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Edited Transcript of TALK.L earnings conference call or presentation 15-Nov-19 9:00am GMT

Interim 2020 Talktalk Telecom Group PLC Earnings Call

London Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Talktalk Telecom Group PLC earnings conference call or presentation Friday, November 15, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kate Ferry

TalkTalk Telecom Group PLC - CFO & Director

* Tristia Harrison

TalkTalk Telecom Group PLC - CEO & Executive Director

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Conference Call Participants

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* Adam M. Fox-Rumley

HSBC, Research Division - Analyst, Global Telecoms, Media and Technology Research

* Alexander Hogan

PGIM Fixed Income, Research Division - Research Analyst

* Ben Rickett

New Street Research LLP - Communication Services Associate

* Jeremy A. Dellis

Jefferies LLC, Research Division - MD & Senior Telecommunications Analyst

* John Karidis

Numis Securities Limited, Research Division - Analyst

* Maurice Graham Patrick

Barclays Bank PLC, Research Division - MD

* Nick Delfas

Redburn (Europe) Limited, Research Division - Research Analyst

* Paul Sidney

Crédit Suisse AG, Research Division - Research Analyst

* 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, and welcome to the TalkTalk Telecom Full Year 2020 Half Year Results Call. My name is Rosie, and I'll be your coordinator for today's event. Please note this conference is being recorded. (Operator Instructions) I will now hand you over to Tristia Harrison to begin today's conference. Thank you.

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [2]

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Thank you very much, and a very good morning to everyone, and thank you for joining us for the half year results and a little later than planned. And clearly, quite an interesting day all around for broadband. Kate is here. She's going to shortly present the financial review. Then I will take you through our plan in a little bit more detail as well as the core share of our outlook for the year. And as always, we'll make sure we have enough time for questions at the end.

If you could move to Slide 4. So before we look in detail at the financials, and of course, I'm going to give you an update on where we are on FibreNation. As you will have seen in the RNS, we are very pleased that our absolute laser focus on fiber growth and cost reduction has delivered meaningful results in this first 6 months. We continue to benefit from continuing demand for faster, more reliable fiber services, mostly underpinned by video streaming, over-the-top video streaming, and of course, voice IP -- voice over IP services in B2B. We now have over 2 million fiber customers, for both consumer and B2B. The fiber base grew, as you can see, by nearly 300,000 in the first half, with net adds up 52% year-on-year. 3/4 of new customers in consumer took fiber in H1. That peaked to 81% in September. So you can really see the pivot now from copper to fiber. And actually, in Q2, TalkTalk accounted for 33% of new fiber for the cabinet connections on the Openreach network.

I've said it before, the transition to fiber is good news for customers. It's good news for TalkTalk. It provides a faster, more reliable service, that's obvious, but it also leads to significant improvements in customer SAT, and we are now seeing our highest ever fiber NPS and the lowest ever number of client complaints just in the last month just gone.

Because fiber customers are more satisfied, [that] they churn less, and they come with a significantly lower cost to serve. And that's very tangible, fewer engineer visits, vehicles, contact centers, et cetera. I'll come on to that.

We are also -- and Kate is going to come on to this, proactively encouraging our legacy copper customers to recontract onto fiber deals, and this is contributing alongside voice drag to some of the ARPU dilution that you will see in today's numbers. This is absolutely the right thing for us to do in the long term. Plus, it positions us extremely well ahead of the Ofcom ruling in February, which, of course, is making it mandatory for providers to contact out-of-contract customers and share the best deals available.

We've made really good progress on cost reduction elsewhere. Our HQ moved to Salford, which we announced this time a year ago. It is near completion. It's gone extremely well, and we have more customers than ever using our online digital tools to resolve any problems that they may have, and obviously, as you can see, has led to an improvement in profitability for the first half. We've seen a 14% year-on-year increase in headline EBITDA at GBP 115 million. And I'll come on to explain our outlook. Our EBITDA outlook for the full year remains unchanged.

As everyone knows as well as the interims, we were really hoping to update you all on the FibreNation negotiations. They are going extremely well. As you can imagine, the news overnight from labor has inevitably meant that we are all pausing, reconsidering and digesting. And once we know more, we will update everybody on that.

Now with that, and I think we're moving to Slide 18. I'm going to cover -- hand over to Kate to cover the financial review.

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [3]

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Thank you, Tristia, and good morning, everyone. Yes, I'm just going to spend about 10 minutes running through the key financials. And actually, I'm going to start with some housekeeping. So actually, I think the slide you have to be on is probably Slide 7, with the lovely total IFRS 16 impact on TalkTalk. So if you could all move to that. I remember, actually, it must have been time of the year, a year ago, telling you all the story of my daughter asking me about IFRS 15. I'm delighted to say that IFRS 16 has been much less complex. So there hasn't been much chat of that at home.

I told you at the prelims that we are adopting IFRS 16 on a modified retrospective basis. That means that we won't be restating full year '19 under IFRS 16. Instead, we'll give you the numbers throughout FY '20 on both the pre- and post-IFRS 16 basis. So you'll still be able to see all the like-for-like comparisons versus the prior year.

As you know, the main types of lease that the new standards impact relates to operating leases within our network. So that's things like backhaul circuits, data centers. And under IFRS 16, we need to bring all these leases onto the balance sheet and the liability. So they are now included in our overall debt number, which increases debt by GBP 211 million.

Again, as you know, rather than taking the expense [now] through OpEx, the costs are now taken predominantly through depreciation and amortization as well as, of course, as an element through finance cost. The result of all of this means that EBITDA increases GBP 25 million in the first half as the lease costs move below EBITDA. So for the full year, I'd expect an EBITDA impact of around GBP 50 million. And of course, no cash impact from the new standard. This is purely accounting adjustments. All pretty straightforward, but do follow-up with Tim or me should you have any further questions after the call.

If I can move you now on to the next slide, the income statement. I'll skip through this slide fairly quickly because we've got some more detailed slides on the key lines in just a moment. We have seen a modest contraction in revenue and gross margin for the half. But at the same time, we have made significant progress on costs, which has enabled us to report 14% like-for-like EBITDA growth versus the prior year. And this includes GBP 1 million to GBP 2 million FibreNation spend could, of course, be still a healthy asset during the first half. As a result, debt-to-EBITDA growth, we have seen improved profit before and after-tax. And consequently, earnings per share also up for the year. As we guided to, the dividend for the half is 1p.

So I can now move you on to the next slide, which is a slide on revenue and ARPU. Don't get [your move arounds] at this point. The blocks are deliberately the same size. But I hope this chart just gives you a sense of the moving parts within revenue and ARPU. The red ones are the shorter-term trends, whilst the green blocks we see is fundamental to our strategy. As I just said, we have seen a contraction in revenue in the first half. Revenue excluding Carrier and Off-net, down 0.9%. This is predominantly driven by both declines, B2B voice down 16% as businesses continue to use cheaper voice services over traditional landline. And we saw a similar decline in residential voice, coupled with a drop in voice-based as customers use their landlines less and they see less need for call boost packages and very much an industry-wide trend. The year-on-year voice decline will, of course, become less of a negative in time.

In the half, as Tristia talked about, we have also been accelerating the recontracting of the legacy base. So we increased our in-contract base to 72%. You'll remember in Q2, that was 69%. We've really been actively encouraging our remaining legacy customers to recontract on to our Fixed Low Price Plan. So now that's only 28% of our base out-of-contract. We feel this puts us in a very strong position, ahead of the regulatory and industry commitments on out-of-contract pricing. It has come with a bit of ARPU dilution and a little bit of incremental churn from these legacy customers. But again, we see this as a short-term headwind.

Increasing the fiber mix continues to drive higher ARPU and data revenue growth of 4.7%, that also has a positive impact driven by Ethernet base growth and the higher take-up of our 1 gig services. So we see these green blocks as the key long-term drivers of ARPU and revenue growth.

Looking into the second half, we expect to see broadly stable revenues driven by continued fiber mix improvements and Ethernet growth offset, of course, by the continued Voice, Ethernet and boost clients across consumer and B2B that I've just mentioned.

Moving on to the next slide, please. Cost of goods, that remains broadly flat year-on-year despite higher fiber penetration. This is, of course, because we get the full 6 months if the [BTA] can reach a fiber discount versus aiming 1 month in the prior period. This means that the moving parts I've just described within revenue has flowed into gross profit. But we are already seeing significant benefits further down the P&L from increasing the fiber mix. In fact, a large percentage of the cost to serve reduction is, of course, the future of the fiber mix. And all of that results in a 14% EBITDA growth reported today.

Like-for-like operating costs, down GBP 37 million year-on-year. This was made up of GBP 7 million of savings associated with our move to the HQ, to our HQ in Salford, and the remaining benefit is split between cost to serve and [backend] marketing.

Again, Tristia will comment to you in more detail. This rapid migration of customers onto fiber lines as well as our investments in the My Service Centre dashboard, that we've taken some of these through, have seen cost to serve come down materially year-on-year. We've got more customers self-serving, fewer calls into the call centers, fewer engineer visits. And as you know, these fiber lines are being more reliable. Customers are experiencing fewer [faults]. And therefore, our costs associated with serving these customers is coming down.

Within, second, marketing, we have moved to a more efficient digital marketing channel, and this is also seen as bring down cost to acquire customers. We have previously mentioned exiting a distribution agreement in the second half of last year, and we have actually realized additional savings by entering into alternative customer acquisition and marketing models with different partners. We expect this momentum in cost reduction to continue, which we feel underpins our EBITDA growth in the long term.

Moving on to the next slide. I think we're on Slide 11 now. I think there might be a bit of a lag on the website, but it's the one that says, "HQ move efficiencies remain on track." So just a very quick reminder here is expected savings from moving to one campus in Salford. When we announced the plans to move, we indicated that we get an annual benefit of GBP 25 million to GBP 30 million, and we remain very much on track here.

Due to the phasing of the closure of the London office, the full annualized saving was never going to be recognized this year. So in the current year, we expected to deliver savings of GBP 16 million to GBP 20 million in the P&L, with about GBP 5 million to GBP 6 million of CapEx savings. You'd see GBP 7 million in the P&L this half, as mentioned on the previous slide, and further GBP 10 million or so expected in half 2.

If we can move on to the cash flow and net debt. We have done, as you know, a lot of simplifying and restructuring of the business. And I've previously flagged that the actions that we've taken to date, like the move to Salford, moving to better distribution agreement, much of this would impact the cash flow this year. The cash outflow in the half was predominantly driven by working capital and nonheadline items, both of which I'll come onto in a moment. Both of those, the result of the significant reorganizations we've taken.

The rest of the cash flow, I think, should be pretty much as expected. Interest in tax, investments, in dividends, all broadly flat on the prior year. Investments, as you will remember, relates to the TV business and our involvement with the UV joint venture. You've got a GBP 17 million dividend payment. That's the final 1.5p dividend of FY '19. Then, of course, in the second half, you'll see a cash payment of GBP 11 million, which is the interim dividend, of this year, of 1p.

Looking ahead for next year, full year '21, I think you should really expect a much more healthy relationship between EBITDA and cash. Non headline items, I expect, will be below GBP 10 million. Working capital, significantly lower due to all other items broadly stable. As I flagged before, this year, we're always going to bear the brunt of the reorganization, but all of that is behind us now, and I feel confident that we will generate a strong free cash flow in FY '21.

Working capital, just lots of several moving parts within that. You will remember at the year-end, we said that the GBP 11 million inflow was flatted by a couple of the prior payments falling out of the period as well as the settlement to the prior year claim. So you should have expected that to reverse, and that probably accounts for GBP 20 million to GBP 25 million of the working capital outflow in the half. The bulk of the move, however, is because we've moved from one distribution model to another. So we were paying staff on the go, whereas now we pay upfront as we shifted to a new distribution model.

Again, as I've just mentioned, we exited the old distribution agreement in the prior year. So we have to settle up some of the remaining payments and incur an exit fee there. That was in the P&L in FY '19. Obviously, the cash impact has landed in FY '20. We've now moved to a new distribution agreement with our main marketing agency. It's a really good risk model, and they're working much more closely together to deliver more valuable customers.

But of course, since this is the first year of the new arrangement, you are seeing the working capital impact because, of course, the cost is spread under IFRS 16, but there is an upfront cash cost. Clearly, at the time, the unwind from previous periods will start to match the annual cash cost.

Also worth mentioning, we've seen significant growth in fiber volumes. That is driving additional provisioning cost. And again, the cash cost of this is paid upfront, with the P&L cost spread over customer tenure under IFRS 15. So whilst we are driving fiber volumes in the way that we are, that will, of course -- are working capital outflow.

We can move on now to CapEx, a very similar message to our operating expenses in that, simplifying the business, focusing on fewer things. We have been able to reduce our cash CapEx. One thing now to be clear that we are not sacrificing if we continue investment in our network capability. We are, as you know, 100% focused on fixed connectivity. And of course, our ability to make the ever-increasing demand for it.

Within the half, we incurred GBP 8 million of CapEx spend on FibreNation. There will be a bit more FibreNation CapEx in the second half than originally anticipated due to the timing of disposal.

If we can move now on to nonheadline items. Again, a recap of nonheadline items. There shouldn't be anything new or unexpected in here. The last few years, yes, they have seen very high levels of exceptional items. But as I just said, these are items relating to simplifying and reorganizing the business, which is now broadly done. That's the exit from mobile, the HQ moved to Salford, the reduction in headcount, alongside the network transformation piece, which has only got another year to run.

So for the half, we are broadly flat from the prior year for both P&L and cash cost. As we look to the full year, of course, the year-on-year P&L charge will be significantly lower, having announced the HQ move last year. But you will see the cash cost in default have moved coming through as we actually pay the redundancy and so on. And of course, the final payment relating to exiting our MVNO will also come through in the second half.

By next year, as I look to FY '21, nonheadline items will be minimal, probably around the GBP 5 million mark from both a P&L and cash perspective, which will drive a much cleaner EBITDA cash relationship that I just talked about.

So in summary, I think we've made really good momentum in fiber growth and the cost to serve benefit is really starting to come through. Excellent progress on cost savings, with HQ move benefits on track. We've seen a 14% growth in like-for-like EBITDA, and our outlook for EBITDA for the year remains unchanged.

And with that, I will hand back to Tristia to talk through our plan in a bit more detail.

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [4]

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Thank you very much, Kate. I think we are now moving to Slide 18, which is the medium-term shape. Most of you would have seen this at the preliminary results. I think it's just important to remember, and you can sort of see this in the numbers today, the simplification is a journey. I think the illustrative shape of what we're doing today and how we look forward is important. You will see as we continue to accelerate fiber and high bandwidth, high-speed products, these come with a higher ARPU and will lead to modest revenue growth in the medium term. As Kate has outlined, we see that being flat in the second half.

We also expect a modest increase in the cost of sales. As everyone knows, fiber is a little bit more expensive than copper on a wholesale level. But this is clearly being offset by the regulatory and commercial agreements we have with Openreach. Gross margin, therefore, will be relatively stable, and this is despite the ongoing drag on voice services and voice boost, as Kate mentioned, and also, in the short term, some of the work that we're doing to proactively encourage legacy customers to recontract.

And we continue to make really good progress on cost reductions. As we've been saying, this is mainly driven by accelerating fiber take up. But as always, there is much more to be done. We're, therefore, confident we can deliver sustained EBITDA growth due to the modest growth in many under perception focused on cost reduction. And all of this is underpinned by having most of our base on fiber products.

Moving now to the next slide. Our priority remains exactly what we need to do, focus on fiber, our consumer business, B2B, network and connectivity, cost reduction and, of course, our people.

Moving to the next slide, tracking Fibre for Everyone. As we've been saying all morning, it's really about fiber for TalkTalk. We continue to drive the scale adoption. And as well as fiber to the cabinet, we are also ready and launching other high-speed, high bandwidth products. That includes G.fast, which was launched. That's still a part fiber product, but it offers significantly faster speeds at 150 meg and 300 meg, and we're putting on good numbers each week there. We're ready to consume single order, generic Ethernet access. So SOGEA at scale in the next 12 months. And our fiber for the premise trials with Openreach are also underway, and we have customers in our model office now as we speak. And of course, we have continued to sell at scale in Europe and beyond with FibreNation.

Moving on to the next slide, Fibre for Everyone looking forward. The only long-term solution is transition for all customers to use full fiber network. And we, of course, want to see that as quickly as possible. Fiber to the cabinet network investment can only work, as we have said many times, if it is underpinned by high fast take up by customers with scale such as TalkTalk.

We are in ongoing close discussions with Openreach on scale, fiber to the premise rollout. We're pushing for viable prices, enable us to migrate the customer base over as quickly as possible. And we really think that's the best way to accelerate adoption to ensure the whole of system benefits.

Moving now to the next slide. So after the operational rollout in FibreNation, so the negotiations on long-term funding are going well, as I've talked about, and they continue. But in terms of the operational rollout, we made good progress. We are now using ducts and poles at scale in New York, we've passed over 43,000 homes at the end of September. And construction has also started in both Dewsbury and Harrogate. The customer SAT stats continued to be incredibly impressive, with customer SAT, 87%; and NPS up at the high 30s. Looking forward, we will continue to accelerate fiber to the premise in Yorkshire and in the Northeast, and the guys are continuing with momentum as we speak.

So next slide. Looking now at our consumer division. Clearly, in a market where value uncertainty really matters in the utility service, people want it to be affordable. We have a clear structural price advantage over our rivals. Our Fixed Low Price Plans really continue to resonate. With a guarantee of no mid-contract price increases, these plans continue to ensure customers can save around 10% to 15% and more, in some cases, over the length of their contract compared to what is consistently being offered by our main competitors.

It's obviously not just about price. In the world of Amazon Prime, Netflix and YouTube, consumers need faster and much more reliable connectivity. And that is obviously why focusing on fiber is the right thing for us.

The fiber-first strategy helps us benefit from the rising demand in data, where we see 30% to 40% increases year-on-year without having to defend premium TV and mobile basis. We remain competitive, with sensitively priced add-ons, so customers can access TV and mobile. But it's very much a second-tier product.

As with many other industries, telcos business models are clearly being scrutinized more than ever. Regulators questioning the practice of charging higher prices for existing legacy customers to offset cheaper deals for new consumers. And as we reset the business now nearly 2.5, coming up to 3 years ago, introduced our Fixed Low Price Plans, we believe we are and continue to be very well positioned ahead of this forthcoming regulatory agenda, designed to tackle the royalty penalties that many of our rivals still depend on.

And we continue to make some amazing investments in customer experience, as Kate has alluded to, and I'll share some results on that in a few minutes.

Moving on to the next slide. The acceleration of speed and bandwidth underpins reductions in costs and churn. The move to fiber fundamentally improved, over the long term, the economics of the business. It's not just about growing the total base, it's about gradually migrating customers on to those faster hierarchy products.

On the left here on the slide, you can see the legacy products, so that's copper and voice. As we've said, we're accelerating the recontracting of customers from copper lines, and some of those customers could be paying GBP 30 to GBP 35 to current fiber deals. Many customers have initially began the entry-level fiber for the cabinet product. But there is now real demand for the 80-meg product as well. And as mentioned earlier, 40% of our new fiber customers in the first half took this faster, higher ARPU offering. And this number has nearly doubled over the last 12 months, and it was just 22% this time last year.

As I've mentioned, we've launched G.fast and the trial in fiber-to-the-premise. And as we move up this ladder on this slide, ARPU increases to around high 30s, early 40s, for fiber-to-the-premise. Cost of serve reduces materially. Churn comes down, and so profitability improves.

We see today that fiber customer has doubled the lifetime value of a copper customer. So whilst we are doing a lot of work to accelerate the recontracting of the copper base, and we've seen some short-term ARPU dilution for the long term, this is a very, very strong tailwind.

Moving now to the next slide, a fair deal for our customers. This is underpinning our existing pricing strategy. As everyone knows, the Ofcom and CMA has voiced concerns over the last 12 months about loyalty penalties. And clearly, as TalkTalk is a company that democratize this market to some extent and continue to offer and campaign for fairer, affordable connectivity for everyone, we fully support the Ofcom votings and the CMA in their mission to ensure providing a fair deal for customers.

And that's why we made a number of commitments earlier in the autumn to improve customers' experience, including making it easier for new and existing customers to access exactly the same deals, plus from January, to have plenty, ensuring viable customers are proactively moved to the better package for their needs.

And that's not all. For mid-February, it will be mandatory for providers to contact customers that have approached the end of their contract and share details of their best available pairing. And the aim is to encourage customers, our legacy customers, packages to continue to recontract.

At TalkTalk, we've obviously made already a significant investment in this space. We already contact customers ahead of contract end. We've been doing that for a long while and encouraging them to recontract to another Fixed Low Price Plan. Our customers are responding as most of our base are now in contracts, 72% of the base is now in contract, and as mentioned earlier, during H1, we have been encouraging more of our higher ARPU, mostly copper legacy customers to recontract on to FLPP ahead of these changes.

Moving now to Slide 26 (sic) [Slide 25], the shape of our business. This slide provides information on the shape of the base. Fees on copper versus fiber, [fees] in contracts versus out-of-contract. As I say, 76% of the total base borrowing contract. On fiber, that's 90%.

Over the last few years, we've been bringing down prices for new and existing customers into line, with the price delta on our Fixed Low Price Plans at around GBP 3. And we believe that's significantly lower than our competitors. And while, as you can see at the bottom right, legacy copper customers are paying more, as we've been saying, but this is because many of their packages include call and TV boost. However, only 15% of this space remain on these packages. And that's what we've been talking about. We're seeing that rapidly reducing in the last quarter and through the second half. Closing the price gap of moving customers to Fixed Low Price Plans continue to be a contributing factor for the ARPU dilution that you'll see in today's results. However, the long-term view is flat ARPU year-on-year and growing as we continue to see the benefit of fiber take up. This puts us in a strong place. Lifetime value of customers is higher. It significantly drives our costs down. And so to recap, we are well positioned ahead of these of Ofcom changes as we come into September.

Moving now on to the next slide. We do, as I've mentioned, have sensibly priced add-ons. We have an aggregate TV service. We have mobile. We have voice services. And increasingly, we are driving competitive bundles, which is showing good signs of some ARPU improvement.

Next slide, just thinking a little bit more about the customer experience, the improvements in repair. We've been investing heavily here over a number of years. And that's really, really working. As we demonstrated at the prelims and also at our Capital Markets Day, customers have access to our unique online platform. We call it My Service Centre, where they can identify and resolve problems without having to call. And it's really resonating. Over 50,000 customers a week are now using it. 53% of customers with a technical issue are now self-serving. And this is resulting in real pragmatic material improvements in both experience and cost reduction.

21% of -- we've seen a 21% reduction in the number of agents due to reduced contact center demand. And our customer complaints are down 61% for those customers that use this service center. The job of My Service Centre is to resolve customers quickly and efficiently. And for a lot of the customers, the problem is because of the rise in demand, we can show that, and we can show where it's relevant to, therefore, be upgrading to fiber. So as well as resolving problems quickly, it is also helping us move customers onto higher ARPU products. For example, fiber sales, up 154%, following a self-serve journey versus a journey with an agent.

Moving to the next slide. This is all translating to improved customer metrics. We have the highest -- we are currently the highest-ranking telco on Trustpilot. We have seen a 10% year-on-year improvement in our CSAT tools. I've mentioned this already. But over the autumn, we've had the lowest ever number and share of Ofcom complaints. And this really is a significant moment for the business, and we are delivering on our promises to improve customer experience and clearly the associated cost benefits of that.

Moving now on to the next slide on B2B. Obviously, businesses, small or large, are continuing to consume more data. So it will come as no surprise, the acceleration to high-speed fiber and Ethernet products is the primary focus for both our wholesale and our direct B2B business. Nearly 60% of partner gross adds actually now took a fiber product in H1. So it's happening in consumer, and it's happening in B2B. We've also strategically locked in several of our key broadband and Ethernet partners, with long-term commitment deals in the first half, adding 2,100 to the Ethernet base, taking the overall to 39,400. And obviously, within that, we're seeing good mix shift from 100-meg to the gig. We have a renewed focus on direct B2B, where we serve customers directly. We've structured it as a stand-alone business. It's bearing fruit, and it actually delivered record net adds in H1. That continued actually when you're looking into Q3 as well.

Wholesale represents the vast majority of TalkTalk business. It remains Britain's largest provider of wholesale broadband, with over 50% market share. You've heard me say this before, but the ARPU for wholesale customers, clearly, it's typically lower than direct customer, but they have materially lower cost to serve. So the overall profitability is very similar.

Moving now on to high bandwidth products. This slide just explains exactly that, which is B2B customers are upgrading 100-meg to gig. We're seeing a great progress there.

And the next slide is, obviously, we are serving a whole range of customers for more demand partners and carriers as well as a whole range of small, medium and large brands that we serve direct.

Moving now to the next slide, optimizing our network. Clearly, like every telco provider, we are seeing exponential data usage, 30% to 40% year-on-year increase in demand for data and having a resilient, stable network of more than [40 minutes] ever been. We have to strike the right balance. We use our CapEx carefully to manage consumer demand, whilst also making sure we are future proofing and modernizing the network, hence the move to fiber-to-the-premise, looking at exceptionally [moving] towards that.

You can see on this chart, over-the-top, videos have continued to account for over 60% of network traffic. We see no sign of that slowing down whatsoever, not at least, because of the introduction of these services coming online [digital, et cetera] coming soon, clearly, YouTube Prime Video and Netflix and all of the other streaming services. So the demand for data is up, but there is also a greater need to improve in-home experience. And we are very pleased, alongside our partner, ASSIA, and with the recent -- the Wi-Fi hub that we have this week only being recognized as the best in-home WiFi product for 2019.

Moving now to the next slide, cost per gig. We've invested to improve how we manage the network demand, plus ensuring cost per gig continues to come down as data usage increase is clearly fundamental to our long-term cost position. For example, it has enhanced our customers' network experience by caching 98% of Netflix content within the network. That means we move the content creator to the end customer so it doesn't have to travel so far over the network. For the customer, that just means less buffering and a much more seamless experience. For us, it means we significantly reduced pressure on the network, and we reduced our costs.

So in all-in all, we keep our network cost down. You can see that in the medium shape that I showed you earlier, whilst it's building the increased demand for data.

Moving now to the next slide, simpler, leaner cost base. Our optimization continues. We will always be on this journey, frankly. We have been focused over the last 2.5 years on being simpler and leaner. You can really start to see that coming through, but we have more to do. You can see that in our core products, the commercial discounts make fiber more profitable. And obviously, cost reduction is significant.

Customers need a more reliable connection. We've made the investment of digital tools in the Wi-Fi hub to make sure that, that happens. And on our noncore products, TV and mobile, we continue to deliver those in a capital-light way. And we are also, again, I talked a lot about this before, we're transiting to a much, much more efficient, extremely disciplined approach to marketing. In fact, we will not be adding growth at any cost, which we'll come on to that in a moment. And we're focusing on closing on much, much more targeted digital channels. And that's really paying off in terms of SAC efficiency.

Moving now to our HQ move. So it was 12 months ago that we announced our move from London to Salford. I'm very, very pleased to say that we're coming to the end of the transition phase and to say, and it's gone extremely well. Most of our staff now are there, and we are sitting right in the heart of the northern powerhouse. And we are just starting to see the real green shoots of all of us being together in one place, working on this sort of end-to-end customer experience. You can see from some of the pictures, it has a modern, spacious look and feel. It's been genuinely designed from scratch to improve collaboration, deliver great productivity. And we really, really are starting to see the working benefits of that, a real sense of community.

Moving on. We've had some all sorts great talents joining the business. They've got some great buildings. We've got some brilliant people that have joined. We're very pleased with how the recruitment has turned out. We have attracted people from all sorts of brands, actually, Nike to Sky, [British Gas], all sorts. I've got key members of the Exco join the new members. Jonathan Kini joined us as Managing Director for TalkTalk Business and Jack -- and Sian Doyle, who is currently an Executive Director at CBRE and has worked at Comcast and EA, will be joining in the next few weeks to run our consumer division.

Moving on to the next slide here. Here is just some stats, really, to show you how this transition has been working. And I know there were a lot of questions 12 months ago around risk, et cetera. And we are very, very pleased with how this has gone. We have recruited over 360 people, externally. At the same time, we've made sure that our existing employees extend their careers, move around the organization. 38% of the post have been filled by internal candidates. And just as important, and frankly, the most fundamental thing to me personally and I would rather say for any CEO, is that we have very strong employee NPS. And I think at the last count, we are now at plus 20. And this last November, a year ago, was a negative 24%. So we have come a really, really long way. And for new starters, it's an amazing cost [that we fixed]. We, of course, cannot take this for granted, and we continue to work extremely hard to make sure TalkTalk is a great place to work.

So moving now on to my last slide, which is the outlook. As we've just talked about in the RNS, and Kate has reconfirmed, our outlook remains unchanged. We believe our plan is absolutely on track. The business is stable, underpinned by fiber, and we expect to see strong full year growth in headline EBITDA.

Now with that, I will take some questions. Thanks, everybody.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of Maurice Patrick from Barclays.

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Maurice Graham Patrick, Barclays Bank PLC, Research Division - MD [2]

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Maurice here. So just on the full year outlook. So it looks like revenues were slightly weak in the quarter, and you've called out some of the impacts, including sort of recontracting. But you've reiterated the EBITDA guidance. Can you just remind us sort of what you mean by reiterating EBITDA guidance for the year, what that actually means? And do we -- should we interpret that the term cost-cutting is running ahead of expectations if revenues are slightly light? Or is it actually running as you thought?

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [3]

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Great. Thanks, Maurice. Yes. I think on the EBITDA outlook, we are reiterating exactly what we said at the full year. So no change to the EBITDA guidance that we gave when we stood up in May. I mean I think all I can say is on the cost. Yes. I mean, I think, the cost momentum that we are seeing, we do see that continuing.

Clearly, as we've talked about, the fiber mix and, especially given the acceleration there in the fiber adds that [is] having a beneficial effect on cost. But also, we remain very focused on overheads and all the other things that we've talked to you about before. So yes, definitely a continued momentum on cost.

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Maurice Graham Patrick, Barclays Bank PLC, Research Division - MD [4]

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And just a quick follow-up, if I may. On the FibreNation, I'm sure you're very frustrated yourselves by sort of not completing what you hoped you will complete because of the labor announcement. But how should we interpret it? Is it just on pause now until the election is done? Or how should we think about the FibreNation process and progress?

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [5]

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Yes. So I mean, as everyone knows, we are in very advanced negotiations. We've had enormous amount of interest. That's continued. News of this sort is clearly going to make everyone in this sector pause, reconsider, digest. But those conversations and negotiations are ongoing. So we'll update as soon as we can.

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Operator [6]

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The next question comes from the line of Robert Grindle from Deutsche Bank.

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Robert James Grindle, Deutsche Bank AG, Research Division - Research Analyst [7]

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Yes. I have a follow-up on that very advanced negotiations. Is it very advanced negotiations to get to something quite early stage, like a heads of terms? Or is it sort of very advanced to get to something that's really quite close to a deal where you sort of kick on with doing some stuff?

And then do you still envisage a residual interest in a distinct FibreNation project? And then beyond the deal, CapEx in H1 was about 20% lower, I think, year-on-year, and it may have been down even more than that ex FibreNation. What's the story there? Is it just timing differences? Are you below budget, et cetera?

And you mentioned Openreach discussions continuing. The press recently has had stories suggesting that FTTP prices are being discounted very dramatically. Is that what you guys are seeing, too?

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [8]

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I'll take one and three. Kate, the CapEx. Yes. Yes, we are [enthused]. We are advanced in our conversations. So as soon as we can share more, we will share more. In terms of Openreach, I mean I think they see what we see, which is the only way that there's going to be really fast migration of customers to full fiber is through large-scale, minimum volume commits, et cetera. And we're working really, really well with them. The existing FTTC discount agreement is a great example of that. So we will continue to update. But we're pleased with what we and working extremely well with Openreach. Kate, CapEx?

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [9]

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Yes. Just on the CapEx. I mean, I think, Rob, absolutely, we are continuing to reduce cash CapEx. I think, as I said a moment ago, since we're doing fewer things, it means that we are spending less. I think for the full year, some of it is phasing, where we typically tend to be more second-half weighted. I think for now, we will stick with our original guidance. Let's also not forget that there's coagulation CapEx in there, as I kind of alluded to. Obviously, the timing of the disposal will mean that we've actually got a little bit of CapEx relating to FibreNation in the second half, where potentially, we might not had previously. So I think no change on outlook for now. But yes, making really good progress there, and then we'll fine tune the other costs.

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Operator [10]

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The next question comes from the line of Adam Fox-Rumley from HSBC.

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Adam M. Fox-Rumley, HSBC, Research Division - Analyst, Global Telecoms, Media and Technology Research [11]

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So my first question was on the recontracting of corporate customers. I'm assuming you're trying to simultaneously sell them fiber broadband. But are there a portion of those who are sticking with copper? And have you got any insights why they might be doing that, given your fiber pricing at the moment?

Secondly, I was wondering if you could clarify your outlook for ARPU, please. I think you're saying stable in the second half and beyond. And then growth to follow. But I was wondering if you could talk a bit more specifically about timing of that?

And then thirdly, if I may, could you talk about the outlook for net debt, maybe into 2021? Do you think it could come down in absolute versus where we end up in the end of fiscal '20?

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [12]

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Adam, I'll do the first. You take the third. Yes, so in terms of recontracting, we've seen a very, very deliberate action. It has come into market dilution, as we've talked about. We have around 15% of the base on these sort of predominantly legacy products, copper products. 3 things are going on. First, yes, customers are recontracting to fiber to cabinet. That's great. And they're locking in for 18, 24 months.

The second thing, through the recontracting, you do, there's a little bit of [wake-up], frankly. So you see a little bit of copper churn. You've seen some of that in the numbers.

And then the third thing, as you rightly say, some people just stay, and the reason for that is there are legacy bundles with lots of bits of pieces of TV and voice, et cetera. You'll see more of that in Q3, but that 15% will reduce as we lock more and more customers into contract. As I said earlier, 90% of the fiber base is in contract. And overall, it's over 70%. So we're very pleased with what we're seeing on recontracting.

In terms of outlook on ARPU, yes, stable, flat year-on-year, by the time we get to the end of March. You will see some of these trends carry on. We're okay with that. The long-term or medium-term view on ARPU is strong because we are obviously going through the voice drag, the acceleration of recontracting. But that is being now offset by fiber for the cabinet ARPU improvement. So as I said on the medium shape, as we look into next year, we see modest rises there in the ARPU.

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [13]

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And then just on the net debt question. I mean I think I had guided to net debt going up in the first half. We've got the working capital movements that are running during the presentation. And of course, we do have a high level of cash exceptionals, predominantly due to the move to Salford. However, as you look forward to FY '21, clearly, much lower working capital. CapEx, as I've just talked about, continues to come down. And as for the nonheadline, the exceptionals, they will be minimal. I mean we've literally just got the tail end of the network transformation. We've actually got a positive coming in there from the MVNO. So you are looking at single-digit millions and all the other lines, broadly stable. And yes, I would expect a good picture for FY '21 that manages the debt to come down.

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Operator [14]

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The next question comes from the line of Nick Delfas from Redburn.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [15]

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So a couple of questions from me. First of all, in the going concern section, which is quite long, you say that the group's headroom was GBP 273 million at 30th of September 2019. Could you give us an idea of how close it got to the -- during the 6 month period? Because obviously, that's not a huge amount of headroom, given the scale of your payables and receivables.

And secondly, as you talk about next year, calendar year, could you talk a little bit more about how much the loyalty penalty work is going to cost you? Because you had quite a big loyalty penalty differential. In fact, the biggest of any company in the work that Ofcom published. So I just want to understand how much you think that's going to cost you incrementally going into the next 6 months or to 12 months.

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [16]

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Okay. Yes. Nick, Thank you. The going concern section, I mean, you're right. There is a lot of disclosure. But I'm afraid that, that is the world we live in, and I think we're not alone in seeing more and more disclosure and not less. I mean there's an awful lot in there, whether it's G&A, Brexit. There's probably more than that than we saw in the full year. So nothing really to particularly comment on there. I mean I don't think we can technically kind of give you a breakdown month-by-month on the cash flows. But we have plenty of headroom.

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [17]

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In terms of loyalty penalties, we sit within a strong place. Just -- you're right. The Ofcom figures relate to the legacy base that I've just been talking about, which is higher. It's on our chart, so GBP 12 to GBP 15. Actually, on our core business, FLPP, with the vast majority of our base, we're low. We've sort of between the sort of GBP 3 to GBP 4. We're very, very happy with that. And that is exactly why we're focusing on this recontracting.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [18]

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Sorry, just to be clear, the Ofcom table, so that's the contract status of all customers, not just of your non-FLPP customers?

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [19]

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It's purely our legacy customer base.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [20]

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So that's a mistake from Ofcom?

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [21]

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It was clearly our legacy customers. But the -- and also, it was some 12 months ago, I think, the most up-to-date tracks are in the presentation, where we've got sort of GBP 1 to GBP 4 delta on our main FLPP customers. And then we have this legacy that we are rapidly recontracting.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [22]

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And just to follow-up on Adam's question on net debt. Sorry, what -- I may have missed it, but what are we expecting for net debt by the end of March? Is that going to go up again? Or should it come down off the September 30 level?

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [23]

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So I mean I don't -- in respect to any further working capital outflow, CapEx, as I say, typically does tend to be second-half weighted. Exceptionals, likewise, as we have a lot of people leaving at the end of September, so the payments to those people will fall in the second half, interest and tax, tax a little bit H2 weighted. But then, of course, we have got more EBITDA in the second half. So I think in around, probably, little movement from half 1 to half 2. So broadly where we are today. And then obviously, coming down meaning -- in a meaningful way in FY '21.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [24]

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Okay. And so just going back to the going concern. I mean, if you've got a normal working capital sort of respiration that all these -- all companies have, I think, is it fair to say that, that is in the fifth -- tens of millions? Or is it in the hundreds of millions that, that working capital cycle works to? Just to try and get an idea of how close you've got for the headroom during the first half.

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [25]

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Nick, as I said, we've got plenty of headroom. We are well within our covenants. And I don't really think I need to give you any more detail.

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Operator [26]

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The next question comes from the line of Paul Sidney from Crédit Suisse.

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Paul Sidney, Crédit Suisse AG, Research Division - Research Analyst [27]

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Just a couple of questions for me, please. Just a follow-up, I think, from Robert's question earlier on FTTP. I was just wondering. Does TalkTalk expect a move to sell Openreach's FTTP wholesale product to coincide with an expanded commercial deal? And I think you said at the Q1 stage, that you expected FTTP to be more profitable for you than 80 megabits per second. I was just wondering, is that still the case?

And then secondly, Liberty's CFO said this week, offering U.K. wholesale access on the cable network was possible. I just wondered what your thoughts were on that, given your commitments to Openreach? And also, any potential upfront costs in reselling cable?

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [28]

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Okay. So yes. We will be selling fiber-to-the-premise through Openreach. In fact, we've just started putting customers on trial, as I said earlier. Yes, we're working with them on what that looks like over the long-term and what kind of commercial agreement we can work with them on. And yes, we believe they will be more profitable, and that's because of the ARPU we can drive and the cost to serve that we can reduce.

In terms of other wholesale providers. Yes, I mean, we would consider those that have fantastic wholesale prices, to be perfectly honest. So we certainly wouldn't rule that out at all.

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Operator [29]

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The next question comes from the line of John Karidis from Numis.

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John Karidis, Numis Securities Limited, Research Division - Analyst [30]

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A few questions, please. The first one is, do you expect revenues to grow in fiscal '21? Secondly, what was the net benefit of you changing your distribution model? So I'm sure you had to sort of invest more with others, but was there a net benefit during the period? Or will there be one during the year?

And then thirdly, with regard to Ofcom's initial thoughts about incentivizing investment in fiber, do you agree with a proposals such as setting Openreach's wholesale prices based on old net costs and increasing those in line with inflation and also with Openreach asking to change the prices it charges in areas where it competes with other alternative network operators?

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [31]

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Thanks, John. I'll take one and three. Yes, if you look at our note on medium outlook, that we do expect revenue to modestly grow. As we've said, we expect the full year to be flat this year and then modest growth. Next year, really underpinned by ARPU -- by fiber to the cabinet. The -- Kate can take the distribution agreement.

In terms of Ofcom. I mean the proposals are imminent. I think we've been very clear where there's competition, genuinely where you can see competition, and there are options to provide such as TalkTalk to go on to different wholesale providers. Then, of course, regulated pricing could be reviewed. We do think that it's a thoroughly good thing that both for Openreach and other infrastructure investors are deploying capital now at scale. It's long overdue. The U.K. has got to catch up. So we would thoroughly support that. Kate, on the distribution agreement?

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [32]

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Yes. And on the distribution model, clearly, there was a cost, as you know, of exiting the old model in FY '19 in the P&L and actually, there's the cash cost of that as well in FY '20. But in terms of the new model, you're absolutely right. I mean, it's the first year of the new model. And whilst I've outlined the kind of cash impact of that from a P&L perspective, absolutely, yes. It is beneficial. It's a more efficient channel and very much more aligned to the kind of customers that we're trying to acquire. So yes, that is very -- I've talked about costs coming down. That will be part of it.

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John Karidis, Numis Securities Limited, Research Division - Analyst [33]

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I'm sorry, could you actually answer the specific question? So on the Ofcom proposals, I asked you about setting regulated prices in line with old net costs and increasing them in line with inflation. Do you agree with that or not? Do you agree with Openreach changing -- charging presumably lower prices where it competes with alternative operators, yes or no? And in terms of the net benefit in the first half, in the first year, how much was it? I'm sure there was one, but how much was that?

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [34]

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Sorry. So in terms of the first one. Sorry. Support the investment. Do you think that there needs to be higher prices related to investment? I think the only way that's going to be established on a fair basis is if there's competition. Kate, do you want to take that?

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [35]

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Yes. And John, we haven't broken down line-by-line where the kind of GBP 37 million operating cost. You can see they've come down, but I'm not going to give you exactly how much we save by moving from one distribution to another one. Because you might have mentioned in the [program], but that's not the kind of detail we can give. But it's worth moving or we wouldn't have done it.

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John Karidis, Numis Securities Limited, Research Division - Analyst [36]

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Right. But presumably, that's a one-off benefit, Kate, right?

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [37]

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No. Because I mean -- so we took -- the cost of exiting, we took last year. But clearly, we have moved to a much more efficient model of acquiring our customers a very long-term model. In fact, with our ad agency, they actually very much see themselves as part of TalkTalk. They're sitting in our office in Salford. As I said, we're towards the proper risk-reward model, a long-term model, and we will see the benefits of that, whilst we continue to work with them.

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Operator [38]

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The next question comes from the line of Ben Rickett from New Street Research.

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Ben Rickett, New Street Research LLP - Communication Services Associate [39]

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Just a quick update on your experience with BT's PIA Access product. Is BT a constructive partner in offering this service? And how are you sort of seeing the potential cost savings from using that rather than trench?

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [40]

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Ben, yes, we're working really well with Openreach, actually. On PIA, helpful that we have such a significant relationship with them. We see Clive all the time. They are a constructive partner, and we think they can do more. We think things can be more automated, things can be more organized, but we have come a very long way with them in the last 6 months.

In our current build, a good proportion of what we're doing is ducts and poles as we go into places like [Dewbrick]. It could be over 50% of the homes. And as you know, there's a material cost per home benefit. So on a trench, we average around GBP 500. When we're using ducts and poles and a combination of, it's around GBP 300. So it's a single metric that drives the cost economics of fibre-to-the-premises sales. So we expect more and more of that as we roll out.

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Operator [41]

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The next question comes from the line of Sam McHugh from Exane.

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Samuel McHugh, Exane BNP Paribas, Research Division - Analyst of Telecom Operators [42]

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Just 3 short questions, hopefully. First one is the post office. I wonder if you can give us an update on the contract out for tender and how we should think about the risk of losing the contract or price deflation?

Secondly, on the Ethernet basis, growing, I think, about 13% year-on-year, and you're talking about selling a lot more higher speed services. But then again, you talked a bit about price deflation you're seeing in this market. I think I've seen some of your peers cutting prices, 30% to 40%, over the summer.

And then just lastly, on the fixed line price plans and the loyalty penalty, kind of what's your working assumption for the impact from the end of contract notifications in February? How much is built into this year's guidance? And how should we think about the impact for next year? And were there any offsets, and whether you think about raising prices off the back of it?

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [43]

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Okay. Post office. So we're not going to comment on the detail. The RFP is out there, making good progress on that. And I think the updates will be due at some point next year. In terms of Ethernet, yes, good improvement. Yes, it's a competitive market. We are absolutely single-mindedly focused on moving customers to 1 gig. We've made some very good progress there. We're taking a good share of 1 gig. That is a very profitable business that comes with high ARPU and tends to be 4, 5-year contracts. So it's very sticky as well.

In terms of end of contract, I mean, a lot of the work that we're doing on the legacy that we've talked about has been deliberately to help us mitigate that. So we're 15% at the moment, seeing whether that activity is with halfway through Q3. So in terms of the outlook, we don't see a big impact, and it's absolutely all within our guidance.

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Operator [44]

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The next question comes from the line of [Jim Kalana] from Goldman Sachs.

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Unidentified Analyst, [45]

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Just one from me. In fixed broadband, it appears that the implied KPIs have modestly improved. How are you thinking about the balance between market share ambitions and pricing over the medium term? In particular, given the price rises we've seen across the market, is there any upside, which could support profitability going into FY '21?

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [46]

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Thanks. I think, again, if you look at our medium-term shape, we're not going to be heroic on base growth. We'll see modest base growth. We'll grow where it's sensible to do so. We're very comfortable with this copper churn. It is all about acceleration of fiber. In terms of the outlook for the -- for this year, we see the base flat. And that's our focus, really. It's absolutely about putting -- taking customers from copper to fiber and modestly growing the base. That's what we see next year and ongoing.

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Operator [47]

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The next question comes from the line of Jerry Dellis from Jefferies.

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Jeremy A. Dellis, Jefferies LLC, Research Division - MD & Senior Telecommunications Analyst [48]

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Yes. 2 questions, please. First one relates to your ARPU. It looks like your sort of on-net ARPU in the second quarter was around about GBP 24.3. So that will be down 3%, 4% year-on-year, which will be a deterioration in trend. So you've mentioned that there was some active sort of recontracting going on during the quarter. But there was also a sort of near enough 10% price increase on front book plans that was imposed in June. I'm just interested to understand why we don't see that feeding through into the revenue number in a more material way?

And then secondly, in the event that you were able to crystallize some disposal of proceeds on FibreNation, could you just please remind us how you might think about sort of allocating those proceeds and the relative sort of thought on paying down debt versus, perhaps, rewarding shareholders?

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [49]

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Yes. I mean, I think on the ARPU, I talked you through this various moving parts in revenue. And clearly, that is feeding through into ARPU. So we have, as Tristia talked about as well, being, if anything, accelerating this legacy recontracting piece, and we are seeing a voice plan. We see those as reasonably short term. So I think you'll see the trends that you've seen in Q1 and Q2 of '18. And we've talked about stable ARPUs in the second half, clearly, as we get more fiber and data.

Also, the other part I was mentioning is actually the wholesale and retail mix obviously impacting ARPU as well. Further down the P&L, as we've always said, we're reasonably ambivalent, but we have a wholesale or retail customers from a profit perspective. But clearly, ARPU, that will have an impact.

On your debt question, I mean I think we've always been very clear that as and when we come to an agreement there, we reduced the proceeds to pay down our debt.

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Operator [50]

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We have time for one final question, and this comes from the line of Alex Hogan from PGIM.

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Alexander Hogan, PGIM Fixed Income, Research Division - Research Analyst [51]

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I was just wondering on your consumer base, how many, maybe as a percentage or an answer there on the -- of your consumers are on -- have packages with add-ons? And then what's the average number of add-ons per RGUs after those who do?

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Kate Ferry, TalkTalk Telecom Group PLC - CFO & Director [52]

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We don't actually disclose or break out RGUs. We have 6% of the basis on fiber. We've got around 72% of the in-contract, but we don't break out the -- per RGUs and add-on.

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Operator [53]

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We have reached the end of the Q&A. So I'll now hand the call back to Tristia for any concluding remarks.

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Tristia Harrison, TalkTalk Telecom Group PLC - CEO & Executive Director [54]

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So I guess, thank you very much. Thank you for your questions. Kate and I are around if anyone wants to follow-up. And we look forward to seeing you all very soon.

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Operator [55]

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Thank you for joining today's conference. You may now disconnect your lines. Hosts, please stay connected and await further instruction. Thank you.