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Edited Transcript of BT.A.L earnings conference call or presentation 31-Oct-19 9:00am GMT

Q2 2020 BT Group PLC Earnings Call

London Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of BT Group PLC earnings conference call or presentation Thursday, October 31, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bas Burger

BT Group plc - CEO of Global Services

* Cathryn Ross

BT Group plc - Director of Regulatory Affairs

* Clive Selley

BT Group plc - CEO of Openreach

* Gerry McQuade

British Telecommunications plc - CEO of Enterprise

* Marc David Allera

BT Group plc - CEO of Consumer

* Mark Lidiard

BT Group plc - Group IR Director

* Philip Eric Rene Jansen

BT Group plc - CEO & Executive Director

* Simon Jonathan Lowth

BT Group plc - CFO & Executive Director

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Conference Call Participants

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* Carl Murdock-Smith

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* David Antony Wright

BofA Merrill Lynch, Research Division - Head of Developed EMEA European Telecoms Equity Research and Director

* James Edmund Ratzer

New Street Research LLP - Europe Team Head of Communications Services & Analyst

* Jeremy A. Dellis

Jefferies LLC, Research Division - MD & Senior Telecommunications Analyst

* John Karidis

Numis Securities Limited, Research Division - Analyst

* Michael Bishop

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Nick Delfas

Redburn (Europe) Limited, Research Division - Research Analyst

* Nick Lyall

Societe Generale Cross Asset Research - Equity Analyst

* Paul Sidney

Crédit Suisse AG, Research Division - Research Analyst

* Polo Tang

UBS Investment Bank, Research Division - MD & Head of Telecom Research

* Robert James Grindle

Deutsche Bank AG, Research Division - Research Analyst

* Samuel McHugh

Exane BNP Paribas, Research Division - Analyst of Telecom Operators

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Presentation

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Operator [1]

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Hello, ladies and gentlemen, and welcome to BT's H1 2019/'20 Results Conference call for the first half of the year ended 30th September 2019. My name is Angela, and I'm your coordinator for today. (Operator Instructions) I'd like to advise all parties that this conference is being recorded today. And now, I'd like to hand over to Mark.

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Mark Lidiard, BT Group plc - Group IR Director [2]

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Thank you, Angela, and welcome, everyone. My name is Mark Lidiard from the BT Investor Relations team. Presenting on today's call is Philip Jansen, Chief Executive; and Simon Lowth, Chief Financial Officer. Also on the call for Q&A are members of our Executive Committee.

Before we start, I'd like, as normal, to draw your attention to the usual forward-looking statements on Slide 2 and our latest annual report for examples of the factors that could cause actual results to differ from any forward-looking statements we may make. Both the slide and the annual report can be found on our website. And with that, I'll hand you over to Philip.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [3]

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Thanks, Mark. Good morning, everyone. Thanks for joining today's call. When we announced our full year results in May, I underscored the need for BT to be bolder, smarter and faster. Now the objective here is to ensure that we remain successful and create a better BT for the future whilst also delivering sustainable long-term value to our shareholders.

In that vein, we recently announced an enhanced lineup of new products, new services and our new skills programs to help create a better connected and more competitive Britain. This range of new propositions across our businesses clearly demonstrates that our focus is on delivering converged connectivity and services to help build customers' loyalty with a value proposition, customer-led approach.

Today, we will tell you about how our actions in the second quarter have continued to move us in the right direction as we delivered half year results in line with our expectations and confirm that we are on track to meet our outlook for the full year.

You'll remember, however, at our quarter 1 results in August, I underlined that whilst we enjoy strong positions in our consumer and enterprise markets, we are prepared to act decisively to maintain our customer bases. In a continually competitive environment, we will use price as one of the levers at our disposal where necessary.

We'll now review our recent progress against our strategic pillars on Slide 5. Looking first at differentiated customer experience, quarter 2 was our 13th consecutive quarter of NPS improvement across the group, which reflects the hard work and commitment of our people who strive every single day to attract customers and ensure they stay with us.

In the consumer market, Ofcom announced its review of broadband pricing which took account of the actions to improve our competitive position that I outlined at our full year results in May, particularly around end of contract notification and ensuring that loyal customers can access the same deals as new customers. We were encouraged that Ofcom is proposing no further intervention at this time.

Elsewhere in the consumer market, our EE brand launched 4G and 5G unlimited data handset and SIM plans. This is a clear continuation of our more-for-more approach by providing customers access to the ultimate mobile experience on the U.K.'s #1 network.

In what's been a packed period of announcements, a few weeks ago, we launched a new purpose and identity for our BT brand to reflect our ambitious new approach. We also wanted to tell you about how we're launching new products and new services to help boost the U.K.'s potential.

These include first, our new converged Halo plans for consumers and businesses to keep Britain connected with the best network, service and support, including unlimited fix and mobile data and access the 5G; and for SMEs, Halo also includes a future-ready digital phone line.

Secondly, 900 home tech experts to help people with digital tech in their homes and tech experts for SMEs taking Halo.

Thirdly, reintroducing the BT brand to the high street in over 600 dual-branded EE BT stores providing sales, service and support.

Fourthly, we announced the upgrading of 700,000 homes and businesses that are currently on copper to Superfast Broadband by June 2020 at no extra charge, giving customers faster, more reliable connections.

Number five was launching 5G on the BT brand.

And lastly, for our large enterprise customers, delivering next generation SD-WAN cloud connections.

These initiatives are key parts of the longer-term transformation of BT and will have positive impacts for people, businesses and society.

Moving to our second strategic pillar of best converged network on Slide 6. Our 4G network has, again, been named best mobile network by RootMetrics, taking top or joint top spot in every single category.

Meanwhile, with coverage of more than 20 large towns and cities, our next-generation 5G network is now available in more places than any other network and we will deliver 5G to a further 25 towns in 2019.

As you're well aware, 4G geographic coverage has been a particular focus of ours for a long time. We have consistently had the U.K.'s broadest 4G network and have expanded it to 85% by Ofcom's definition. We continue to invest in rural mobile coverage and are always looking at new ways to deliver 4G efficiently to areas that are hardest to reach.

We, together with the other 3 MNOs, have put together an industry proposal which, combined with critical government support, will remove key barriers to tackling the tricky not-spot problem. This will ensure people and businesses right across the U.K. get access to the digital connectivity they need wherever they are.

On the fixed side, Openreach continues to get on with the job of passing 4 million premises with FTTP by March 2021, where it is commercially viable. It is doing so at pace and scale, at low cost and with attractive wholesale pricing, including our new 550 megabits per second and 1 gig products. Openreach has now accelerated to passing about 23,000 premises per week, which is the equivalent of 1 premise about every single -- every 26 seconds.

Looking ahead, you're well aware that we are very keen to further accelerate the pace of our FTTP rollout right across the U.K. We continue to have constructive discussions with government, Ofcom and industry on the fiber enablers to get the best solution for delivering the enhanced speeds that the U.K. needs and deserves with fair returns for our investors.

Continuing on Slide 7. Our third pillar is to create a simplified, lean and agile business. We continue to make progress on the BT modernization agenda and are now halfway through our program to deliver 3-year growth savings of 1.5 billion plans -- GBP 1.5 billion. The plan remains on track with about a further 1,500 roles removed during the quarter to take the total to about 6,200 over 18 months. Savings from the program are currently running at an annualized benefit of over GBP 1.1 billion with an associated cost of GBP 487 million.

Our Better Workplace Program will consolidate BT's footprint into a small number of modern, future-fit buildings, including corporate offices, contact and shared service centers and specialist sites. It is the largest program of its type in the U.K. and it will dramatically improve our organization agility by providing buildings designed for the modern-day working. During the quarter, we signed leases on the new buildings in London and Bristol.

In parallel with the current program, we're continuing to work on IT modernization as a catalyst to simplify our processes and systems. This is a wholesale transformation of everything we do, from how we're going to rationalize and modernize our legacy platforms, to how we're going to digitize our business. Howard and his team began to talk to you about this during June's technology business briefing, so you'll remember that the opportunity from fixing all of this is massive.

However, it's not straightforward to implement while continuing to deliver for customers, so we're working hard on plans to realize the opportunity in the best possible way.

In addition, we continue to make sensible inorganic changes to our organization so that we can better focus on our core business to deliver converged connectivity and services. And as an example of our continued execution of the strategy, in September, we divested BT Fleet Solutions.

The progress against our strategy supported the delivery of a solid set of results for the first half. In a moment, I will summarize our divisional performance, but at a group level, on Slide 8, our financial highlights were in line with expectations. Simon will provide greater detail in a moment, but to quickly summarize: revenue in the first half was down 2% at GBP 11.4 billion; EBITDA was down 3% to GBP 3.9 billion; CapEx, up 3% to GBP 1.9 billion; and normalized free cash flow was GBP 604 million, down 38%. In addition, we have also confirmed our interim dividend at 4.62p per share.

I'll now move to a review of our operations, starting with consumer on Slide 9. Financially, revenue for the half was down just 1% at GBP 5.2 billion, primarily due to known regulatory headwinds from international calling and mobile spend caps. EBITDA was down 5% to just under GBP 1.2 billion, driven by regulatory pressure on revenue, higher content costs and increased spectrum license fees. Excluding the impact of regulation, both revenue and EBITDA were broadly flat.

Strategically, consumer is focused on delivering profitable revenue growth by maintaining a consistent customer base and encouraging the take-up of new propositions to produce a richer mix. This strategy is going well. As an indicator for our customer base, churn fell year-on-year to 1.3% in the fixed business, following improvements to customer experience and our new annual CPI pricing strategy. Mobile churn was flat year-on-year at 1.2% despite the introduction of auto switching.

As a demonstration of improving product mix, our premium BT Plus proposition continues to exceed our initial expectations, with take-up having grown to around 25% of BT's broadband base, while our EE brand added a new top rung to its pricing ladder with the introduction of unlimited plans.

Taking a forward-looking perspective for a moment, the fixed side of the consumer business continues to progress through a period of transition. Once completed, customers will benefit from clear and transparent pricing, while from a financial point of view, it will provide greater predictability. However, in the near term, it's worth reminding you of a couple of waypoints along this journey.

Early this year, our BT brand connectivity products led the industry by moving to contractual CPI-linked price risers, which means there won't be a price rise for existing BT broadband customers in the second half of this fiscal year. And as previously announced, the second half will include the bulk of the 700,000 customers being upgraded to Superfast Broadband with an increased input costs but no incremental price or contract extension for the customer.

Moving to our Enterprise unit on Slide 10. Revenue was down 5% to GBP 3.1 billion, mainly due to the ongoing decline in traditional fixed voice, together with lower managed service revenue and a reduction in low margin equipment sales.

These declines were partially offset by growth in mobile, despite tough market conditions; voice over IP, where we see strong growth in demand; WAN and ethernet products also. In addition, we also saw growth in the overall broadband subscriber base. Operating costs were down 6% as the cost base continues to be transformed, which meant that EBITDA was down just 3% to just under GBP 1 billion.

In addition to some of the new enterprise products and services I mentioned earlier, we've also announced the launch of a new counter drone solution that will help organizations protect themselves from threats to privacy, security and safety from intruding drones. Following the sale of our BT Fleet Solutions business, enterprise won't include it in its revenue in the future. Retail order intake increased 11% to GBP 3.1 billion and the wholesale order book was flat at GBP 1.1 billion, both on a rolling 12-month basis.

Looking now at global on Slide 11. Revenue was down 6% to GBP 2.2 billion, reflecting our strategic decision to reduce low-margin business, divestments and legacy portfolio declines. This was partially offset by growth in security, where we continue to see strong performance and separately, some FX movements.

EBITDA was up 19% to over GBP 300 million as the lower revenue was more than offset by around GBP 30 million of positive one-offs, the majority of which were in the second quarter, and also a positive operating cost performance. Total order intake on a rolling 12-month basis was GBP 3.7 billion, up 4%. During the period, we saw an expansion of our relationship with the Spanish government and a contract renewal with Nestlé.

Moving now to Openreach on Slide 12. Revenue was broadly flat at GBP 2.5 billion. It was dragged down by price reductions, both from the impact of Openreach offer on fiber volume discounts, unregulated price reductions and higher service level compensation, but these were partly offset by growth in our fiber-enabled and ethernet rental bases.

Operating costs were 5% higher, primarily due to high business rates and higher salary costs because of more colleagues to deliver service improvements and training of colleagues to deliver investment plans and pay inflation. This led to EBITDA of GBP 1.4 billion, down 4%.

As I mentioned earlier, Openreach continues to be the largest infrastructure provider, rolling out FTTP at pace and scale, accelerating to add about 23,000 premises per week to what is already the U.K.'s largest FTTP network. We've announced the 103 locations in which we will build FTTP to meet our target of 4 million premises by March '22 -- '21, and are doing so at the lower end of the GBP 300 to GBP 400 per premises pass range at which Openreach believes it could cover 50% of the U.K.

This increased investment saw CapEx, excluding BDUK grant funding deferral, up 16% or GBP 135 million, with some of the fiber infrastructure investment partially offset by efficiency savings.

As we've said before, the costliest premises are expected to require a considerably greater outlay to pass. We therefore welcome the government's recent $5 billion pledge to support the rollout of gigabit-capable broadband in the hardest to reach parts of the country and are doing everything we can ourselves to ensure that no part of the country is left without next-generation broadband.

As part of this, Openreach engineers are trialing a range of new tools and techniques to upgrade 13 of the U.K.'s rural communities to give us a much clearer picture of the technical challenges in these areas. If the pilots prove successful, it could mean hundreds of thousands more homes and businesses across the U.K. could potentially become part of Openreach fiber first investment program in the years ahead.

As it builds network, Openreach works hard to upgrade customers to ensure we earn a return from our investment. The number of FTTC connections has grown by 1/5 in just 12 months and over 60% of all Openreach-connected premises are now fiber-based.

On that positive note, I will now hand you over to Simon to talk you through the financials in more detail.

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Simon Jonathan Lowth, BT Group plc - CFO & Executive Director [4]

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Well, thanks, Philip, and good day to everybody on the call. Over the next few minutes, I'm going to summarize our financial results for the first half before concluding with our outlook for this year.

So starting with the first half results on Slide 14. Adjusted revenue was GBP 11.4 billion, that's down 2%. The main contributors to revenue pressure in the half were our enterprise businesses. In the U.K., the ongoing decline in fixed voice and lower managed service revenues were only partially offset by the solid progress in IP, in mobile and in networking. Lower revenue in global resulted from our strategic decision to reduce lower-margin business from divestments and from declines in the legacy portfolio.

Adjusted operating costs were down 1%, mainly driven by restructuring-related cost savings, partly offset by increased spectrum license fees, content costs and the higher costs of recruiting and training new engineers to support Openreach's Fibre First program. Adjusted EBITDA was GBP 3.9 billion, that's down 3%.

And moving below EBITDA on Slide 15, please note here that there are no comparator figures due to the introduction of IFRS 16. Depreciation and amortization of GBP 2.1 billion included lease depreciation of GBP 336 million due to IFRS 16. Our adjusted net finance expense for the half was GBP 359 million, the adjusted tax charge was GBP 289 million and we expect our effective tax rate for the year to be around 20%. This resulted in adjusted profit after tax of GBP 1.2 billion. Cost of specific items after tax is GBP 88 million. This comprised a number of items, the largest of which were a GBP 150 million gain on the sale of BT Center and GBP 144 million of restructuring costs.

Reported profit for the period after (inaudible) started the adjusted EBITDA of GBP 3.9 billion. Interest, tax, lease payments and working capital combined represented a cash outflow of around GBP 1.3 billion. The increase in normalized cash tax reflects the accelerated payment phasing this year to align the tax paid with the year to which it relates. This resulted in cash available for investment in distribution of GBP 2.7 billion.

Cash CapEx was GBP 2.1 billion, that's 19% higher than last year. As a result, normalized free cash flow was GBP 604 million in the half, that's down 38%.

Given our full year normalized cash guidance remains unchanged, we do expect a significantly stronger second half cash flow. This is mostly the result of this financial year's wholesale billing and collection cycle, which means we expect to receive significantly more in H2 than we received in H1. There was a net cash inflow from specific items of GBP 67 million. After specific items, reported free cash flow was an inflow of GBP 671 million.

Looking now at the CapEx on Slide 17. H1 reported CapEx was GBP 49 million higher at GBP 1.9 billion. Excluding BDUK gain share deferral, network investment was around GBP 140 million higher this half year. Investment in the FTTP build across fiber cities and new sites explains most of the increase. However, core network CapEx has also risen to ensure the core continues to meet rising demand from data usage and fiber connections.

As we've said before, the trajectory for group CapEx in the next few years will be something of a 2-way pull as fiber build costs scale up while some existing programs fall away. Of course, if we can secure the necessary enablers and we can increase our FTTP plans beyond the 4 million premises passed by March 2021, then we will need to increase CapEx.

As we've said previously, we will look at how we fund the increased CapEx for network investments while retaining our BBB+ medium term rating target at the point that we make the investment decisions. The funding sources could be one of a number of using our balance sheet. Given the long-term nature of the investment, this could include hybrid bonds, reprioritizing CapEx from elsewhere within the group, creating additional investment capacity through our transformation programs and reviewing our distribution policy.

Moving to debt on Slide 18. Net debt was GBP 18.3 billion at the 30th of September, or GBP 12.2 billion excluding IFRS 16 lease liabilities. Net financial debt was GBP 1.2 billion higher than at March 2019, principally reflecting the payment of pension deficit contributions and dividends partly offset by reported free cash flow of around GBP 0.7 billion. And as I mentioned just now, we remain committed to a BBB+ medium term rating target. That's one notch above our current BBB stable rating with the major agencies.

Moving to Slide 19 on pensions. The IAS 19 pensions position at the end of the first half saw a reduction in the deficit to GBP 5.1 billion net of tax compared with GBP 6 billion at the end of March. The reduction was primarily being driven by deficit contributions of GBP 1.26 billion, with changes to financial assumptions used to value the liabilities broadly offsetting asset returns.

It's worth noting that at 30th September, the implied real discount rate was at a historic low of negative 126 basis points. Well, since then, real rates have ticked up.

In September 2019, the government and the U.K. Statistics Authority announced potential changes to the calculation of the retail price index. The announcements create uncertainty around future expectations of RPI and CPI and therefore the measurement of pension liabilities at the 30th of September.

We've amended the inflation assumptions to reflect our future expectations, but note that additional developments could lead to further changes to our inflation assumptions at future reporting dates. In line with our normal policy, all the assumptions, including those for inflation, will be reviewed in detail at the 31st of March 2020.

So looking at our outlook for the current year on Slide 20. Despite competitive markets and continued declines in legacy products, there is no change in our overall financial outlook for the full year, and we also continue to expect year-on-year growth in group EBITDA next year. With that, I'll hand you back to Philip.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [5]

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Thanks very much, Simon. So to summarize on Slide 22. We've delivered half year results in line with our expectations, and we confirm that we are on track to meet our outlook for the full year.

Back in May, I reiterated that we need to be bolder, smarter and faster to build a better BT for the future. Our long term plans are a natural evolution of our 3 strategic pillars covering differentiated customer experience, the best converged networks and modernizing our company to make it simpler, leaner and more agile.

The recent activities that we presented this morning demonstrate that we're moving in the right direction. We have plenty to do and it won't all be easy, but I look forward to updating you about our ongoing progress in the quarters to come.

I continue to be really excited about the long-term prospects for this great company, so thank you very much for engaging with us today, as ever. We will now open up to questions, and I'd like to, this time, just cover as many as possible, so could I kindly ask you to limit your questions to one at a time, if that's okay? And then Simon and I and the team will do our best to answer them as succinctly as possible as well, so we get through as many questions as possible. I think last time we had a few that didn't get through at all. So Mark?

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Mark Lidiard, BT Group plc - Group IR Director [6]

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Yes. So just before we open up, I would like to emphasize that point of one question per person. We didn't get through everyone last time. We would like to try to get through as many people this time as possible. And if you do ask more than one question, we will reserve the right to pick the easiest one and move on to the next question.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [7]

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That sounds excellent.

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Mark Lidiard, BT Group plc - Group IR Director [8]

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With that, Angela, if you could open up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Jerry Dellis.

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Jeremy A. Dellis, Jefferies LLC, Research Division - MD & Senior Telecommunications Analyst [2]

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Yes. I think the enterprise part of your business still comprises about 30% of group cash flow. Looking at consensus numbers for next year and the year after, the expectation seems to be a sort of 2% Star revenue decline. I guess that's before the deconsolidation of BT Fleet.

But 2% revenue decline is a much better trend than what enterprise or the former BPS business been doing at nearly any point in the last 4 years. Just wondered, please, whether you could comment on your comfort level with consensus, and more generally, what we can expect coming through on the enterprise side in the next sort of few quarters?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [3]

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Yes, maybe -- I think probably, Simon, you want to do that? And maybe Gerry, do you want to make a couple of comments about the market and stuff, yes? How you see it going forward?

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Simon Jonathan Lowth, BT Group plc - CFO & Executive Director [4]

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Yes. I mean, I think -- I mean, the first point is that we've been pretty clear, I think, and I'm sure Gerry will elaborate on this, that we do face and have faced, over the last several years, some significant headwinds in our enterprise business, particularly (inaudible) our public sector.

Those pressures will continue to bear on the business, but we're also seeing good momentum in some of the growth products for the future and we're comfortable with consensus in the way that those 2 trends come together. Clearly if we were not, we would be saying so. But Gerry, over to you, a bit more color perhaps on the individual...

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Gerry McQuade, British Telecommunications plc - CEO of Enterprise [5]

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Yes (inaudible) I mean, I think where we see the numbers today, I think the quarter-on-quarter last year position is slightly depressed with -- its cables were sold. Also at the time, we also saw in the Republic of Ireland a number of CAT sales that were quite hefty in that quarter as well. You'll see that in the Republic of Ireland numbers as well on the comparator.

But the trend -- underlying trend is broadly where we expect it to be. We do have the -- that challenge of fixed voice, which we definitely see in the numbers. Most other things are going exactly as planned. I think the risk is, obviously, whether that voice decline accelerates and, against that, just how successful we can be in continuing to grow the other product lines, but we're very happy with where we are with consensus at the moment.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [6]

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And I'd just add one thing, yes, Gerry (inaudible) Jerry, it's a really important question because obviously you understand well that the fixed voice decline and that will continue to affect us for a little while. I think we've seen some encouraging stuff. But when we've launched new products recently and the stuff we refer to, 4G Assure, [Amiga], I mean we've -- Gerry, tell the group the kind of response we get when we get the product right. I mean, there's a market out there, right?

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Gerry McQuade, British Telecommunications plc - CEO of Enterprise [7]

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Yes, I mean, we've seen this in the -- previously when we broke down the retail numbers. You'd have seen the voice revenue was increasing when we launched 4G. The broadband revenue was increasing when we saw 4G Assure launch, the Halo launch that we did earlier this quarter. The demand was 2 or 3x what we expected in terms of that. You see the broadband numbers are beginning to turn in terms of both the volume and the value. I think we're getting the right things happening in there.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [8]

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What we're saying is that there is good things happening in the market that we can go after. We've just got this massive headwind that we just have to get through. Is that all right, Jerry?

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Jeremy A. Dellis, Jefferies LLC, Research Division - MD & Senior Telecommunications Analyst [9]

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Could I just ask one quick follow-up, which is that last -- in the last quarter's call, I think you commented that some of the...

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Mark Lidiard, BT Group plc - Group IR Director [10]

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Jerry, really sorry, Jerry, but we have to try and get through everybody. Apologies.

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Operator [11]

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Next one comes from Nick Delfas.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [12]

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Can you hear me now?

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Operator [13]

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Yes. Please go ahead.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [14]

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Apologies. Just a question for Marc, really, on the consumer business. Churn was flat, despite automatic switching. Could we hear a little bit more about what's going on in the market? We've seen some front book price increases from Sky, for example, is now on GBP 32 for 60 megabits. How are you seeing competition in the market right now?

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Marc David Allera, BT Group plc - CEO of Consumer [15]

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Yes, it still remains a very competitive market. On the mobile side, we have seen elevated churn in the market overall. A larger acquisition market effectively of switches. Certainly at the beginning of that regulatory change, we saw some spikes. They have trended down but are still -- are at levels that are higher than before the regulatory impact. But that also creates an opportunity for us to win some customers.

And the churn levels, whilst they're up, are not numbers that concern us greatly and that's reflected in the churn performance on mobile. Obviously, we're going into Christmas and Black Friday period and that tends to create a little bit more froth in the mobile market and the pricing in the mobile market still remains very competitive with pretty much everyone now with unlimited price plans and reduced prices compared to ours, albeit we're very confident in the network credentials and the brand credentials that keep our performance going.

On the fixed side, I mean, you've highlighted one particular price point, but I could highlight 20 other changes in the last few weeks. It continues to be a very volatile market. People adjusting prices to compete on a regular basis.

I think for us, we're pleased that our fixed churn is coming down. If you look at the year-on-year comparator at 1.6 to 1.3, I think we're making good progress there. The job is certainly not done on the churn side and we're focusing on that a lot as we enhance not just our propositions like Halo, but we also continue to build a really strong service network for our customers.

And if you think about BT customers having stores to go to now, the home tech experts that are rolling out, the U.K. call centers that have now been -- by Christmas, 100% of calls that BT customers make will be in the U.K. and Ireland, and that's 1 year ahead of schedule as well as the price changes that we've led the industry on by moving to fairer pricing on CPI, for example. We expect that to drive better loyalty, but it remains a very competitive market within which we're competing reasonably strongly.

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Operator [16]

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Next question comes from Robert Grindle.

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Mark Lidiard, BT Group plc - Group IR Director [17]

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Maybe on mute? Are they on mute?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [18]

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Are you there, Robert?

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Operator [19]

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He seems to have disappeared, I'm sorry. They've all gone. (Operator Instructions) We've got Robert Grindle back.

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Robert James Grindle, Deutsche Bank AG, Research Division - Research Analyst [20]

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Okay. Can you hear me now?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [21]

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We can, Robert.

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Robert James Grindle, Deutsche Bank AG, Research Division - Research Analyst [22]

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Great. My question was about squaring off the differentiated network and best converge strategy with the rural sharing initiative that's just announced. Is it just that the CapEx saving and the political gains are worth the sort of loss of network differentiation in rural areas? And on the politics, are you effectively delayed now 2 months with regard to discussions on enablers, given the upcoming election?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [23]

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Okay. So actually, I'll do the politics in a minute. Do -- Marc, do you want to talk about the differentiated network and our plans on that and the SRN?

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Marc David Allera, BT Group plc - CEO of Consumer [24]

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Yes, I mean, I can talk more broadly on network differentiation. I think network differentiation is not just about coverage, there are a number of dimensions there. Speed, reliability, quality in and out the home and our network has been independently verified on a number of metrics over the years as being the best. And obviously, we're in a very strong position when we think about geographic coverage already.

But as we look to 5G, for example, that battle is very much going to be about coverage in areas where there are significant numbers of people and speed and reliability. And as we converge our core network, the ability for us to deliver a brilliant experience in and out of the home by bringing fixed and WiFi and mobile together is something -- we're progressing well on that journey and we're excited about what that's going to mean for customers. And obviously, we have a number of years of a head start in terms of our coverage, which will allow us to invest more in innovation and 5G and the converged network.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [25]

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Yes, that's great. I mean, Robert, let me just add to that. I think -- and I'll just reiterate what Marc's actually said. We have the best networks, full stop, today. A key part of our strategy is to maintain that, and as Mark says, there are lots of different metrics.

Because we've got the best 4G coverage by quite a long shot, as that gap narrows, the battle will move to other things and we're working on those to make sure that the credentials of the mobile network for both EE and BT are super-class. And so we know exactly how to do that, and therefore our money is going into those areas as the network differentiation changes emphasis a little bit. So no, we feel really positive about that. Just -- Robert, what's your specific on the politics question?

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Robert James Grindle, Deutsche Bank AG, Research Division - Research Analyst [26]

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Well, is there a delay now because of the election? I'm talking about enablers and other stuff.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [27]

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Well, yes. That's really important. Obviously, there's a lot of shenanigans going on in the political landscape right now with general election coming on and a whole a lot of uncertainty. Clearly, with the change at DCMS recently announced overnight, that does put a question mark on that part of things.

But at the same time, there will be a general election result in 6 weeks' time or so. So hopefully that will be relatively short-lived. I guess the way I think about it is, whoever wins, number one, we believe will have digital infrastructure high up on their list and we believe a -- fibering up the whole nation should be a high priority and all our -- all the indications are that whoever sits in that seat will have a view that we should be investing heavily in digital infrastructure and fiber. So that's our perspective.

In terms of the enablers, I mean, you're right. Those are the key things. The most important thing to us is that we can see a clear framework from the regulator on how we can be encouraged to invest significant funds into fiber over the next 10 years or so that will give our shareholders a fair and reasonable return.

And so you'll know there's a document coming out planned in December, and that's a -- there'll be some more consultation on the back of that. But that's a critical document and I'd like to think that document doesn't get delayed and does come out on time and isn't distracted at all by any of the stuff that's going on in the wider political agenda.

So we're very hopeful. Obviously, we have -- as a result of the catalyst of the ambition to get full fiber by 2025 announced by the current Prime Minister, I think we -- it proves there's a real catalyst for all the industry to think about how we could accelerate our plans. Also, from an Ofcom perspective, what is needed to help make that a reality. That momentum is maintained at this moment in time and it's really good. Clive, do you want to add anything to that? No? Okay. Thanks, Robert.

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Operator [28]

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Next question comes from David Wright.

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David Antony Wright, BofA Merrill Lynch, Research Division - Head of Developed EMEA European Telecoms Equity Research and Director [29]

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Kind of super simple. I think you said 13 million Global Services one-off, 1-3, not 3-0, just to clarify that. And then my question is just back to U.K. mobile, please. Vodafone, I think clearly a disruptive force. You can't seem to get away from those adverts right now. And it looks like that could keep -- maintain some pressure on pricing through the next sort of 6 to 12 months.

And your 5G pricing, it does feel it's still a little premium-led. Do you think that given 5G networks are sort of so nascent and there isn't really any obvious advantage to this yet, that you need to be a little bit more competitive, just in the eyes of the consumer?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [30]

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Okay. Simon, you want to clarify it's 30? I mean, do you want to clarify?

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Simon Jonathan Lowth, BT Group plc - CFO & Executive Director [31]

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Yes, okay, we're getting a token question, then?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [32]

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Oh, yes. Go on. Given that it's a clarification, go on.

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Simon Jonathan Lowth, BT Group plc - CFO & Executive Director [33]

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Yes. Spirit of generosity. So yes, the one-off provisions we -- Philip mentioned, was closer to 30, 3-0, than 1-3. To be really clear, these are a couple of reasonably sizable contract provision releases in the half, mainly in the second quarter.

To be very clear, this is not unusual in terms of getting provision releases or indeed, taking provisions for a contract-based business. We simply had a couple in this quarter or this half that were somewhat bigger than usual and we felt it important to call them out.

It's fair to say as we went into the year, we had a plan to address and de-risk these contracts and so we're pleased that we've been able to do that. It's also fair to say we've seen some things slipping into the second half of the year. So our overall guidance is absolutely unchanged.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [34]

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Yes, and on -- David, on the sort of pricing, mobile and broader thing that we think we've already referred to, let me just make one point, then Marc can fit in. I mean, it is our -- probably our single biggest sort of uncertainty in the sort of next year or so, is how does the market pricing play out in the broadband market and in the mobile market as things develop and as 5G comes on board as you rightly say?

The only thing I'd say is, so far on 5G, I think we're really encouraged with the start we made on 5G, right? There's some very encouraging things are happening there. But I'll let Marc give you his perspective on the mobile pricing and changes in terms of what [I got] -- some of our competitors are doing.

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Marc David Allera, BT Group plc - CEO of Consumer [35]

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Yes, I mean, first point I'd make, you can't advertise your way to a great network. You've got to have a great network, you've got to maintain that consistency and we're really pleased with the consistency that we've shown in our network performance. And quite recently actually, we've had a couple of early sights of our performance relative to others on 5G and we're showing real leadership there in terms of speed and quality of 5G coverage relative to all our competitors that have launched 5G. So we're pleased with that.

We're also pleased and encouraged by the take up to 5G, albeit as you say, you rightly say, it's a very early market and the take-up we've seen from our existing customers and new customers is in line with our expectations. And that category is going to grow in time as the handset range broadens, both from Samsung and, I'm sure, Apple at some point, will launch a 5G device and that's when we're really going to start to see the category grow.

We're not changing our pricing -- our approach to pricing at the moment because we still believe, for a better network, customers will pay a small premium. But of course, if we come under pressure and don't achieve what we set out to, we'll look at pricing in the round with all the other elements to our proposition.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [36]

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Great. While we're on the topic, David, just -- I know you didn't ask it, but I think it's worth just pointing out, 5G in enterprise in Gerry's shop, quite important. Gerry, do you have a couple of comments on how you see that?

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Gerry McQuade, British Telecommunications plc - CEO of Enterprise [37]

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Yes, I mean, I think it's -- everybody sees 5G as being, in the long term, something that will really change businesses. So it's very important for us to actually -- we continue what Marc's talking about there in terms of building the network strength around 5G message.

You'll have seen us do a number of things around 5G and enterprise space, which actually, some of them are world leading and what we're doing on a live network really shows actually -- the thing that Philip said about, we're really investing in this to differentiate ourselves. And I think the message around 5G and the ability to do that and therefore charge the premiums that we can do, I think we're pretty comfortable where we are on that.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [38]

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Yes, and I think we're the only one doing it on a live network, right? And what we're getting at here, it's really important, is we will build a 5G network that has the best performance. And we will define and make sure we know how we define that, but we might not share it all in the detail. But be assured that we are absolutely clear on how we can do that and we've made a good start to it. Thanks, David.

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Operator [39]

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Next question comes from Nick Lyall.

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Nick Lyall, Societe Generale Cross Asset Research - Equity Analyst [40]

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Just a quick question to come back to the enablers, please. Even with the elections through, I mean, it seems like Ofcom is still the sort of lowest or slowest common denominator here. So in your discussions, have your expectations changed? Have you come to a better understanding with Ofcom yet, do you think? And could give us an update on whether the timing has changed? Is more pressure being brought to bear on Ofcom getting a move on with things? Could just give us an update on your expectations on timing, please?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [41]

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Yes, Nick, I mean, it's a crucial question and a difficult one to answer. I guess the way I would express it is, because of the ambition to accelerate full fiber to a sort of target of 2025, I think everybody has seen that as a catalyst to think how one could deliver that kind of stuff, including Ofcom thinking things through.

I think the reality is today, the program, the agenda, the timeline doesn't change. So I think you're in a situation where it's not until April 2021 that we'll have absolute certainty on the situation. What I am hopeful about is that the next document -- consultation document that comes out in December has some real clarity that one senses that the industry will get behind.

I mean, if -- that would be a nice change, that the document that gets written seems to have universal support from the industry. If that was the case, that would be a change. But again, I can't talk for everybody else, right? I can only talk for what I know and the conversation I have with government and with Ofcom.

And I would like to say that I do feel there is good, positive thinking and movement in terms of trying to get the right answer, which as ever, is not straightforward. I should ask Cathryn if she wants to add any perspective on how you feel about how the landscape has changed over the last 3 to 6 months? What do you think?

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Cathryn Ross, BT Group plc - Director of Regulatory Affairs [42]

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Yes, yes. I'm happy to add a little to what you've said, Philip. I mean, I think the thing I would provide some reassurance on is, in all of our conversations with Ofcom, there is absolutely no doubt in my mind whatsoever that they are prioritizing their work on the framework for the fixed telecoms access market review, which as Philip says, will kick in, in April 2021.

This is a huge priority for them. They're putting an awful lot of effort into it. And it's not easy. I mean, we've been talking for a while about the fact that this represents a pivot point in the regulatory regime towards a framework that is genuinely more pro-investment. And it does require some thinking through. And as Philip says, it does require some time and effort with the industry to build consensus.

The only point I'd add, really, is that's really in nobody's interest for Ofcom to unduly rush this process. We need a decision from Ofcom towards the back end of 2020 that is genuinely well-reasoned and robust. And that requires some proper process. And we are assured that the December consultation document will be fairly pointy in nature. It will contain some useful details, but it's important that they go through the consultation properly and reach a reasoned decision.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [43]

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Great, thank you, [Cat]. One other thing, Nick, just what I think about it is it's an encouraging sign that the government announced GBP 5 billion extra investment in the last 20%. I think the most gritty issue currently, I think, is thinking about the rural part that's not in that GBP 5 billion or not funded by that. It's how does the industry tackle the more rural areas that aren't covered by that GBP 5 billion.

That's probably the biggest remaining issue, is to how would that actually occur? And how can the regulatory framework encourage all industry to build in those places that the economics are not as certain as dense urban locations? Thanks, Nick.

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Operator [44]

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Next question comes from John Karidis.

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John Karidis, Numis Securities Limited, Research Division - Analyst [45]

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I just wanted to follow-up on next question, please. Is it the case -- are you now saying, Philip, that BT might actually decide or not to go ahead with the 15 million premises target once the December consultation comes out? Or will you still wait until everything is absolutely nailed down?

Just simply, because I assume, for example, BT is interested in things like differentiated pricing, where it faces competition from old net. So I don't expect these guys to agree to this. So it's really important to figure out when you'll take that decision very simply, because I think that's very linked to the dividend. And if you do stick to March '21 as the time when you'll take that decision, then I sort of wonder why consensus is forecasting a dividend cut next year?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [46]

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Thanks, John. Well, I think -- I don't know is the honest answer because the documentation will come out in December and we'll have to look at that very, very carefully to understand the implications of it. But the reality is, nothing will be cast in stone until April 2021.

So I can't see any scenario where that's not the case. I can't see -- and I may be wrong, by the way, where either the regulator or anyone else is going to being that cast in stone date forward. So if we assume that's not changing, that's the only time when I can be absolutely 100% certain that the regulatory framework is cast in stone.

However, if the consultation document that comes out in December -- and let's hope it does come out in December, by the way, sometimes these things get delayed. If it does and it has great clarity and the sense is that the whole industry is behind it, then I think that would lead us to be more encouraged to trigger the investment case.

What I would say is we're assuming that, over the next 6 to 12 months, maybe it ends up being 15 -- all the way to April, we're assuming we will build at pace. That's our planning assumption. But it's not the investment case yet.

So when I said earlier about Clive is building so quickly and he's accelerating as fast as he possibly can, we are covering one home or business, one premise, every 26 seconds. Right? And his challenge is to increase that. I'd really hope we're not in a situation where, in April 2021, we have to slow that down because the reality is different to what we hope for.

So I know it's not a helpful answer and I'm really sorry, but I can't say to you, "Yes, this is our plan. In December, we'll look at and then we'll be doing these things and this is the implication of the dividend." As soon as we have new information that helps us get clarity so that we can decide with certainty what we should do, of course we'll make some decisions and then we'll look at the funding of it.

But this is enormously important. We were talking earlier about the scale of investment. We're talking BT as a group could spend around GBP 35 billion over the next 7, 8 eight years in CapEx. That needs to be very, very carefully thought through and I'm not doing it without having real conviction that it is going to give our shareholders a fair return over the long term.

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John Karidis, Numis Securities Limited, Research Division - Analyst [47]

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On that, you still expect EBITDA growth next year?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [48]

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John, at the moment, that is what we hope for, yes.

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Operator [49]

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Next question comes from Michael Bishop.

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Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [50]

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Just picking up on the comments you made on cost transformation, really, 2 points. One is, it appears that given you've done GBP 1.1 billion, you presumably are tracking a little bit ahead of the original run rate on the GBP 1.5 billion. So I'd love to get your thoughts on whether you are tracking ahead and whether that means more opportunity or whether this has just been the existing opportunity being delivered slightly quicker than your expectations?

And then if that is the case, do we then potentially have to sort of wait for what you've referred to as the Phase 2? Or do you still think this Phase 1 and the GBP 1.5 billion of cost cutting can sort of roll into the Phase 2?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [51]

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Yes, [good]. I mean, what I'd say is the GBP 1.5 billion is the GBP 1.5 billion. You're right, we are slightly ahead of phasing, but it won't be more than GBP 1.5 billion. But it doesn't stop at the GBP 1.5 billion. But it's different.

So I think -- as you know, this was a reorganization, mainly in the managerial population. And the 13,000 was offset by some recruitment in Clive's area, particularly for extra engineers. So that program -- what we're really saying is, the program was really well thought through, launched, executing really well, slightly ahead in terms of time, but we're going to deliver that number.

But obviously, the last -- as ever, the last GBP 400 million of GBP 1.5 billion is harder than the first GBP 400 million, right? So we're not quite sure how that will phase out for the last bit, but we're good for the GBP 1.5 billion.

What we're sort of -- and I think we're referring to it today is saying look, we're now in a situation where we need to think through the future of BT and how we modernize the whole of BT to make it fit for the future. And that involves reengineering processes such that -- and systems such that we can automate and digitize more and more, both the customer experience but also the activity within BT. That is a really complicated task.

So what I think we will do over the course of the coming months is plan out that and it will be a multiyear program of re-architecting systems, building new systems, connecting the new architecture in a way that delivers what I described. There is no question that that will deliver productivity benefits and therefore a lower cost base.

The question is, how would that be done? When will it accrue? But I'm telling you, it's a multiyear and it will take, obviously, more costs upfront to do those kind of things and that's what we need to work through. All right, John (sic) [Michael], thanks very much.

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Operator [52]

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And next question comes from Paul Sidney.

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Paul Sidney, Crédit Suisse AG, Research Division - Research Analyst [53]

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Yes. I had a quick question on the consumer segment. Philip, you've made comments in the past that market share losses at the retail level are not acceptable, and I appreciate you don't report sub data within the consumer segment. But with EE having clear network leadership with the strong momentum on BT Plus, is it possible to give us an idea of where you are in terms of market share? Are you holding your market share, gaining or losing currently? And how is that expected to trend going forward?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [54]

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Are you asking on EE?

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Paul Sidney, Crédit Suisse AG, Research Division - Research Analyst [55]

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No, it's really the whole consumer segment.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [56]

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Yes, I mean, again, I think -- look, it's again, you raise a strategic point with an execution question. On the execution part, we're in reasonable shape on market share. There's no big issue there.

The strategic point is, as a leader in every regard, we have to be in a situation where we have a stable, good customer base that is slightly growing but definitely not declining and has customers with increasing satisfaction who are happy to part with more money because we're offering great services. That's my point.

And what we're doing is developing plans and launching things that are against those principles. And so far, they seem to be going down pretty well. But go back to the number of questions we have from other people on the call, we're not alone in this. This is a hugely competitive market and so what we need to make sure of is that what we do is always put in the context of what's happening in the marketplace.

And all I'm saying to you is, whatever happens, under all circumstances, BT will protect its business and do what's necessary to deliver great value for our customers. We hope that will be on an upward trend. We hope that our more-for-more and our principles, for example, the way we're handling 5G, is a great example. We see that as new technology.

We're launching new stuff in it, we're investing heavily in best-performing network. And it's best coverage already now, but will be the way that Marc sort of outlined it. We're going to keep doing that. We've got to make sure that people value it enough and that there aren't other movements in the market that undermine that philosophy and that's what we're trying to do.

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Paul Sidney, Crédit Suisse AG, Research Division - Research Analyst [57]

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And no problems currently on that score?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [58]

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At the moment, there are -- right now, as we said, we're happy with our outlook because we see things playing out a certain way. If you expand past the next 6 months or so, I can't predict what other people will do. We're outlining our plans to you and telling you how we're going to approach it. Let's see how the market reacts. But if -- I say consistently if there is irrational, unsustainable pricing that is damaging our business, we will respond.

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Operator [59]

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Next question comes from Carl Murdock-Smith.

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Carl Murdock-Smith, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [60]

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In consumer, picking up on your comments from the presentation, can you help us with the scale of EBITDA headwinds this year and next? Obviously, there's lots of moving parts and you helpfully explained the excluding regulation spectrum EBITDA will be flat in H1, not minus 5%.

Going into next year, you got the new price (inaudible) measures, a whole year of inflationary price increases, whereas, obviously, H1 still benefited from the September '18 increases. You'll have your first full year of onshored call centers and you'll have the additional costs from the copper to fiber migration.

I guess what I'm trying to ask is, how confident are you that consumer EBITDA can return to growth next year, which is what consensus expects, when your underlying seems to be flat in H1 despite the fact that you're still benefiting from last year's price increases, and next year, you'll still be facing additional headwinds?

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Simon Jonathan Lowth, BT Group plc - CFO & Executive Director [61]

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Carl, Simon here. Let me pick up that question. And actually, I think you've already answered your own question, which is that you've set out quite rightly some of the regulatory pressures that we faced on the top line. You've correctly set out most of the main drivers of cost pressures and I think you also know we're not going to provide you with unit-specific guidance in any 1 year and certainly not a year ahead. I think you should take it that we're firmly on plan in our consumer business. Marc, any color to add to that?

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Marc David Allera, BT Group plc - CEO of Consumer [62]

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No, that's a pretty comprehensive summary of the headwinds we're facing, Carl. There's a couple of others in there as well. We've got -- you've got price caps that are kicking in. There's discounts on mobile, all part of the voluntary settlement with Ofcom kicking in, in February as well, as well as digital voice migration. So they're the -- they're some of the headwinds in addition to the ones you've mentioned. The tailwinds are we've got a fantastic service network, great propositions, good roadmap and a fantastic team of people selling and serving our customers. So...

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [63]

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Yes, but Carl -- I mean, Carl, you're on the money in terms of -- if you connect what we just talked about in terms of some of the headwinds and the things that you referred to and Marc and Simon has underlined and then we talk about the previous conversation, right, about how the market plays out, you can see what our aim is and you can see what our desire is, but we can only control so much, okay? So I think we're crystal clear on what the headwinds are. We explained this because we think you need to understand them when we've got them. But how the market plays out and what happens over the next 6 to 9 months is the one area where we're a bit uncertain for the reasons that have been raised by other people on this call. And what we're crystal clear again is what we're doing. But -- and again, I'll reiterate it, if the market moves in a different direction, then we will adapt our approach and that might have an implication which is not perfect in the short-term, but if it's necessary to do the right thing in the long-term, we will do it. Thanks, Carl.

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Carl Murdock-Smith, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [64]

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[Right, perfect.] And thanks for the compliment, Simon.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [65]

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His pleasure.

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Simon Jonathan Lowth, BT Group plc - CFO & Executive Director [66]

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Absolutely, Carl.

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Operator [67]

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Next question comes from Sam McHugh.

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Samuel McHugh, Exane BNP Paribas, Research Division - Analyst of Telecom Operators [68]

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So I guess last year, after you talked about coming in at the top end of the guidance range, and obviously, this year you have not made any incremental commentary on it. If I look at 1H, EBITDA has declined close to 3% and that's including having a pretty decent tailwind in global. And so to hit consensus for the full year, I think you need to see EBITDA decline to moderate to more like 1% in 2H. Can you maybe just talk a few -- a bit about kind of the buckets in terms of revenues and costs that will help us get there?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [69]

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So I think maybe Simon can do that for you. And then maybe I'll ask Gerry perhaps just to have a little comment on global and how you feel about it? Is that all right, first half? Good.

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Simon Jonathan Lowth, BT Group plc - CFO & Executive Director [70]

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Yes, sure. So I mean, I think we've -- in the first half -- first point to say probably, Sam, is that we're obviously confirming our guidance for the full year of [7.9] to [8]. And that absolutely firmly remains the guidance. We've got to see a couple of things picking up in the second half of the year relative to the first. I think the first is continued delivery of our cost transformation plans across the various units that Philip described. I think the other big driver is probably through into -- we can see some improvements in Openreach in terms of the volume and commercial discounts coming through and that would probably be the second thing that I would call out in terms of the EBITDA H2 versus H1.

We've also got important trading to deliver in our consumer and enterprise businesses, particularly as we go into a busy time of the year in consumer. As you know, the Q3/Q4 is always an important part of the consumer trading year. But those are probably the 3 costs, Openreach and probably the consumer sort of fund -- or second-half trading.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [71]

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And Simon, hopefully that helps. Why don't we -- since you mentioned global, why don't I get Bas just to give you sort of a quick heads up on how he sees the first half?

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Bas Burger, BT Group plc - CEO of Global Services [72]

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So Sam, I think if you look at our transformation, the majority of our transformation clearly is focused at cost, but also it's simplification of our business that needs to lead to higher customer experience. So it's a little bit of both. I think we're 18 months into a 5-year plan and we're on track with regard to our transformation. But the market remains challenging. I think the need for innovation, the need for simplification in our customer base is growing. And we're keeping up at the moment, but it's something that we will focus on in our strategy. And our strategy is particularly around focus on the right customers, focus on our growth portfolio and making sure that we can transform our customer base also from our legacy mature portfolio into growth areas. So -- and we're on track, and I think for the rest of the year, I think we'll see roughly the same trend.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [73]

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Okay. Great. Thanks, Bas.

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Operator [74]

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Next question comes from Polo Tang.

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Polo Tang, UBS Investment Bank, Research Division - MD & Head of Telecom Research [75]

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Yes. I just had a question in terms of Openreach because the year was weaker than expected in Q2. And I appreciate there was a tough comparable in terms of the FTT (sic) [FTTP] side. But can you talk through why WLR revenues were so weak and will this continue going forward? And can you also remind us what the impact on Openreach EBITDA is from the step up in business rates for this year and how does that flow through? Like what -- rather, what's the impact in terms of next year? Is that kind of quick one in Openreach in terms of you're building up very fast, but what are you seeing from competitors, such as CityFibre, Hyperoptic and Gigaclear? Are they stepping up their rollouts, too?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [76]

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Okay, will do. Clive, do you want to...

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Clive Selley, BT Group plc - CEO of Openreach [77]

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Well, just a comment if I may then, Polo, on WLR. What I would point to on WLR is that the contraction on the basis actually slowed down compared with prior quarters. The issue is really about ARPU on WLR, Polo. So we've had one significant scale CP, moved customers from Care Level 2 to Care Level 1 over the course of this half. We think that is -- has basically played out. There is a negative revenue in the WLR line for customer auto compensation. So you remember, that scheme was launched at the start of the year by Ofcom. So that's featured. And the other thing I would point out is that the base of ISDN services, both ISDN2 and ISDN30, and ISDN30 is typically used to support legacy voice, has been in decline. So it's really an ARPU issue, not a base issue.

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Simon Jonathan Lowth, BT Group plc - CFO & Executive Director [78]

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On your second question, I think you asked about the business rates impact year-on-year and the business rates impact full year effect is high 10s of millions for this year, spread evenly, obviously, through the 4 quarters.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [79]

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And do you want to make a comment on the last point about how competitor is out there, other builds?

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Clive Selley, BT Group plc - CEO of Openreach [80]

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Yes. So there's barely a week or a fortnight that goes by without another alt net being announced, often with a bizarre name. So there's definitely lots of activity out there, lots of people declaring that they are going to build. The consumption of our PIA is rising, so that's very clear in the numbers and we are committed to making that a highly usable product. That's my commitment to Ofcom, our commitment to Ofcom. But the good news right now, I think, is that line losses are very modest. So our job is to defend our line base and that's what you're focused on doing.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [81]

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Great. Thanks, Polo. I think we got time for 1 more question. James, are you there?

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Operator [82]

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Yes, we got James Ratzer.

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [83]

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Just wondering if I could just come back to the topic on cost transformation, please? I'm just thinking about how we can kind of continue to track this going forward. I mean, I think the original target was kind of GBP 1.5 billion but also 13,000 gross headcount reductions. I'm talking on a net level, I mean, it looks if net headcount reduction, BT over the past kind of 2 years has actually been close to 0. So I mean, is there more scope for net headcount to come down going forward? And how can we think about monitoring future cost reductions? Consensus has got in, I think, only GBP 200 million of net OpEx reduction over the next 2 years. I mean, [couldn't] it not be higher than that? Especially presuming a lot of the costs in Openreach from taking that extra staff on it is going to be capitalized in future as you increase your build? So just kind of interested in exploring this topic more in terms of how we can track it going forward. Is -- can you give us guidance on net OpEx reductions we've heard some of your peers like Vodafone?

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [84]

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I mean -- let me give you a sort of a general comment and then maybe Simon might want to talk about some of the specifics. I think -- again I would reiterate, the really good news is we announced this one GBP 1.5 billion savings program. We're on track to deliver the whole number and slightly ahead on a phasing basis, which I think is encouraging.

I guess the challenging part is that there is a desire and a need to become more productive, as I said earlier, and find a way of being more efficient. The challenge for us is, in order to do that, we need to find a way of putting in new systems and putting in new proceeds that take out unnecessary manual intervention and unnecessary handoffs and automate and digitize as much as we possibly can because we've got 107,000 people who all work extremely hard every single day delivering great service and sometimes having to -- we're around some of our very, very antiquated systems and side effects of some of the legacy challenges that you understand we have. So we're determined to fix that, that will take time, as I said before. And in the end, that will deliver some form of productivity benefits. Dimensionalizing those right now is hard in the longer term, but we're definitely going to have a plan going after. In the next 2 years, I mean, Simon, what do you want to say about the next 2 years?

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Simon Jonathan Lowth, BT Group plc - CFO & Executive Director [85]

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I would say -- I mean, personally, I think you've reiterated on this call that we are firmly on track with our transformation program to deliver GBP 1.5 billion worth of gross cash cost savings.

And the second point, it's a really important point to make, is that alongside our efforts to transform the cost base and productivity of BT, we make very conscious decisions to invest in building and driving profit and value into the future and we do that by making investments in CapEx, but we also do it by making investments in OpEx. And the net of those two is what will drive your net OpEx and CapEx. What we're not going to do is set a net OpEx target, which then limits our ability to make the investments we need to make to drive for future profit and value growth.

So to be specific, we said 13 -- let's take it down to headcount. We said that we would save gross 13,000 roles and that is indeed the productivity improvements we're making. We said that we'd invest 6,000 new roles in security, in our customer service, in the fiber build. That we've seen opportunities is to put a bit more investment in those areas and we've talked about it, scaling up fiber program, the further investments we made at the beginning of the year. They will drive growth, profit growth and value into the mid and longer term. But they will mean that the net cap reduction is not quite as great. And as we move forward, in future guidance, we still stick to those principles of being clear on the gross reductions and the conscious investments we are making.

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Philip Eric Rene Jansen, BT Group plc - CEO & Executive Director [86]

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Great. Look, thank you very much, everybody, for your great questions as ever, and your interest in BT. We really appreciate it. I hope it's been helpful. I look forward to seeing all soon.

All the best.

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Operator [87]

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Thank you. Ladies and gentlemen, that concludes your call for today. You may now disconnect.

Thank you for joining, and have a good day.