BT Group H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 15 speakers on the call.

Operator

Good morning and welcome everyone to BT Group's results Following the presentation we will be having a Q and A session. I would like to make everyone aware that this event is being recorded for replay purposes. 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 make. Both the press release and the annual report can be found on our website. With that, I'll now hand over to Alison.

Speaker 1

Good morning, everyone, and welcome again to our half year results presentation, and thank you for joining us. Back in May, I reconfirmed our 5 strategic priorities, and I'm pleased that we are making solid progress against all of them. We're accelerating the key foundations that will drive value creation over the mid and long term, specifically doubling down on the U. K, fiber build and take up, lower costs and happier customers. But let me begin with some highlights.

Speaker 1

Openreach delivered record building connections in the half and increased its market leading take up, outpacing even our own expectations. With lower build costs, we can now go even further and build beyond the original €4,000,000 target that was set for this year, keeping our foot to the floor on one of the country's largest ever infrastructure investments. In Consumer, we saw excellent growth in both our 5 gs and our fiber customer bases as we accelerated the migration of our customers to next generation platforms. And our mobile subscriber base grew for the first time in 2 years, and our converged customer base is starting to grow again too. Customer satisfaction also improved across all 3 consumer brands for the first time in nearly 3 years.

Speaker 1

In business, we accelerated the carve out of our global segment and started the transition to a simpler, more focused U. K. Business. And while radically modernizing, we also improved customer satisfaction. Across the group, structural transformation and improved cost discipline delivered a further GBP 400,000,000 run rate savings.

Speaker 1

And bringing all of this together, we delivered growth in both EBITDA and normalized free cash flow despite the revenue weakness, which is keeping us firmly on track to meet our EBITDA and our cash flow targets for the year. Finally, we will increase the interim dividend by 4% to 2.4p per share, in line with our progressive dividend policy. But let me now hand over to Simon to run you through the numbers before I take you back through a more detailed update on each of our units, our transformation agenda and the outlook for the rest of this year.

Speaker 2

Well, thank you, Alison, and good morning to everyone. Looking first at our group results on Slide 7. So adjusted revenue for the half was £10,100,000,000 That's down 3% as challenging conditions in business, particularly outside the U. K. And an expected H1 decline for Consumer more than offset growth in Openreach.

Speaker 2

Adjusted operating costs before depreciation were down 3%. We have made £433,000,000 of gross annualized savings this half with £187,000,000 cost to achieve. That's absolutely in line with our target. Before moving on from costs, I wanted to quantify the impact of last week's budget on BT Group. We expect that the additional 1.2% on Employers' National Insurance Contributions, The GBP 4,100 reduction in the NI threshold and the known increase in the national living wage will together cost BT around GBP 100,000,000 per annum from April 2025, of which about 70% will be OpEx.

Speaker 2

We will intensify our productivity and our cost transformation programs to offset this. Turning now to adjusted EBITDA for H1. This was up 1% to GBP 4,100,000,000 Cost transformation and operational efficiency have more than offset the lower revenues. Reported CapEx came in at just under GBP 2,300,000,000 for the half. That's down 2% compared with the prior year.

Speaker 2

This was mainly due to lower non network infrastructure spend and the decline in IT costs following last year's platform deployment to support the new EE launch. It's worth noting that FTTP CapEx is down 2% in the half, benefiting from lower unit costs as the build has accelerated. Lastly, we're still expecting FY 'twenty five cash CapEx to be around GBP 200,000,000 higher than the reported CapEx due to the net impact of grant funding and capital creditors. Normalized free cash flow of £715,000,000 in H1 was up 57% on the prior year. This reflects the benefit of a lower working capital outflow, which was primarily from lower handset stock levels and a net inflow of mid tens of 1,000,000 of pounds from supply chain finance and handset monetization.

Speaker 2

We continue to expect a more neutral outturn for working capital for the full year. Separately, we also received a cash tax refund of around GBP 100,000,000 in the Q2. And as Alison just announced, we're proposing an interim dividend of 2.4p per share. That's an increase of 3.9 percent. And that's in line with our policy of paying an interim dividend of 30% of last year's total dividend.

Speaker 2

Moving now to our individual unit results, that's on Slide 8. Openreach grew revenue 2% in H1, driven by price increases and strong momentum in FTTP and Ethernet, partly offset by declines in broadband and voice lines. We expect continued momentum on FTTP and Ethernet beyond FY 'twenty five, broadly offsetting the impact of line losses and the closure of WLR related revenue streams as we approach the PSDN switch off. Openreach EBITDA grew by 6% in the half driven by stronger revenue, improved cost transformation, including around 5,000 fewer FTEs over the past 12 months and partially offset by pay inflation. Consumer revenue was down 1% for the half, impacted by the expected challenging pricing comparison with the prior year combined with a lower broadband base.

Speaker 2

Consumer EBITDA declined by 1% in the half year due to the revenue flow through and higher input costs, partially offset by continued strong cost control and higher equipment margin. In our Business division, H1 revenue was down 6%, principally driven by non U. K. Trading in our global and our portfolio channels. U.

Speaker 2

K. Revenues saw a small decline, around half of which was due to the change in recognition of £38,000,000 of wholesale managed broadband revenue in Q3 last year and that impacted the H1 comparative figures. Business EBITDA declined by 7% for the half, reflecting the revenue declines offset by cost control. We expect H2 year on year revenue and EBITDA trends to improve versus H1 in part due to a favorable comparator as we lap the impact of last year's £38,000,000 wholesale broadband recognition change and £41,000,000 of billing accuracy adjustment. We also expect the usual B2B pickup in H2, albeit in a tougher CPS trading environment.

Speaker 2

And on that note, I'll hand back to Alison.

Speaker 1

Thank you, Simon. So going back to the units in a bit more detail. Openreach delivered another stellar performance with growth in revenue, EBITDA, fibre build and fibre take up. We built fibre to a record 2,100,000 premises in the half, a 30% year on year growth, taking our footprint to £16,000,000 or around half the country, while also driving down our build costs. This strong operational delivery gives us the confidence to now increase our build target this year to £4,200,000 which we will achieve within our existing CapEx envelope.

Speaker 1

Customer demand for full fiber continues with 5,500,000 premises now connected, a record for connections in the half. And our take up rate is now a market leading 35%, showing that we're not only building, but we're also connecting at pace. In our operations, our repair volumes decreased around 10% over the last year, driven by the shift to full fiber where the fault rate is 60% lower than copper. Fault volumes will continue to fall as fiber expands, benefiting our customers and our OpEx going forward. Our service also remains best in class, achieving all of Ofcom's quality of service measures for both copper and Ethernet and contributing to NPS growth of 4.3 points year on year.

Speaker 1

Broadband line losses in Q2 were similar to Q1 and are at GBP 377,000 for the half, driven by the same factors, as I said earlier in the year, moderately higher competitive losses and a weaker broadband and new homes market. More than 80% of our losses occur in areas where we don't have full fiber. So I'm confident that our best defense is to keep building at pace and stimulating take up in the way we've been doing, which is why we invest every pound we save in our build back into growing our network. This ever expanding Openreach footprint, combined with an expected recovery in new homes that will come and the market will enable us to reduce these losses over the medium term. So overall, solid take up of fiber and strong operational momentum, together with ARPU growth from indexation and product mix, underpins the targeted return on our fiber investment, which very much remains on track.

Speaker 1

Moving to the next slide. Our Consumer business is performing well in what is a competitive environment. Revenue and EBITDA were both down a percentage point as we expected, driven by a tougher pricing comparable in the first half and a slightly lower broadband base. Nevertheless, ARPUs for both fixed and mobile grew. And on broadband, our market share was broadly stable with our full fiber base growing 33% to 2,800,000 nationally and market share growing in urban areas where we're already rolling out fiber.

Speaker 1

We see higher churn where we don't have fiber. But as Openreach continues to build fiber nationwide, we expect our churn to improve. In the quarter, we also launched the U. K. 1st Wi Fi 7 service, strengthening our premium broadband position and our ability to drive positive ARPU development in the future.

Speaker 1

Moving to mobile. The postpaid mobile base grew for the first time in 2 years and churn improved to an industry leading 0.9%. 5 gs connections were up 17% with the base now at 10,500,000 connections, all underpinned by what RouteMetrix have named the best mobile network for the 11th year in a row. In the quarter, we further strengthened our leadership position with the launch of 5 gs standalone in 15 cities across the U. K, which will increase to 30 major towns and cities within the next 2 months.

Speaker 1

Moving to convergence and new EE. We have two priorities to drive household penetration and customer lifetime value: fixed mobile convergence and family or household tariffs. Early signs indicate that New EE is doing better than our previous best of both dual brand approach with more than half of New EE broadband customers now taking a postpaid mobile contract. Consumer NPS, as I said earlier, remained strong and improved 4.2 points year on year. And as I also said earlier, that was across all three of our consumer brands.

Speaker 1

As the market leader, it's also important to me that we have taken a stance on the dangers of social media for young children. And we were the 1st operator to advise parents against giving smartphones to under 11s. This is a great example of us living our purpose. We connect for good. And it's very much appreciated by both parents and regulators alike.

Speaker 1

Back to the results. With the progress made in the first half and the run rate we are now seeing, we remain confident that consumer will return to growth in the second half. So let's now move to business, which is on Slide 12. As Simon said, revenue and EBITDA were down 6% 7%, respectively, in the half, principally driven by non U. K.

Speaker 1

Trading in our global and portfolio channels. Meanwhile, our U. K. Channels make up 2 thirds of our overall business revenue. And within these, managed services grew by 3%, while fixed and mobile connectivity declined by 6%, but with around half of that decline due to a prior period revenue reclassification in the Wholesale Broadband segment.

Speaker 1

So underlying, the U. K. Business declined by just under 2%, so not too dissimilar to what we saw in Consumer. As you all know, we are in the midst of a radical modernization and turnaround of BT Business, touching all our products, all our platforms and our geographies in order to drive the right long term customer and shareholder value. And as in the consumer market, we are seeing strong demand for those next generation products and solutions that we are evolving to.

Speaker 1

With full fiber customers up 57% year on year and our 5 gs base up 86%. In areas where we have fiber, we have over 50% of our customers take it. So as Openreach expands its footprint as it's doing, we expect to see further growth momentum. Customers on voice over IP also grew 8% year on year and now make up around 2 thirds of our voice base. Customer satisfaction improved as we are successfully managing these migrations to new platforms and increasingly putting security and trust at the heart of the refreshed better on BT business brand.

Speaker 1

And looking forward, and as Simon also outlined, EBITDA trends should improve in the second half. Let's now move to Transformation, which is on Slide 13. As you've seen, we're making solid progress against a massive agenda. This includes over GBP 400,000,000 run rate savings delivered in the past 6 months, keeping us firmly on plan to deliver our £3,000,000,000 ambition by the end of fiscal year 2019. To recap, we're driving most of the cost savings from 4 key programs: shutting down legacy networks and applications, simplifying our products, scaling the use of fewer shared platforms and deepening our data and AI capabilities.

Speaker 1

With respect to what we saw in the first half, let me bring to life how these savings are being realized. Well, we migrated over 1,000,000 customers away from legacy energy hungry fixed and mobile networks. And the network decommissioning that follows enabled tens of 1,000,000 in cost savings reducing our energy consumption by 10 gigawatt hours. This is around a quarter of our total energy reduction over the past 6 months. Digital transformation also delivered tens of 1,000,000 in savings.

Speaker 1

We've cut the number of applications we use by more than 20%. And our AI enabled chatbot, Amy, is transforming service, reducing inbound calls and improving customer experience. Openreach is also using AI to reduce its cost to build, improving planning processes, helping avoid multiple truck rolls and street works as well as reducing downtime between jobs. And partly as a result of all of these initiatives, our total labor resource dropped by around 2,005 and 5,000 over the past 12 months. Most of this reduction was seen in Openreach and Business, thanks to fewer faults on fiber and the continued transformation of the business unit.

Speaker 1

It's also due to increased efficiency across the company through the smarter use of technology. So clearly, I'm pleased we've made solid progress year to date, and I do see lots more to go after. And as Simon just mentioned, we will now intensify our cost transformation so that along with workforce productivity and other levers, we will offset the increased National Insurance burden now on us. Moving to our outlook here on Slide 14. Back in May, when we announced our group revenue outlook for fiscal year 'twenty five of 0% to 1% growth, I set out our expectation that half 1 would be much tougher year on year than half 2.

Speaker 1

Half one revenue was indeed tougher. It was down 3% on last year and it's been tougher than we anticipated. We therefore now expect group revenue for the full year 2025 to be down between 1% 2%, primarily reflecting that weaker trading outside the U. K, driven very much by reduced low margin equipment sales along with a softer macro environment impacting our U. K.

Speaker 1

Corporate and public sector channel in particular. Of course, this still implies a better relative performance in the second half, especially in Consumer, where we expect both service and equipment revenues to grow. Beyond revenue, we are confident in reconfirming our fiscal year 2020 EBITDA guidance of around GBP 8,200,000,000 supported by strong progress and ongoing focus on costs. And our CapEx outlook for the year remains at below GBP 4,800,000,000 and we continue to expect our fiscal year 2025 normalized free cash flow to be around the £1,500,000,000 mark. Our outlook beyond fiscal year 2025 remains unchanged for all metrics in all years, and we're confidently progressing towards our BBB plus credit rating target.

Speaker 1

So to conclude, Openreach is breaking records on fiber build and fiber take up. Consumer has laid the foundations for a return to growth, and we're powering ahead on the transformation and turnaround of business. We're therefore delivering against our strategy with accelerated progress on those most important aspects for long term value creation, doubling down on the U. K, fiber, lower costs and happier customers. And together, this is what's underpinning our EBITDA and normalized free cash flow growth and are offsetting the short term revenue pressures.

Speaker 1

We're therefore firmly on track to achieve our short term and our long term cost savings, EBITDA and cash flow targets. And with these results and further time in the job, I'm even more convinced of BT's potential to become a true national champion, the U. K. Only true digital backbone. Of course, it's without doubt that there's still more to do to fully modernize BT, but we're working at pace and our sharpened focus positions us well to generate significant value for all our stakeholders, our colleagues, our customers, the country and our investors.

Speaker 1

So listen, thank you for listening. We will now move to Q and A. And given the time available and the number of people online, please do keep it to 1 question per person. But let's move to the first question now.

Speaker 3

Thank

Operator

you. Our first question today comes from David Wright at Bank of America. David, please go ahead.

Speaker 3

Hello, guys. I do hope you can hear me and I apologize there's no video this morning. It does feel a little like a broken record that we're saying better Openreach, worse BT Business. We've said that for multiple years. It's been said possibly a bit more under the guise of Global Services by multiple CEOs.

Speaker 3

So Alison, I guess the question is, what can be done here? We've had some reports of potential divestment of the international businesses. Can BT Business be sold in entirety? Is it easy to actually extract that from the BT Group? What can be done here?

Speaker 3

Was your first full year results back in May, and so soon after that, you're already bringing down revenue guidance on the back of this. So what can be done with this business after so much disappointment for so long? Thank you.

Speaker 1

We are doing a lot. First of all, we need to migrate away from legacy products and services and move it to new products and platforms and radically simplify the business. That's what BaaS set out this time last year and that plan is very much on track. I also said back in May that we're really going to look at focusing on how we optimize that global business, whether it be in our portfolio channels or also the multinational customer segment. And if you just look at the U.

Speaker 1

K. Piece, the U. K. Business, as we just discussed, it's performing similarly to Consumer, following all of the CPI plus pricing these last couple of years. We always knew the first half was going to be negative, but that we would get back to growth as we move into the second half of the year.

Speaker 1

So the U. K. Business is clear. We just need to radically transform and simplify the products, the portfolios and really strengthen the brand, which is what we're now doing. The global piece, we're looking at a range of scenarios.

Speaker 1

I do believe that, that global multinational customer segment is right for consolidation. And that is one scenario that we are pursuing. But in the meantime, we've got to radically simplify and modernize that business as well. But I do believe a focus on the U. K, which is showing not dissimilar trends to our consumer business and will return to growth and then really radically simplifying the portfolio in global, which we're doing.

Speaker 4

Which we're doing.

Speaker 1

We'll return this business to growth consistently top and bottom line under the period that Bas also set out last year. He said revenues wouldn't stabilize until sometime during 'twenty five, 'twenty six with growth after that. And EBITDA stabilization and return to growth would be a year after the revenues. So we're still on track for that. But trust me, we are radically transforming the business, and we are looking at options and solutions to optimize that global footprint.

Speaker 3

And maybe, Alison, just to clarify your point, you said that you thought the segment was right for consolidation. I assume you would want to be you would be a seller into that rather than a consolidator and potential buyer of assets. Is that a conclusion you can make here?

Speaker 1

Yes. Certainly, I wouldn't want to double down in that segment. That's very clear. But if it's right for consolidation, we'll be looking at different scenarios. But I won't be doubling down on the global multinational customer segment.

Speaker 3

Thank you so much.

Operator

The next question comes from Akhil Dhatani at JPMorgan. Akhil, please go ahead.

Speaker 5

Hi. Good morning, Alison and Simon. Thanks for taking the question. Can I maybe ask a question on UK consumer trends? You've mentioned that you're expecting a better performance into H2, but I guess I was looking to understand from a KPI standpoint and a competitive standpoint, how things are performing.

Speaker 5

I think, Alison, back in May, you said one of your initiatives was to stabilize the customer bases again, and there's been good progress on consumer postpaid. But I'm mindful that consumer broadband is still declining around 40,000 in the first half. So maybe if you could flesh out for us exactly what you're seeing in the market competitively and how do you think about the journey to stabilizing the consumer broadband base? Thanks.

Speaker 1

Yes. So the as we said, we're seeing really good progress on mobile. New EE is having a great impact on customer satisfaction. And as we increasingly push convergence, we are getting broadband under the EE brand into new more homes. And they are showing much more propensity to buy a bundle, including TV and including mobile subscriptions as well.

Speaker 1

And we've seen seen a real uptick in our broadband our fixed mobile convergence in that new EE base. It's actually up quite dramatically. What we're seeing in the broadband base is a reflection of what we're seeing in Openreach. Where we don't have our Openreach full fiber and BT Retail only wholesales from Openreach, we are seeing some losses to AltNet. But if you look at how BT Retail is performing relative to the losses we're seeing in Openreach, it's actually doing pretty well because we're now building market share in urban areas where previously we didn't have the highest speed, most competitive product to compete with.

Speaker 1

So as what I'm expecting is as Openreach gets into the other half of the country that it's not yet in, that the BTEE broadband base will start to stabilize and we will start to grow again. But that it suffers the same a bit as Openreach in the short term where we're not in every part of the country. But now that we're ramping up our fiber build and going faster this year than we previously expected, we expect that to help to reduce the losses. And really happy with how new EE is performing. EE is a very strong brand in urban areas.

Speaker 1

And the market share growth that we're seeing in those urban areas where previously we were suffering is really building up. So I'm confident we will stable that base in the coming quarters.

Speaker 5

Great. Thank you.

Operator

Thank you. Thank you. The next question comes from Adam Fox Rumley at HSBC. Adam, please go ahead.

Speaker 6

Thanks very much. I wanted to ask a question about visibility of the sales line really because you mentioned that first half sales were worse than expected. Obviously, within the consumer and the Openreach businesses and indeed at the small business end, you've got pricing policies in place. So maybe you could just reflect a little bit on how the global line kind of came to be worse than you had anticipated? And I guess on a related note, for the U.

Speaker 6

K. Part of the business, did you see anything in the order book or in customer conversations around the election or around the budget in terms of customer caution that might subsequently unwind? Thank you.

Speaker 1

So the sales line thank you, Adam. The sales line was only worse than expected in the global area. Openreach very much in line with what we expected and great revenue development and consumer exactly in line with what we expected. In that global piece, more than half of the global mess was actually very low margin, almost no margin equipment sales, which is very lumpy and it can come occasionally. So it had no impact on EBITDA cash flow.

Speaker 1

And then the other And some of those government contracts, they can be And some of those government contracts, they can be lumpy in nature as well. They're not always EBITDA cash flow positive in the early periods either. So definitely, there's been a bit of slowing of some of the public sector contracts than we previously would have expected because of the change in government. And that's really the only dynamic that we're seeing in the U. K.

Speaker 1

That's slightly different versus what we expected coming into the year. And whilst we're looking at that public sector slowing and clearly we're waiting to see how things pan out from a budget point of view, we're being cautious on the outlook for the corporate and public sector in the U. K. At the moment. But beyond those kind of phasing of public sector contracts and those big global equipment deals, there was nothing really different in the sales line versus what we expected in May.

Speaker 1

The

Operator

next question comes from James Ratzer at New Street.

Speaker 4

So if I look at Openreach, it seems like one of the big kind of variables over the medium term that's going to drive performance is actually the overall market growth rather than whether you're losing market share to Altmetz or not per se. So I'd just love to get Alison, Simon, your views on what you're seeing for broadband market growth in the UK at the moment. I mean, it looks to me as if it's actually pretty flat at the moment despite household growth actually continuing in the UK suggesting we've actually got a slight decline in broadband penetration in the UK. I mean, would you agree with that? Is that coming from maybe some signs of mobile tethering, fixed wireless access?

Speaker 4

Just love to get your thoughts on how you see the overall market growth for fixed broadband developing from here. Thank you.

Speaker 1

Yes, James, we look at it in a similar way. You saw growth in the broadband market during COVID. So households that previously were mobile only, everyday moved to broadband and mobile during COVID. And what you've seen is a bit of a correction of that growth we saw in COVID, and we're kind of back to the rates we saw on broadband and mobile tethering pre COVID. But as the economy recovers, it will at some point.

Speaker 1

And now that the government is encouraging new homes build, planning restrictions being lifted, we expect all of that to benefit the broadband market going forward. We're also really positively pleased with the consumer demand for full fiber. The fact that we're getting a 35% take up rate at this rate in the build and in some areas like 80%, even 2 years in, I was visiting an area up in Scotland recently says there's great demand for full fiber. So the more that we get full fiber throughout the country, that will stimulate demand as well economic growth and, of course, the new house building as well. And that gives us the confidence that, that combined with our penetration increasing throughout the country, we've passed more than half the premises in the country now, that will reduce the line losses that we're currently seeing.

Speaker 4

But you're not seeing any evidence at the moment of like increased FWA or tethering take up? Is that what you're

Speaker 1

No. It's kind of reverting to where it was pre COVID. There's always a bit of tethering down at that low end of the market. But fixed wireless access still very marginal in the U. K.

Speaker 1

The fiber product is so keenly priced in the U. K. It's difficult to see fixed wireless access taking off its scale like it's doing in the U. S, where pricing is much higher of the cable and the fiber product. But clearly, there'll be areas of the country where fixed wireless access will make economic sense for the network owner and will provide good coverage for the homeowner as well.

Speaker 1

But that's not we're not really seeing anything of a material nature changing in that segment.

Speaker 4

Got it. Thank you.

Speaker 1

Thank you.

Operator

The next question comes from Jacob Bluestone at Exane BNP Paribas.

Speaker 1

Jacob, you're on mute.

Speaker 7

Good year. Hopefully it works now.

Speaker 1

Well done. It was good that somebody did that.

Speaker 7

You think after a pandemic we'd work out how Zoom works, but apparently not. Thanks for taking the question. I had a question on cost. So you said you'd offset the weaker revenues through some cost cutting. And then for next year as well, you'll offset the impact of higher national insurance and so on through additional cost cutting as well.

Speaker 7

So it's quite a bit of extra cost cutting essentially that you're announcing with this release. Could you maybe give us a little bit more of an understanding of where are all these extra cost savings coming from given I mean, it's probably an extra $300,000,000 $400,000,000 of cost savings that you've sort of found. So just a bit of clarification around that. Thank you.

Speaker 1

Simon, why don't you take that one?

Speaker 2

Yes, certainly. So thanks, Jacob. Firstly, do bear in mind, as Alison stressed, a fair proportion of the revenue weakness versus our expectation was in really very low margin activity, particularly outside the U. K. Having said that, you are quite right that we are continuing to drive cost reduction harder, and we will intensify that to offset the impact of the budget.

Speaker 2

How are we doing that? We've set out a very clear, pretty comprehensive transformation program that's going to deliver $3,000,000,000 over the course of the next 5 years or so. We're finding ways of bringing forward some of that transformation to offset revenue pressures. In addition to that, we've been looking at further ways in which we can simplify the structure of the organization and the focus that Alison described helps us do that particularly around areas like support functions. It's also worth bearing in mind that something like 2 thirds of our cost base is, of course, 3rd party cost, and we've had significant progress in terms of procurement supply chain savings.

Speaker 2

So across the board, we're looking at each of the cost areas and we've got a very good track record of keeping continuing to develop greater cost savings than our expectation every year and we'll sustain that.

Speaker 1

And Jacob, €100,000,000 is less than 0.5 percent of our total cost base. We've experienced inflationary pressure like that short term in the past. As Simon said, we've got multiple levers to offset it. And I'm even more convinced of the scale of cost takeout opportunity that exists in this company the more time I'm here. And particularly as we head towards that U.

Speaker 1

K. Focused organization, we can really go after a reduced and simplified corporate function overhead setup that will help drive simplification of the company as well. So it's we've done it before. We've got multiple levers. We know how to do this.

Speaker 7

Great. Thanks, guys.

Operator

The next question comes from Andrew Lee at Goldman Sachs. Andrew, please go ahead.

Speaker 8

Yes. Morning, everyone. I had a question on Openreach again and also on margins, somewhat following on from Jacobs. So your Openreach margin trend ticked up relatively meaningfully in this half versus what you've been delivering in terms of margin expansion prior in prior years. Could you just explain how much of that is the incremental cost savings and how much of it is kind of underlying structural mix improvement?

Speaker 8

And maybe help us to understand how you think about margin evolution at Openreach into the second half and more importantly into the coming years? Thank you.

Speaker 1

Thank you, Andrew. Yes, as I said, Openreach had a stellar start to the year. It is a mix of mix. The fact that we've got really great progress on the shift to fiber, we've got great growth in Ethernet. They are higher priced products, higher margin products.

Speaker 1

And then we're doing a fantastic job on fault reduction, which reduces our OpEx as well. And Clive and the team are really ruthless on driving operational excellence. And to take cost out. And that's what he's to take cost out, and that's what he's doing. He's also had quite a restructure of his management overhead recently as well, consolidating 2 management teams into 1.

Speaker 1

And so we will continue to really focus on margin and therefore EBITDA development considering that the line losses will be a drag for a bit longer. So he's really focused on how does he keep growing his EBITDA and his cash flow generation whilst there will be some line losses to offset until we've really built out the fiber throughout the rest of the country. And I don't know if I can add to that actually.

Speaker 2

Andrew, actually it's a great example of where we've had huge benefits flowing through from procurement and supply chain management. So the Openreach team working with our procurement function have looked at all of the engineering materials, done a hell of a lot of value engineering to take cost out, while still delivering great network build. They've looked at different forms of contracting. So it's not simply on the repair volumes. It's actually the unit cost through supply chain management and procurement activity.

Speaker 2

You've been a great example.

Speaker 8

Can I just follow-up on those answers? So you obviously delivered a lot of cost savings in the first half and you highlighted line loss as a drag. Should we think about the first half margin improvement as a better guide to margin evolution over the next few half years? Or do you think you'll return to similar margin evolution that we saw in FY 2024, for example, which is a bit more muted?

Speaker 2

We will continue to see some margin improvement through exactly the same portfolio of initiatives we just described in Openreach. So I'm not going to give you precise percentage changes each quarter going forward, but the same levers will be available to us.

Speaker 8

Thank you.

Speaker 1

Thanks, Andrew.

Operator

The next question comes from Polo Tang at UBS. Polo, please go ahead.

Speaker 9

Good morning. Thanks for taking the question. So I've got a question on working capital and free cash flow. Can you confirm whether Q2 benefits from a $200,000,000 catch up on late payments by TalkTalk? And does your $1,500,000,000 of normalized free cash flow guidance already factor in the benefit of this catch up payment?

Speaker 9

Or is it a source of potential upside to the full year? And just on subject of free cash flow and working capital, are there any other notable puts and takes to call out this year? So I noticed that you have a £95,000,000 tax refund benefit. Are you going to see any benefits from forward copper sales or any benefit from factoring of handsets?

Speaker 1

Thanks. Over to you, Simon.

Speaker 2

Yes. Paolo, thanks very much indeed. So firstly, we guided to GBP 1.5 £1,000,000,000 of normalized cash flow, and we firmly reiterated that guidance for this year. We did receive a tax refund of about £100,000,000 That wasn't certain at the start of the year, but we ascribed a sort of probability weighted component in our guidance. That having delivered helps us clearly to have greater confidence in the delivery of the cash flow.

Speaker 2

We can also look at absolutely optimizing the amount of handset financing we do to manage interest costs appropriately. So just to reconfirm, we're firmly on track with our cash flow guidance for the full year. In terms of your second question, were there any particular movements in working capital in the first half? The short answer to that is no. We had slightly better working capital or to put it this way, lower working capital outflows in the first half compared to last year, and that's principally just around timing of payments and receipts.

Speaker 2

And we deployed broadly the same amount of working capital funding to manage the cash flow timing on the mobile handset business, which we've explained before. There were no copper there was no copper securitization in the half. And our guidance for the year assume that our CPs would pay to term, and that remains our assumption for the year.

Speaker 7

Thanks.

Operator

Thank you, Polo. The next question comes from Robert Grindle at Deutsche Bank.

Speaker 10

Yes. Good morning and thank you. I wonder what's your view on the CMAs near approval of the Vodafone 3 deal. I think your comments put into the process were less pro the deal than O2, who have a spectrum arrangement with Vodafone. What do you see the puts and the takes are from that merger from a BT perspective?

Speaker 10

Do you feel strongly either way? Thank you.

Speaker 1

Thank you, Robert. Well, we've made our position clear from the beginning. We've always wanted to clear from the beginning. We've always wanted to ensure, as you would expect, that any merger would not negatively impact competition and the ability for all parties to be able to get the right investment on their and the ability for all parties to be able to get the right investment

Speaker 11

on their

Speaker 1

infrastructure investments going forward. And so we've made our position clear. It's now for the CMA to decide and work with emerging parties as to how they move forward. In the meantime, this deal has been going on for 1.5 years. We've continued to build up our 5 gs network.

Speaker 1

It reaches 80% our 5 gs network reaches 80% of the population now. We've been further ahead of everybody else on the shared rural network. We've won the best network for the 11th year in a row. And if you combine that with everything we're doing on the fixed infrastructure layer with fiber, we believe we've still got the best networks in the country and that will continue for the foreseeable future. So let's see how it all plays out now.

Operator

The next question comes from Steve Malcolm at Redburn. Steve, please go ahead.

Speaker 12

Yes. Good morning. Thanks for taking the question. I'll go for sort of one, maybe a small add on to follow-up on Akhil's question earlier. Just on first on revenue, look, I don't want you to give guidance detailed guidance beyond 25,000,000, but you do have an aspiration to grow revenues in the midterm.

Speaker 12

And I guess when I look at 'twenty five, 'twenty six, you're going to have a lower tailwind from CPI. Clearly, you're going to have sort of greater volume pressures within Openreach because the average base is going to go down. So can you just kind of give us some reassurance that you think you can grow beyond this year? And maybe what that mix looks like? Can you get B2B back to stable?

Speaker 12

I don't want to get it, but it just looks like quite a tall order to grow revenues with less CPI next year and lower volumes in Openreach. So maybe some comments around that would be great. And

Operator

then on

Speaker 12

the consumer business quickly, I noticed the broadband churn ticked up in the first half or second quarter particularly. Is that just an impact of the kind of people coming out of 2 year contracts? And as that sort of annualized in the second half, is that part of the reason you think that the trend should improve? And maybe net adds will get a little bit better as that sort of churn and other contracts experience comes to an end. Thanks.

Speaker 1

Yes. I think what we won't have next year is the sawtooth effect we had this year coming in coming off of these 14% price increases on both Consumer and the SMB segment. We had a massive correction that had to happen in the first half of this year. Both mobile, broadband, consumer and SMB. We're not going to have that going into next year.

Speaker 1

And yes, there'll be less CPI if inflation stays low in some of the underlying. But we have still got our £3 and our £1.50 in our contracts coming through. Because of the scale of that back book to front book correction that had to happen earlier this year, there was a bit more save desk investment, a bit more regrading went into the market. And again, we're going to have much less of that going into next year as well. So underlying, I think we and that goes to your point on broadband churn.

Speaker 1

Some of that was driven by the scale of the loyalty gap that had built between the back book and the front book as a result of 2 years of compounding CPI plus 3.9 when CPI was very high. So and then, of course, one of the reasons we lose a bit of broadband at the moment is where we don't have full fiber in areas where we have all net competition. By this time next year, we'll be past 20,000,000 homes. So BT Retail, both consumer and business, will be able to start competing again in parts of the country where it hasn't had a full fiber offer. So all of those areas give me confidence.

Speaker 1

And then let's remember some of that more than half of that global revenue that we didn't get in the first half is very low margin or sometimes nil margin. So it has no impact on our EBITDA and cash flow. And that's why we really need to focus on the U. K. Going forward and finding the right solutions for that global business, which, as you can tell, I'm fully focused on.

Speaker 12

And just quick follow-up, do you think you can sort of deliver growth with the current perimeter? Or do you need to do get this disposals done to remove

Speaker 1

The current plan is to deliver growth with the current perimeter, yes. But clearly, I'm going to be focused on the U. K. Going forward once I found the right solution for

Speaker 3

global.

Operator

The next question comes from Maurice Patrick at Barclays. Maurice, please go ahead.

Speaker 13

Yes, hi there. Hopefully, you can hear me and I can use my mute function.

Speaker 1

And we can see you, Maurice, as well, which is lovely.

Speaker 13

What a delight. Luckily, I'm hoping my cat won't come across my screen this time. But no guarantee. So a question on NPS in consumer. So I think you showed NPS improving in the period across your 3 brands.

Speaker 13

I was just conscious that on the recent Swisscom and KPN calls, they talked overtly about the cost of living crisis and how NPS was suffering a bit from that. You did see churn popping up in the quarter as well. Just curious as to kind of like cost of living, general pressures, is there some NPS pressure taking place there? It would be helpful to get more clarity on that. Thank you.

Speaker 1

Well, clearly, the cost of living crisis had an impact on our NPS and Everdy's NPS over the past couple of years. We are seeing that starting to correct and revert again. And we're seeing within NPS, our value for money perception is improving again. We do see that Plusnet in particular has performed extremely well from an NPS point of view. Its recovery has come faster.

Speaker 1

That's our value brand. But as we've been improving our customer experience, launching Wi Fi 7. We've actually invested into our call centers recently to help the migrations, particularly to new EE. That is all benefiting all three of our brands. And actually, as we've moved into the quarter, we're seeing NPS building even further.

Speaker 1

So I think we had that cost of living crisis impact on NPS these last two years. And now everything we have done to improve our product with full fiber, to improve our customer experience and also getting that value for money perception right as we close the front book to back book, gap that developed during the cost of living crisis is having a benefit now. Great.

Speaker 4

Thank you.

Speaker 1

Thank you.

Operator

The next question comes from Ottavio Adarizio at Bernstein. Ottavio, you are currently muted.

Speaker 14

Hopefully you can see it and you can hear me now.

Speaker 1

We can. It's lovely to see you.

Speaker 14

To say, likewise. So just a question that was asked earlier is on the CMA. Your answer was mostly on the competitive environment, but when I read your response, most of it was also based on the NBNL impact on the NBNL GV with Hatch. Now from the remedies being proposed there is no much that's going to mitigate that impact, So of course still we haven't seen the final response and the final remedies. But my question to you would be if nothing will be done how you can basically mitigate we are actually in all the arguments you put that were very significant the impact can have on your cost.

Speaker 14

And following up on that, no matter how the JP merger will unfold, by 2,031, the JV will dissolve anyway. So could you tell us how it's going to the impact to your leasing costs comparing that the fact that a significant portion of the country is covered by their JV and these towers will now go towards Cellnex. Would you need to lease from them? That means your leasing cost we have to project leasing cost to increase. If you can give us some bits of granularity on what you're going to plan beyond 2,031?

Speaker 1

Simon, why don't you take the answer to this question?

Speaker 2

Yes, sure. Atavia, thanks very much indeed. So I mean, you made one very important point, which is that there is a contract that is in place through between ourselves and Hutch on the management and the funding of MB and L that sustains through into the beginning of the next decade. And that obviously gives us significant protection for our costs in that period. We've also and that obviously gives us significant protection for our costs in that period.

Speaker 2

We've also done a fair amount of planning ahead of that and have got a series of things that we will be looking at doing to ensure that our cost of the individual towers is not significantly impacted when we get into the next decade. We've got a lot of time to plan for that. Who knows how the network will develop. A lot of our concerns are actually more about the conduct of MB and L in the near to in the sort of in the interim. And obviously, we will be engaging with the parties to ensure that our concerns were not founded.

Operator

We have time for one last question today, which will come from Andrew Beale at Arete. Andrew, please go ahead.

Speaker 11

I think you might want to answer the last one, right?

Speaker 1

We answered the last question, Andrew.

Speaker 3

Sorry. Okay.

Speaker 11

All right. So just coming back to the refocus of the business back towards the U. K, Can you update us on the sort of geographies or characteristics of global that you've determined you want to sell or shut? And what activities, if any, you might want to keep to be able to offer services to multinational corporates, U. K.

Speaker 11

Corporates with Global Fabric in the sort of profitable sense. And there have obviously been some things in the press, but what can you tell us about where you've got to in that process?

Speaker 1

Well, clearly, we never comment on ongoing potential mergers, acquisitions or disposals. But in terms of the global footprint, we have 2 channels that we are looking into optimize and simplify. There are individual businesses in what we call our portfolio channels, which is a mix of individual geographic businesses or services that were acquired and built up over the years that we have been simplifying and reducing over a number of years, and that work continues. And then there is the multinational customer segment and how we serve that segment outside of the U. K.

Speaker 1

And that was the piece I particularly put my emphasis against in May to say I believe that, that segment is right for consolidation because most telcos that are serving their multinational customers outside of their home domestic markets have seen new competition over the years develop. They've got there are probably too many players in too many places now considering the new competition that has come in from hyperscalers and others. There's been a lot of shift away from legacy services into cloud based services. And that's the segment that I see is right for consolidation opportunity. And we're in dialogue with a number of players at the moment to look at what the options are going forward.

Speaker 1

Meanwhile, we are not overly dependent on finding a sales solution. We have to radically simplify and transform that business just as we're doing with the rest of our BT business.

Speaker 11

Yes. Thank you.

Speaker 1

Thank you.

Operator

This concludes the Q and A session. And I would now like to hand back to Alison for any closing remarks.

Speaker 1

Yes. Thank you all for your questions today and for dialing in. And of course, myself, Simon and the IR team are ready to take up any questions offline. And I look forward to meeting as many of you as possible in the coming days weeks as we get out on our road shows. So thank you again and look forward to seeing you soon.

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Key Takeaways

  • Openreach delivered a record 2.1 million FTTP builds (up 30% YoY) with a market‐leading 35% take-up rate, enabling it to raise its fiber rollout target to 4.2 million premises within the existing CapEx envelope and drive 6% H1 EBITDA growth.
  • In Consumer, BT grew its 5G connections by 17% to 10.5 million and its fiber base by 33% to 2.8 million, saw mobile subs rise for the first time in two years, and registered its first NPS improvement across all three brands in nearly three years, positioning it to return to revenue growth in H2.
  • Business division H1 revenue and EBITDA fell 6–7% due to weaker global and portfolio channels, but UK managed services grew 3%, next-generation platforms accelerated fiber and 5G migrations, customer satisfaction improved, and H2 EBITDA trends are expected to strengthen on easier comparators.
  • BT’s transformation programs delivered over £400 million of run-rate savings in H1—including decommissioning legacy networks, application rationalization, AI-driven efficiencies and a reduction of 5,000 employees—and remain on track for £3 billion of annualized savings by FY 25’s end.
  • FY 25 outlook: Group revenue now expected down 1–2% (vs. 0–1% prior), while reaffirming EBITDA of ~£8.2 billion, CapEx below £4.8 billion and normalized free cash flow of ~£1.5 billion; interim dividend raised 4% to 2.4 p per share.
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Earnings Conference Call
BT Group H1 2025
00:00 / 00:00