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Hello, ladies and gentlemen, and welcome to BT's Q4 and Full Year Results Conference Call for the year-ended March 31, 2020. My name is Nigel. I'm your event coordinator for today. [Operator Instructions] I would like to advise all parties that this conference is being recorded. I'll now hand you over to Mark. Mark, please go ahead.
Thank you, Nigel, and welcome, everyone. My name is Mark Lidiard from the BT Investor Relations team. Presenting on today's call is Philip Jansen, Chief Executive; and Simon Lowth, Chief Financial Officer. Also on the call for Q&A are members of our Executive Committee. Before we start, I'd like to draw your attention to the usual 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. With that, I'll now hand over to Philip.
Thanks, Mark, and good morning, everyone. Thanks for joining today's call. Like all companies reporting in the midst of the U.K. lockdown, we do have a slightly unusual format today as everyone is joining remotely from multiple locations. As per normal, I'll be making some prepared comments as well Simon Lowth, our CFO. And as Mark said, for the Q&A session, I do have all members of my executive team on the line, so they can also provide you with any information or perspectives that you would like. So moving to Slide 4. We're also going to approach the presentation a little differently today. We plan to spend less time than normal on last year's results as they were overall in line with expectations and therefore, spend most of the time looking forward. Partly, this will be an update on how we are dealing with and thinking about the impact of COVID-19. But primarily, it will focus on some key drivers behind our investment proposition, revolving around the critical importance of converged connectivity, industry-leading efficiency and productivity and a strong balance sheet and liquidity position to support our near- and long-term strategic objectives. Now you know that we lead on network infrastructure in the U.K., focused on 4G leadership and a rapidly expanding 5G footprint, a smart converged core and leading on FTTP. We will retain the best converged network leadership position, but I will focus today on the rationale behind our decision to rapidly ramp up our FTTP build program to 20 million premises by the mid- to late-2020s, with average build cost across the entire footprint of between GBP 300 and GBP 400, with expected pretax nominal returns of 10% to 12%. Next, we want to deliver a differentiated customer experience. And although this isn't the focus of today's presentation, this also remains core to our success. Particularly driving to take up on converged product offerings such as Halo. And finally, we want and need a more efficient business. And we will update you on the completion of Phase 1 of our transformation and share with you our next phase that is a radical modernization and simplification of BT, a path to a simpler, leaner, more agile BT with a flexible modern core IT estate, an all-IP network, at least a 50% reduction in product variance and full automation for most major customer journeys. And crucially, a BT with a lower cost base, delivering GBP 2 billion of savings over the next 5 years. Finally, by putting all of these moving parts together, I hope it will provide a fuller picture and help explain why we have taken the very difficult decision to suspend the dividend until 2022, creating the capacity needed to undertake this value-enhancing major investment program and manage, with confidence, through the COVID-19 crisis. These decisions, particularly on the dividend, network investment and transformation are key to underpinning BT's investment case. It's driving network strength, it's driving competitive strength and it's driving financial strength, providing more clarity to the market and driving long-term value to our shareholders. I'm confident that these decisions that we've announced today will position us really positively for the future. In terms of highlights for the year, I think we have made positive progress in a number of areas. We have grown our converged and new product offerings. Halo now makes up around 30% of our consumer broadband base with good mobile attachment and 4G Assure still accounts for over 50% of our SME product sales. We launched our new flexible TV packages and a new enterprise managed wide area network service for U.K. businesses. In Global, we launched a new security advisory service practice marking another step in the ongoing expansion of our cybersecurity capabilities. We've made strong progress with customer experience, with the 15th consecutive quarter of NPS improvements and Ofcom complaints on the BT brand below the industry average for the second consecutive quarter. Our mobile network was again named Best Overall Network in the RootMetrics Biannual Awards and despite some of the wettest weather on record, Openreach achieved all of Ofcom's 42 quality of service levels for voice and broadband. We have made real progress on the all-important fairness agenda with out-of-contract notifications and maximum step-up in prices for those who are out of contract and ensuring that customers on a copper service pay less than those on fiber products. On our modernization agenda, Phase 1 of our transformation program is now complete, a year ahead of schedule, which has delivered GBP 1.6 billion of gross cost savings. We continue to streamline the business with sales completed or agreed for a number of noncore assets. And finally, we have made good progress on maintaining our strong leadership positions in fixed and mobile and on network build and deployment. Specifically, we are ahead of forecast on FTTP, passing more than 1.3 million homes last year, and we now have 80 5G towns and cities. So a positive year in many respects. But inevitably, our immediate priorities have now reorientated to help support the nation through these extremely challenging times. The crucial importance of connectivity has been thrown into sharp focus. And underlines not just a systemically important role BT plays in critical national infrastructure, but also how essential BT is to the daily lives of people, homes and businesses up and down the country but also all over the world. I will talk more about what each of the business is doing in a moment. But first, let's move on to the full year results on Slide 6. I'll just give you the headlines as Simon obviously will go into more detail later. Adjusted revenue for the full year was GBP 22.8 billion, down 3%, and adjusted EBITDA was also down 3% to GBP 7.9 billion. Reported CapEx of GBP 4 billion was up 5%, excluding BDUK grant funding deferral. And normalized free cash flow of GBP 2 billion was down 18% on last year. And finally, on the dividend. Despite a good performance last year, we are clearly being impacted by the current COVID-19 crisis. More crucially, as just mentioned, we also have a strong strategic intent for an accelerated FTTP build, a 5G expansion that will see us more than double our footprint by March 2021 and to fund BT's modernization program, coupled with a commitment to maintain at least a BBB credit rating. To create capacity for these and other value-accretive investments, we needed to look at whether the current distribution policy was appropriate going forward. In reviewing the dividend, we wanted to come up with a plan that ensured we had sufficient cash and liquidity for our investment needs and the COVID-19 impact that would provide clarity to the market and deliver a sustainable future dividend policy. Taking all of this into consideration, the Board has decided to suspend last year's final dividend and all dividends for this financial year, creating around GBP 2.5 billion of additional funding capacity compared to holding it flat. We expect to resume the dividend in 2021, 2022, and at an annual rate of 7.7p per share, being 50% of our most recent full year dividend. We will then continue with our progressive policy from this rebased level. A difficult decision but one that we feel is in the best long-term interest of our shareholders. Moving to Slide 7. We can see the CFU results in more detail. In consumer, revenue for the year declined due to known regulatory headwinds and a declining base of voice-only customers. Revenues from TV and sport continued to grow last year. EBITDA for the year declined due to regulation, the voice-based decline and investments in the fairness agenda. Fixed churn improved to 1.3% across the year due to improvements to customer experience and our new annual CPI pricing strategy. Mobile churn improved quarter-on-quarter to 1.1%. In Enterprise, revenue decreased 5% due to continued declines in traditional fixed voice and the impact from our divestments, partly offset by growth in wholesale mobile, WAN and Ethernet. Excluding the impact from divestments, revenue decreased just 2%. Operating costs were down 5%, helped by labor efficiencies. EBITDA decreased 3%, with our lower cost base, more than offset by the reductions in revenue. Excluding divestments, EBITDA was down just 1%. Consistent with our expectations, EBITDA did benefit by around GBP 15 million in the fourth quarter from a customer agreement but this was partly offset by a small trading impact from COVID-19. Despite the competitive market, enterprise delivered a strong order intake. The wholesale order intake increased 15% to GBP 1.2 billion, and the retail order intake increased 23% to GBP 3.6 billion, helped by a major government contract. Following the disposal of fleet and ticket, our remaining ventures businesses have now been reorganized from the start of April as we look to simplify enterprise and maximize the opportunities we see in the venture space. As a result, we will no longer report ventures separately and aim to publish a pro forma set of external KPIs later this quarter. In Global, revenue for the year was down 8%, reflecting a further reduction in our low-margin business, divestments and legacy portfolio declines partially offset by growth in security, and a GBP 13 million positive impact from foreign exchange movements. EBITDA for the year was up GBP 30 million or 5% as lower revenue was more than offset by a reduction in operating costs. Order intake for the year was GBP 4.3 billion. That's up 32% year-on-year with a strong quarter 4 that included a number of large renewals, including Lloyds Banking Group. We do expect a slowdown in order intake this year due to a reduction in renewals, combined with the impact of COVID-19. And finally, in Openreach, we saw 1% revenue growth driven by higher rental bases in fiber-enabled products, up 20%; and Ethernet, up 11%. This was offset by price reductions from volume discounts and regulation and higher service level guarantee payments. Operating costs at Openreach were 5% higher driven by higher business rates and higher salary costs. These drivers were partly offset by efficiency savings and certain one-off items, resulting in a 3% decline in EBITDA as the revenue growth was more than offset by higher operating costs. Before I talk about how COVID-19 is impacting our businesses, I would like to talk about the progress on FTTP and on the next phase of our transformation program. Starting with FTTP on Slide 8. This slide shows how we are progressing with the build. Last year, Openreach built FTTP for 1.3 million premises. That's up from the 600,000 the year before. We are building across the whole of the U.K. at a very high quality and at a very competitive cost. We exited this year passing around 32,000 premises per week, and that's 7% ahead of the 30,000 that we expected. We have shown that we have what it takes to build FTTP at pace and scale, and we are all ready to accelerate the build once we return to more normal conditions. Given this, we are today committing to a target of 20 million premises by the mid- to late-2020s, almost 2/3 of the U.K. and an increase from our previously stated ambition of 15 million. This will include a significant build in those parts of the U.K. that are the hardest to reach, known as Area 3. Once we are through the current phase of the COVID-19 crisis, we are going to accelerate as fast as possible and expect to pass at least 2 million premises this year. And get to our maximum capacity of 3 million premises per year as soon as possible after this. Our cost of bill to date has been lower than expected in cities, and we are confident that we can maintain this lower cost. But as you would expect, the cost of building in rural areas will be higher. However, when we put the 2 together, we have confidence we can achieve an average build cost across the entire 20 million premises of between GBP 300 to GBP 400. This really is market-leading and will be difficult for others to replicate. One of the most important sensitivities in the business case is household take-up. Openreach needs its customers, Sky, TalkTalk, Vodafone, BT Retail and many others to migrate their copper households to full fiber as quickly as possible. Over recent months, Openreach has been in discussions with all of its large customers. And whilst these are currently on pause due to the COVID-19 situation, we do expect to agree long-term offers that drive rapid migration from copper-based connections to FTTP. And finally, probably most important of all, the industry needs a package of enablers from the regulator to support a rapid build and ensure that BT and other players can earn a fair return on these very long-term investments. Ofcom's Wholesale Fixed Telecoms Market Review consultation document released in January was a significant step towards this aim. Since that time, our discussions with Ofcom, government and industry have been positive, and we are confident of seeing a package that supports investment in fiber networks, including by BT. But to be clear, to meet the GBP 20 million target, it is critical that we get the enablers as envisaged, and this includes extending the enablers across the whole of the U.K., being able to sign acceptable deals with customers, agreeing the details of the fair bet and understanding how government funding will be applied to rural areas, and finally, getting Cumulo rates relief. We believe that with the successful resolution of these last few issues, the industry will have reached a fair outcome for investors and particularly for BT shareholders. On this basis, we will continue to build as quickly as possible across the U.K. to meet our 20 million premises target. When we put all this together on the build, take-up and enablers and whilst recognizing that there are significant risks around execution, the project returns on a reasonable mid case basis we estimate to be at between 10% to 12% pretax nominal. The independent Openreach Board and indeed, the BT Group Board believe this to be a fair return for such a long-term infrastructure project. Moving to Slide 9. I'd now like to talk about the next phase of modernizing BT. Simon will talk to you about the great progress we have made on Phase 1 of transformation. But what I want to do now is talk about how we're going to modernize our business going forward. What we want to achieve is actually very simple, but it's very hard to do. We want to create market-leading experiences for our customers. We want to fully equip our people to service our customers, making it a great place to work for them, and we want to create a highly productive organization. To achieve this, we have to transform end-to-end across CFUs on what we call value streams. A value stream includes all of the activities necessary to provide a brilliant customer experience from the customer's perspective. So for SMEs, for example, the value stream would include everything from how a customer learns about a product, buys a product, use the product and get support and service for a product. The transformation will focus on 4 missions aimed at addressing the complexity that holds BT back. We will simplify our portfolio. Today, we have thousands of product variations that are often outdated and expensive to support. We will simplify and automate customer journeys to reduce manual intervention. We will move to modern IT architecture. And finally, we will migrate customers from our decades-old legacy networks to our modern FTTP and 5G networks. These 4 missions are common to our value streams, and I now want to talk to a bit more detail about these on the next few slides. Moving to Slide 10. The next stage of our journey is to rationalize and update our product portfolio. Our current portfolio includes the extensive use of legacy networks and is frankly, holding us back. Today, we have over 14 million customers on our PSTN network. Over the next 5 years, we will migrate all of these customers to IP voice that runs on modern broadband technology. This journey has already started. On mobile, we will continue to reform our spectrum from the older generations of technology to superior 4G and 5G. And we will close our older copper networks that offer speeds no greater than 8 megabits a second. These migrations will allow us to reduce our product variance by at least 50%, which in itself will massively reduce complexity. And once customers are migrated to the new networks and services, we can close the legacy networks, which is key to removing much of the legacy cost and remaining complexity. Looking at Slide 11, we also need to simplify and automate our processes. Our current processes are just too complex with multiple handoffs and high levels of manual intervention. Manual effort and rework negatively impacts productivity and the customer experience. To give you an example, to move a customer today from copper broadband to FTTC takes an average of around 16 days to complete. That's 16 days where we are disappointing the customer and delaying the onset of revenue. To shorten this period, we need to simplify the process and then digitize and automate the entire customer journey. Today, BT has just 1 such customer journey that really is 0 touch, fully automated and fully digitized, and that is ordering BT Sport. By the end of 2025, we expect to make the majority of our high-volume customer journeys fully automated and 0 touch with short or even instantaneous fulfillment times. And as I said on our quarter 3 results, underpinning all of this change is the transformation of our IT estate. Looking now at Slide 12. Whilst we currently have good stability and very high resilience, it is outdated and inflexible. Data can be difficult to access and exploit. And we have 58 system stacks that are tightly bound to particular products and networks. Our plans will see a total transformation with state-of-the-art component and modular solutions creating a flexible modern core IT estate. In parallel, we will rapidly develop a digital layer that will enable our business functions to develop new customer experiences without the need to change code in our core IT systems. The result, product time to market will drop massively with lead times as low as a day. Extensive adoption of AI and machine learning technology will support 0-touch processes. Our IT will be highly configurable and allow the digital teams in our businesses to make rapid changes themselves. And finally, we will have a much more productive and efficient IT operation fit for our digital future. These actions to modernize BT will have a huge impact on our business, significantly improving our sales effectiveness and lowering our operating costs. To reflect these efficiency gains, we are setting a target of annualized gross benefits from this program of GBP 1 billion by the end of March 2023 and GBP 2 billion by the end of March 2025. This is an ambitious program. But one that BT must complete to ensure that we become competitively placed for many decades to come. I would now like to move back to the customer-facing units and talk about what our teams are doing to support customers and essential services through the current crisis. Simon will cover the financial impact and the implications. What has become clearer than ever before is the strategic nature of our business and the critical role we play in keeping the nation connected. But we couldn't do this without all of our colleagues. So our #1 priority is to keep them as safe and protected as possible. As a result, where possible, all BT and Openreach colleagues who can do their role from home are doing so. This includes a large number of call center colleagues that we have set up to work from home. For those of our colleagues whose roles are critical to our ongoing operations, but who can't perform their roles from home, we have designated them as key workers, as outlined by the government. We are doing everything we can to protect colleagues and follow government advice. So for example, in our contact centers, we've massively increased cleaning and arranged for people to work at recommended safe distances. We also made a further pledge for our employees that commits to no job losses related to the COVID-19 crisis for 3 months, and supports a pay increase for all non-managerial workers. I want to offer a huge thank you and pay tribute to all our staff who have worked so tirelessly to keep our customers connected, safe and secure. There are so many stories of BT people going beyond the call of duty to deliver for our customers. And as the next few slides show, we have and are delivering vital connectivity to our customers and helping keep some of the country's critical infrastructure running smoothly. If I now look at what each of our business is doing, I'll start with consumer on Slide 14. We have removed all caps on home broadband plans, so every customer has unlimited data. In addition, all of our EE and BT Mobile customers can now access the NHS online without using any of their data in their plan, even if they run out of data completely. We've given unlimited mobile data to all NHS workers for 6 months. This is alongside the 20% NHS discount that's already available. BT Sport customers can get a bill credit for 2 months of BT Sport or ask us to donate that credit back to the NHS. While there isn't live sport, we will continue to offer bill credits. For vulnerable customers, we've launched a number of initiatives. For example, for vulnerable BT landline-only customers, we're removing out-of-bundle charges for the most critical services like U.K. landline and mobile calls. For the less tech savvy, we have teamed up with ITV for a series of top tips and guides to make the most of basic connectivity and online services. And for customers worried about their finances, we put in place a dedicated team to support those that need extra help with their bills. Moving to Slide 15 in enterprise. We have supported many businesses that have a greater number of people working from home. We've worked with our partners to introduce some special offers, free upgrades and discounted pricing across our voice and video conferencing, unified communications and web collaboration products to ensure the best remote working tools. We are providing enhanced monitoring capability for all critical services and prioritizing faults requests for changes and provisions. For the 999 service, where we answer all calls in the U.K., we initially saw a big step-up in traffic to levels normally only seen on New Year's Eve, with more people than normal off work. So we have been training additional people for the 999 service ensuring we have around the clock capability to call on and adjusting their leave pattern and shift working to maximize capacity. We supplied around 5,000 iPhones and iPads to the MOD as they had a mass scale move to home and remote working. We are helping keep the justice system working by providing more conference solutions and facilities for courts and tribunal services. We developed a secure remote access solution for doctors and healthcare workers so they can access patient records and information on the health and social care network. With help from our partners, and Guy's and St Thomas' and King's College Hospital, we have developed the Life Lines solution, a free service to provide video-enabled tablets to patients in all COVID-19 intensive care units across the U.K., so that patients can stay connected with family and friends. So we are doing many truly great things, but many of our customers are facing financial stress. For our enterprise customers in financial difficulty, as a result of the crisis, we have several mechanisms in place to support payment flexibility. For small businesses, in particular, who are struggling, they needn't worry about being automatically disconnected from their broadband, voice and mobile services. Moving to Slide 16. Global, in general, have been providing massive increase in capacity, tightened security and supporting more distributed home-working and virtual working support. To give you a few examples, we enabled 130,000 employees for 1 global customer to work remotely, quadrupling remote access capacity in record times across 170 countries. We've provided Lloyds Banking Group with remote access services for around 45,000 of its employees currently working from home. We sold 40,000 VPN connections in 1 week in Spain to facilitate home working. We're providing IT support for multiple public hospitals in Northern Italy. We've provided security solutions for dealing rooms now operating remotely. And we have rapidly delivered capacity upgrades across multiple industry sectors. And finally, on Slide 17, Openreach has been doing a truly great job, keeping the fixed access network running in the U.K., but this has meant that its focus has been on service and maintenance rather than sales and upgrades. Openreach has also been working with the NHS to ensure connectivity for all of the temporary NHS Nightingale hospitals. And in recent weeks, Openreach has declared MBORC, Matters Beyond Openreach Reasonable Control, for the first time ever at such scale and scope, giving it relief on its normal service level guarantees, reflecting that Openreach is unable to deliver to its normal high-quality standards. All of these actions will impact results this year. On that note, I will hand over to Simon to talk you through the financials in more detail.
Well, thank you, Philip, and good morning to everyone on the call. I'm going to summarize our financial performance for the full year, and our progress of our transformation programs before providing updates on our group's net debt and liquidity and on our pension position. Given the uncertainty created by COVID-19, we will not be providing an outlook statement today for this current fiscal year or beyond. This is not a decision that we've made lightly. The full impact on the group will depend on the duration of this unique crisis and how deeply it impacts the economy, both during the period of lockdown and as restrictions ease and people and businesses return to a new way of life. As a result, the range of potential outcomes is too large to provide a meaningful quantification today. We will continue to evaluate the potential impact as the situation develops further, and we hope that we can provide an outlook statement later in the year. Starting with our financial performance on Slide 19. Adjusted revenue for the full year was GBP 22.8 billion. That's down 3% and slightly below our guidance for a decline of circa 2%, and as revenue growth in Openreach was more than offset by declines in consumer, enterprise and global. Operating costs were down 3% as the cost savings that we generated through our transformation programs more than offset our investments in improving customer experience and in delivering our customer fairness agenda. Adjusted EBITDA for the full year was GBP 7.9 billion. That's down 3% and in line with our guidance for the year. Moving below EBITDA on Slide 20. Depreciation and amortization was GBP 4.3 billion. This includes, for the first full year lease depreciation of GBP 671 million, following our adoption of IFRS 16. Our adjusted net finance expense was GBP 757 million. This includes lease interest of GBP 140 million under IFRS 16. The adjusted tax charge was GBP 536 million, reflecting an effective tax rate of 19%. This resulted in adjusted profit after tax, GBP 2.3 billion. Specific items after tax of GBP 590 million included restructuring costs of GBP 322 million, and GBP 95 million of charges related to COVID-19, primarily from increased expected credit losses on trade receivables and contract assets. Reported profit after tax for the period was GBP 1.7 billion. Finally, our reported EPS was 17.5p per share, and our adjusted EPS was 23.5p per share. Moving on to cash flow on Slide 21. We delivered GBP 2 billion of normalized free cash flow in the year. That's down 18% and in line with our guidance for the full year. We paid cash tax and interest charges of GBP 1.4 billion and lease payments of GBP 651 million, partially offset by an inflow of GBP 204 million from working capital and other movements. We invested GBP 4.1 billion in cash capital expenditure in the year. That's up 12%. I'll provide more details on our CapEx investments shortly. Cash specific item costs totaled GBP 112 million, including restructuring payments of GBP 350 million, partially offset by an inflow of GBP 210 million from the disposal of BT Centre. Reported free cash flow was GBP 1.9 billion. That's up 2%. We made GBP 1.3 billion of payments into our pension schemes, resulting in free cash flow post pension deficit payments of negative GBP 547 million. Moving on to our major investment programs on Slide 22. Reported CapEx, excluding the BDUK clawback was up 5% at GBP 3.9 billion for the year. And this was driven primarily by investments in our Fiber Cities network build, in our 5G rollout and in Ethernet provisioning. This was at the top end of our guidance. Within this, we invested GBP 2.1 billion in our networks, excluding the BDUK clawback, that was up 4%. We invested GBP 972 million in customer connections, GBP 755 million in our systems and IT and the remaining GBP 163 million in our physical infrastructure. For this fiscal year, we expect that the COVID-19 lockdown period will partially restrict our ability to invest in some areas and dampen demand for new customer connections. However, these reductions will be largely offset by our plans to accelerate our FTTP build from 1.3 million premises passed in FY '20 for circa 2 million in FY '21. Turning to our transformation programs on Slide 23. As Philip highlighted, we've largely delivered Phase 1 of our transformation program, a full year ahead of schedule. We've achieved a gross savings run rate of GBP 1.6 billion per annum with a total cost to achieve of GBP 670 million incurred across 2 years of the program. The first phase of our transformation program is focused on organizational restructuring, targeted efficiency improvements and enhanced procurement. Looking at each of these in turn, we've significantly simplified our operating model and organization, delayering management structures, creating fewer, bigger, more accountable leadership roles, and in the process, we've removed about 9,000 roles from the business. We've driven process improvements and quick automation in customer service and engineering teams to raise efficiencies, we've invested in new cooling equipment in our exchanges to improve energy efficiency, and we've delivered some significant procurement savings, leveraging strategic sourcing strategies, optimizing specifications and rationalizing our vendor base from 18,000 suppliers to 14,000 today. We rolled the opportunities for further savings from these productivity initiatives into the next phase of our transformation. The growth role have reduction been offset by targeted investments in more colleagues in key strategic areas of the business. These colleagues are now delivering better service and building our FTTP network in Openreach, they're working on leading security propositions in global and they're driving a step change in customer experience, following the onshoring of our customer contact centers in consumer. In the next phase of our transformation, we'll move from unit specific productivity improvements to end-to-end process transformation. Our objective is, simply put, to modernize BT. We're going to simplify our product portfolio, simplify and automate customer journeys, move to a modern modular IT architecture and migrate customers from the decade-old legacy networks to modern FTTP and 5G networks. This program will deliver annualized gross cost savings of GBP 1 billion per annum by the end of March 23, realized in broadly equal annual increments, and increasing to GBP 2 billion per annum by the end of March 25. The savings will comprise reductions in both total labor costs and our spend with external suppliers. We expect that around 80% of the savings will be realized in OpEx and the remainder in CapEx. The one-off costs to achieve these savings will be about GBP 1.3 billion in total across the 5 years of the program of which GBP 900 million will be invested in the first 3 years, including around GBP 400 million this fiscal year. We will also dedicate a significant proportion of our systems and IT CapEx to development of the new flexible modern IT estate. It's going to underpin the product and process transformation. In addition to delivering significant cost savings, the program will create a lean, agile business with materially improved customer experience, faster time to market for new propositions and, of course, more productive colleagues across BT. Alongside launching this next phase of fundamental transformation, we are also taking short-term actions to challenge every element of our cost base to reduce discretionary costs to mitigate the financial impacts of COVID-19. For example, we've flexed down third-party resourcing from subcontractors and outsourced partners, leveraging our own workforce wherever possible. We've canceled and delayed planned recruitment across BT. We've launched a process to partner with our major suppliers to deliver significant and sustainable cost reductions along the supply chain. We focused and rephased our marketing spend. And of course, we've reduced the discretionary spend for the whole of FY '21 on travel, training and external fees. And finally, we continue to progress targeted disposals so that we can focus on our core business, delivering converged connectivity and services. In the fourth quarter, we agreed the sale of selected domestic operations and infrastructure in 16 countries in Latin America. And this followed our agreement to sell our Spanish and managed ICT services business earlier in the year. We expect to complete the transaction this fiscal year with the corresponding impact on revenue and EBITDA. We also entered exclusive negotiations on the sale of our domestic operations in France in the fourth quarter. These regional business divestments are in addition to the sale of ticket, which we announced in the fourth quarter and the sale of BT Fleet Solutions, which completed earlier in the last fiscal year. Moving on to net debt and liquidity on Slide 24, our prudent financial approach has positioned us well for this period of uncertainty. We typically raise funds 18 months in advance of requirements, and at year-end we had cash from current investments of GBP 6.6 billion and an undrawn committed credit facility of GBP 2.1 billion. In March 2020, we renewed this facility, which now matures in March 2025. Furthermore, the majority of our debt is long-dated with only term debt of GBP 1.3 billion and pension deficit repair payments of GBP 900 million due this fiscal year. We have no short-term need to access the capital markets. We ended the year with financial net debt of GBP 11.3 billion. That's up GBP 0.5 billion, primarily reflecting the GBP 1.3 billion paid into our pension schemes and dividend payments of GBP 1.5 billion, partially offset by normalized free cash flow of GBP 2 billion. In January of this year, we issued our inaugural hybrid bond of GBP 0.4 billion, and we are encouraged by the strong investor demand. Hybrid bonds support our prudent financial policy by providing more headroom under our current credit ratings. We've reviewed our funding strategy given the current trading and capital market uncertainties. We remain fully committed to our medium-term credit rating target of BBB+ and to our minimum rating of BBB. Maintaining our BBB+ target rating with a BBB floor, we're ensuring financial strength and flexibility and an optimized cost of capital. We're providing our customers with full confidence in our long-term ability to provide them with their critical services. And we're demonstrating the strength of our covenant to the BT pension scheme. The dividend decision that we've announced today reinforces our financial strength and ensures that we've got the funding capacity to drive value-creating investments in our networks, products and transformation while navigating with confidence through the COVID-19 uncertainties. Turning to the pension position on Slide 25. At the 31st of March 2020, the IAS 19 deficit was GBP 1 billion, net of tax. That's down GBP 5 billion since 31st of March 2019. The decrease in the deficit reflects an increase in the real discount rate, deficit contributions over the period and positive asset returns. Now as I've said previously, the IAS 19 valuation provides useful insight into the value of the pension deficit but it is different in several ways from the triennial actuarial valuation used to determine future cash contributions. Of significance, given recent market movements, the 2 valuation methodologies apply different discount rates to the future cash flows in order to calculate the present value of scheme liabilities. Whilst the IAS 19 valuation uses a discount rate based on corporate bonds, the actuarial valuation uses a prudent discount rate based on gilts and swaps. And due to COVID-19, we saw a significant expansion in credit spreads in the fourth quarter, which reduced our IAS 19 valuation as at the 31st of March 2020 without a corresponding reduction in our actuarial valuation. I should also note that our estimated IAS 19 deficit will have materially worsened since 31st of March, principally reflecting a subsequent fall in credit spreads. Soon to be approaching the 30th of June 2020, triannual actuarial valuation date. During negotiations with the BT Pension Scheme trustee, we'll discuss a number of topics, including the size of the actuarial deficit and the level of cash contributions to be made, ready to complete these negotiations in the first half of the next calendar year. And clearly not be appropriate to speculate on the outcome of this process, but there are 2 recent developments in the pensions universe, which will have an impact on the valuation of the deficit and on the recovery plan. Firstly, the U.K. Statistics Authority and HM Treasury are jointly consulting on the future of the RPI inflation measure with a view to aligning RPI with CPIH. Now without any mitigating steps, this change would reduce the value of the RPI-linked pension liabilities. However, the value of the scheme's RPI-linked assets would also be negatively impacted and the result will be a net increase in the pension deficit and the earlier than any reforms carried out created the impact on the deficit. Secondly, pensions regulators currently consulting on a new statutory funding regime. Whilst any new rules are not due to take effect until late in 2021, by which time, the net actuarial valuation would have concluded. Expectations of the new regime will likely feature in upcoming discussions with the trustee. We are currently considering our responses to both of these consultations. So turning finally to Slide 26 and our expectations for the future. I should start by saying that without the impact of COVID-19, we have confirmed our prior expectations for this financial year. However, COVID-19 will have an impact on our business. The full impact on the group will depend on the duration of this unique crisis and how deeply it impacts the economy, with a range of potential outcomes that are too large to provide a meaningful quantification today. Nevertheless, I would like to highlight the areas most impacted by COVID-19 already and our expectations for the future. In the last financial year, as I said earlier, we recognized GBP 95 million of COVID-19-related impacts as specific charges, primarily related to an increase in our expected credit loss provisions against trade receivables and contract assets, and that was mainly in our enterprise units. This fiscal year and beyond, we expect the primary trading impact in 5 areas. First, we're seeing lower revenues from our BT Sport propositions in consumer due to the impact of customer credits, pubs and clubs closures and reduced advertising revenues. We will continue to offer bill credits while there isn't live sport. Second, we expect an impact from sharply reduced business activity and rising insolvencies, specifically amongst the SME segment, served by our enterprise unit and, to a lesser extent, by our global unit. Third, we're seeing an adverse impact on Openreach trading. While we anticipate lower churn, we expect reductions in the volume of broadband and Ethernet upgrades and provisioning due to reduced business activity, including fewer new site builds, and restrictions on provisioning activity under current stay-at-home guidelines. Fourth, retail trading is being adversely affected in our consumer unit and the volume end of our enterprise unit with fewer sales and upgrades across fixed and mobile products, partly offset by lower churn. In addition, we're seeing lower mobile roaming volumes. And finally, we are seeing a reduction in spending and a more cautious approach from our multinational business customers, resulting in cancellations and delays to purchasing cycles, impacting trading in our Global unit. Of these, we expect the vast majority of the financial impact derived from the first 3, so lower revenue from the impacts of our BT Sport propositions, the SME segment and Openreach trading. So these impacts were evident during April, when, for example, a significant number of BT Sport customers took a bill credit or donated their credit to the NHS, and consumer sales were directly affected by the closure of its retail stores to the public, partly offset by a significant increase in sales through digital channels. In Enterprise, mobile net sales to SMEs were down by half our normal levels, albeit partly offset by lower churn. And Openreach saw 50% fewer fiber broadband orders during the first few weeks of the lockdown with orders increasing steadily since but still 30% lower than pre-lockdown levels. Openreach has also seen a 20% reduction in demand for Ethernet. As I stressed earlier, we are clearly taking short-term action to reduce discretionary costs and mitigate the financial impacts of COVID-19. So to conclude, we delivered results for the year in line with our guidance and completed the first phase of transformation 1 year early. While we're not providing an outlook statement today due to the uncertainty created by COVID-19, we hope to be able to provide one later in the year. Despite this uncertainty, the dividend decision that we've announced today, combined with our short-term COVID-19 mitigating actions and the next phase of our ambitious modernization program, gives us the financial strength to drive value-creating investments in our networks and products and to move rapidly to respond to evolving customer demands as we emerge from this crisis. And with that, I'll now hand back to Philip.
Thank you, Simon. So to summarize on Slide 27. We have delivered full year results in line with our expectations and have a positive year on many fronts, from products to service and on our 5G and FTTP build programs. We have revised our distribution policy to create capacity for our value-enhancing investments to phase into COVID-19 and to provide clarity on our future intentions for investors. We are accelerating our FTTP build, and if, as expected, we get those critical enablers, can pass 20 million premises by the mid- to late 2020s. We are launching the next phase of our transformation to modernize BT, delivering GBP 1 billion of annualized gross benefits over the next 3 years and GBP 2 billion over 5 years. And finally, we are delivering vital support to the nation during the current COVID-19 crisis. The executive team believe these decisions position BT really positively for the future. And I am confident we will generate considerable long-term value for our shareholders. As ever, thanks very much for engaging with us today. We will now open up to questions. And as usual, I'd like to cover as many as possible. So please would you be kind enough to limit your questions to one each and Simon and the team will do our very best to answer them as quickly as we possibly can. So Nigel, can we open up the lines, please, for questions?
[Operator Instructions] Philip, the first question is from Akhil Dattani from JPMorgan.
I guess the question for me is around the dividend. You've outlined quite clearly the impacts around your acceleration in fiber build. But I guess, I'm just trying understand the broader dynamics and thought process on the dividend. So I guess two parts to it. Firstly, how have you thought within the framework of what you've done around not just free cash flow but also the gross profit of the group leverage? What is the overall framework you view as beyond just the CapEx issue in itself? And then I guess more broadly, when you resume to paying a dividend, the new dividend is about half the current level. What has been the thinking about the right way to structure BT long-term payout ratio into the mid-term? Because clearly, the payout ratio based on broadly where consensus is modeling free cash flow at in the mid-term would seem low. How is that thought process run, please?
Yes, sure. Akhil, thanks so much for your question, obviously a really important topic. What I'll do is I'll give you a couple of comments, then Simon can add his perspective as well. I mean you sort of answered your question in the way you phrased it. When we've looked at the dividend, we've looked at it in the round. And the Board considered it extremely carefully, obviously. And what we did is we've developed a sort of 5-year plan, and we set out the main elements of that today and other elements you're well aware of. So the big investments in FTTP, the big investment in transformation and modernizing BT, combined with our originally and previously outlined aspirations on 5G and all the things that we're doing in our CFUs, in Global, in Enterprise and in Consumer, in addition to what we just announced on Openreach today, gives you sort of a sort of 5-year view of how the businesses are going to develop going forward. And then in order to think through how one can afford to invest -- and the theme today clearly is investment, right? This is investment for the future, for the long-term benefit of our customers and our shareholders. So we take it in the round. And the overall framework was all of the businesses connected together for the BT Group and how we saw that playing out over the next 5 years. And I guess the key point is clearly we've got a lot of legacy systems and processes but also networks, and the copper is the best example of that. This is the day we're saying that we're moving away from that. And there are huge value-creating levers, not just on the revenue line within Openreach and other places but also on the cost line as we move to an all-IP world and a full fiber world and a 5G world. So that's where we are. And again, in terms of resuming the dividend, I think we articulated our plan going forward. It is targeting the 7.7p that I mentioned earlier on. And we think looking forward across 5 years as much as anyone can forecast 5 years out, we've got very, very strong plans that the executive team has spent the best part of the year working through. We've got a sort of vision for the future of BT. And we think that payout ratio and that profile that we've described to you today is appropriate, given what we know today. Simon, do you want to add anything to that?
No, Philip. I think you've caught the key points, absolutely. I mean we started by looking at the investment, the value-creating investments that we intend to make to drive long-term value in the business in our networks and in transformation. And we wanted to ensure that we have the financial capacity to fund that value-creating investment. Second, we needed to be confident in retaining our target credit metrics. That's very important for a business such as ours with a pension fund and with long-term investments to support. And we wanted to have the confidence that we could navigate through the uncertainties of COVID-19. And that led us to the dividend decision that we'd arrived at today in the 7.7p and reinstating, driven from a cash and a balance sheet perspective. Your comment on payout on earnings, you're right that it might look a lower payout in the out-years. But do remember that we are currently investing significantly ahead of our depreciation. And so earnings payout will reflect that. But clearly, with our progressive dividend policy over time, as we complete that investment and start driving the cash return from that investment, it creates capacity for dividend into the future.
Philip, sorry, can I just ask one very quick follow-up, which you just -- I think in the past, on the pension, the view was that's more of a debt issue rather than a dividend issue because you don't see the cash flow item. I just wondered if that's changed at all in the broader thinking that you've been putting through on the dividend.
No, not really.
And Philip, it has a key point though, and we've always said this, there are 2 aspects to the pension. The first is that the absolute size of the deficit impacts our credit metrics, whether it's Moody's or S&P. And we have to ensure balance sheet strength, taking account of future uncertainty in the value of the deficit. However, if we're operating with overall leverage, pension plus debt, within our credit metrics, then we will continue to use increased financial debt to fund the pension debt. But those 2 are separate issues. I hope that helps.
The next question is from Carl Murdock-Smith from Berenberg.
I'd just like to ask about your ability to actually spend CapEx during the lockdowns, obviously with Openreach absences at around 20%. Firstly, are you still seeing those kind of absences? And secondly, what conditions will you look for before you start sending engineers back into customer premises? And over what time frame do you currently think that might happen?
Yes. Carl, I'll get -- Clive can have -- give you an update on that. I think, Carl, the overall answer is you're right. Of course, we've been restricted on getting into customer premises and connecting new customers. That's obvious. And it's been the most severe over the recent weeks for all the obvious reasons. I think we feel confident that things are going to change or we all know things are going to be eased. And actually, we've got a number of approaches that Clive can tell you about working with government to how we can start mobilizing again. So again, in our planning, we have a number of different scenarios, which again Simon would have referred to in the sort of the COVID-19 management. So let me let Clive just give you the specifics on what we do in Openreach. But it sort of applies elsewhere as well how we mobilize coming out of the lockdown. Clive?
Thanks, Philip. Thanks, Carl. So Carl, you're right, absences in the early days of lockdown were at around the 20% level. That has improved and improved very significantly now. So we have much lower absences now both amongst our own people but also amongst our subcontractor teams. The fact that trading is down through lockdown means that there's less CapEx being spent because provisioning is capitalized in the main and there is a slight hit on network build, as Philip alluded to during his introductory session. So we are spending slightly less CapEx on build this quarter. But it's not going to be a huge hit on builds. There will be a modest hit on builds. And what we're doing there, Carl, is rephasing. So we have a completely -- we've had 2 plans in a month. There was the original plan, the build to get to the GBP 2 million number that was sanctioned by Philip. And there is now a revised plan, which still hits the GBP 2 million build, but it's slightly rephased, so a little bit softer in Q1 and then real acceleration from Q2 onward as we come out of the COVID lockdown. We are expecting our engineers to go back into premises, both residential premises and more business premises. And the approach we're taking on that is safety first. We're concerned for the safety of our engineers and we're concerned for the safety of our customers. So when they go back, they are likely to be using protective equipment. We're working on the definition of that with Dr. Richard Caddis, the company's Chief Medical Officer, and we've also innovated new provisioning processes, which mean that when we're back in the home, we're in the home for significantly less time, so it reduces the risk through reducing the time in the premise. So I hope that answers your question.
Yes. Clive -- Carl, let me add one thing because other people may be interested in this as well. So I think the way Clive is describing is true for most of BT in that it was very, very acute when we had massive demand and reduced workforce availability. That's all got to a new normal. Now we see things coming out on this easing of lockdown. Assuming there's no second peak, for example, and that we can see a steady improvement and economic activity reemerging, we feel very comfortable the outside activity of building and repairing and managing the network that Clive referred to will be fine. We'll get our way through that. We know how to do that already. It's getting people back into homes and into offices, that's the challenge for us. We don't particularly need the offices that much. But we do, as Clive says, we need to make sure we can get back in the homes to start connecting people to the plan that we've got for the full year. So does that make sense, Carl?
No, that's great.
The next question is from Nick Lyall from SocGen.
I think before, Philip, you talked about your 15% return on fiber just similar to fiber to the cabinet at least. And that is being fair. Now the expectation on return seems to have fallen to 10% to 12% despite, I think, you mentioned a similar build cost even in the final 1/3. So could you just say why the change, please? And why do you feel you need to be a bit more precise now?
Yes, Nick. Well, actually -- yes, thank you very much for the question. It's absolutely crucial, right? So I think that what I'd say is we've called it a mid-case. So I think what we can see is, inevitably, this is a huge program. There are risks associated with that, as you can imagine. So in terms of as we build the cost profile, although we're very, very happy with where we're landing, we've still got to deliver that for 20 million homes. And we're saying it's going to be between GBP 300 and GBP 400. Given the balanced build in rural and elsewhere, it's probably going to be the higher end of that, I'd probably say, right? But who knows exactly? Clive will do his very, very best on that front. So what we're saying is mid-case, is 10% to 12%. Of course, I want to do a bit better than that. And it depends on a number of factors, right? It depends on how quickly the cost for one level, how quickly we migrate, what the pricing is, how quickly our CPs move people onto the new FTTP and away from copper. You're absolutely right to point to the 15%. I think what we're saying here is that has been the water -- the high-water mark that the regulator used for FTTC to demonstrate that they would be happy up to that level before they were to get involved. So again, I think what we're saying is that 15% is entirely appropriate for FTTP. And all the indications I've got from Ofcom is that planning assumption is reasonable. But going into the build and the execution and the delivery, we've got a mid-case that's in the 10% to 12% range, which we think is an acceptable return for this kind of long-term infrastructure project. If we do a superb job and our CPs do a superb job and get migration going really, really quickly, which is good for everybody, we might nudge that up a little bit. But it's never going to be above the 15%.
The next question is from John Karidis from Numis Securities.
I'm trying to figure out whether BT, now that it isn't a yield stock, whether it's actually a growth stock. And I'm sorry, the sort of 10% to 12% mid-case and whatever gross benefits you think you'll get from your transformation program doesn't really help me figure out what the free cash flow is going to be in your mid-case 5-year plan. So rather than respectfully yet again giving us just warm words, is it possible, please, to get -- be more explicit about what the EBITDA and the free cash flow estimates are in this mid-case 5-year plan? I mean if BT and the Board doesn't have confidence to give any guidance for fiscal '21, how are we on the outside trying -- expected to figure out what the progression is going to be over 5 years?
John, thank you very much for the question, appreciate it. John, I understand where you're coming from. It's very, very difficult to, at this moment in time, give an outlook or our guidance for the next 12 months, given the environment we're in, okay? There's a lot of uncertainty, there's a wide fan of outcomes. What we're saying today is with a load of decisions we've announced, real clarity on our investment plans going forward, all of which I think make economic sense, I think you can see an investment case for why BT is an attractive proposition for shareholders. I mean you'll have to work out for yourself how you think it's going to play out in terms of some of those inputs and what will exactly happen over the next 5 years. But I think the investment case and the clarity we've provided today is pretty compelling. And I think most commentators should be able to calculate that there's a decent return to be had going forward if we deliver along the lines we talked about. If we deliver that kind of return on FTTP, we continue to drive our business forward using 5G. We launched a modernization and transformation program, generating GBP 2 billion of gross cost savings. I think all those things are good. Is everything else certain? Is there absolute certainty going forward? Of course, there isn't. But I think those elements are very, very compelling.
Philip, how can you say that, given that the share price is at half the level you bought -- you and Simon bought the stock a few months ago? How can you say that the market recognizes that this is a compelling investment, given what the share price is doing?
I didn't say that. I said I feel today what we've announced is a very, very strong story in terms of investment for the long term. And our shareholders, I think, over time, we'll see that, that investment case is very, very attractive. And I believe that. And that's why we've laid out our plan today.
The next question is from Charlotte Perfect from Arete Research.
I suppose just on the returns point, I have a question around long-term copper switchover savings. And I understand it's too early to quantify that. I think previously, we said that the fault rates on fiber are around half the fault rates on copper, which may suggest sort of half maintenance cost. But just thinking through long-term copper switchover, what would the areas of savings be in a long-term copper switchover scenario? And would you say that those could nudge you up towards the 15% returns rate? And also, would you see those as included in your new cost savings programs or those could be incremental and longer term to that?
Charlotte, great question. I'm going to ask Clive to comment on the specifics in a minute but also ask Howard to answer the question in a slightly broader fashion. Because the answer to your question is, yes, you're dead right. Of course, moving to copper and fiber has a whole host of benefits, right, not just in terms of the customer experience but in terms of cost savings. So for example, we've got 5,500 exchanges. When we get to a full fiber estate, all-IP estate, we can reduce that dramatically to sort of 1,500 or something so that takes out cost. The fault rate point is important, you're right. And Clive will give you the specific numbers on that. The reason I think we'd expand a little bit is, yes, it's in the savings because it's all connected. So the taking-out activity, fault rate as a classic example and using new systems and new IT and new networks and standing down all our legacy networks and systems is the way -- is the path to these value-accretive cost savings that I'm referring to. So Clive, do you want to just make a little comment on fiber versus copper and how you see those savings coming through in your business plan? And maybe, Howard, if you could just give a slightly broader perspective on what we're doing on taking out complexity in this GBP 2 billion cost saving program? A lot of it is driven by using technology in a way that drives out our cost and drives that inefficiency and makes BT a leaner, simpler engine for growth. Clive, do you want to go first?
Yes, sure. Let me just talk to 5 points really quickly, right? So firstly, the fault rate is lower. And yes, the evidence to date is about 50%. But it's not just the fault rate, it's the variability of fault rate. So we had a really tough time in Q4 with the weather, a series of massive storms, very high rainfall. And we have to staff to deliver good service with -- even in the face of this variable weather position that we have being in the U.K. at the edge of a rather large pond, right? So it's not fault rate, it's fault variability. And what we saw in Q4 was almost no movement in the FTTP fault rate with very bad weather. And that will allow us to staff much more predictably and at a lower cost. Second point is when we switch over customers from copper to fiber, we open up the possibility of selling them higher-speed services that have a higher value and the CPs in turn can sell a broader range of products because the speed and the latency of the fiber infrastructure support that bigger, better range of products. Third point is recovery of the copper. The copper has a value. We can recover it. Fourth point is that we think we will have around about 1,000 fiber headends, so 1,000 buildings containing the headend infrastructure for a full fiber deployment. Today, we, as it were, own, operate, staff 5,500 buildings. And finally, big fiber deployment will allow us to race at the job of closing the PSTN, moving to voice over IP. And again, we get to close expensive legacy infrastructure that consumes vast amounts of maintenance labor and a lot of electricity actually, very expensive to run just in energy terms. Over to you, Howard.
Yes. Let me just pick up on where you left off there, Clive. So Charlotte, I mean, you're quite familiar with a lot of this. But underpinning that PSTN network, the 14 million lines that we spoke about earlier, we've also today got a separate SDH/PDH core and also riding over that is the old digital private circuit network, the MegaStream and KiloStream network and the first generation of copper broadband. So part of the migration program here and moving off these legacy networks is to shut each of those down. As Clive says, that delivers significant savings in his organization but also in my organization. And the scale of the energy saving is about 50% of our total energy bill, so quite significant. And it opens up that road to get from our 5,500 exchange buildings down to nearer to 1,000. Similarly, on mobile, we're very focused on 4G, 5G. So we'll, over time, start to migrate customers solely to those 2 technologies. And then if I move to the IT area, and we talked here about the broader transformation program being about reducing our portfolio, improving our processes and completely modernizing our IT. You can see we've talked about 58 stacks and significantly reducing those. That also includes a significant move to cloud and using more cloud-native capabilities, both for the cost savings that they deliver in the IT organization but also in terms of the agility that it provides to the business. We are right now within the middle of launching our new ways of working. So we are standing up 14 tribes across the business in the value streams that we saw earlier, training all our people to those new ways of working. And those new ways of working, combined with the significant simplification that we'll deliver through IT and through process, underpins a significant amount of the GBP 1 billion and the GBP 2 billion that we've talked about. And then I think the final area I'd cover is we have started the process of getting some real effective automation into the business. But the more we look at that, whether through robotics or through AI and machine learning, there is significantly more to do there. And then particularly, getting sort of 0 touch into our happy path for customers in normal process, but equally important, when a customer falls out of the standard process, really ensuring that's efficient and effective because today, that's where a lot of the cost builds up as customers go through those processes. And all of that will be transformed as part of this program.
The next question is from Michael Bishop from Goldman Sachs.
Can I just follow up on the couple of CapEx questions? Because, look, I think it's really helpful and really clear the trajectory you've given on the build rate ramping up from the 1.3% to 2% to 3% and very clear on the GBP 300 to GBP 400. And a lot of the focus always ends up on that part of the CapEx budget. But in essence, there's another GBP 3 billion of the existing CapEx spend of GBP 3.9 billion, which it'd just be great to get your discussion on the puts and takes within that existing EUR 3 billion going forward.And then the second part of the question is whether you've got any updated thoughts on the cost of connection and potentially how that ramps up over the next couple of years in your take-up scenarios. Because I think what I'm trying to get to is if we set aside the COVID impacts, where could we potentially think about the group CapEx going to in a more normalized year once you're at the GBP 3 million build, so FY '22, FY '23?
Yes. Okay. Great questions, Michael. I'll let Simon give you just sort of -- there's a lot of moving parts in the CapEx. You're absolutely right. And it's not just an incremental number on a nonmoving core of 3. So you're absolutely right. Simon can give you a perspective on how we think about that in a minute. On the cost of connection, again you're on the money there. That is one number which is a bit higher than we would like. And obviously, as we -- depending on how much we build in the rural areas, by definition, that provisioning cost is going to be higher. So now that needs a bit of work. It's probably higher than the number that's been previously articulated, but we plan to get that down over the next -- and Clive's got a very clear plan to do that, testing lots of different methods to deliver. And that's an example of the sort of some of the risks associated with this plan. But we think we're very confident we can land it in the right place. And the cost of connection is a variable and it is one of those things that does vary, by definition, urban versus rural in a way that we need to get our mind around and Clive is working hard on. I'll let Simon comment. If you want to make a comment on the connection costs as well and give a bit more help on that, feel free, Simon. And if you want to, Simon, just give the -- how you think about the GBP 3 billion non-FTTP spend, if you like.
Sure. Well, actually, let me start with the overall shape of the CapEx plan moving forward. Starting with this year, we guided to about GBP 3.9 billion of CapEx. Within that CapEx, we'd set out that there's something like GBP 1 billion worth of customer connections. And those are Ethernet connections in Openreach, which saw strong growth last year. It also includes broadband provisioning and connections in Openreach and it includes connections for our major customers in our Enterprise units. Over time, clearly, the copper-based network broadband connections will get replaced by fiber, FTTP connections. But overall, we'd expect that level of customer connections at about GBP 1 billion. Much of that is an obligation upon us. Our main lever to address that is through efficiency. And clearly, as we move into a heavy mix of FTTP provisioning, that number is going to rise because it's a more expensive connection, and there'll be more of them for a sustained period. The other element of spend, about GBP 750 million we spent in fiscal '20 on systems and IT. And I'm sure you'll have gathered from the prior question that, that level of spend, if anything, is going to nudge up, given the opportunity we've got to transform productivity across BT through investment in a modern IT architecture. The remaining spend of about GBP 150 million on our physical infrastructure, that's clearly one we will challenge and examine all the time. But it's mainly going into energy efficiency cooling, more energy-efficient vehicles and our Better Workplace Programme. So there's not a lot of flex other than through efficiency there. On the network spend, across fixed, mobile and our core network, mobile, we intend to continue to sustain rollout of 5G and maintain leadership. And that's not an area of spend we're going to compromise on. And in addition, as we've proven through COVID-19, the investment we make in our integrated core and the proactive capacity in that serves us extremely well, and we will maintain that policy, which then gets to the fixed access piece. And there, obviously, we're significantly scaling up our FTTP from 1.3 million to 2 million and then peaking up at 3 million, and you'll have done your own calculations on sort of step-up of FTTP spend. That will be partially mitigated by the reduction -- the natural reduction in our spend in our copper network, both fault but also VDSL capacity. That will trend downwards over this period but will be way more than offset, obviously, by the step-up in FTTP. And it's that step-up in FTTP above and beyond the current GBP 3.9 billion. So it's the delta between the FTTP rising to 3 million minus some mitigation in the VDSL. That is what we've taken into account as we've looked at the dividend decision. So those are the moving parts. Clive, do you want to talk about the work you're doing on FTTP connection and how you see that developing?
Yes, Simon. And thank you for the question, Michael. So I would start by saying what we've got right now is very extensive experience on the build, Michael. So we built 2.6 million. Back end of the summer, we'll have done 10% of the U.K. covered with the build. So that's becoming a mature program and a mature set of processes. What is earlier in the life cycle is provisioning. We provisioned about 520,000 services over multiple years and just over 200,000, about 218,000 in-year. That number is going to scale up very rapidly and to a much bigger number. So what we will focus on this year is how we take cost out of that provisioning process. And we're very focused on it. If I try and bring it to life for you with some examples of initiatives that will take the cost down, we're investing in a technology called optical test heads, which will make it much more reliable that when we do a provision, there's successful end-to-end right path back to the OLT. For customers who have underground or ducted lead-ins, we are now rodding and roping those lead-ins at the point of build and not at the point of provisioning. This is far more efficient, and it gives rise to much more predictable provisioning processes for customers. And another example is an initiative to take cost out is that today, when we put in a drop cable to your home to give you FTTP, Michael, it's actually a hybrid cable that we deliver. So it's a fiber cable with a twisted pair included. And this is because not all CPs yet have adequate, scalable voice over IP capabilities. So they're not all able to deliver voice over fiber. They're all working on fixing that. That will get fixed this year. And when it's fixed, we will move to fiber-only drop cables, which are considerably cheaper than the hybrid cables. So what I am confident of is that we have a program, multiple initiatives, all of which will take cost out of provisioning, and it will be a big thrust for the whole program during the course of the next year.
The next question is from Maurice Patrick from Barclays.
Sorry to come back to the dividend because obviously you've got other good stuff you're talking about today. But just whether the 7.7p definitely is a floor, I mean, you've been pretty clear from the comment today that CapEx is going up as you go through your investment and the big transformation plan ahead. But you also talked about protecting the credit rating. I know you've been issuing hybrid debt to defend that. But given the uncertainty ahead, appreciate it's your sort of best estimate on a 5-year plan. But if there is a negative development from COVID and you keep going ahead with the CapEx, is that 7.7p definitely a floor? Or is it just a best estimate? Appreciate that...
No. Maurice, it's a good question. Look, that's our guidance today. And the Board and the executive team debated all our different options to dealing with investment needs but also the COVID-19 impact. What we're saying today is, given all the currently imaginal scenarios -- and if you can imagine, if you look at COVID-19 and the economic consequences of it, it's a potential wide fan of outcomes for everybody. Now of course, BT is more resilient than most by nature of the kind of business we do, but we're not immune and we've given you an indication of some of those things that are obvious. So you all know how we'll be impacted. But it still allows us to feel confident that under all imaginable scenarios for us today, we can continue to invest heavily in the way that we described and described what we think about the dividend of 7.7p in the time frame we've talked about. So the rebasing, we feel, is absolutely the right thing and we want to do it and is the -- we're very confident based on our planning assumptions, we can deliver that. The other bit I'd say, just for clarity, is in terms of the delivery of the fiber plan, we'll go as fast as we possibly can. If the economic impact of COVID-19 is much greater than we've anticipated and goes on for much longer and this deep recession that people are talking about goes on for multiple, multiple years, that may lead us to land a bit later on the 20 million homes than earlier. And that may give us the flexibility to phase our spending and therefore deliver the dividend, our outlook and guidance we just described today. So like everything, Maurice, it's all about a balance. What you're seeing and hopefully hearing from us today is this is a balanced program that gives us -- gives the market clarity that we feel very compelled is the right -- and got strong conviction is the right way forward. And today, we think we should deliver exactly what we described.
The next question is from Nick Delfas from Redburn.
So just two questions. The first one is whether you're interested in any way in separating out the value of Openreach? Obviously, that's something which would be more to do with share price management perhaps than anything fundamental in the business. But I'm just interested in your thinking around that. And the second question is just on the COVID impact. Obviously, you've got probably revenues from pubs and clubs of around GBP 100 million. I just wanted to check whether that's a reasonable annual figure. And obviously, that's a significant risk as one of the items of the COVID impacts.
Yes. Nick, thanks for the questions. Again, Simon can chip in if he wants. But I think on the COVID impacts for BT Sport in pubs and clubs, you're not 1 million miles off there, yes. And you're right, it's significant. And we're working really hard with the sport governing bodies to come up with a plan for the reintroduction of sports, specifically football, obviously. So look, we're very hopeful that, that will come back. But again, it's a good example of what we were saying with Maurice, there's a lot of uncertainty. But you're there and thereabouts. And Simon might want to just give you a bit more detail on that in a minute. On separating-out of Openreach in terms of looking at the value of that as an individual entity, I mean, the answer is not now. Clearly, given you can see around you the perceived value of infrastructure companies like ours, and it does beg the question of Openreach, given its build program that we've just announced, but also its size and scale and its market leadership, we need to make sure we start seeing the value of that in the marketplace. So I'm very conscious of it. Right now, we need to just charge and having the anchor tenant for FTTP is underpinning the business case. It's absolutely crucial. Having BT Retail as an anchor tenant underpins our business case and gives us the ability and confidence to build at scale and pace we've talked about today. And anyway, it will be hugely complex and difficult to even think about it. So I don't want any distraction. I want Clive and the Openreach team building the fiber for the future as fast as we possibly can. And I think that will unlock massive value for the BT Group in time because we will be the market leader in FTTP. We'll have the biggest footprint, we'll have more customers than anybody else. And they'll be happy customers, who can move through the future in a very exciting way as new products and services come onboard in the new world that we all know is coming around the corner. Simon, do you want to add anything to that?
No, Philip, I think -- no, I think you've covered it.
All right. Thanks. Nick, you're good with that, Nick?
I'm very good with that. Just a very quick one because no one has asked, I think, the consumer pricing during the lockdown. You obviously are seeing less movements, less churn, I think. But what are you seeing in terms of actual pricing moves in the market, if any?
Yes. I mean I'll let -- Marc can just comment on pricing because it's an important question, obviously. But yes, you're right. Basically, look, it's less sales with less churn in the short term for obvious reasons. But Marc, do you want to make a comment on consumer pricing?
Yes. I mean there's a lot of movements in the markets, both mobile and fixed. Just to briefly come back to Sport, there's the pubs and clubs impact. There's also the residential impact of a significant number of customers who've opted for credits. And some of those customers have opted to donate that to the NHS. We've seen lower advertising revenues as well. So there's more than just the pubs and clubs impact. But obviously, pubs and clubs, we're more concerned about when that revenue will come back, given social distancing. And that looks more like towards the end of the year. In both markets, we've seen some significant changes, retail coming out of the mobile market, the retail stores. Retail is quite a big part of mobile sales and upgrade activity. And we've seen less activity and less churn in the broadband market and subsequently less sales as well. Pricing hasn't actually moved that significantly. I think most people -- certainly, we have prioritized looking after customers and serving customers over and above sales activity. A lot of what we do is incremental sales, convergent sales to our customer base. And we put a lot of that on pause because we prioritize putting every single resource we've got in the company on putting our arms around our customers and supporting them. But in terms of market pricing, looking at pricing today, it doesn't appear that there's been significant change. But there's big channel shift, big volume shifts and some changes in customer behavior, which we've seen, which may or may not sustain that we'll have to keep a close eye on that.
The next question is from Paul Sidney from Credit Suisse.
Just a follow-up question on the FTTP acceleration in terms of the build-out. I was just wondering, what was really the key trigger to move to committing to the 20 million versus the ambition of 15 million? Was it the Ofcom announcement in January? Was it pressure from fiber challenges? Was it anything else? Just really wanted to get the big picture in terms of the decision to expand the build-out and what was really the trigger actually.
Yes. Paul, yes, good question again. I mean it's a number of things, right? I think how would I think -- how would I describe it? I mean number one, I guess, the importance of infrastructure has been confirmed, if you like, right? So it's -- you can see how important it is going forward. So the environment just sort of underlines that for one, I'd say. Secondly, I think the -- we were close to doing this a little while ago. We've been edging forward for many months, making great progress with Ofcom and government and other industry players, coming up with a program of work that made sense and a program of sort of enablers and a package of stuff that made sense. And I think the WFTMR consultation that came out in January was a real trigger for that, demonstrating that the so-called enablers, I'm sure you know well, and applying them across the whole country is something that was a direction of travel, which we were very pleased by. And therefore, that again triggered us to say, well, okay, given that, that's how brings us to a position where we can build in the rural areas, too, which is important for obvious reasons. And as we put all that together, I guess we were getting closer and closer coming into the COVID-19 crisis. And we thought, well, let's just see how things play out and get a little bit more information on how that might evolve over time. So there's probably a little bit of a pause recently for a bit of prudence. But actually, when you look at it, the investment case stacks up, I think we described it today, it's very compelling. This is a long, long-term infrastructure project, which will put the fiber network in place for decades to come. And I guess the final thing I'd say is with Ofcom, there have been such productive, constructive conversations related over the last year. There has been some leadership changes. And therefore, I personally spent a fair amount of time with Melanie just going over some of the historical activities and the progress that's made and how we ironed out some of the issues. So I think there is a strong desire, which has always been the case for Ofcom, to promote investment and promote competition. And I think we're up for both of those. And therefore, all the sort of progress that's been made over the last few months, I think, it continues to bode well for the future investments. So I think it's a combination of all those factors that lead us today to say this is the right time to make this announcement and provide clarity to the market. And the final thing I'd say is we feel strongly about this. Everybody needs to get out and do whatever they can to rebuild the economy after this massive shock we're all experiencing. And it's going to be more problematic in the next few months obviously as we get back to work. So having an investment program, which frankly is heavy investment, increasing investment can only help. And it's good for BT and in the end, it will be very, very good for our customers. And I really believe it will be great for our shareholders.
The next question then is from Polo Tang from UBS.
We've obviously had a confirmation of the Virgin Media-O2 deal this morning. So what is your view in terms of the implications for BT and the market from this merger? And specifically, is there any downside risk to revenues for BT, such as managed services or backhaul revenues within Enterprise? And maybe just very quickly, can you talk about where you are in the process of new volume deals for FTTP at Openreach? And have you had any sign-off from Ofcom on the volume deals?
Okay. So I'll let Clive come back and do the new volume deals with his customers for Openreach. On the O2-Virgin deal announced today, I mean, look, obviously not a surprise, first thing. My personal view is that the industry needs consolidation, so -- and to me, it's a sensible move. I mean it sort of follows our strategy that we started 4 years ago. And as you know, we have a strong conviction that there's a clear advantage in having mobile and fixed converge. So as you rightly say, both O2 and Virgin are important customers for us, and they will continue to be. I'm sure we haven't fully assessed exactly every kind of different moving part in terms of the impact of the deal. But there's no question both those people who will be a combined entity now will be important customers for the BT Group going forward. Will there be bits of business that they will try and put into their own entity as a result of this merger? Of course, there will be. And there will be bits of backhaul inevitably. But again, I'm sure we can manage that. But I personally think that there will be opportunities coming from this for BT. I think out of market changes and these kind of moves, we're very keen to look at opportunities that might come about. And again, I'd probably just reiterate the really important point here, which is -- and again, you know it, but it's important. We've been going down this path for a long time. You can see the success we're having with our converged products and the take-up we're getting and the massive satisfaction with -- our customers are showing in that, whether it be in SME businesses, consumers. And let's not forget, BT is the largest and has the most extensive fixed and mobile network, right? And so BT is the outright leader. And I think the announcements we've today set out how we plan to invest to maintain that leadership and deliver innovations for our customers, and I said value creation for our shareholders. So this doesn't change anything. If anything, this extra competition, this new dynamic and competition will just drive further innovation. But we're already there. And we've spent 4 years trying to put together the propositions in the way I described. And some of the things we talked about today are on the transformation program, reengineering and modernizing BT to deliver those kind of products, which we are well down the path of doing very, very well, and we can see great response from our customers. So I hope that helps you in terms of our view of what's happening in the industry at the moment. Clive, do you want to just talk about how the negotiations are going with all your customers, from Sky, Virgin, Vodafone, BT Retail, TalkTalk Group and many others?
Yes. Thank you, Philip. And thanks for the question, Polo. Look, in the period before lockdown, we were in almost daily discussions with one or other of the CPs. So we're talking, as Philip alluded, to all the big CPs and, in fact, to a whole bunch of the smaller CPs who've got an interest in the FTTP platform. Unfortunately, through the lockdown, we've had to put it on hold. All our CPs are busy reestablishing their channels, particularly their contact center channels. So there's been a bit of a hiatus. And of course, also we have withdrawn from provisioning work in the home. So our provisioning is on hold for a short period. The good news though is as we come out of lockdown, we will be in a very strong position on those negotiations with our CPs because of the announcement that Philip has made today. So what he's done, he's given real certainty about the scale and the tremendous pace of the build that the BT Group will now back for Openreach to execute on. And so I'm really looking forward in the short term to a relaxation in lockdown for our engineers to go back in the home to do FTTP provisions and for us to get back around the table with all of our CPs and also with Ofcom. Because our intention is to build a very large-scale network and then to fill it up.
Can I just stick with Ofcom? Have they specifically allowed you to do the volume deals? Because I seem to remember that was a bit of a stumbling block kind of last time.
Yes. So Ofcom are very, very keen that we build this large network. And they know that we have to fill it in order for the business case to hold. So they're very rational. They're also very pro competition. So they're keen to understand not just how we will fill up our network, but how there will be space in the market for others to do a build and to fill up their networks as well. So we're just involving them in understanding our thoughts on how a deal might be structured that works for us but also works for wider industry.
Yes. And Polo, it's a really important point. I mean let's bring in Cathryn here. Cathryn, do you want to make a more general comment on Ofcom and the so-called enablers but also your perspective on these -- on how Clive is approaching the deals with CPs because they're really important? As everyone knows, my intent is not just to build it, it's really important to get people connected to it as quickly as possible. And I think we're all on the same page, Ofcom, government, industry and obviously, Clive. Cathryn, do you want to add anything?
Yes, sure. I mean I'll cover off the deals point first and then come back to enablers. I think Clive's really covered it very well. I think the important point is that Ofcom doesn't actually clear these deals as such. We won't get signed off from Ofcom. We won't get an upfront stamp of approval from Ofcom. Because that's just not how it works. But what we can do and what we are doing is exactly what Clive outlined, which is we are keeping them very much abreast of what we have in mind, what we're planning on doing and also crucially, what benefits that would bring for investment in FTTP, which, as Clive said, is exactly what everybody wants. So watch this space in terms of what we eventually do. But what you won't see is any Ofcom sign-off. In terms of the enablers, yes, I mean, I think Philip's covered it really well, actually. We are now at a moment in time where we've got a fairly comfy consultation document from Ofcom that came out earlier on this year. They've got some firm proposals on the enablers. The direction of travel is really positive for us. We've said many times on calls like this and indeed to many of you face-to-face that this is an intricate process. The Ofcom new remedies that in respect to wholesale fixed telecoms markets won't actually kick in until April 2021. They will issue their final decision shortly before then. There may or may not be an appeal process. But what the consultation document that we got earlier on this year does give us is a high degree of confidence over direction of travel. And as Philip says, everything that we're doing and everything we're planning on doing, we do discuss extensively with Ofcom. And ultimately, the big prize for Ofcom and the big prize for the U.K. is a really significant investment in FTTP, which is what we're planning on doing.
Thanks, Cathryn, superb. I hope that's okay, Polo?
Yes, that's very clear. Just can you actually sign volume deals before April 2021, just to clarify, at Openreach?
We think so, yes.
Then the next question is from Sam McHugh from Exane.
Just a follow-up on the Virgin-O2 thing. So you're about to overbuild Virgin pretty materially. So presumably, part of your case on fiber is to kind of stabilize your retail...
Sam, sorry, could you just -- I missed that. I know it was on O2-Virgin. Can you just say -- start again, I missed it.
Yes, sorry, probably my Vodafone connection.
Probably is. You should think about going to EE.
You're about to overbuild Virgin. And presumably part of the case on fiber is to stabilize share losses kind of across the business. But they've just bought a national mobile operator. So I just wonder what you're baking in your expectations around the dividend resumption and the 10% to 12% return on fiber to any change in Virgin builds? And also, why won't your first-mover advantage in conversions be significantly eroded because of this deal?
Yes. Really good questions. Look, actually, funny enough, what they've announced, it doesn't actually change our FTTP profile at all, right? So you're right to say -- you all know we are weaker in certain places where Virgin is stronger. So that will change as a result of our FTTP build. I mean make no mistake, there are some large cities where our market share is going up because of FTTP, so -- and I mean that from a group point of view. And when you look at Clive and mentioning his big CPs, all of them will connect into Openreach FTTP and we will build market share on the Openreach platform. I also expect BT Retail and our other CPs to steal market share in those cities and towns. That is part of this fiber build where, in some cases, we've been behind where we'd like to be. So one big part is building FTTP in urban areas where we compete very, very effectively. And I think you know enough about the technology of FTTP versus others, FTTP, fiber to the premise, is the new technology. It is the right technology. And indeed, you'll know that, that's what Virgin are building out as well. So their new stuff is building FTTP, so -- but a much smaller footprint than ours. So look, I think the share numbers, you're on the money on. And you can make your own calculations what that might -- how that might play out. But market share gains will be had by BT in those areas. And that's why we're doing this, by the way. And BT is getting on the front foot. We are the outright leader. And copper is not the answer to maintaining our leadership position. FTTP, 5G convergences, and we are 4 years down the path of delivering converged propositions. And like anything in life, things sound simple, but they're not that straightforward. So we're very confident with our network. The 4G network is the best network. Our 5G leadership is already there. And we are going to double down on 5G this year and double our coverage in the next 12 months. And you'll see continued leadership in mobile as well as fixed for the BT Group. And the way we bring that together for our customers, I think personally, I'm really excited about the kind of new stuff that we can deliver for our customers over the coming months, both in Consumer but also in SME, particularly in Enterprise but also in the wider company. So I should also say just that while I'm on it, this is all about investing for competitiveness in the long term that will give us sustainable advantage versus our competition to create shareholder value. And across the whole business, we haven't even talked about Global, for example, but they're getting investment, too. In this CapEx number that Simon talked about, there's investment across the board here to make sure that our Global customers are getting software-defined solutions fit for the modern age in a very flexible, modular way. And we're a long way down the path of -- we've got an NVP out already. And so in Global, you've got that. In Enterprise, our whole host of brilliant stuff coming out for the public sector. You've seen us deliver amazing things for the NHS very rapidly across the board in many ways, GP surgeries. I mean that's not an insignificant move on its own, moving -- the ability for GPs to work from home, do video consultations and very importantly access medical records remotely and securely and then prescribe -- do prescriptions online all in one go. That is not easy. That's what you get with a proper network leadership position that BT has. And so don't be -- don't fall in the trap of thinking this is just a one investment in one area. This is a rebalancing of all our investments to deliver across the whole company. And we've been a bit behind on the fixed investments because we needed the enablers in the right place. Now we're in the position where we think we've got what we need. It's full steam ahead across the board. So really exciting times, but a lot of heavy lifting for us to do to maintain what I've described, which is building our market share and delivering for our customers. That's a long answer, Sam. I hope that does it.
Well, I got to say, not really, actually. I guess the question was more specifically, do you think it will elicit a response from Virgin in other areas? And are you building in anything for that in your case?
You'll have to ask them what they're doing. We've got a crystal-clear case. We know exactly what we're doing, and I'm very confident it will do what I've just described.
The next question is from David Wright from Bank of America.
Yes, I'm sure we're probably getting that a little close to time now. But I appreciate this long call. And I might just start by just expressing an appreciation to you for your salary sacrifice to the NHS. And if I could just follow just on a similar vein with my question, I think I read some reports about a change in compensation structure being proposed for the senior management team. I wondered if there were any details on that as we look to see how the senior management are incentivized, let's say, over the coming period.
Yes. David, thanks for your comments, appreciate that. We've all got to do our bit here, obviously. So I think the Remuneration Committee has spent a lot of time thinking about what the right approach is going forward and it's developing a new policy, which will be approved hopefully by shareholders at the July AGM. And it's evolved really just to connect to our longer-term aspirations and the sort of direction of travel that we've outlined today. So that's all I can really say on that. And actually, there will be plenty of communication on remuneration, the stuff in our Annual Report. The Chairman of the Remuneration Committee has been in extensive conversations with all our shareholders. And I think we are getting to a place where I feel, from what I can gather but it's really for him to comment on that, that our shareholders are very much supporting the direction of travel we're taking, which is really thinking about aligning as closely as we possibly can, the executive directors and the management, including the Executive Committee and everyone else, the activities they put in place and the remuneration they get, aligning that to shareholders. And obviously, we all know it's been a really tough time for our shareholders over the last few years. But we're all shareholders, too, right? So let's not forget that. So we are aligned. And anything we can do that the Remuneration Committee can do to deepen that alignment, I fully support. And I think you'll see things coming into place in the not-too-distant future which achieve that. And that's certainly why I want to participate in it as well. So David, I hope that helps.
So the next question is from Siyi He from Citi.
Just another question on your new cost-cutting program. And I'm wondering if you can talk about the annual phasing of it because most of the phasing seems coming from labor reduction. And does it mean it will come after the new system or process is in place before you can reduce headcount? And also, wondered if you can talk about the potential net impact of that. The last saving program seems to only have 40% net benefit drop-through. And how should we think about the net impact of the new plan?
Yes. Look, Siyi, thanks for the question. I'll let Simon give you his perspective on that. Simon, are you still there?
I was, I was busy with my mute button. So the -- start with the first question, the program that we've announced today, we set out -- we expect the program to deliver GBP 1 billion per annum by March 23 in annualized cost savings. You may have heard I said that we would be delivering that in broadly equal annual increments. And then that steps up to GBP 2 billion in March -- by March 25. So that's the phasing of the program we announced today. I also made clear that the savings, and you will have picked that up from Philip's remark as well -- remarks as well, the savings will come from both the labor cost in our business but also a significant quantum from our spend with third parties. Remember, it's 2/3 of our cost base. And we also stated 80% of it would be realized in OpEx. In terms of the gross savings and the movement to net, the gross savings will cover both some inflation that we'll experience over this period. There are also going to be investments that we make. And obviously, FTTP is going to be one significant one. But you've heard us talk about investments we're making in products and network. And so some of the gross savings will be used to drive investment in future growth. And clearly also, if we're successful in delivering on the strategy, as we sure we will be, we're going to deliver revenue improvements. And that will lead to a higher cost of sales. So that will also [ absorb ] from a total net cost position. But we would certainly expect this program, and be disappointed if it didn't, deliver net benefits for us over time. Coming back to the -- so the bottom line. Coming back to the first program, again we delivered on our program 2 years rather than 3. We said when we set that program out that the gross savings would offset the headwinds we were seeing from regulation and from inflation, particularly Cumulo rate of energy and from the decline in our legacy products. But we expected that to be depressing on from bottom line in EBITDA from FY '19 and '20. We expect it to stabilize and offset and deliver some net benefits in FY '21. And as I've said in my remarks, that would indeed have been the case prior to COVID, where we'd have been confirming our guidance. So hopefully, that gives you what you're looking for.
Well, I think, Mark, we're going have to close off the call though. I think everyone else has many things to do as well. I think I'd just like to say, appreciate all your interest and support. As ever, fantastic questions. Thanks for giving 2 hours of your time to listen to us and participate in this conference call, and look forward to interacting with all of you over the coming weeks and months. Many thanks.
Thank you, Philip. That does conclude the call for today. You may now disconnect. Thanks for joining, and have a very good day.