Good day, welcome to BT's Q3 results call for the third quarter ended 31st December 2022. My name is Shreya, I'm your host today. During the presentation, your lines will remain on listen only. I would like to advise all parties that this conference is being recorded for BT purposes. Now I'd like to hand over to Mark Liddell. Please proceed.
Thanks, Shreya. Welcome everyone. Presenting on today's call is Philip Jansen, Chief Executive, and after some prepared comments, Simon Lowth, Chief Financial Officer, will join Philip to answer your questions. We'd like to ask that you keep it to one question per person. Before we start, I'd like to draw your attention to the usual forward-looking statements in our press release and our latest annual report for examples of the factors that could cause actual results to differ from any forward-looking statements we may have made. Both the press release and the annual report can be found on our website. With that, I'll hand you over to Philip.
Thanks, Mark. Good morning, everyone, thanks for joining. As usual for our third quarter results call, I'll make some prepared comments before Simon and I take your questions. I'll summarize the highlights of the quarter and our business unit results, update you on our FTTP investment, then briefly cover our cash position. Before diving into the detail of the quarter, I wanna confirm that we remain on track to deliver our long-term ambition to transform our network to 5G and FTTP, to digitize and automate our systems and processes, to significantly enhance our customer experience through delivery of next-generation products and related services.
Overall, we made good progress in the quarter, the business performed well given the current market conditions. Against last year's pro forma results, group revenue was flat, while EBITDA was up 1%. As we said at the half year, normalized free cash flow will be more back-ended than last year. I'll explain why that is and why we are reaffirming our full-year outlook shortly. The pace of operational progress has continued. A few examples. Our FTTP program is delivering on all fronts. We've built FTTP to a record 810,000 homes in the quarter, while staying within our cost range of GBP 250-GBP 350 per home passed, which has taken the footprint to 9.6 million premises.
Customer demand is extremely strong from both CPs and end customers, with orders up a staggering 51% versus last year. The take-up rate has now reached 29% with 324,000 net adds in the quarter, bringing our total FTTP customer base to 2.7 million. We are building like fury, and we are connecting like fury. Staying with Openreach, we announced regulated price increases from this April of 11%, and we're delighted to say a number of major CPs have given statements of intent to sign up to Equinox 2 once Ofcom has concluded its review of this offer. In Consumer, we confirmed last month that we will raise prices by 14.4% from April.
T his uplift is needed to offset cost inflation and pay for our investments. On average for our customers, it equates to only around an extra GBP 1 per week and still represents exceptional value for money. You can see that ARPU has reduced as we've invested to protect the base, with the result that churn-to-date has remained pretty stable in the face of robust competition. As I've said many times before, we will not stand by and allow others to take our customers. Despite current cost living pressures, our confidence in consumers' trajectory remains strong. We know that we will be facing a value-focused market, but we were prepared for this, and we are well equipped to compete in this market.
For example, we connected a record number of FTTP customers in quarter three, taking our consumer base to 1.6 million. In mobile, we've extended our award-winning 5G coverage to 60% of the UK population. Moving to our B2B divisions, as you know, we'll integrate these as a single unit, BT Business, from quarter one next year. This is where they've accelerated transformation and delivery of next-generation products and solutions. It will also deliver at least GBP 100 million of run rate cost and CapEx synergies through the streamlining of management teams, support functions, product portfolios, and systems by the end of fiscal year 2025.
We're very pleased to have reached an agreement with our union partners on a consolidated cost of living payment that started last month for our U.K. people paying less than GBP 50,000. That's 85% of our workforce. Very importantly, the CWU and Prospect have agreed to work with us as we continue to transform and modernize the business. Following industrial action, operating and service metrics are steadily recovering. Finally, despite today's market volatility, we are reaffirming all our outlook metrics for this year and beyond. As I said earlier, we remain on track delivering our plan, supporting our customers and our colleagues, while underpinning economic growth in the U.K. and delivering to our shareholders.
Moving to quarter three CFU results, which I'll talk to on a pro forma basis, assuming the Sports JV had been in place last year. Consumer service revenue grew by 2%, overall revenue for the division was flat as the benefit of contractual price changes and the return of roaming was offset by lower handset sales, as we see customers holding onto their handsets for longer. EBITDA was up 1% as the revenue flow-through and strong cost control was up against a strong prior year comparator. Enterprise revenue was down 3% as legacy product decline and the migration of an MVNO customer were partially offset by continued growth in our SME and SoHo divisions.
Conditions clearly remain very challenging, we're pleased to see sequential improvement once again in both enterprise revenue and EBITDA. In global, revenue was down 2% as low equipment sales and prior year divestments more than outweighed the benefit of an FX tailwind. EBITDA was flat as cost transformation counteracted the lower revenue. Openreach revenue was up 4% in quarter three as price rises and increased sales of FTTP and Ethernet offset the decline in physical lines and lower chargeable repair volumes. EBITDA grew by 6% as revenue flow through and cost control more than outweighed costs from higher levels of FTTP provisioning and pay inflation.
I should add that the broadband line position, which was down 10,000 in Q3, did see some improvement on recent quarters as reduced market activity and losses from industrial action were counteracted by a seasonally stronger market in Q3 and some catch up in last year's divisioning. Staying with Openreach, I'd like to show a little more detail on the FTTP program. We are still building at a pace of over 3 million premises per annum, but most importantly, as I implied earlier, we have begun to industrialize our connections machine, and we're now at 29% take up overall. However, this does not really give a sense of how take up has developed over time.
If we were to look at FTTP built just 24 months ago, nearly 50% of end customers using Openreach's broadband network have made the switch to FTTP, supporting higher ARPUs, delivering better end customer satisfaction and lowering operating costs. Equinox 2 is designed to accelerate this take-up even further. Before closing, I wanna spend a little bit of time taking you through our outlook, which as I said is unchanged. Maintaining our EBITDA outlook of GBP 7.9 billion set two years ago has meant we have had to deliver an additional GBP 700 million of EBITDA this year. GBP 300 million is a step up from last year's GBP 7.6 billion.
Unforeseen headwinds just from higher energy prices and pay inflation added around GBP 300 million to costs. I'm sure you'll recall, we have also had to deal with the migration of a large MVNO customer. To achieve that sort of GBP 700 million swing, we have delivered on cost transformation together with the implementation of price indexation and solid trading in many areas of the business. The plans we are executing set the business up for consistent and predictable growth in the future. Of course, we also need to convert that EBITDA to cash. As I said earlier, BT is structurally skewed to deliver much more cash in the second half compared with the first half.
This year, our normal phasing has been further accentuated in quarter four by two factors. Very significant CapEx consumption in the first nine months of the year as Openreach accelerated its build, including considerable work in progress, as we mentioned last quarter, and accelerated take up with FTTP, resulting in over GBP 650 million worth of more cash CapEx this year to date versus last year. We will unwind some of our work in progress, giving us a unit bill cost tailwind and therefore lower our cash CapEx in quarter four. The second factor is on phasing a more back end of EBITDA and receivables delivery than usual, primarily from our B2B units.
To wrap up, Openreach has built a record number of premises and more importantly, connected a record number of end customers. As a result, FTTP take up has continued to increase and is now at 29%. We expect this to accelerate further in quarter four and again once Ofcom's review of Equinox 2 is completed. Consumer has connected a record number of customers to FTTP and can now reach 60% of the U.K. population with 5G. Its transparent pricing mechanic will help offset the considerable cost pressures in the business and allow us to continue to invest to deliver the quality of service and value for money our customers have come to expect from BT.
Enterprise and Global have delivered a more stable quarter overall. While the market is still tough, I am convinced that the combined BT Business can complete the job of transformation that is already underway in both divisions. Overall, BT is delivering to plan, and we are on track to achieve our long-term ambition. With that, I would now like to open up to questions. As usual, could I please ask you just to stick to one question? Operator, could you please open up the lines?
Everyone, your question and answer session will begin now. If you wish to ask a question, please click on the Raise Hand icon at the bottom of your screen. If you'd like to withdraw your question, please click on the hand icon again. Once it is your turn to ask a question, we will unmute you. Please limit your questions to one per person. Thank you. Our first question is coming from Adam Fox-Rumley from HSBC. I'm now unmuting you. Please go ahead.
I would like to ask basically about pricing, please, and your engagement with Ofcom around the recent price changes or the announced price changes, where they're most interested, if there are any tensions and also I suppose the reflections on their investigation into you being sufficiently up front in your contract terms with your customers. Thank you very much.
Yeah. I mean, look, obviously we are engaged in conversations with Ofcom on multiple fronts all the time, okay? It's a really important relationship, given what's happening in our business and in the industry at large. One of the key elements is clearly pricing, right? There are sort of two parts to that. There is the regulated pricing through Openreach, and then there's the sort of retail pricing part for our consumer business. I think on the regulated part. You know, everybody understands that the WFTMR had a very clear CPI indexation, mechanic to it. That's been absolutely necessary to help fund some of these investments that we make in FTTP.
You can see that in our description of how we put our foot down on the gas here in terms of building 9.6 million homes, but also preparing the pathway to the next 6 million as we described it, the sort of network work in progress activity we announced last quarter. I think, I hope that the regulator recognizes that, you know, the CPI indexation that's inherent in WFTMR is designed to fund this kind of aggressive expansion, which we are actually delivering. The, you know, the FTTP initiative is now a runaway train, both in terms of build, but also now in connections. That's what really matters, by the way, is that customers get connections to this new fantastic network.
I hope that they're encouraged by that. Without the CPI, that's obviously much harder to do. I think that's a long-term regulatory settlement as you know. On the one hand, no one likes seeing prices go up significantly. No one's happy with the inflationary environment, but it is what it is. The CPI mechanic is there for a reason, because it's to insulate us against massive increase in costs, which of course we're seeing by definition. That's the regulator part. On the other part, which is the CPI plus 3.9, which we're putting through as we speak almost. Again, the real challenge there, and I think it's a fair challenge, by the way, is have we been transparent and clear with our customers what the pricing mechanic is? Obviously, we feel we have, and we'll do whatever we can to make sure that is the case.
I think it's fair to investigate and make sure we're doing everything we possibly can. You know, we research and talk to our customers all the time. Clearly, we've got millions and millions of customers calling us every month. I think it's fair to say people understand it. Do people appreciate and like a big price increase? No. Again, you've got to go back to it. This is the thing with Ofcom as well, which they do understand, I believe. The value for money of what we offer both in broadband and mobile is truly exceptional. It's less than GBP 1 a day to get unbelievable service, and it's unlimited usage. Let's not forget that.
It's not gas, it's not electricity, it's not a meter. People can camp at home and do spend all their time on our network using as much data as they want for GBP 1 a day. Therefore, percentage-wise, these look like big increases, but it's GBP 1 a week extra on this price increase on average for our customers. If you put that in the context of the overall household bill, the relative importance of what we do and compare it to other things, that's why all our research tells us although no one, you know, celebrates a big price increase, they understand why we're doing it. I hope that's okay. We're going to move to the next question.
The next question is coming from Maurice Patrick from Barclays. Please proceed. You're muted, unmuted now.
Thanks, guys. Hopefully you can hear me okay.
We can hear you, Maurice. Hi there.
Good to know. Thank you. Thank you. Morning, guys. Yes. I guess, just a quick question on Openreach momentum, please. I mean, you've seen stories in the press today around CityFibre cutting 20% of their staff. Your own broadband numbers inside Openreach improved significantly. I know you blamed the strike action on the negative number last quarter. Just curious to see from your side of your view on the sort of the relative growth in the broadband markets changing, if you're seeing any impact from altnet build actually taking market share away from you at all. I think you indicated before you thought the market was broadly stable in the last couple of quarters.
Has the market picked up this quarter? General views in terms of, yeah, market dynamic, how Openreach is doing and market share losses. Thank you.
I'll make a comment there and Simon can chip in. I think, you know, again, stepping back, you know, Openreach has well in excess of 20 million broadband, you know, lines effectively, right. We've always said over the longer term, we think our broadband base is gonna be broadly flat. And, you see a few losses, obviously, as you referenced to certain other players, but that's offset by sort of market growth and other factors, particularly new build particularly, right. At the moment, we've had a double whammy, if you like, in a year because we've seen the market for new homes come down and we've seen a pull forward of people in COVID taking more broadband than they would have otherwise done.
You've also got this third factor, I guess, which is people being a little bit more cautious. There is some evidence of a few people taking mobile only, but it's in the noise. I wouldn't get carried away on any one quarter. What we're looking at here is, you know, we're very confident that, you know, we can keep the thing roughly flat, in the medium to long term, given what I just said. I sort of point to, you know, what's happening with our base. The base is enjoying a good migration from copper to fiber, and the ARPU is up 7% with satisfaction levels obviously heading in the right direction. Stable base each quarter, you know, will bump around a little bit. We benefited in this quarter from the fact that students came back.
Yes, we're unwinding a bit of strike action that obviously hurt us. Again, I need to look at this over across, you know, multiple years, and we think it's gonna be broadly flat. We need the market to come back and new homes to start being built again. That's not gonna happen any time soon. Simon, anything to add to that?
I think the key point is that Openreach is investing at, you know, massive pace scale in building FTTP and end customers and CPs are really wanting that product. It, you know, the rates of connection and take-up is probably somewhat ahead of our expectations. Clearly that gives Openreach a huge competitive advantage. The small moves in broadband base, as Philip said, are more about homes and broadband market overall. We're not seeing any change in sort of competitor loss, very much in line with what we'd expected.
Yeah. I've also, okay, just to reiterate, you know, what we're looking at is, you know, the mix, which is really good, and the ARPU, which is really good. The bouncing around any one quarter, we don't get too worried about as long as there's no mega trend, and we watch it very, very carefully. Do expect it to be a soft market for the foreseeable future, right? As the economy, you know, continues to be under great stress. Given that situation, we feel very credible performance to be doing those kind of KPI performance that I just read out. Next question please.
The next question is coming from Nick Lyall from Redburn. Nick, I'm now unmuting you. Please go ahead.
Hi, Nick.
You're gonna put the prices up,
Nick, sorry. Nick, you're gonna have to start your question again. I think we just missed the mute button. Can you start again?
Yes. Can you hear me now?
Yes. Loud and clear.
Just a quick question on price structure. Obviously you're intending to raise prices, and we understand why that is from a market perspective and, as you say, from value for money perspective. How does this work while you're trying to keep the base stable, in terms of the loyalty penalty discounts and all the other things that you have to comply with? In other words, if you raise price on existing customers, how does that impact your ability to be aggressive in the front book market? Thanks.
Yeah, Nick, great question. I mean, first of all, I'll just step back a little bit and just make sure I understand. If you look at, take a, you know, our drop through, what we're saying here is we put our prices up by CPI plus 3.9%. In the end, we think the net drop-through after everything, of cost increases and recalibrating what we're offering our customers through the year, is a drop-through of between 30% and 50%. In this year, we think we're gonna be, you know, sort of a bit closer to the upper end of the range. For next year, we'll probably be at the lower end of the range because the number's much higher, obviously. What actually happens is the prices are completely transparent within the contract. They all go up in April.
You'll see next year exactly see what you see this year, which is quarter-on-quarter, you'll see a slight degradation that just goes down over the course of the year as customers ring up and come onto new contracts, A. And B, we deal with some of the things you're talking about, because what we don't wanna do is create lots of anomalies in our customer base. We've got a machine that Mark runs, which manages that price, which is to keep everything in equilibrium. I've talked about this for four years. It really is high customer service, strong NPS, great value for money, low churn. If you look at our KPIs, all those things are happening.
The revenue's gonna go, obviously you've got handset sales, which are obviously offsetting a little bit, but you're gonna see increased revenue, and you're gonna see drop-through in the EBITDA line. That's gonna happen this year, and it's gonna happen next year. The only thing I'd say to you is just to bring it a bit more to life, Nick, is we've always said we're not in the business of losing customers. We will compete really heavily to maintain our market share, but the mechanic of the price increase is done. It's then as people ring up, remember, they average have a two-year contract. As they ring up, we discuss with them what's the best package for them.
Of course, we've got much more in our locker now with FTTP and 5G and combining things together and bundling IoT and a whole host of other facts and features into mobile. Overall, what we look at is customer lifetime value. I can reassure you, because it is in our, in our KPIs, we're making sure we've got the right share of the right customers who will stay with us as long as possible. Okay, next question.
The next question is coming from Georgios Ierodiaconou from Citi. Georgios, I'm unmuting you now. Please feel free to speak.
Yes, good morning. Thank you for taking my question. It's actually on the guidance for the full year, specifically on EBITDA. Looking at the run rate implied for the fourth quarter, it does imply an acceleration in EBITDA. I'm just trying to understand, you do have some headwinds, as you mentioned, from customers optimizing during the course of the year. You also have some higher labor costs perhaps coming in the fourth quarter. I just wanted to get a bit more understanding as to what can drive this acceleration. Perhaps I'll follow Maurice's example in asking a bit more than a question. If you could also give us a bit of clarity on energy, not just for the fourth quarter, but how you're thinking about it in next year. Thank you.
Yeah, sure. Good question. Simon can give you the answer to those.
Firstly, on Q4, we've reaffirmed the outlook for EBITDA. You know, we are gonna see continued strong trading momentum in Consumer and Openreach, which you've seen during the year, benefiting from, you know, the continued strength of the pricing. Do remember, you know, yes, there's been some pay awards, but we continue to drive our cost transformation hard, and that simply ramps up through the course of the year. You'll see continued strong trading from Consumer and Openreach. Also, as we generally see in Q4, you know, our B2B units typically deliver a stronger Q4 than the first three quarters.
Of course, that will be further, you know, characterized this year because the Virgin MVNO, of course, dropped out Q4 last year, so we don't have that same quarterly comparator headwind. That's on EBITDA. Reaffirming the outlook, continued trading momentum in Openreach Consumer, a bit of a step up in B2B, and a big drive on the continued cost transformation. On energy, so this year, we, you know, largely hedged. We've also had the benefit of the energy scheme from the government. I think not an awful lot more to say on that for this year. For next year, we're following our policy, which is we progressively look to hedge our demand.
We've made good progress in hedging next year's energy position through a combination of power purchase agreements and market purchases. As you know, power prices have been somewhat weaker and there's been some growing liquidity. We're ramping up the hedges for this year. Clearly we've still got some exposed position and we're still exposed to sort of volatility energy prices. We'll update you in Q4 when we'll have a, you know, the hedge book finished for the year.
Thanks.
The next question is coming from Andrew Lee from Goldman Sachs. Andrew, I'm unmuting you now. Please go ahead.
Andrew.
I just had a follow-up to Nick's question, Philip, and your comments or your helpful range of drop-throughs that you anticipate and see from your price rises in consumer of 30%-50%. You touched on it, but I just wondered if I could dig in a bit more on one of the key inputs into that drop-through, which is clearly competition. Could you just give us an update? It looked like competition has picked up a bit this quarter, and people have been trying to work out what your consumer broadband net adds are or were in the quarter. They looked a bit, you know, weaker, but I think there's some issues with rounding there.
If you could just give us an update on the degree of competition you're seeing and both in Q3 and in the run rate into Q4 and how you've been able to maintain customers through that increasing competition, if there was one. Thank you.
Thanks, Andrew. Yeah, look, you're right, it is a very competitive market, we're competing really well in it. Again, we monitor many elements of some of the things that we report on. Obviously at a macro level, you can see the churn, right? We've kept churn at consistent levels despite a more competitive market. Yes, we are reinvesting to keep our customers. That's what you see is that our ARPU through the quarters comes down. Again, it's gonna take a big step up. The thing is, it's gonna take a big step up by everybody. That's the thing is obviously we announced our pricing mechanic a long time ago. Everybody has to put their price up for the reasons that are obvious, right?
Given what I said earlier. I think there's a level playing field from that point of view. And I think there's a general understanding that a more stable market is better for everybody. And I'm seeing that, you know, in terms of the churn is low for most people. As we look forward, the reason I said we expect it to be at the lower end is, A, the pricing is higher, and B, we think the competitive intensity is higher. And also there are a bunch of people here who don't get price increases. I mean, we've got the social tariff, we've got, you know, a landline only. It's a blend of things.
Also on the drop-through, clearly the costs that Consumer are experiencing, you know, by definition are going up, not least of all they get the Openreach cost that everybody else gets as well. Very competitive market. I think we've got a handle on it. I mean, we're very well prepared, one of the great things that the Consumer didn't do is get organized and plan for how to manage the customers with a lot of science, a lot of data, and a lot of understanding of which things to offer which customers and why and when. That form has proven to deliver. This year, we're on our targets, and I think we'll deliver the same next year, notwithstanding it's gonna be a very competitive market, of course.
Our next question is coming from Polo Tang from UBS. Polo, I'm unmuting you now. Please go ahead.
Hi.
Yeah, hi. Thanks for taking the question. It's just about consumer fixed service revenues because we've seen a noticeable slowdown quarter-to-quarter despite the benefit of the 9.3% price rise. If I look at the numbers over the past three quarters, consumer fixed service revenues were +6% and +4%, and in the recent quarter is +1%. Can you comment on what is driving the slowdown and give some color in terms of both net adds and ARPU, and how should we think about consumer fixed service revenue growth into Q4? Thanks.
Do you wanna handle that?
Yeah, Polo, I mean, as I think we've already mentioned through the year, you know, the price rise goes, and Nicola touched on this, two dimensions. Firstly, ARPU, as we've said, we put through the price increases on the first of April. During the course of the year, we engage with our customers. We ensure that as they come up for renewal, they've got the best offer for them. That does include some ARPU reduction or indeed putting more benefits into their package. Therefore, during the course of the year, as you can see, we get some quarter by quarter attenuation of the ARPU, and that flows obviously through to the fixed revenue. The broadband base is overall broadly flat, down a touch, but really very modest.
It's mainly the drop through some attenuation of ARPU. Of course, as we get into the 1st of April next year, we'll put through the price increase, and we'll continue then on the same pattern of working with our customers to get them on the best package, retain them, but seeing some attenuation through the year. It's really just. What you're seeing in the fixed revenue is exactly the pattern that Philip described.
I'm gonna, Simon sorry, it's gonna happen again next year. I mean, you're gonna see a step up from quarter four to quarter one. As the price increases go through, you're gonna see quite a big step up. If you look back, you'll see it happened last year. Quarter four to quarter one goes up quite considerably, then each quarter it'll come down. That's because people are joining on new contracts. What we're trying to do is make sure that we don't have any big extremes. Of course, we're dealing dynamically with the whole customer base. If you're the very top end paying a super premium, and there are some people like that, obviously, when they come to reconnect, we do a better deal for them. That is how the market works.
In totality, it ends with a drop-through of somewhere between 30%-50% in the consumer EBITDA. That's the most important thing. As long as we're looking after our customers, and they see good value for money, we keep churn low and maintain our broadband base in the way that we've described. Simon, you want to say anything?
I was just gonna say, just to finish, Philip, there's a couple other factors, and I think Philip wants to mention one of them. One is that we are seeking to re-engage with customers who, you know, are vulnerable customers to ensure that they have access to, you know, the Home Essentials product. That has a little bit of a bearing. Then we're also seeing some small reduction in our SoHo customers as we really try to drive to all IP to enable the PSTN closure. These are not, really not material in the grand scheme of consumer level at BT.
Yeah.
They have a, you know, a small impact quarter-on-quarter.
Thanks.
Thanks, Polo Tang.
The next question is coming from Jakob Bluestone, calling from Credit Suisse. Jacob, I'm now unmuting you. Please go ahead.
Hi, Jakob.
Hey, guys. Just wanted to follow up on Maurice's question around Openreach. Last quarter, you kind of gave some breakdown of what was the impact of strikes, and as you mentioned, the underlying performance is sort of stable. Just to help us understand what that underlying performance is, can you break down what was the impact of this quarter's strikes, and also what was the impact of any catch-up from the Q2 strikes, just so we can sort of back out, I guess, the organic trend in broadband adds in Openreach? Thank you.
Simon, do you want to
Yeah, sure. The overall, you know, the Openreach lines quarter-on-quarter, so I'm talking about broadband lines here, are down about 10K. We estimate that the impact of industrial action through essentially orders being placed and then delayed in being converted was something like 20,000. Strip those out, clearly the lines would have been up about 10K in the quarter. The specific dynamics to that, firstly, for the overall dynamic, firstly, some continued, you know, churn to competitors. We'd always expected that. I think as I said earlier, in truth, that driver is possibly somewhat lower than our expectation.
I think a reflection of, you know, the great progress Openreach is making in rolling out fiber and migrating its customers. We've had that has been offset by still a relatively subdued new house market, which Openreach gets the majority share. That's been somewhat subdued. What we did see in Q3 relative to Q1 and Q2, is we saw the normal Q3 seasonal uptick in the broadband market, generally associated with school and university returns, you know, people moving on and setting up their own home. That, that gave us a bit of a boost in Q3 relative to first two quarters. Hope that helps you. It's really a, it's a continuation of what we've seen in the year with a, with a more buoyant market in Q3, more buoyant seasonal market.
Thanks, Jakob.
The next question is coming from the line of Sam McHugh from BNP Paribas Exane. Sam, I'm going to unmute you now. Please go ahead.
Hi, Sam.
Just first, you know, where do you think working capital should be falling out this year? Looking into next year, you obviously have the Sports JV where you've got that GBP 700 million provision that will be unwound, I think, through working capital, giving you a bit of a non-cash EBITDA boost. Consensus only has minus GBP 50 million of working capital next year. Can you just maybe talk us through where your expectations are and what the moving parts are on working capital? Thanks very much.
Sam, just so we got, I guess, most of the last bit. We didn't hear the intro. Can you just repeat it for me?
Yes. I'm sorry. I have terrible headphones. I should upgrade them. Just on working capital, kind of what the moving parts are for next year, really. I see consensus is around minus GBP 50 million. I think you have quite a drag from the Sports JV, which is being unwound through working capital. Just what the moving parts are on working cap for next year.
Okay. Simon, can you do that?
Yeah, I mean, the shape of working capital for next year, we don't expect to be really materially different from this year. It's always a seasonally skewed phasing, so we always have a negative working capital outflow in the first nine months, followed by a very strong inflow in the fourth quarter. That's the pattern we're seeing this year, and we expect that pattern next year. Yes, you are right that the Sports JV has a working capital impact, which will slightly, you know, increase the working capital net deteriorate the net working capital position for next year, but it's offset in EBITDA. I don't think it's a major factor on, you know, the overall cash profile year-on-year, Sam.
Thanks.
The next question is coming from James Ratzer from New Street. James, I'm going to unmute you now. Please go ahead.
Good morning, Philip and Sam. Can you hear me?
We can hear you well, James. Morning.
Great. Yes, thank you. I was actually gonna ask a very similar question to Sam. If possible, I'll try and ask it in a slightly different way, which is I think consensus for next year is looking for around GBP 1.1 billion of free cash flow. Given, you know, what might happen with working capital and maybe with interest with tax, so some of these below-the-line items, do you think that kind of level is a sensible level for consensus to be at at the moment? Thank you.
Thanks for the question. I mean, we're comfortable with, you know, consensus, beyond this year. Obviously, we'll give you the normal update in May and talk you through all the different moving parts.
Our next question is coming from Robert Grindle from Deutsche Bank. Robert, I'm going to unmute you now. Please proceed.
Thank you. Can you hear me okay?
Yeah. Hi, Robert.
Hi, hi there. Just a point of clarification on energy costs. Is that a pass-through for Openreach to the ISPs, BT is only really exposed to the bit that BT, the customer-facing businesses use? Actually, my question is, I saw the Code Powers applications by the Altnets have been slowing, and I wondered whether you're seeing that in the demand for passive infrastructure requests or are those still accelerating for now? Thanks.
On the first question, I mean, yes, where CPs are using the Openreach infrastructure and drawing power, yes, they pay for the cost of the power they consume at the price it, you know, that it took us to procure it. I think in terms of your second question, you know, we're not seeing any particular change in, you know, the request for passive infrastructure. It's in line really with what, you know, we'd expected and reflects a progressive build planned by Altnets. As we have seen, typically the plan and ambition is rather higher than what we actually see on the ground.
The next question is coming from David Wright from BofA. David, I'm going to unmute your line now. Please proceed.
Good morning, gentlemen. Can you hear me okay?
Hi, David.
Okay. Hello. Yeah, thanks for taking my question. I guess it's just back to the drop-through, the price drop-through discussion. I think the my colleagues before have pretty well covered the sort of dynamic in how we should expect revenues to evolve. I guess my question is a little bit more theoretical. That's quite a poor rate if you're down towards the 30% or so levels next year versus the perhaps negative sort of headline perceptions, both from a regulatory and a political perspective, the Daily Mail, et cetera. Why do you think there's almost a discussion to be had around price elasticity here, which is you could actually lower the price rise on the headline price rise, but you could actually deliver broadly the same result?
I'm just wondering because, you know, to announce 14.4% and only really monetize 4% feels like, you know, I guess a poor result. I might be sort of wording that badly, but do you feel like there's something missing here? I know you, Philip, very, in my view, accurately described the value that it brings, but perhaps that message is just still not getting through to the customer. I'm just interested in your thoughts. It's a little bit more theoretical.
No, it's a really interesting point. One thing I think maybe you're not forgetting, but you're not acknowledging it to me is the drop-through is affected by, you know, yes, anything we change with our customers on pricing, but don't forget the massive cost increase that we're experiencing. You've gotta remember there's, you know, we feel inflation, as we've said, on multiple fronts. Our pay bill is, you know, close to GBP 6 billion. You've gotta recognize that, there are cost pressures, energy Simon's talked about, across the board. Everything's going up. That part you've gotta remember when you look at the drop-through. I think it's a good point on the theoretical point. There is a.
There is definitely a perception that prices are going up by 14.4%, and they just sit there, and everyone gets it, and they get compounding of another big price increase the following year. That's not how the market works. That's what we're saying to you. Actually, we've got a mechanic which we think is Absolutely transparent, it gives you a predictable outcome, but you also know the timing of it. I think there's a virtue of the predictable contracts, right? We can actually plan for it, manage it, as opposed to it being random. Actually, the mechanic we think actually works. I can understand from a mathematics point, if you're just looking at a spreadsheet, you think to yourself, hang on a minute, your revenue should go up by 14.4%.
What are you giving it all away for? The whole point about it being a competitive market, it is. We set ourselves out to compete well, but notwithstanding the point that prices need to go up on average overall, and they are. This is the second year we're doing a significant price increase. We think, and that's the argument of Ofcom, by the way, which is why we think we'll be fine. In the end, if the drop through is only 30%, maybe a bit more this year, and all that ends up going to cash CapEx, and we spend so much on the network to invest in the future, that's sort of the message, which is why we're getting support, I think, from the main stakeholders, both the government and Ofcom, to keep going down the path we are.
Notwithstanding checking that we're being totally transparent with customers on pricing mechanics. That's how we think about it. I understand what you're getting at, because we get a lot of negative publicity on the price increases, when in reality, over the course of the year, prices average out below that because people are on 2-year contracts. When they recontract with us, we give them the best deal we can.
The next question is coming from Carl Murdock-Smith from Berenberg. Carl, I'm going to unmute you now. Please proceed.
Carl. listened to lots of questions on consumer and Openreach. I'm feeling a little bit sorry for enterprise, so I'll ask one on that, if that's okay? I was wondering if you could just comment on the competitive dynamics in enterprise. Obviously, we've seen retail broadband line loss, in enterprise this quarter, the worst it's been for several years. If you could talk about competitive dynamics there, and also the logic of the merger between enterprise and global to create BT Business, the synergies there and kind of why now? Why does it make sense to do it now? Thank you.
Yeah, sure, Carl. I mean, you know, on enterprise, you know, there's some encouraging signs on SoHo and SME, as you saw. You know, mobile's modestly up. There are some positive signs. I think in the other part of the large contracted base, which we've always talked about, continues to be softer than we would like. That remains challenging. To your point about why now? We have a lot of change going on in both divisions, and we wanted to sort of get the bulk of that done that was independent to each place. That's what we've been doing over the last couple of years. I think they are very much stabilizing the way they operate. We've got, you know, people in certain places doing the right stuff.
I think this is the right time now to look at it as one entity. It's partly to deliver cost savings, but the timing is about being able to get those cost savings without turning the businesses upside down. It's a lot of change. I mean, they've changed a lot. If you look at global, we've divested 30 plus entities over the last few years. That business you probably see it's firming a bit, stabilizing, and the return on capital's, you know, much better than it ever was. It's stabilized. SoHo, SME, mobile in good shape. The large contract business and corporate and public sector is under pressure in the U.K., and that can benefit from some of the thinking in global and vice versa.
We've got a really good group of people in there, in the corporate public sector working with Bas, Thakral Ashish. He's working through a new plan. I think he comes out of Global originally. There's lots of good reasons why now is a good time. We've got the right manager in the right place at the right time to get the synergies. As important as the GBP 100 million synergies is to make sure that the products and the services that we're offering those customers are fit for purpose in the new world of cloud and multi-cloud, secure multi-cloud, software-defined networks, all, you know, Voice over IP, all those newer areas, many of which are growing quite nicely.
You need to get more of that kind of stuff and see the back of some of the legacy voice declines you know well. There's a good plan, stump market, and Bas is getting himself in the right place.
We have a question from Terence Tsui from Morgan Stanley asking cash flow expectations for Q4. Is BT already seeing signs so far this quarter that cash flow is picking up materially? Can you share any anecdotes?
Yeah. I mean, look, obviously there are three main elements, on, you know, CapEx run rate, EBITDA, and obviously receivable. I'll let Simon just give you his perspective on that because, yeah, of course, some of the indicators are usually in the right place at this stage, and they are. Simon, do you want to just give your view on that?
Yeah. No, I mean, I think, Philip touched on it earlier, but the Q4 cash flow, you know, delivered through three primary things. I mean, obviously, EBITDA will step up further and to underpin the GBP 7.9 billion outlook. We took a question on that a bit earlier, very much in line with our expectations. Second, very importantly, cash CapEx will drop significantly compared to the first nine months of the year. It'll be probably lower than Q4 last year, when you recall we actually had a big CapEx step up. Philip explained the reason for this. It's that we moved extremely fast in FTTP build in Openreach in the first nine months. We built significant width, and we've completed 9.6 million premises, but we've actually started work on probably another six.
We'll unwind that with lower unit cost, and see much lower cash CapEx and this exit rate of December on the cash CapEx run rate is where we need it to be to deliver on the Q4 outlook. That's the second, cash CapEx. The third, which is the working capital inflow, as it always does in the Q4, moving to an inflow principally driven by timing of collections and receivables. Again, you know, the teams, sales and collection teams, they've got clear line of sight. They've got the clear plans. Indeed, the collection rate again, as we exited, December, in our B2B units was pretty much where we needed it to be.
Of course, you know, there's not just BT involved in this, it's customers as well. There's lots of work to do in Q4, but we're very firmly focused on that.
Yeah. Can I just, yeah, no, just as it is related, just back up one on cash flow. Just to repeat, I'm sure you've all got it, we haven't had a question about it, but I'm gonna say anyway. This cash CapEx that we spent of GBP 660 million more in the nine months compared to the previous year, that is strategically very important. You know, we've explained what's happened on the build and the connection rate. To connect 300,000 customers in the quarter, to build 810,000, and to climb the pump for 15 million households using a lot of third-party contractor labor and our own to get ourselves strategically positioned in the right place so we can put our foot down on the connections next year is probably the most important thing that we've talked about today.
Haven't got a question on it 'cause I guess you've all understood it. But that's what the decision we took is to. It's a tough decision, put our foot down on build and connections in the face of an economic storm. I'm really happy with the outcome. 29% take up, building like fury, connecting like fury. Any questions left, Marc? Yeah, I think, Trey, a couple more.
We do have a few more questions. The next question is coming from Akhil Dattani from JPMorgan. Akhil, I'm unmuting you now. Please go ahead.
Hi, Akhil.
Can you hear me?
Can hear you now, yeah.
Great. I've got a question. You mentioned at the start of the call that, if you look at the early cohort to fibre that you rolled out, you're now at 50% penetration rate. Obviously, you know, very good take-up rate. I wonder if you could give us a little more color on what you're seeing around trends and economics around that. I guess the things I'm interested in are, if there are interesting changes in market shares you're seeing. I mean, I presume quite a bit of this build is in the immediate footprint area, obviously it'd be interesting where you're under-penetrated, how that's impacting.
Similarly, any sort of comments you can give around wholesale and retail offer trends in that footprint area, just so that as we think about as your fiber build progresses, how that can impact economics.
Akhil, it's a great question. The answer is yes, we've got lots of encouraging underlying indicators on that 50%. It's a key number. Anything built two years ago, to have half of them on FTTP is a very significant number. You've already put your finger on the button here in terms of what it means from a market share point of view. We've got it by different slices of places in the country, including rural areas, cities, towns, highly urbanized, very densely populated. Every slice you can imagine, we can see it. I think we'll probably provide a bit more info maybe in May as to what those things might mean. When we finish our full year, we'll come out with a full build number, you know, hopefully and accelerate the connection rate.
I sort of might want to do a bit of a deep dive on your question because you can. There's some really. I've given you a sense of the build and the connection rate in a macro sense. I've laid the breadcrumbs of 50%, where we built it two years ago. You can imagine there's a whole host of things hanging off the back of that, and I give you one other, copper recovery. In places where we are a long way down the path, we're beginning to work out how we get the copper out the ground, which as we all know, is potentially worth quite a lot. I can't do it now for you, Akhil, but we will try and lay out a bit more of wider build than that. I talk about the fiber runaway train.
It's a runaway train now. Why is that? It's 'cause of all these indicators I've shown today and a few more that are underneath the 50% number that you rightly picked up on. Sorry, I can't give you more today, but wait until May.
The next question is coming from Nick Lyall from Societe Generale. Nick, I'm going to unmute you now. Please go ahead.
If you can hear me.
Yeah. Can hear you, Nick.
Great. It was just a couple of questions about Enterprise, if that's okay. I mean, the Enterprise trends at the EBITDA level looked quite a bit better this quarter. Was there anything lumpy in terms of savings that came in or is that just underlying business improving? I mean, obviously, any contract implications or, you know, including the MVNOs. The second thing was, you know, we've talked a lot about price rises at Openreach and at Consumer, but Enterprise faces a big corporate tax rise, as in its customers face a big corporate tax rise from the first of April instead. What are they thinking about the outlook into a first of April corporate tax rise? Should we just assume that Enterprise just keeps on getting worse for the time being? Thanks.
Yeah, Nick. Thanks. The answer is there's nothing significant one-off or anything. Yeah, things are stabilizing, but it's still much more to do, right? 'Cause you're right, it's a tough market. Obviously, you know, these businesses more than likely are gonna be, you know, under more pressure in the coming 12 months. By the way, I would say in terms of, you know, sort of failures and lack of funds, that's not a problem for us, right? We monitor that really carefully. What we're doing, as you can imagine, is working really hard with all our large, medium, and small customers to make sure we're giving them the best possible proposition we
possibly can. Actually, unfortunately, as ever, the price increases are going through, right? Ctually you can see that in solar, you can see it in speed, you can see it in mobile as well a little bit. The tax rise is gonna affect people. They are gonna be able to be careful, and we're working with them to make sure we deliver the goods as best we possibly can. Treyer, I think we've got time for one more question. If we can have the last question, please.
The last question is coming from Andrew Beale from Arete Research . Andrew, I am now going to unmute you. Please go ahead.
Just one more question on the 30%-50% net drop through in sort of about the effects. I just wondered if the coming EE brand focus on new convergence and connectivity products gives you some more perhaps, you know, more for more type angles beyond the renewal discounts that might help deal with the 14.4% price increase. Or whether you think that the cost of living issues for consumers sort of trump everything. You know, you still only end up at 30%. Just any thoughts on, you know, what you might be able to do with the new EE brand.
Andrew, sorry. It's a great question again. The short answer is yes. It won't be immediate, but the stuff that's being done sort of under the surface from a technology point of view, which I sort of inferred earlier, allows us to be able to be much more nimble with our customers. The, the new EE that you're gonna see has underneath it a flexible dynamic IT capability which will allow us to do much more in the conversion. You can see in our conversions, we're sort of, you know, it's been steady. We haven't grown that enough. We are starting bundling things together on mobile and we're bundling more on broadband.
We're not putting it together as much as we would like. There are lots of reasons for that, but the unlocker is the technology. You're dead right. It's really, really important. I think in the next 12 months, it's gonna be a tough market to be very competitive, and some of the technology will arrive in the year, but it's phased over the year. I wouldn't expect that to help us much in the year, but it will help us in year two, three and four unquestionably. Thank Andrew, thank you. Thanks, everybody, for joining. Appreciate your interest and questions as ever, and look forward to seeing you all soon.
Thank you, everyone. That marks the end of the webinar. Thank you for joining, and have a nice day.