needs it. If we can't find a way of doing it that makes sense for our shareholders, we won't. In which case, we are then in a different situation where we're saying well, we'll actually reduce our CapEx and we become cash-generative and we sit there generating more cash, or more likely, we do something else. And doing something else will probably involve a hybrid, a mixture of different things, waiting for other technologies to come through and it will be a sort of step-by-step, much slower activity. It will be okay. But it will be suboptimal and that's what I'm trying to avoid.On the dividend, again, look, what I'd say is simple answer is, no, it's not a tight one. And the decision by the Board was unanimous and no one recommended a dividend cut. I think the thing you should know is [Audio Gap] the shareholders. When we look at it, we got -- we can afford it easily, the balance sheet strength. The profile of the cash flow is, we think, is fine. And the key point is I feel as the incoming CEO, and I think Simon agrees, we are able to spend all the money that we need. We're not feeling like, "Oh, we need to spend more money." What we're signaling is if the things fall in the right way on FTTP, we will [Audio Gap] no, it's actually fun enough, a relatively straightforward decision for those reasons. Thank you.
Sorry. This is a question for Philip and probably Simon. If you're positioning the business now, in 2 years' time, it sounds like you're going to have a decision to make on fiber. From what I've heard today, not a lot is changing, telling me how BT is going to be positioned in 2 years to actually now accommodate a dramatic increase in fiber spend. So if I go back, why hasn't there been a more aggressive, for example, cost-cutting agenda? Because we talked about cost transformation. But if we look past the past 3 years and we look going forward, cost transformation is sort of rearranging numbers into different pockets, but cost actually not going down. So in reality, I'm worried about the fact that you might have a step change in 2 years' time. How do you avoid that step change in 2 years' time, given we're not actually changing very much now from what was announced last year and it's more a case of moving sideways rather than actually moving forwards.
Yes. Look, it's a fair point. I've tried to sort of highlight the challenge there. And by the way, the cost cutting is easy. I mean if we want to cut the costs, we can do that in the next year, but that would damage the business because the problem we've got is the reason we're inefficient is we got all these systems and processes. Now I joke about the spaghetti chart, but that's the truth. So the actual taking out of cost is just a decision to just remove heads and I said we're just not doing that. So the problem we've got is in order to be more productive and end with a more efficient cost base, which is what we both want in terms of ourselves and our shareholders and everybody else, we're going to have to do a lot of hard work to get those processes redone and then automate. So then by definition, the cost comes down. So I can understand sort of a level of disappointment on that front, but it's just sheer hard work to get it done and it will just take time. So that's the dilemma is we've got to invest in the way I described and we got to get the cost down, but we can only do it when we've done the work and the work in BT is extremely complicated.
Can I -- I'd also take exception with moving from one pocket to another, particularly for those people involved in this. We are taking significant action to drive productivity improvement and simplify our organization, huge amount of work by a lot of people and it's delivering genuine benefits. You saw our enterprise units were down on average 7% in terms of their operating costs. It's making a meaningful difference. But we have to be investing. We have to reinvest some of that into improved service and you saw pretty much every service metric was going in the right direction. And we have to invest in improved propositions for our customers. As Philip described, there is clearly further opportunity. The next phase of the opportunity described is getting at the heart of the complexity of the products and the processes and we will do it but we're going to do it in the right way and that will generate sustained benefits over time.
Yes? Thank you. Please, sir.
It's Andrew Beale from Arete Research. I just wanted to come back to the fiber -- FTTP investment and returns question. Obviously, getting a return on the GBP 300 or GBP 400 per home passed is a mixture of incremental revenue, sustainability, regulatory prices and longer-term savings as you retire the copper network. Can you just talk about the importance of the copper switchover approach in that equation? And if there's anything you are willing to share from the early days of the consultation from Openreach with the CPs, that would be interesting. And then second question, just on edge compute. I mean obviously I understand the potential there, but what is it that BT platform could offer customers that a scale player like an AWS couldn't do?
Okay, what I'll do is, let me just give you a couple of comments and ask Clive to talk on the first one. And maybe, Howard, do you want have a bit of a -- on the second? Look, the copper switchover point is actually crucial. I think that the combination of switchover from copper to fiber plus all-IP and we would do it exchange by exchange on the, call it, switchover is enormous, right? And it -- they all link. So by simplifying the estate in that regard and dealing with systems and process, you are just fundamentally changing the cost profile of the company. So it's hugely important. I'll let Clive comment on that. And while we're -- before I -- then you can pass the mic over.I think on edge compute, I think -- again, I was trying to send a signal to you that with all this change in technology, you're going to get more cloud, more edge, full stop. Everything is going -- more things are going to move out closer to the end user and end applications and devices. And I think BT is thinking very hard about what does that mean for us and how do we compete with those people who are coming from a different angle as it were. So I think we've got some good ideas on that and they're not fully formed. But we're working very hard on it. So I'll let -- Clive, do you want to make a comment? And then Howard, can you give some examples?
Yes. So 2 points on switchover, absolutely crucial. We can't have a copper network in the U.K., build a second all-fiber network and have the customers camp on the copper network for too long. There has to be an arrangement that says, "Once in a given area that fiber network is built, then we wait a certain time and then it's withdraw the copper products, okay?" So we must have that. The experience on full fiber we know about now. We have a 300,000 customers base on full fiber now. So we know it is cheaper to own and operate, both for us and the CPs and we know that the customer experience is way better. So it's not just about higher speeds, it's about consistency of speed and it's about a much lower fault rate for end customers. And as they use broadband evermore in their daily lives for life-critical stuff, they will value that more and more, right? So we must get to switchover. I think that has dawned on everybody, including the regulator, including the other CPs. And then on CPs, engagement is tremendously strong now on full fiber. So we are running field trips for the CPs to go inspect the network as we're building it. We now have a 1.2 million footprint. So it's sort of becoming very readily available for them to go see. They're beginning to understand why the way we are building it is a superior way of building it. It'll give fantastic customer experience and it gives longevity. The way we are building it will be highly future-proofed. So I think they're beginning to understand why the network we are building will be the best full fiber network in the U.K.
Howard and then maybe Joe, if you want to comment on some edge. Just give a few sort of top-level examples of how we're doing it.
Yes. I mean very quickly, I mean, we all see the trend where the amount of data requirements out at the edge of the network are continuing to increase. One option is to haul all that back into some central computer, process it and work out what to do. A better option though actually is to put some of that processing and storage capability out closer to the edge because then you get the latency benefit of being much closer to the customer. And if you just imagine thousands and thousands of CCTV cameras all producing petabytes of data, processing that data at the edge, looking for exceptions and feeding exceptions back is a much more effective way of doing that. And our opportunity here is that we have literally space, power and cooling next to where the edge of our network terminates in our 1,100 fiber exchanges. And increasingly, as we converge the core as Philip talked about, all of our mobile will terminate in the same places. So there's real strategic advantage that we have there and increasing use cases that we see to harness that capability.
Joe, do you want to add anything or...
Yes. The only thing I'd add to that is actually what we're seeing is customers who have seen what we've been doing on 5G coming up with their own ideas about where they want to use the technology and the convergence of what we have in 5G and fixed into their premises, especially in industrial space, but also in large corporate businesses seeing 5G being part of their office environment and they see the edge as being part of that solution. And the obvious place for that is to put that next to where you're transmitting. The closer you've got that to that, then the more reliability you will get. And we think we'll have a part to play in that.
Okay.
Can I just ask, are you willing to allow the Amazons and Googles into your edge?
Go on, Howard.
I think that's something that we spend quite a lot of time thinking about and isn't something we're going to comment on at this stage.
Okay. Sure. Yes, please, sir?
Yes. It's James Ratzer from New Street Research. Philip, welcome aboard too from me. Two questions, please, first one on Openreach. I think we kind of discussed it quite a lot today around FTTP. And if I think about your business plan, I mean, very simplistically, it's kind of a long-term profit in Openreach for a function of your mean capital employed and then the allowed rate of return you get from Ofcom. You've talked quite clearly today about wanting to get a 15% return on FTTP. You talk about it being a more risky investment. So I have 2 questions. One is if you can get the copper switchover, why is FTTP a more risky investment? So what's the catch? 15% return would clearly be very optimistic. Is there some catch around the mean capital employed? Do you expect some of that capital base has to be written off as copper is migrated? And then the second question, please, was as you've kind of reviewed the group around your use of capital, I mean, you've made it clear today that you see Openreach as a critical asset. You said you don't want to deploy more capital necessarily into sports rights. You may be open to freeing up capital in mobile towers. What's your thoughts within the group around Global Services? I mean, do you think that's a good use of group capital at the moment?
Okay. I'll do the second question on use of capital in Global Services. I think, Simon, do you want to do the main capital switch -- copper switchover?
Well, I think -- yes, the question, I think, was what's the risk profile of FTTP, particularly in the context of, for example, the FTTC rate we quoted with copper switchover. I mean there are a number of risks, significant risks associated with an investment in FTTP. These are the sorts of risks that we know how to take, know how to assess but we need to get them properly reflected in the return. Examples, we are entering a period where there are many companies that are contemplating and indeed getting on with building fiber infrastructure. As Clive described, we think we can do it as well or better than any. But there is uncertainty about the pace, the deployment, where they were build, how they will price.Secondly, don't forget, there's lots of competing technologies to provide connectivity. How will those technologies evolve over time? What parts of the geography will they be able to access? So there's a technology risk. And bear in mind, we have to think about that, not over a year or 2 or 3, but a decade or perhaps 2. There are uncertainties. There came a question from one of your colleagues earlier about willingness for customers to pay and the pace with which they will take up these services and the premium they will pay. As you all know, we're sure you've done modeling, the pace of takeup is critical in terms of returns, the pace. So there's a risk around that. There is a risk around the operating cost. We've got a pretty good handle, I think, on the towns and cities that we've been working on and actually in some of the deep rural through the BDUK work. But we've got a lot more of the country to cover and we will -- we have to take into account the risks around that. Finally, also do bear in mind this is a high operating leverage project because you're putting a lot of capital in with a relatively slow takeup. So the operating leverage is high. We're probably not going to allot a lot more time for you to continue with the risk of list -- a list of risks, but there's a good handle for some of them that are important.
Yes. And I'd reinforce, Simon, I think we've got, I think, sufficient evidence to point that FTTP is more risky than FTTC. FTTP versus FTTC. So look, on Global Services, look obviously it had a difficult challenging couple of years. I think its new strategy makes enormous sense, focusing on 800 multinational corporations. I think that the performance is good as you can see. Profit is up 17%. Is it the highest priority for the group? Of course not. The #1 priority is the U.K. domestic business. Of course, that's the case. But I think there's good things we can do. We've got lots of customers who are, particularly in the financial sector, really important to us and they bleed across the U.K. and across the world. So most of them are basically domesticated and they're sort of headquartered in the U.K. I guess the point about investment and use of capital, we will be putting lots of money in Global Services in security because security in Global Services plays a great competitive advantage and the rest of the company benefits from that. In Enterprise, to a certain degree today, and a little bit in Consumer. In the future, connected devices and the sheer scale of what we're dealing with, security is going to be even more important. And therefore, given we've got such a strong position on security, which sits in Global Services as the area of expertise, that's where a lot of the money is going. We will make sure that the Global Service proposition for those 800 customers works, but it's much more focused than it was before. And I think as you can see, one of the reasons they've done so well in terms of their profit delivery is they've done well on -- [ Bas ] has done extremely well in his transformation agenda as well. So it's not the highest priority, of course, but it's an important contributor to the group.
Just a very quick follow-up just on the capital employed point. Do you expect that to rise or fall in an FTTP versus copper world?
I mean, the -- we would expect, given if we're ramping up to the 15 million ambition in that sort of world, that's going to be deploying significant capital. We would expect our capital employed to increase pretty significantly over time which, combined with the 15% return, will help you understand the attractions of making that investment if the conditions are right.
Right. I've got in front of my screen, we're sort of coming to the closing time. So I've got a telephone question from James Britton at HSBC. I thought I'd try the technology.
Can you hear me okay?
We can hear you, James.
Great. So my question is on the emphasis on systems and process simplification and transformation. It's -- from my perspective of covering the industry, this area is pretty opaque to outside observers and fraught with risk. We have heard from Plusnet their issues recently. Vodafone had some quite material issues a few years ago. And you've also got experience in this area from your time at Worldpay. So does this mean shareholders have to accept a BT with increased operational risk in the near term? Perhaps also can you just comment on the sort of financial cost implications from pursuing this ambitious simplification? And I cannot help but use this football analogy. So are we going to be BT going three-nil down before we start to see the benefits and BT would claim the victory from the jaws of defeat?
Okay. We'll do the last one first. No. We're not three-nil down. You've raised a very good point. I know what you're driving at. So you are right that -- and that's why I made the point when I was speaking earlier that the whole idea of simplifying our systems and processes is a huge challenge. And of course, it is risky. What I -- and the reason I was so clear that it will take us a long period of time to do this properly is we're not in the game of building a brand-new thing going through a huge migration. That is -- would be suicidal in my view. So what we've got here is a rolling transformation program over many, many years, which simplifies processes, simplifies our systems, takes out legacy, attacks it wherever we can and begins to bring in automation and all the new technologies that we all know about in the right way at the right time, to do exactly what you're talking about, which is to manage that risk. So it's an acceptable risk and that we're not in any way putting at risk our core business in dealing with customers every single day.In terms of the cost, I just don't know. But again, to the point made earlier about my comments around the nature of returns, I think the cost will be very manageable in the context of the potential benefits. It just may take a long time and I'm just trying to be realistic about it.
I think the other think I'd say on the cost, Philip, is that typically these -- if we get it -- if managing the risk right, the payback in terms of the productivity improvement and the better customer experience, we can see that coming fast. We are investing quite significantly in, effectively, a legacy platform of processes and systems. And there is a real opportunity for us to manage that down over time to create the capacity for the investment in the new systems.
Yes. And James, that's a key point. Just to add on that is what will happen is we will make a lot of improvements over next few years. We'll then hopefully hit a tipping point which will coincide with all IP and all the other things we talked about today. And then suddenly, we'll hit the runway. And I agree completely with Simon that the returns should be great. You can see that already in some of the stuff that we've done in the transformation program that Simon described earlier on today and the progress we've made there.I think we've got time for one more question in the room, if anyone has. Yes, sir, please.
It's Nick Delfas from Redburn. Just following up on the cost point. Obviously, you're doing a lot of cost transformation. How should we think about the total FTEs? In the KPI sheet, they're showing a rise still. Should those start to decline in aggregate in FY '20 and FY '21? Or what kind of scale, net, should we expect?
Well, that sort of talks about the future. And in terms of those numbers, I think, hopefully, you recognize why that's the case. I think we said in the beginning, although we were making some reductions, we are front-loading the recruitment of the engineers, particularly in cloud. There are 6,000 new recruits. So that's why the numbers are likely off for now. Moving forward, off the KPIs, Simon, what do you want to say?
Yes. I mean I think that there are a number of things that are going on, Nick. Firstly, we are, as we described today, well on track for reducing the gross reductions of 13,000. We did -- we were pretty clear that we were reinvesting in a set of roles in engineers in Openreach but also in onshoring and in the security business. We also, I think, made it clear that, that was more front-loaded. So we've seen quite a lot of that activity this year, which has therefore masked the sort of 4,000. I would say that as we go into '20, we'll obviously expect to see continued delivery of the transformation program. There is a bit more of the recruitment still to go and to support the Openreach but we would expect to see that reduction start to show through in TLR. There is though, quite an important mover in this, which is that we are continually examining whether we will do better to have the labor internally as employees within BT and to reduce our subcontracting workforce. And we are actually seeing quite a significant reduction in subcontractors, which therefore boosts the TLR metric, the workforce metric you can see. But actually, if we look at our overall workforce, it's coming down. But if that does make a marked impact on the numbers during '20, rest assured, we'll explain what that dynamic has been.
Thank you very much. Well, listen, I think we've run out of time. Thank you all very much for attending, and thank you again for your questions and I look forward to seeing you again soon. Thank you.