Earnings Call: Q1 2022

Jul 29, 2021

Good day and welcome to BT's Trading Statement for the First Quarter Ended the 06/30/2021. My name is Sandor Moktors and I'm your host today. During the presentation, your lines will remain on listen only. If you require assistance, please put a message in the chat box. I would like to advise all parties, this conference is being recorded for replay purposes. And now I would like to hand over to Mark Ledyard. Please go ahead. Thanks, Tanner and welcome everyone. As just said, my name is Marc Lidyard from the BT Investor Relations team. Presenting on today's call, we have Philip Jansen, Chief Executive of BT, and he will be joined for Q and A by Simon Lau, Chief Financial Officer. Before we start, I would just like to draw your attention to the usual forward looking statements on Slide two 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. And with that, I'll now hand over to Philip. Thanks, Mark. Good morning, everyone and thanks for joining today's call. As usual for our first quarter results presentation, I'll make some prepared comments before Simon and I take your questions. I'll talk through the highlights of the quarter, our business unit results and a little update on our progress against our strategy. Moving to the highlights on Slide four. The business is performing well, and overall, we delivered results in line with our expectations. Revenue of £5,100,000,000 was down 3%. Increased revenue in consumer, including higher BT Sport and handset sales and in Openreach with growing numbers of end customers taking fiber and Ethernet was more than offset by ongoing legacy product declines in enterprise, prior year divestments and more challenging than expected market conditions impacting our global unit. EBITDA of £1,900,000,000 was up 3%, driven by growth in consumer, enterprise and Openreach. We delivered strong cost control across the group, which more than offset the revenue decline in enterprise, but only partially offset the weaker market conditions in global. Reported profit after tax was just £2,000,000 This was due to a one off non cash tax change to reflect the remeasurement of deferred tax balances following the increase in the corporation tax rate to 25% from April 2023. This resulted in a GBP $439,000,000 increase in the tax charge for this quarter. Reported CapEx, excluding spectrum, was £1,000,000,000 up 9%, driven by continued higher spend on our industry leading full fiber and mobile networks as well as a non network infrastructure. Normalized free cash flow was an outflow of £43,000,000, reflecting the usual first quarter pressure on working capital, CapEx creditors, and the payment of the annual bonus. This is slightly ahead of quarter one last year as high EBITDA and the expected lower cash tax were partly offset by higher cash CapEx. As highlighted in our quarter four presentation, we expect our full year cash flow of between GBP 1,100,000,000.0 and GBP 1,300,000,000.0 to be heavily weighted towards the second half of the year in line with last year. Earlier today, we announced the strengthening of our strategic partnership with Microsoft to accelerate innovation across a range of products and services, including enterprise voice and cybersecurity. We expect this partnership to underpin over £1,000,000,000 of revenue across our enterprise units over the next seven years as we capitalize on our superior networks and security credentials, supporting our overall revenue growth. During the quarter, we started to see a COVID-nineteen bounce back in The UK and while some uncertainty remains around the near term impact of the withdrawal of the government support schemes, the overall picture is one which is largely in line with our expectations. Beyond The UK, we are seeing variable rates of recovery, which are creating challenging conditions in many of global's markets. Strong operational delivery across most of the business, coupled with a more favorable economic environment, leaves us firmly on track to deliver our outlook for this year and beyond, including an inflection in revenue before the end of this financial year. Turning to Slide five and our operating performance. Overall, the trends impacting our business units remain largely unchanged in the quarter. Consumer revenue was up 1% driven by higher BT Sport revenue and direct mobile handset sales as lockdowns eased. Sales were supported by the industry leading service we provide through our recently reopened retail estate, although both footfall and sales remain lower than pre pandemic levels. We continue to see lower fixed and mobile service revenue driven by changes to improve fairness for customers, a greater proportion of direct handset sales and the ongoing trend towards SIM only in the mobile market. EBITDA increased as a result of higher revenue and marginally lower operating costs driven by reduced indirect commissions and tight cost management. Lower costs were partly offset by the Sports Rights rebates we received in quarter one last year, although the substantial majority of these rebates benefited the second quarter. Consumer is well positioned for growth as churn remains low and with further year on year increases in the BT and EE net promoter scores. In June, we launched BT Home Essentials, which widened the reach of our social tariff to 4,600,000 low income families across The UK. And as we strive to ensure decent broadband connectivity reaches every last corner of the country, we have signed a memorandum of understanding with OneWeb to explore satellite broadband provision for the hardest to reach parts of The UK. Moving to enterprise, the smaller business end of the market held firm with flat revenue from SMEs, which is an improved performance versus last year. Nonetheless, a slow recovery amongst larger corporates, coupled with declines in our wholesale division, impacted revenue. EBITDA increased year on year as the reduction in revenue was more than offset by lower costs, including savings delivered through our transformation programs and a one off asset disposal within our wholesale division. In June, we implemented a new operator model within Enterprise with a sharper segment and commercial focus. This includes the creation of a new business unit dedicated to serving the millions of small office home office firms in The UK that are either small by design or just starting up. At the same time, we launched the country's first unbreakable Wi Fi for these businesses, delivering guaranteed workplace coverage, full fiber speeds of almost a gigabit per second, and free tech expert support to capitalize on the high growth potential of this market and to help these firms kick start The UK's economic recovery. This follows our best ever NPS results for our BT and EE brands as voted by SMEs. As I said earlier, Global was impacted by more challenging conditions than we expected due to COVID nineteen. Customer business activity has reduced resulting in delayed project based spend and equipment sales, for example, for office based connectivity. The impact among multinational customers is particularly pronounced as they are entering different phases of the pandemic across the globe. This contrasts with the prior year when we saw some short term positive impacts from COVID nineteen, including high margin conferencing minutes as customers went into lockdown for the first time. In addition, revenue this quarter reflected the impact of prior year non core divestments and a negative foreign exchange movement. Excluding these, revenue was still down 12%. EBITDA for the quarter reflected the lower revenue, partly offset by lower operating costs from ongoing transformation and rigorous cost control. Excluding divestments, one offs, and foreign exchange, EBITDA was down 19%. Looking ahead, we remain confident in global strategy and plan and anticipate that markets will show some recovery in the second half of this financial year. Over the last three years, Global's asset light strategy has reduced risk and increased focus on its core capabilities, driving NPS results up almost 40 points to an all time high this quarter, and we have held market share even in these very difficult economic conditions. We will maintain a tight grip on the costs to mitigate the impact of lower revenue, albeit we do plan to hold some costs in expectation of the market recovery. We will continue to drive uptake of our future proof growth product portfolio, which in the quarter represented just over half of total orders won compared with a third in the prior year. In June, we completed the sale of business units serving customers in the public administration and SME sectors in Italy. And early this month, we made a strategic investment in safe security, a leader in cyber risk quantification. Safe security provides services which enable organizations to measure their susceptibility to various forms of cyber attack, and our investment reflects our increasing focus on security as a key growth area for BT. In Openreach, revenue growth was driven by higher rental basis in fiber enabled products and Ethernet and increased provisioning activity when compared to that during lockdowns during due to COVID nineteen in the first quarter last year. EBITDA growth reflects the increase in revenue, partly offset by higher repair and provisioning costs and investment in people to deliver ever improving customer service and network build. During the quarter, our colleagues in Openreach worked hard to clear the backlog of full fiber provisioning orders, which accumulated during the last lockdown and the work stack is now back at more normal levels. We continue to drive volumes off copper and onto our full fiber network using both commercial deals, which I'll talk to on the next slide, and exchange based stop sales. As of last month, Openreach's customers can no longer sign up to buy legacy services in 14 exchange areas. And by April, this would have expanded to almost 300 exchange areas covering around 3,000,000 premises. So in summary, despite some ongoing impact from the pandemic, we continue to deliver against our expectations, and VT is emerging as a more resilient and competitive organization. Moving on to Slide six. In May, I outlined our plans for a future that is about consistent and predictable growth with prospects. Our path to growth is underpinned by our ability to deliver against our targets today, while also investing for tomorrow. This will generate sustainable EBITDA growth from this year and consistent and predictable revenue growth from next year, firmly underpinning the reintroduction of our progressive dividend. And then post 2026, after the peak network build, reducing CapEx will deliver an uplift of more than £1,000,000,000 per annum to normalize free cash flow. Looking at our full fiber rollout, we continue to mobilize our workforce towards building to 4,000,000 premises per annum as quickly as possible. During this quarter or the last quarter, we passed 555,000 premises with the highest quality, lowest cost FTTP in The UK. And we increased our commercial rural build target to 6,200,000 premises as part of our plan to reach 25,000,000 premises by December 2026. More than 1,000,000 homes and businesses are now connected to Openreach's ultrafast, ultra reliable full fiber broadband network, including an increasing proportion from external communication providers. Appetite for faster connections is accelerating, and during the quarter, over 50% of FTTP orders were for ultrafast speeds. In July, we published the new FTTP offer providing long term competitive wholesale pricing certainty in return for rapid adoption of FTTP where it's available. This compelling offer is designed to reinforce Openreach's long term relationships with its major customers, enabling even faster take up in the future, whilst also providing a fair return on our investment. In parallel, we continue to investigate whether we can deliver even more value to shareholders by funding our build to five of the 25,000,000 premises through a joint venture between BT and one or more external parties. We'll update you on progress at our first half results. Moving to mobile. Our class leading network was this month ranked as The UK's number one for the eighth year running by RootMetrics. We recently announced plans to drive four gs connectivity deeper into rural areas with over 4,500 square miles of new coverage by 2025. In parallel, we will grow our five gs network to cover half of The UK population by early twenty twenty three, '4 years ahead of The UK's government's ambition. By 2028, the geographic reach of our five gs network will pass that of four gs to become The UK's largest digital network, providing signals over 90% of UK landmass. To enable this, new 700 megahertz five g spectrum will be deployed across the majority of our mobile sites, offering stronger indoor and wider rural coverage. We'll launch a new five g core network control system by 2023, built upon BT's distributed network cloud infrastructure, bringing together all of our digital networks. All of this will be delivered within our previously announced CapEx plans of up to £5,000,000,000 a year at the peak. In the near term, we're already seeing the benefits from the success of our converged products. With over 47% of consumers' BT broadband base on Halo. And with the recent launch of new converged products by our enterprise division, we're ensuring we leverage our industry leading networks across all of our markets. In the long term, our plans will deliver a unique smart network infrastructure. This will be a platform for revolutionary new services for customers as well as converged technology opportunities for businesses, ensuring we maintain our network leadership and deliver fair returns on our investments. As we implement our plans to build a better BT for the future, how we get there is every bit as important as meeting our targets. We're a leader in the responsible use of technology, and in May, we launched our Hope United campaign using the power of football to tackle online hate. Diversity and inclusion are also central to our vision for the future. And during the quarter, we published our our first diversity and inclusion report, setting out our DNI strategy and our workforce and leadership targets. In addition, early this month, we reached a partnership agreement with our largest union, the CWU. This agreement recognizes the need for change and ensures our colleagues continue to be treated fairly and with respect as we progress on track with our modernization plans. So to conclude on Slide seven, we started the year overall in line with our expectations with EBITDA growth in consumer, enterprise and Openreach. Many leading indicators across the business reflect the positive progress we've made. For example, consumers churn levels stayed at near all time lows as we came out of lockdown, and group NPS remains positive. In addition, we now inflation linked pricing across around two thirds of our revenues, and we continue to deliver our transformation and cost savings plan. We are firmly on track to achieve our outlook for this year and will gather momentum through the latter half of the year, including some recovery in global markets. This places us on a trajectory to deliver EBITDA of at least £7,900,000,000 and revenue growth in full year 2023. And lastly, we're making solid progress against our strategic agenda, which will deliver enduring success for all BT stakeholders. So that concludes my remarks. We've got about forty five minutes, I believe, for Q and A. So can I ask you please limit your questions to one per person to allow as many people as possible to ask questions within the time we have? And with that, I'd like to ask the operator to open up the lines, please. Thank you. Your question and answer session will now begin. If you wish to ask an audio question, please click on the hand icon at the bottom of the participants panel. Once your question is answered or if you wish to withdraw your question, please click on the hand icon again. And our first question is coming from Akhil Dattani from JPMorgan. Akhil, you are now live in the call. Hi. Good morning, Philip. Hi, Akhil. How are you? I'm good. Thank you. Good. I've got a question just, I guess, less on the results, but more on the strategic side of things. I'm sure you've seen this morning Virgin Media has made an announcement about a full fiber build where they're talking about overbuilding their cable network with fiber. So I guess just keen to get your thoughts on was this something you're expecting? What are your thoughts on the market and competitive impacts of that? So it's really that. But if I can ask a really small follow-up on one of the points you made as well, which is you talked about the 1,000,000,000 of revenues from the Microsoft contract over seven years. If there's any comments you can give on phasing and EBITDA and cash flow as well, then obviously that'd be great as well. But, yes, really the Virgin one, which is a big Okay. Okay. Let me just do the Microsoft. I can't really give you specific what what we're saying there is it's a big deal. That's the minimum I'd expect from it, and there are load it opens up loads of opportunities. So we're just deepening the relationship with Microsoft. You can see we're doing more in cyber. They're doing more in cyber too. We're bringing that together. We're doing lots of integrated voice activity around Teams as more and more people use that product by definition. So it's a really collaborative, deep relationship with Microsoft. And and in terms of contribution, it's gonna be very, very positive. I expected I hope it's more than that, by the way, but that's the minimum it will be. So so I can't give you details on EBITDA or margin, but it's it's a very positive financial picture. And it's been and we've worked on it for a long time, by the way. You know, it's it's complicated and multidimensional, which is is good, not bad. But look, Akhil, yeah, look, obviously, it's really important news today. Firstly, your question was I expecting absolutely, by the way. And I have to say it's the right thing to do. It makes sense. It's what I would do. And, you know, if you had a choice of HFC DOCSIS versus FTTP and the cost was, you know, not too dissimilar, and there is a bit of difference, you have to do FTTP. So I I I first, I think it's it's what I expected. I I'm I knew it was gonna happen, to be honest. It don't surprise me at all. I guess, is the question what are the implications for us? Is that what you think? Yeah. Yeah. Well, I mean, look, mean, the way I I think about it is, does it change BT's plans? No. Absolutely not. It just endorses exactly what we've been saying, which is FTTP is the winning technology, and and, you know, the good news is, you know, we're going to 25,000,000 by 2026. So so I mean, I think the second question is, does it change the alternate plans? And the answer to that is, yes, it should. And I think then the third big one is, you know, what are the implications for wholesale? Because I think that's something that could change the dynamics of our industry. And and all I'd say on that is, you know, we're the incumbent or the market leader. We can never be complacent, and we're absolutely not a BT. But but let's be honest, we're gonna have almost double the footprint in almost half the time. And we've got decades of experience, one clean network. We've got fantastic service, and the prices we're offering, particularly right now, are very attractive, and we're giving long term sustainability and and visibility of people for ten years. We're gonna keep investing. We're gonna keep innovating. And it this stuff is more complicated than people real realize it. And I think you know that, but, know, it's not it's it's more complicated than meets the eye. You know? So remember, we got 30,000 people on the road building and maintaining the the the the quality networks. And, you know, we announced today, for example, moving to electric vehicles. All these operational changes are massive. They're not easy to do. So I think whatever happens, BT Openreach is gonna have millions of FTTB connections from all CPs. No one's gonna do an exclusive deal with Virgin even if they decide to wholesale. So any any wholesale change, if they were to happen, would have a significant migration question and technical challenges. Right? So so and therefore, we're gonna have those customers. So if I you know, the way I sort of think about it to finish off the the the answer is, if you accelerate to twenty thirty Akhil, we're gonna have, you know, we're not gonna stop at 25. We'll be infilling. Let's say we're roughly 30,000,000. They're roughly fifth 15,000,000. The question is how big is the alt mix? And if they're in the 10 range, I think the market will will operate very effectively because it can take two big operators competing like Fury, big fiber footprints. It's the question is how much of the extra bill that creates irrational behavior, and and that's the only thing I'd be concerned about. And so and can I just ask one super quick follow-up, which is obviously, as you rightly said, wholesale is the big question? But were they to sign wholesale contracts? Do you think there were then reggae communications as well, or do you think that's fully captured in the framework? No. I think I think I think I think there'll be questions on regulation as soon as that wholesaling starts. So and again, remember, know, whatever happens, you know, it's not clear cut, and, obviously, it's a question for them. But, you know, you're have to get a lot of wholesale customers to offset losses that you'd get on your retail side. And so I think what we've seen today is it's a 15,000,000 footprint, which I think quite likely they can't afford not to upgrade to a technology that is similar to us. And I think the wholesaling question is a is a is a big question. Of course, by definition, opens up the opportunity, but we'll have to wait and see. And I feel comfortable that with what we're offering both in terms of the product, but also the pricing. You know, I always say this, okay, when you look at our prices, if you look at what we're offering people for FTTP today, the retail pricing is actually very competitive. And if you compare a one gig price compared to a Virgin retail price, they could be up to 50% more expensive than that. That's a tricky equation to to solve if you're gonna wholesale because you're gonna bring that retail price tumbling down. We would be we would be in with the regulator, of course, and Virgin know this. We will be talking to the regulator and make sure that there's a level playing field because what many people would argue is not level playing field today. Great. Thank you. Thank you, Akhil. You are now muted. Please lower your hand. And next question is coming from John Caridis from HSBC. You're now out the call. Please go ahead. Thank you. Good morning. Good morning, Philip. Given that Akhil sort of blew out of the water the instructions you gave us, I'll I'll just ask two very quick ones. The first one is, do you still expect a bubble of insolvencies, in Simon's words, when the, the the the scheme runs out at the September? And then secondly, you had 1,100,000 FTTP lines at the end of the quarter. How many of these were actually used to provide speeds above the after the that achievable by FTTC? So roughly, what proportion of those were used, for faster speeds, ultrafast speeds? John, I'll Simon can answer both of those. He'll give his view on insolvencies, and then we'll give you the rough percentage on the 1,700,000 FTTB line. Simon? John, hi. Thanks for the question. Yes, I mean, we do continue to expect that as business support of various forms is removed, we will see an increase in the rate of insolvencies among smaller businesses in more impacted sectors and John, we continue to hold provisions that we took as we went into COVID against that. I think on the offset, John, actually, we've seen and I think you'll have noted a pretty high rate of business formation as we have exited from lockdown and seen sort of the economy start to rebound in The UK. So that will be a counterforce Exactly how that plays out over the rest of this year, hard to predict, but that's the range of outcomes built into our outlook for the year. Hope that helps, John. I'll turn it back to you. Thanks. Thank you. Thank you. Could I ask for that proportion, please? About it's about 50%, John. Alright, sir. More than 50%. I said it in my speech. I'm ultrafast. Forgive me. In your speech, you talked about the additions, during the quarter. I I was talking about the 1,100,000 that you have in aggregate. Yeah. Greater than 50% are ultrafast. Okay. Thank you. Yeah. Sorry, Philip. It's probably worth adding, John. I think you know this, but obviously, some of the initial FTTP build, quite a chunk of it was in the BD UK, which obviously was replacing lower speed circuits. Obviously, as we ramped up the FTTP beyond the BD UK footprint, a much, much larger proportion, far more than that majority is going into ultrafast speeds. And I'll talk to both. That's that's John. Thank you both. Thank you, John. You are now muted. Please lower your hand. And the next question is coming from Polo Tang from UBS. Please go ahead. Yes, hi. Thanks for taking the question. My question is actually on BT Sport. So you currently have a reciprocal content agreement with Sky where Sky gets access to BT Sport and you get access to NOW TV and Sky Sports. But if you bring in a partner for BT Sport or sell BT Sport, does the agreement still stand? And and how important is content in terms of supporting your broadband business? And are you making a return on BT Sport currently? And maybe just a super quick follow-up in terms of is there any update in terms of the appointment of a new Chairman? Thanks. Sure. Firstly, on the last one, no update. Mean, as soon as we're ready, of course, we'll make an announcement that there is a process being led by our Senior Independent Director. As soon as that concludes, clearly, we're going to announce it immediately, but there's no update on that one. On the it's a great question, Polo. You're right. We have a, you know, we have a very strong partnership with Sky, across multiple levels. Obviously, clearly, they're a big supplier, or customer of Openreach, but also from the BT Sport point of view, multiple angles here. And and including, you know, they they sort of sell our BT Sport, advertising. Right? So it's a it's a multidimensional ratio. So as we look at what we might do with BT Sport, which talks to your how important content is and how's the business doing, as we look at what we're gonna do next as a result of the strategic review, the Sky relationship is fundamental for the reasons you say. Because there's reciprocity, which in any future, we need to maintain the strong partnership we've got with them today where we access their stuff and they access ours. Any form of, agreement has to make sure that the Sky dynamic is as good as if not improved. And the same would be true of other providers or other customers of BT Sport. So it's a very important question and that's why we're taking our time to work through all the details to make sure whatever we do on VT SPORT is in the best interest of all stakeholders, and we're taking our time to look at all the options. And just a final point on how important it is. You know, it's it's doing it's a great product, doing really well. I've I've always said to we don't see ourselves piling more and more money into the rights within BT Sport. We've got some fantastic rights. It works well now. It's growing. We see some growth prospects in the future. Some of the partners we're talking about, you know, have ideas about how they could help fuel that growth, and that's what we're looking at. Thanks, Paulo. Thank you, Paulo. You are now muted. Please lower your hand. And the next question is coming from Andrew Lee from Goldman Sachs. Please go Yes. Good morning, everyone. I had a question just following up on your comments, Philippe, on the technical challenges related to taking up BMeds fiber from a wholesale customer perspective. So just apart from your ability to offer a more nationwide network coverage for wholesale customers and apart from pricing, what are the other key technical differences that a wholesale customer will have to take into account when choosing between your fiber and VMeds fiber? And just as a quick follow-up, just any update on wholesale negotiations following that wholesale FTTP offer prices you set out a month ago? Is there any sign of anyone taking an early sign up there? Thank you. Yes, sure. Again, really important questions. I mean, I think that the answer to that first question is multiple levels again. I mean, the the whole engineering in itself is is a significant challenge. Right? So that there's a there's a technical engineering challenge to whenever you're going into mass upgrades, builds, and these are these are challenging things. Right? So an engineering point of view, you've actually got a to our point, we're building 4,000,000 a year. I I think Virgin gonna be trying to upgrade, I don't know, probably half a million a year, whatever the number is. Probably, probably, they'll probably do two try and do 2,000,000 upgrades a year, I guess, is their run rate. So so that in itself is not insignificant to get that done. But the technologies have to work and you need the IT platforms to all integrate. Remember, it's a live system. Right? So it needs to be maintained. It needs to be monitored, and it needs to deliver consistent service. And with all technologies, things happen. So there's this technology, IT, platform, integration, customer service all wrapped in together. So when I say there's significant challenges in building, connecting, and managing a network and delivering great systems and service work for for customers, it's not straightforward. So I think, remember, setting up a system for wholesale isn't that easy either. Right? And and you you can see what's happening in some of the alternative programs or alternative providers who have been working for many, many years. So that's that's the first one. On the wholesale, I think we've had not not to be complacent, but we've been in discussions with our CPs for a long period of time. I'm very encouraged by the conversations that Clive and his team have been keeping up. I think we're making good progress and that the response has been very, very good. Thank you. Thank you. You are now muted. Please lower your hand. And our next question is coming from Sam McHugh from Exane. Please go ahead. Good morning, guys. Actually a quick question about debt for Simon. So I think it was net debt came in about $1,000,000,000 higher than consensus, up 900,000,000 quarter on quarter. Yeah. Broadly flat free cash flow, a spectrum refund of 220,000,000 or something. So you had about 1,100,000,000.0 below the line cash out. Now I think some of it is spectrum. I wonder if you could I'm sorry. Not spectrum. Pension payments. I wonder if you could talk about the rest. And I guess how much for specific items? Because you talked about £900,000,000 of specific items for your three year restructuring plan, having already spent £450,000,000 I wonder whether we should now be factoring in slightly higher restructuring charges versus what we were expecting before? Thank you. Sam, thanks for the question. So, the bridge really, as you say, normalized cash flow is sort of broadly awash. So, the increase in debt in Q1, big components were the payments into the pension scheme, which went in the first quarter. That's a combination of the recovery plan and the ABF and that's just shy of 600. We did also undertake some share repurchase as we always do to cover employee share schemes plus specific items also amounted to just under 300 and that's a combination of some sort of investment activity but also some restructuring that was something like sort of 90 or so, but no, are firmly on track with the restructuring plan. We have not changed our view on the total cost at this stage. So there is the outflows, pension restructuring, investment activity and share repurchase and that was offset to bring us back to the 800 up by as you say the spectrum refund. Mean, that's Q1 movement. Obviously, we don't expect that sort of movement in Q2 through the year. Expect to see that sort of change in net debt. Hope that helps, Sam. Thanks. Yes, very clear. I will leave it at one as well. Thanks, guys. Thanks Sam. Thank you Sam. Thank you Sam. You are now muted. Please lower your hand. Our next question is coming from Robert Grindle from Deutsche Bank. Robert, the floor is yours. Thank you. Good morning. I'd like to ask about the physical line losses in Q1, which running about eight times last year's quarterly run rate level. What percentage of these are to be alt nets, please? And I think some of the some of the line losses, voice lines associated with FTTP, which fall off when customers move to voice over IP. How many more of these dual lines are there? Presumably, you're not charging twice for some of these, at least to BT retail. And what what do you think the backlog of voice lines is for customers who've already moved on to the old nets who might move on to voice over IP there and leave you guys. Thanks. Maybe Robert got on mute. Robert, could you go on mute? We're getting an echo here. Sorry. Thanks. So yes, the line losses for this quarter, we did see a pickup, So physical line losses declined about 159,000 and that is rather higher than we have seen in recent quarters. But if you strip out, the underlying line loss was actually about half of it, much, much closer actually to the last quarter's first quarter loss. And that reduction was due to the fact that BT's downstream units have been removing the WLR lines that we were using temporarily to support voice on some of our FTTP connections, clearly, that reduction in line isn't really economically impacting for the group. About half of the line losses you saw due to that. Going forward, yes, we do continue to see some continued underlying losses as AltNet expand their footprints. But I think as Philips reinforced, we're rolling out FTTP at speed. We know we deliver a very strong proposition to customers. We'll be defending our line losses strongly our line base very strongly. Thanks. And Robin, just to add to that, you know, talking to Clyde, given that given the specifics, we're not losing loads of lines to Altnex. Okay. Next question. Thank you, Robert. You're unmuted. Please lower your hand. And next question is coming from Nick Lyall from Societe Generale. Nick, you are live in the call. Yeah. Morning, guys. It was just, just one, please. Firstly, on the, the fiber numbers in Openreach, please, Philip. Was was there there was no acceleration this quarter. I'd sort of expected to see Clive start to put his foot down a little bit on the rollout. So was there anything because the backlog was being cleared that interfere with that or No. Nick Nick, well noticed. Yeah. Look. Look. At the 544,000, good number, but but you're right, we didn't accelerate much. And actually, again, you are right. It's down to a number of factors. Nothing to worry about, but we did have a big backlog of various things, particularly around provisioning, and therefore, Clive has put a decent quarter in, but I see significant ramping coming up, at some stage. And again, the other thing I'd say is it's a bigger proportion in this quarter were rural lines, which are a little tougher to deliver. And so it's a mixture of those things is the backlog plus the rural build. But I don't worry, we'll be accelerating. It might be worth adding, Philip, quite a lot of the work in the quarter is putting in the spine networks in some of the new areas. So we're doing a lot of builds that then allows us to then drop the final builds much, much faster. So there's quite a lot of network architect build going on, which is also, therefore, not showing up in the PREMs number for this quarter. Probably the last point to make, Philip. Yes, agree. Thank you, Nick. You are next. Sorry. I'm afraid I got cut off there, I missed a lot of it. Apologies. Thank you. And the next question is coming from Maurice Patrick from Barclays. Maurice, please go ahead. Yeah. Good morning, guys. It's Maurice here. Just ask the one question, please. If I can ask you bit about competitive intensity in The UK market, please, on the retail side. When looking at your reported trends, I mean, broadband, it has looked pretty solid, fifty fifty odd thousand. The ARPU is improving, but still fairly negative. You've called out the impacts of you called out Carphone Warehouse having an impact. But can you help us just build some of those bridges around, you know, what was the impact of the changes of accounting around Carphone Warehouse on service revenues? How much of the ARPU decline is sort of loyalty related, that'd be super helpful. Thank you. Yeah. Sure. Morris, let me give you a little overview on competitive intensity and then maybe Simon can pick up some of the accounting car firm warehouse ARPU trends and what that actually means. I think, look, it's the market continues to be very competitive, of course. UK market is is is is a is one like that. Having said that, I think there's no question that the consumer values connectivity more than they did eighteen months ago. And we can see that in everything. So so that's encouraging. So people are taking faster speeds, and and they're paying more. And as I said in my in my sort of script, you know, our churn is is absolutely excellent. So what we've got here is we've got people value what we do. We're launching more converged products, for example, and we're bundling in more and more things together as we possibly can. You know the numbers on Halo. We've got customer satisfaction rising, and our pricing's about to rise as as everybody knows. Right? We're going CPIC plus 3.9 on a base that is very stable with very low churn and high satisfaction. So I think that we're encouraged by that. So so, of course, there are a few other bits in there. So we are still addressing the fairness and loyalty gap, which drives the a bit of the ARPU pressure. But that's us correcting the base to make sure we've got a really strong foundation to grow revenue in the future. And so we still have bit of that to do, but the base is growing, the churn is low, satisfaction is high, and it's a competitive market. So actually, we we in the consumer division, the the the sort of underlying indicators are really encouraging. Again, no complacency because you're right. There are certain parts where it's a bit brutal. Right? And and the similarly trend continues, and the mobile market is challenging, right, inevitably. That's very competitive. So Simon, do you want to say anything else on Carphone or ARPU dynamics or anything on the accounting to help, Morris? Please go ahead. Sure. Think in a nutshell, base stabilizing, very low churn and we are holding up our share in a smaller acquisition market. There are some upward pressures from ARPU. Obviously, CPI indexation is flowing through to the first wave of the contract base and we've also got upgrades. There's lots of people moving to FTTP, but that's a bit offset by the continued implementation of the fairness agenda, which we think puts us in a very strong competitive position but in this quarter had a net pressure on ARPU, but as you can see, a significantly reducing net downward pressure. If you strip move to mobile, again, base stable, it's a very low churn, again, holding up our share in a reduced acquisition market. ARPU, future ends one continuation towards SIMO. We haven't seen anything like the sort of recovery back to pre COVID levels and out of bundle and roaming and that's weighing on ARPU. And then in addition to that, the move to direct obviously has an impact on service revenue. So in an indirect channel, as you know, gets all flow through service revenue in the direct, capital handset through the equipment. So that was a bit of a pressure on service ARPU. So those are the factors. Hope that helps. Sorry, can I just add one more thing, Ross? It's a really important question. I think we sort of said that clearly, are challenges in the global market and the demand is just not there. But your point about competition is the key thing we're driving. And the reason we feel confident about our growth profile is across divisions, we're getting more competitive. And you can see it in all the underlying indicators actually. Yeah. And and and that's exactly what we're driving both in in consumer and enterprise and Openreach is to make sure we're fit to compete in a market which is, as you say, you know, pretty intense. But we are the market leader and we got good stuff going out the door that people are appreciating, and we're gonna do more of it. So thanks, Morris. Thank you. Thank you, Morris. You are now muted. Please lower your hand. And our next question is coming from Jacob Bluestone from Credit Suisse. Jacob, you Great. Thanks for taking the question. I will keep it to one question as well. Just trying to understand a little bit more the weakness within Global Services. I mean your Financial Services revenues fell by about $50,000,000 Q on Q, and it basically looked like that fully dropped through to EBITDA, which is also down by about $50,000,000 So can you just help us understand a little bit more what happened in the quarter specifically? And what was it that was so different from three months ago? And then just how that sort of ties into the confidence you have in the turnaround in the second half? Thank you. Okay. Jake, let me make a comment about the confidence we have in the second half, and then I'll let Simon sort of try and answer your question. I mean, the truth of it is, no one knows exactly when the bounce back is going to occur. But I think, we can see, for example, in public sector, both in The UK and elsewhere, that pipeline is actually encouraging. So for example, there is plenty of stuff that our customers and enterprise will need in the future that we can deliver for them. At the moment, they're just not buying, Right? And they're deferring and delaying and reconsidering contracts. But we're not losing business, and we're not you know, our market share is stable in terms of the and the win rate. There's nothing underlying that says, actually, the business is actually fundamentally underperforming versus market, but the market is not there. So what what we expect is we do expect some gradual recovery at some stage. We just don't know when that's gonna happen. And what we've taken the decision is, you know, not to run around with our hair on fire slashing everything. We have taken a very considered approach to cost, taken out anything that's not necessary, but we are ready to have that ability to respond to when the customers do show their demand again. And I think that's the key thing. So what we've done, and I personally talked to lots of customers and Baz, the CEO of Global is out there with customers all the time, reassuring them that we're here for them when they're ready to decide to do things. And you can just think of it, yes, the banks, but think of, you know, IAG, a big customer of ours, you know, British Airways owner. It's not the best time for them to think through. We're gonna commit to a load of very essential, by the way. They will have to do a significant amount of IT network connectivity upgrades over the next few years. And, you know, we're obviously they're a big customer of ours. So that's an example. There are many of those that that are just deferring things. So we're hopeful, but we can't call it exactly because obviously, the the global pandemic is is hitting different countries in different ways and different companies in different ways. And some of the cost pressures you'll see from, you know, Unilever, another huge customer of ours. You know, Wrecket, you'll know that these guys are having their own pressures to deal with. So that's what's actually happening in the marketplace, which is why we're not overly worried today, but we need to see the bounce back. Simon, do you want to talk about the specifics in the quarter? Yes. I mean, I'd just add a very brief point. I mean, revenue was down $200,000,000 However, if you strip out the impact of divestments and FX, then the underlying movement was about $100,000,000 and that split roughly 15% of that, so about $15,000,000 or so, was due to an uptick in volume activity, things like conferencing in Q1 last year as our customers sort of went into lockdown. And then on the flip side of that, in Q1 this year, this is the remaining sort of 85% of the 100 or so, we have just seen less business activity amongst our major customers as sort of intimated and that means that we're getting a lower level of project related spend with customers, bit exacerbated by customers not in offices, therefore not access to come in, a little bit of impact from chipset shortages on some kits. Those are the drivers. It's predominantly driven by the pandemic situation. You asked about the EBITDA impact. The project related activity tends to be relatively higher margin and that's why it's flowing through in Q1. As we look ahead for this year, yes, we expect to see some recovery into the second half. We expect to see sort of renewed projects and volume activity, but also customers coming back and re contracting where our win rate remains good. Obviously, we'll be managing the cost base to maintain margins in Global given the great work they've already done over recent years to improve margin. Hope that helps. That's very clear. Thank you very much. Okay. Thank you, Jacob. You are now on mute. Please lower your hand. And the next question is coming from Karl Murdoch Smith from Berenberg. Karl, the floor is yours. Hi, guys. I'll be well behaved in that one as well. To follow-up to Morris' question, but in terms of the mix within consumer, but less so about the main lines of fixed and mobile and more on the kind of other lines of of equipment and other. Other has bounced back really hard. Obviously, the the year on year comp is is impacted by BT Sport, and I know a lot of the BT Sport revenue flow through that line. I think it's also impacted by the revenues associated to the fact that you're now capitalising set top box and routers. So the revenues from those is coming in through that line as well. So you've actually bounced back to above where you were pre pandemic. So the question is basically going forward, what's the outlook like for the other line in consumer and equipment? Because those have basically offset the weakness in two main lines. And can we expect further beats and growth in those lines? Or given the set top box in kind of capitalization impact has now fully come in? Or has it fully come in? Should we expect that to kind of stabilize more around the current levels? Thank you. Okay. Simon, do you want to give Carl the answer to that? Firstly, on hi, Carl, sorry. On equipment, yes, we've seen some good performance on equipment and this is, of course, in part reflects the easing of lockdown and handset sales and, of course, that's somewhat further amplified by change in channel mix as we have gone direct. On the other, you are right. It includes probably two big contributors being the commercial BT Sport side part of our revenue and also advertising through that channel and in addition to that, you are right, essentially leasing on kit associated with our connectivity products. That's what's in there. The fact that that's growing is a function of underlying growth in demand through our commercial channels for sport and obviously through the kit associated with connectivity. As we look forward, we would expect to see continued momentum there in the back half of the year as we continue to see economic recovery. But the core here, Karl, is that performance in our consumer business, it's driven by great propositions for customers and the converged connectivity we bring. Some of that gets accounted through the other line. Hope that helps, Karl. That's brilliant. Thank you. You. Karl, you are unmuted. Please lower your hand. And the next question is coming from David Wright from Bank of America. David, please go ahead. Hi, guys. Thank you for the call on this somewhat crazy Yes, my question is just pursuing just global services a little. You're obviously looking for some H2 pickup. What I'm trying to understand is, to what extent is guidance perhaps exposed to this? If the h two doesn't pick up, is it a business where, you know, you can you can hold back a little bit on the on the on the marketing or even, you know, ramp up the cost cutting during a period of lower activity to just, you know, give you that little bit of buffer in the guidance? Or is this a genuine kind of, you know, make a call at the first half results that it's not looking better, and you might have to sort of tweak towards the lower end. Is is it that kind of materially materiality we're looking at? Or I think you said, Philip, you did say firmly on track, maybe I'm just wrong on it. Thanks. Yeah. No. David, look, it's a good question. Look. Look. Of course, there there is a level of uncertainty by definition in terms of when when is that bounce back gonna happen. And I think everybody, you know, who works in the sector and and dealing with these kind of global customers, you know, you know, we've obviously talked to a lot of different people and and and monitored. So, you know, whether it's the AT and Ts or Verizons or OBS, I mean, anybody who's in this, we we all see the same sort of picture. So, look, at some stage, that that recovery is gonna happen. I guess the way I think about it is if you look at our overall guidance, you know, I think we're saying we're to be broadly flat. And that's up a little bit, down a little bit, who knows, right, on revenue. Broadly flat, I'm very comfortable with it. And even if global still struggles through end the year, we can still deliver that. But the key thing is on the EBITDA point, you know, it's no problem for all the obvious reasons that you can calculate yourself. Plus more importantly, when I look at it for the next year, given all our plans and the indicators that I've referred to, you know, global is a relatively small part of what we do. Yeah. And you can see it on that that slide we showed you. If you actually just stare at it, and then look at the leading indicators underneath and you get some growth back in in in enterprise, you know, something that the group looks very different. So, no, we're we're I'm not concerned about our guidance at all. Yeah. I want global to to come back on stream as quickly as possible, but the the what we don't wanna do is do something precipitous. That means we can't benefit from the the lockdown the the the the bounce back when the lockdowns and everything else finishes. And that's what that's the balance we're trying to to hold. But the good news is we can afford to do that, and that's what we're doing. Simon, do you want to add anything to that? No. I think I think you've you've covered it, Philip. Okay. I I mentioned. Yep. Is that okay, David? Super, Phil. Thank you. Thank you, David. You're unmuted. Please lower your hand. And the next question is coming from James Ratzer from New Street. James, please go ahead. Yes. Good morning, Philip and Simon. Thank you for the call. I suppose no one's asked a question yet about Patrick Drahi, so I might try that. Although I don't know how much you can say on this, but would just be interested to get you know, any thoughts you've had on any kind of recent discussions with him as your largest shareholder or any discussions you're aware of that he might have been having with government that has been rumored in the press and whether you were kind of slightly surprised that he didn't ask for a board seat at the AGM given he has a larger shareholding than Deutsche Telekom. And, you know, now you're aware of any intentions you might have to ask for a board seat in future? Thank you. Sure. Yeah. No, James, of course, important topic. I mean, look, so not surprised that that didn't ask board seat. I didn't expect that. Deutsche Telekom's board seat, by the way, is not to do with the percentage share, it's more about the combination of E and BT, as you know, going back, you know, almost five years now, I guess. So it's different type of arrangement. Some of the topics not being raised at all, not being discussed. And all I say is, you know, it's sort of repeating a bit what I said before. You know, we've now got two shareholders, both of whom understand industry at 12% ish. And and, you know, I'm out a lot talking to to to shareholders and obviously having a block of 12% each, who understand industry. And very importantly, are fully supportive of the plan. And that's the key point for me is, you know, and the questions I've been asking all my shareholders as I've been going out, you when I went out last time, and I'll do it again, you know, this time is, you know, which of the elements of the strategy are you uncomfortable with? And actually, you know, we've just talked about it today. You know, we are building the best fixed network in the land, the best five g network in the land. And so when you put those two together and do some of the things that I sort of inferred in my in my script about how you create a converged super network that can give capacity and capabilities for a whole host of new things for enterprises and for consumers and for homes. And we're dealing with thinking about edge, thinking about private networks for customers. We're thinking about all the services that might happen in the future. The beauty is I've got, I think, all shareholders supporting direction of travel. No one is saying, oh, I'm not so sure. Should you be doing these things? The question is how's the market going to play out? And and therefore and I think, actually, we've landed in pretty good place. If you look all those questions that we used to have, you know, someone like Patrick and indeed Deutsche Telekom and all the shareholders are really pleased with the the the resolution of regulation where we now can make a fair return. We've and we're investing such high levels in our network, both fixed and mobile. You know, some of the questions around pension and sports rights that have all gone. The the CWU now, that's also sorted out as well. So it's now just execute well. And, actually, to go back to the original point, which is what's gonna happen in the fixed infrastructure build market. We've now got two players announcing their plans. I think that's good. It's a it's a land grab. Right? And and and in that land grab, you know, all our shareholders are very supportive of us building it and filling up our network as quickly as possible, and that's what we're focused on doing and and building around it a converged, network performance, which is unbeatable. And and we will definitely do that. The question is what can we act what can we hook on the top of it to make, you know, the kind of revenue growth that we're looking for. That's great. Thanks, Philip. Thanks, James. Thank you, James. You are now muted. Please lower your hand. And our next question is coming from Jerry Dallas from Jefferies. Jerry, please go ahead. Hi, Jerry. Yes. Good morning. Thank you for taking my question. Question is really to do with the Virgin announcement. You said it was something that you anticipated. So I wondered what sort of discussions you've had with Ofcom in preparation for an announcement of this form, and specifically, what would represent an acceptable regulatory outcome, an acceptable framework for regulating Virgin's wholesale business if they decide to go in that direction? Thank you. Yeah, I mean, look, again, there are not advanced discussions on any of these topics in terms of the wholesaling activity, because as you didn't anticipate, we would be talking to all industry players around, the ability to buy different services from different people. And, you know, that includes Virgin, for example. Right? So so I I think nothing's happening on that front right now. And and again, I think if indeed there is a move that changes the dynamics in the market significantly, then we will make sure that BT is operating on a absolute level playing field. And I think that is something which we're very confident we can, articulate the people if it ever happens. Thank you. Could I just could I just understand what the downside risk is if if Ofcom isn't forthcoming with a decision or if they take take their time? Because I suppose Virgin is in this position where it has a very dominant market share in the legacy cable footprint. And I suppose that creates some incentive for them to price wholesale relatively high. So I just wonder what the protection from the regulator could look like. Well, honestly, I'm not so sure we need protection. I mean, again, if you if you just, you know, stand back, you say, you know, the truth of it is this move the reason it didn't surprise us is it's what anyone would do, and it's a defensive move to a certain degree from the number two player to keep up with the number one player. And and that that makes total sense to me. So we're gonna the the I guess the key thing is, as they build out and we build out, there's gonna be a load of competition between the two organizations, which I think is absolutely what the company or the country needs. It needs two big players going head to head on delivering great things for customers. So I'm not so sure we need any protection. What you're I think maybe driving at is, which I think you're right, is nothing is gonna move quickly here. And what I was trying to say when I answered the first question, you know, at the very beginning is, you know, any move on wholesale will leave significant millions of customers on Openreach platform, whatever happens. Because at best, Virgin can only offer 15,000,000 by 2028. So there's a whole migration and and and mixture of different platforms and technologies and customers. And and therefore, my argument would be, if you're a big CP, you know, they don't they understand the complexities involved in the technology of delivering as we described on one of the other questions and platforms and and and interfaces. It's not that straightforward. Why if you're getting a great product at great prices and great service from the major player who's delivering everything you want at at at, you know, very attractive pricing, allowing you to make a good return. If Virgin decide to wholesale, the only way it would make sense is if they really, really had aggressive low rates. Why would they do that? So, you know, in in order to move significant amounts of volume late in the day, it's gonna have to be really, really financially attractive. When that happens, you're gonna decimate your retail base. So I think any that's why any decision around wholesaling, I think, is is is very delicate and needs to be carefully considered. And I'm sure that's what they will do. And we'll participate in that process through the challenge you'd expect. And I think therefore there's an open and transparent dialogue about it. Okay. Thank you very much. No. Pleasure. Good question. Thank you, Jerry. You are now muted. Please lower your hand. And our next question is coming from Nick Delfos from Redburn. Nick, please go ahead. Hi. Thank you. It's actually Mandeep from Redburn. Nick's on an alternative call, so I'm subbing for him. So apologies for I can't believe Nick's gone to another call. How can he do that to us? We're just sharing the responsibilities around the team, so next call exactly the same time. Okay. So, look, I had two, quick questions, hopefully. First, I just want a little bit more color, please, on the mobile. Not declines, not just on the SIM only, but on the sort of move to direct and separating handsets and, revenue. Can you maybe help us quantify minus eight going to get some easy COVID comp? So kind of just help us understand a little bit more about the how the move to direct and IFRS 15 is maybe impacting the numbers. That's the first question. The second question is on the GBP 5,000,000 JV potentially off balance sheet. Maybe some color as to why it's taking so long? Why do we need to wait until the November results? Presumably, there's a plethora of infrastructure money dying to invest in such a venture. So why is it taking so long? And is it possible that Mr. Drahi could play a role in that vehicle? Yeah. Sure. Shall I do the second question first and then and then Simon can talk about mobile and the move to direct and IFRS 15, etcetera, etcetera. There's quite a lot of moving parts in that. So, look. I I think why is it taking so long? I I don't see it as taking too long. I'm just we're taking our time. There's there's, you know, these things we don't need to rush at these things. The the beauty here, Mandeep, is remember I say, we we don't need to do this. And, again, if I'm really, you know, honest, when we first thought about it, we thought we might need to do it. But as you all know, based on our results presentation in May, you know, we we sort of got a £2,000,000,000 cash upside, if you like, from various tax changes, super deduction plus the the tax year we got through the pension, changes you know about. So so there's the the the great news is we don't need to do it if we don't want to do it or we shouldn't do it. So we are taking our time to make sure that all options are evaluated, number one. Number two, the criteria we're looking at, you know, we can be a bit firmer on those in terms of our negotiations and say, look, we're only gonna consider it if it really is very, very attractive to us. Remember, there are some some costs invert or commas or implications of doing it because you've to set up a separate entity and, you know, as per per our earlier conversation, I'm most focused on building that 25,000,000 as is Clive by December 26 for the reasons that are blindingly obvious and underlined by the announcement today. So so I think that's that's my most important thing. The other thing I'll say just to help you a little bit is we're in no rush. We'll take as long as we need because there are certain criteria that would be very interesting to me. And for example, should we have a industry partner? And by that, I don't mean, Adrahi or anyone like that. I mean, in The UK. If there was a way of collaborating to build some premises that were harder to reach or would not otherwise be reached to our current plans, that would be very encouraging. So I'm looking at are there any industry players who would like to participate in that too? And that, I think, is is one of the things that would make it much more compelling if we could find a way of doing that. Does that make sense, Mandeep? Yes. Yes. Thank you very much. So so I hope you got the the the message in the last point. So we're not rushing. We'll take our time, and we'll only do it if it's a blockbuster, and it's quite complicated to achieve the things I'd like to do. But we'll see. Simon, do you wanna talk about the the mobile and move to direct and IFRS 15 and that sort of mobile dynamics? The first point is that equipment revenues are up. The primary driver from that is that the volumes are up relative to the first quarter last year because as we've come out of lockdown, we are seeing more activity and that's driving more volume and that's driving the revenues up. Although, if you look at Q1 versus Q4, what you'll see is there is not a huge growth versus the prior quarter and that's because as Philip mentioned in his remarks, footfall in our retail stores, which is a primary handset channel remains somewhat lower than pre COVID. So that's the primary driver. Yes, there has been some impact from the move from indirect through into wholly direct because under accounting, IFRS 15 accounting, we are booking the direct into a service revenue and equipment revenue whereas through the indirect, it all goes through the service. That's the primary difference. If you want a briefing on that, go to our website. We explain exactly the accounting differential between an indirect and a direct when we transitioned to IFRS 15 that allowed it calculated, but it's not the main impact in the quarter. Hope that helps. Thanks, Mandeep. I think we've covered all our questions, believe. Are there any left? Right now, there are no more questions. Great. Well, listen, thank you everybody for dialing in as ever, spending your time with us. I know as you some of you say, I appreciate it's a really busy day with lots going on. And thanks for your interest in VT and look forward to seeing you again soon. Thank you, everyone. That marks the end of your webinar. Thank you for joining and have a nice day.