BT Group plc (BT) Q2 2024 Earnings Call Transcript

BT Group plc (NYSE:BT) Q2 2024 Earnings Conference Call November 2, 2023 6:00 AM ET

Company Participants

Mark Lidiard – Investor Relations

Philip Jansen – Chief Executive Officer

Simon Lowth – Chief Financial Officer

Conference Call Participants

Akhil Dattani – JPMorgan

Jakob Bluestone – Exane BNP

Georgios Ierodiaconou – Citi

Carl Murdock-Smith – Berenberg

Polo Tang – UBS

Robert Grindle – Deutsche Bank

David Wright – Bank of America

Nick Delfas – Redburn

James Ratzer – New Street

Nick Lyall – Societe Generale

Maurice Patrick – Barclays

Adam Fox-Rumley – HSBC

Andrew Beale – Arete Research

Mark Lidiard

Good morning everyone and welcome to BT Group’s Results Presentation for the Half Year ended 30 September, 2023. Presenting today is Philip Jansen, BT Group’s Chief Executive. Simon Lowth, BT Group’s CFO will join Philip for a Q& session following the presentation. I would like to make everyone aware that this event is being recorder for replay purposes.

Before we start, I’d like to draw your attention to the usual forward-looking statements in our press release and our latest annual report for examples of the factors that could cause actual results to differ from any forward looking statements we may make. Both the press release and the annual report can be found on our website.

And with that, I will now hand over to Philip.

Philip Jansen

Thanks Mark. Good morning everybody and thank you for joining today’s call. Before I get into the detail of today’s results, I just want to pick up the theme of our full year results. Much done, much more to do and give you an overview of how we are tracking against our long-term ambition as well as progress this half.

First, we delivered a strong financial and operating performance with both adjusted revenue and EBITDA growth in H1. At the same time we are strengthening our competitive position and accelerating progress through improving our products, propositions and service, whilst investing heavily in our digitalization and next-generation networks. Second we remain absolutely focused on cost and efficiency. Our transformation program is ahead of plan and now has delivered the original FY25 target of £2.5 billion of gross annualized savings with as expected a cost to achieve of just under £1.3 billion.

Third, we remain on track to achieve our revenue and EBITDA outlook for the full year. As a result of build efficiencies primarily in Openreach, we are lowering our full year CapEx outlook to around £5 billion. This will flow through to normalizes free cash flow which we now expect to out turn toward the top end of the £1 billion to £1.2 billion range. And finally, we are reaffirming our long-term ambition and continue to expect that by the end of the decade, following the peak of our full fiber build, we’ll generate at least £1.5 billion more normalized free cash flow a year. This cash uplift is before any contribution from revenue growth or cost savings net of tax and underpins both our progressive dividend policy and our BBB+ through-cycle credit rating target.

Moving now to the half year pro forma results on Slide 5. We delivered another strong financial and operational performance. Revenue for the half was up 3% with good trading in Consumer and Openreach along with increased lower margin sales in business, partially offset by legacy product declines and continued pressure on large corporate customers. EBITDA was up 4%, reflecting the revenue flow-through and strong cost control, which more than offset the impact of cost inflation and one-off items in the prior year. CapEx in the first half was down 11% to £2.3 billion, mainly reflecting unit cost efficiencies in Openreach, which have more than offset the impact of more FTTP build, connections and of course, inflation. H1 normalized free cash flow was strong at £456 million, primarily due to the higher EBITDA and lower CapEx partly offset by working capital movements. And finally, and as expected, we are announcing our interim dividend of 2.31p per share, in line with our policy for it to be set at 30% of the prior year’s full year dividend.

Let’s now take a look at the pro forma financials by customer-facing unit. Turning to Slide 6, I’ll start with Consumer, which delivered another strong performance with revenue up 3% in H1 driven by service revenue from contractual price increases, increased roaming and more FTTP connections. EBITDA grew 4% and supported by tight cost management and the annualizing of some prior year one-offs. We’re also encouraged by churn staying low for the half year, while ARPU has remained robust. Now this is a tricky balance to get right in the current economic environment. We have worked really hard to offer additional value to the vast majority of recontracting customers stay with us. As I’ve always said, you maybe able to buy cheaper, but you definitely can’t buy better with BT. And with new EEs leading-edge propositions, that has never been more true.

Moving to Business in a challenging environment, revenue was up 1% in the half, driven by lower margin sales and good trading momentum in our small and medium business segment, supported by inflation-linked price rises. This was, however, partly offset by legacy managed contract exits and declines. EBITDA was lower for the half, driven by higher input costs and revenue flow-through along with some one-off items in the prior year, leading to a tougher comparator. Business’ new wins included a new 5-year contract with the Army, which demonstrate that our public sector business remains a key partner across many areas of government and the country’s public services.

Finally, Openreach, which has again showed strong operational and trading momentum, resulting in revenue up 8% in the half, driven by price increases and growth in FTTP and Ethernet basis. EBITDA was 12% higher due to the revenue flow-through and lower staff numbers, partially offset by pay and energy cost inflation along with higher FTTP provision volumes.

Moving now to our operating performance on Slide 7. Despite the tough economic climate, demand for our next-generation products and services has never been higher and is projected to keep increasing. For example, take up on Openreach leading FTTP network has grown to 33%. While in our downstream units, we added another 350,000 full fiber retail customers in the half year. 5G too has demonstrated consistent take-up with almost 1.3 million connections in the half.

In Business the hostile threat environment has clearly left customers motivated to seek protection from cyber attack. And this has driven BT’s security revenue up 14% in the first half. This vote of confidence from our customers is a result of a consistent focus on customer experience right across the business. And I’m pleased to see BT Group’s Net Promoter Score has risen again 1.8 percentage points year-on-year to 22.7.

Of course to retain our customers’ confidence we need to hold on to our lead in next-generation networks. I’m more than confident than ever that we are doing just that as our investment strategy continues to work. A £15 billion investment in FTTP is delivering ahead of expectations with a record quarter of builds extending the current reach of our full fiber network 12 million homes and businesses. Furthermore we maintain the level of work-in-progress for infrastructure and underpins the next 6 million premises. Meaning the build is either complete or underway for around 18 million premises. That’s approximately 56% coverage across the whole of the UK.

Overreach has delivered this with unit cost for H1 in the lower half of our £250 to £350 build range, and we have the capacity to go faster still. We expect to build to more than 900,000 premises in quarter 3 and even more in quarter 4. We’ve also seen strong demand with the fiber base standing now at 4 million. And we expect take-up to grow modestly over the remainder of this year despite the accelerating rate of build. We are determined to remain the partner of choice for our CPs in a competitive marketplace, and we’re delighted that now over 1 million Sky customers are FTTP customers and can benefit from faster speeds and a more reliable broadband network across the Openreach FTTP platform. At the same time as this unprecedented pace of fiber delivery, we’ve made fantastic progress upgrading the nation’s mobile connectivity, and currently have 5G within reach of 72% of the UK population.

We are also investing to transform and digitize to improve customer experience and lower our cost base. Through our modernization program and tight cost control, we’ve seen the cost base continue to come down, and have already delivered £2.5 billion towards our total target of £3 billion of gross annualized cost savings by fiscal year 2025. However, our simplification journey is about more than just cost savings. The launch last month of new EE marks the go-live of an entirely new platform. It builds the foundations of how we interact with our consumer customers and the new single ID to enhance that relationship as well as a flagship customer-facing brand, the systems on which EE’s products will be sold are more integrated, they are more efficient, and they are much easier for our customers and our people to use.

In business, the new global fabric will be a game changer for our corporate customers as they become increasingly digital. It will simplify global connectivity in an ever more complicated multi-cloud, multi-SaaS environment. This will be the world’s largest cloud-centric feature-rich network within build security and multi-cloud management or as a service. Our accelerated delivery, significant network and systems investments and relentless focus on our cost base, culminate in the strengthening of our competitive position. This will result in continued network leadership through our best-in-class FTTP and 5G networks, more customers on our next-generation platforms at an accelerating rate and a lower cost base with a simpler modernized operating model. This will put us in a really strong competitive position with a strong balance sheet and strong cash flow. And I want to take a few moments to remind you how we see BT Group looking in the future before reviewing progress against the key metrics underpinning our 5 clear priorities.

So I’ll turn to Slide 8. As I pointed out at our full year results in May, in the future, BT Group will be a much simpler and more digitized business than the one we have today with leading networks and great customer experience – experiences powered by a lean and efficient organization and utilizing the very latest technology, all of which will ultimately help to fulfill our purpose, we connect for good. So how are we progressing towards this? I’ll take each of our priorities in turn, starting with consumer on Slide 9. In Consumer, we remain well positioned to continue driving growth.

As you can see, we’ve continued our momentum on FTTP additions, winning 335,000 customers in the first half. That’s a 40% year-on-year acceleration in the rate of net adds. At the same time, we have grown our 5G connections to 9 million. Although the proportion of converged households was flat, we do expect to start driving growth through new E with our single brand focus and advanced converged propositions. Strong sales of game consoles, for example, in the half give us confidence that we can stretch the brand into new areas, and it is a testament to the relationship we have with our customers and partners.

Moving on to our second priority on Slide 10 to capitalize on our unrivaled assets in Business. Managed services revenue is broadly flat for the past rolling 12 months and the market remains challenging. However, as I said earlier, strong trading in security and the recent launch of our innovative global fabric will support growth and form the basis of future managed services contract.

Alongside this, we continue to see positive trading momentum with our small and medium business customers, supported by index-linked pricing. Turning to Slide 11. Openreach delivered another record quarter of FTTP build, taking the base 12 million premises passed, of which 3.5 million are in Area 3. Connections were also robust at 364,000 in the second quarter and in some ways, more importantly, FTTP orders in September were at a record high setting us up for a strong quarter of net adds in quarter 3. Openreach delivered this whilst maintaining a premium build quality and at a cost in H1 in the lower half about £250 to £350 per premises build rate with ongoing engineering efficiencies and scale economies more than offsetting inflationary pressures.

Of course, we are not alone in recognizing the benefits of FTTP. We know others are building too, but only Openreach is connecting customers to full fiber at real pace and scale, driving ARPU up and cost down. Our proposition remains incredibly successful with more than 70% of sales for products offering ultrafast speeds. The challenging macro environment certainly contributed to Openreach’s 255,000 broadband line losses in H1.

The downturn in housebuilding and softness in new broadband adoption has meant that we have again a limited offset to competitive losses that were broadly flat against the second half of last year. I think it’s worth noting that our broadband-based decline has occurred where we do not have FTTP. We have grown the broadband base within our FTTP footprint over the past 12 months. We were also pleased to see Openreach broadband ARPU increase by 10% year-on-year, providing a benefit to revenue that far outweighs the drag from the loss of copper broadband lines. Moreover, quarter three is usually seasonally stronger in volume terms, so we’re continuing to target around 400,000 losses over the fiscal year as a whole, but in saying that a weaker-than-expected market, including slower new home build, increases the risk that we will exceed this level. However, let’s be clear, the lines we are losing are primarily low-value copper lines. This is about a slow broadband market. And as just mentioned, we are growing in Openreach FTTP areas. So our best offense to line losses is to build FTTP as fast as possible, which I hope you agree we are doing.

Turning to Slide 12. We’ve moved fast on our fourth priority to digitize, automate and rescale to transform our cost base and improve productivity. Our strong delivery in H1 against this priority has seen total labor resource in the business fall by nearly 7,000 people. Some examples of our transformation improvements include consolidating 17 financial systems into a single standard version saving around £70 million in annual running costs, more than halving the number of products in our business portfolio to around 150 and a significant proportion of the code our BT colleagues add to our IT estate is now written using generative AI, allowing us to boost productivity considerably.

Work in our digital division is also delivering genuine business transformation. We have now moved 80% of our data from multiple locations into Google’s cloud platform from a standing start 2 years ago. All this data is enabled for the use of AI and analytics applications, providing the basis for further savings and customer opportunities in the future. On Slide 13, as I said at the full year, are the key metrics to measure successful delivery of our strategy, which we have updated for this half year, further demonstrating our track record as we work towards delivering future BT Group.

So in summary, on Slide 14, we are driving our growth strategy, investing heavily in our next-generation networks while improving our operational and cost efficiency, leading to a strengthening of our competitive position. We have a robust strategy, a strong plan that we are executing well, and we are reiterating our long-term growth ambition, supporting our customers, underpinning economic growth in the UK and delivering for our shareholders.

Build efficiencies, primarily in Overreach mean we have been able to reduce this year’s CapEx outlook to around £5 billion while still accelerating the fiber build and increasing take-up. This reduced CapEx will flow through to normalized free cash flow, which we now expect to outturn towards the top end of the £1 billion to £1.2 billion range. Beyond the peak fiber build, we continue to expect at least a £1 billion reduction in CapEx flowing through to normalized free cash flow, with an additional £0.5 billion uplift by the end of the decade as we benefit from an all IP, all FTTP network.

This is a clear route to more than double our fiscal year ‘22 normalized free cash flow by the end of the decade. All of this combined to underpin our progressive dividend policy with the interim dividend of 2.31p per share confirmed today. Now it would be remiss of me not to recognize that this is my last results presentation as BT Group’s Chief Executive and to say a few words about the last 5 years, and in particular, to thank all of my brilliant BT Group colleagues and teams who have allowed us to deliver some outstanding outcomes for our stakeholders, for example, providing the network resilience during and after the pandemic to support changing working patterns across the nation.

By the time I hand over to Alison, bringing 40% of the UK premises within reach of our FTTP network, launching the UK’s first and leading 5G service, which now supports almost 10 million customers, reducing our energy consumption over the last 6 years by cumulative 259 gigawatts equivalent to a city the size of [indiscernible], blocking around 280 million texts since deploying our new anti-scam technology in 2021.

And finally, consolidating the 440 locations where our UK desk-based colleagues used to work to just 97. BT Group is on the right track and in much better shape than when I joined it in early 2019. And I’m really pleased to be handing the baton to Alison, who knows the sector, she knows the company and knows what’s needed for the next phase of our journey and I wish her all the best.

And finally, thanks to everyone on the call today. Your scrutiny may not always make for an easy ride, but we appreciate that it reflects the degree to which BT Group matters to people across the UK and beyond. So thank you for your scrutiny, your challenge and your interest in BT. So could we open up to Q&A, please? [Operator Instructions] Ben, could you open the line, please?

Question-and-Answer Session

Operator

[Operator Instructions] And with that, our first question today comes from Akhil Dattani from JPMorgan. Akhil, please go ahead. You are now unmated.

Philip Jansen

Hi, Akhil. Hello.

Akhil Dattani

Hey, can you hear me?

Philip Jansen

I can hear you now, Akhil. Hi.

Akhil Dattani

Hi. Well, look, first of all, just given your concluding remarks, obviously, thanks very much for the last 5 years and all the best for the future. Maybe if I can start with my question, which really is in regards to Openreach trends in H1. We’ve obviously seen very impressive growth rates both in revenue and EBITDA, about 8% revenue growth, 12% EBITDA growth. And that’s despite with Equinox 2, you haven’t pushed through the price hikes that you could have done. Could you help us maybe understand what supported the acceleration? And I guess, just to sort of preempt the answer when I look at the divisional trends, it looks like your core broadband business is doing really well, but the incremental acceleration is from Ethernet and other. So, just trying to understand exactly what’s going on in the mix? And maybe if you can help us understand, you sounded like you are quite construct around Q2 and Q4, but just to better understand the sustainability of these trends? Thanks.

Philip Jansen

Akhil, we couldn’t hear that. Can you ask that again?

Akhil Dattani

Yes. Sorry, I was just saying that, obviously, the first bit was just color around the mix of what’s driving the acceleration. And then the second piece of it was just you made a number of interesting comments around Q3 and your confidence around Q3, Q4. It was just to understand the sustainability of the growth trends we’ve seen in H1?

Philip Jansen

Yes, okay. Got it. Yes, got it. Okay. So I mean, do it in reversal, I think, look, on the build and connection rate, you can see what’s happening here. We’ve had a record quarter. We are signaling that we are going to increase the quarter three and quarter four, right. So we are heading to that target. You know we are trying to get to a build rate of can we get to 4 million a year. So you can see an accelerating profile as we head towards that sort of notionary target. So I think that’s really encouraging. What I think is probably even more encouraging is the build cost is coming down. So despite all this huge inflationary pressures, the team and Openreach are beginning to get a sense where the costs are coming down, right? Now what that means for the future is really encouraging, right. So we build more – we’ve got very big operational efficiency in Openreach, which you know about, which is what the landing zone in the future is exactly that. So I think you’re beginning to see the early signs of what a new Openreach could look like, which is it’s a fiber company. And the fiber company will generate a lot of cash when it’s finished building, and you’re beginning to see the signs of that. So you’ve got 8% revenue growth 12% EBITDA growth, 10% ARPU growth.

And within that, obviously, these cost efficiencies, we said as a group level, 7,000 people less. It’s a significant reduction in headcount. A big chunk of that is in Openreach. So they are getting more efficient, building more, connecting more with less cost – and the less cost is, yes, on build. Yes, it’s in the whole network management. But actually, as we have less copper, it falls less with less service repair. So you can see that on the number of truck rolls is going down, repair volumes are going down. So it’s a little window into the future. So I think all of those metrics are hugely exciting. Simon, you want to add anything to that?

Simon Lowth

No, no. That’s fine.

Philip Jansen

Yes. And I got on the mix by the way, it and Ethernet continues to perform really strongly to your point. So everything in Openreach is firing on all cylinders.

Simon Lowth

Just – I mean, Philip, I might just add and I think, again, we couldn’t quite hear the question. But if you think about the dynamics in Openreach in the first half of the year, we have seen broadband and lines, so the sort of broadband part of the business, basically growing its revenue at about 8%, which is broadly in line with the overall Openreach. Ethernet a bit faster. We are pleased about that 12% of the Ethernet business very important contributor remains strong. And we are seeking to remain price competitive there at the same time. I think the other point is that the costs and I think Philip called this out, remained flat, and that’s a function you’re seeing here, the migration on to fiber, the relief on the copper network, lower service work required, costs can be held flat, which is a great achievement in an inflationary environment and that’s driving the EBITDA up. The only – the final point I would make, do remember as we go into the second half of the year, we did have a pay rise in September. So we have a little bit of upward pressure on our labor cost as we go into the second half of the year across all of the units of the group.

Akhil Dattani

Thanks a lot.

Philip Jansen

Thanks, Akhil.

Operator

Our second question comes from Adam Fox-Rumley from HSBC. Adam, please go ahead.

Philip Jansen

Hi, Adam.

Operator

We will move on to our next question, Jakob Bluestone from Exane BNP. Jakob, please go ahead.

Jakob Bluestone

I had a question around your cash flow. I think your working capital included around £360 million relating to mobile handsets. So just hoping you could help us understand what was that a year ago and how much do you see that?

Philip Jansen

Simon, [indiscernible]

Simon Lowth

Yes. Jakob, thanks for the question. The cash flow for the half year was up almost £400 million year-on-year, so pleased with the cash flow performance. The real driver of that, Jakob, is that we grew EBITDA by about £150 million, and our cash CapEx came down by £300 million. That’s a £450 million growth. And of course, that’s as Philip mentioned earlier, that’s a bit of a preview into the leverage that we get as we develop this strategy out into the future, the combination of EBITDA growth and then being able to reduce CapEx post our peak, you can see the sort of expansion of cash flow that can flow. So a little snippet of that in H1. In terms of working capital, specifically, year-on-year, it was an increase in an outflow of about £50 million. Remember, H1 is always a working capital outflow half for us, about a £50 million increase in that outflow. Yes, we did have a program of monetization of mobile handsets, that’s actually part of an integrated strategy as we move from just 2-year contracts to 3-year contracts in order to normalize the working capital impact of that. We have introduced that scheme, but do bear in mind, and we make this clear, we had another handset financing program, which dropped by about £20 million. So the net effect of those two is pretty modest. So I hope that helps you, Jakob.

Jakob Bluestone

Absolutely enough. So, thank you to Philip and best wishes for the future.

Philip Jansen

Thanks, Jakob.

Operator

Our next question comes from Georgios Ierodiaconou from Citi. Please go ahead.

Georgios Ierodiaconou

Thank you for taking my question. It’s around the comments you made on Openreach and the broadband share remaining strong and growing where fiber has been upgraded versus the other areas. I was wondering if you can share some information on whether there are maybe differences in the overbuild from others within the areas who are present with fiber versus others or whether this is like-for-like? And then maybe squeezing a second question, because it’s linked, there has been a very good improvement in NPS in the last 5 years, as you highlighted. And I just wanted to understand if there is a significant difference between the 10 million, 11 million homes, you are already servicing with fiber a few months ago versus the rest? Thank you.

Philip Jansen

Let me do the first one. Maybe, Simon, you can do the second one. Look, it’s an important question. And I think it’s relatively simple. When we build fiber in almost all circumstances, and remember, we’ve got lots of different cohorts of build. We grow our market share full stop. I think that’s sort of the main headline. However, of course, if you are a customer, for example, in a rural area and you’re an ADSL and you’re getting 10 megabits per second, and a new fiber provider gets there before Overreach is a very good chance we’ll lose that line and that happens a bit – of course, and that’s in the numbers. So – but of course, as we get to 12 million built on the track to 18 million going to 25 million, that is going to happen far less. So I think we’re very, very comfortable with what’s happening on the ground in build and connections and the prospects and how the future should play out for BT. And it’s about delivering for our customers, but also making sure that the investment case that’s anchored into the fiber business case is rock solid. And again, 12 million – 4 million connections, 33% at the build rate and the build cost we’ve shown today I don’t think anyone should be questioning the £15 billion investment. We’re going to get a good return for that. We just want to make sure we do as best we possibly can as quickly for all our customers and get that digital infrastructure in the ground as quickly as possible. Simon you want to do the second one on that?

Simon Lowth

Yes, on NPS. I mean, we’re pleased clearly with just the continued progressive improvement in NPS customer satisfaction across the business. And I think that’s a particular achievement given we are in an environment where in many parts of business, we are putting through price rises reflecting inflation. But you can see that, that’s flowing through into lower churn. Have we done this? This is just a relentless focus on OPS over 5-plus years. It’s something that the whole organization is focused on. It goes into scorecards, one. Two, we have added resources in order to ensure that we can provide good service to customers. Three, we’ve continued to really drive process improvement both in our contact centers and in our engineering workforce. And finally, of course, we’ve achieved all of this even though we’re only in the early part of replacing what is relatively now old IT with modern IT. So there’s more opportunity to come and that remains a clear focus for us.

Philip Jansen

George, can I just add to that? I remember a very little known club called the Koob club, and it looks after its members in a very unique way. And I guess, for me, it’s been a key learning for me of how we look after our customers. And over the past 5 years, I think the overall customer focus has been completely revolutionized. So we – I hope that almost everybody in BT, 130,000-odd people think much more deeply about looking after customers in the broadest possible sense. And to Simon’s point, I am absolutely delighted that in the 5 years, the NPS has more than doubled. I mean that is really important. We’ve got more to do by the way, you know what the targets are. So the – if you’re a customer of BT Group, we’ve got 30 million. In general, the things have moved forward dramatically for the good. I think there is loads more to it. It’s not just about the networks obviously give a significant boost by themselves. When you get on to new modern networks and get off the legacy, that by itself is a fundamental shift but also new propositions, new services that we’re beginning to launch both in consumer and in business are going to make a big difference. And then if you are really, really, really good at digital and thinking about how to use new technology, the way we interact, the way we service customers, the way we look after customers is going to be transformed in the next few years.

And therefore, I’m – it’s one of the things that the most important thing to me. And I guess, when I first arrived, we had loads of call centers outside of the UK, a lot of feedback on that. It was one of the first things I took was to bring it all back. From that moment, we’ve been on a journey to transform the way we should think about our customers, the way we treat them, the way they interact with us. And I – for me, it’s one of the biggest things that’s happened here because we’ve now got a business that is doing the two things that you can’t be successful without. It’s growing and the customers like what we’re doing. If you are not growing and your customers don’t like what you’re doing, you are going to have a tough time. And I feel both of those things are heading in the right direction. Thanks, Georgios.

Operator

Up next is Carl Murdock-Smith from Berenberg. Carl, you may proceed.

Carl Murdock-Smith

Firstly, Philip I just wanted to wish you all the best for the future. And my question is about H1, H2 EBITDA phasing in the Business division. So, after H1 EBITDA of £806 million and looking at where consensus is for the full year at above £1.7 billion that would mean that H2 would need to be 53% of full year EBITDA. So that’s quite an H2 ramp. Last year, we did see that kind of phasing in H2. But in the year before, the year ending March ‘22, we didn’t, and H1 and H2 were much more even. So I guess my question is, what do you expect this year’s EBITDA phasing to be like in Business? And are you comfortable that there are good reasons to justify the significant H2 profitability ramp-up expected by consensus, particularly in the face of the current macro challenges and the salary phasing headwinds that you flagged earlier?

Philip Jansen

Yes, Carl, I’ll let Simon give you a perspective on that. Obviously, we don’t do loads of breakdowns on individual units for individual half year. So I hear what you’re saying, Carl. So thank you for your original comment. I appreciate that. Business is obviously a challenging environment for the reasons you know what’s happened historically in this first half is the continuation of the trend for a little while. Yes, there’s a change out from old to new, which we’re just working our way through the chunk of business that actually is performing extremely well, is the index-linked part. So not just in terms of financials, but its customer base, its performance, its NPS, its revenue EBITDA are all heading in the right direction. And of course, their prices have moved up as inflation has come through. In a big chunk of the rest of the business area, we’ve got long-term contracts, which are a lot on the legacy we’ve been unable to pass through some of the costs that are associated with the inflationary pressure we’re all experiencing. So clearly, that is the headwind you’re referring to in the first half. And obviously, there’s not going to be an immediate bounce back in the second half. There’s a lot of work that Bas and his team are working on. I have to say that the strategy that BT business has now makes a lot of sense. And you are going to see in detail, Bas is going to spend some time with you in the not-too-distant future explaining that. So I think you should wait until you see that because there will be a much stronger proposition for our customers. And as we scale the new stuff, it will make a material difference. It’s just the – we’re stuck between the old and the new and not enough new. But at some stage, that will change. I think Bas is going to give you a sense of that when he meets with you. Simon, do you want to make any further comments on phasing?

Simon Lowth

Sure. No, Carl, thanks for the question. I mean the B2B business does typically see a little bit of a ramp-up in H2 versus H1. But I think this year, it’s going to be flatter than we’ve seen certainly than prior year and possibly before. Why is that? Well, first of all, do remember, as I said earlier, we had a pay rise in September halfway through the year. In the index part of our business, you do get some attenuation of the price rise in the volume part of the business. And of course, it’s a pretty tough macro, particularly for sort of UK, large UK corporates, particularly public sector ones, and we benefited a bit from FX last year. So I think it’s going to be flatter than a bit of a ramp-up, but flatter than prior years. Do bear in mind, of course, Carl that Openreach, I think, strongly performed in the first half of the year. And I suspect that the market will see that. So, perhaps a bit weaker on business but stronger on Openreach.

Operator

The following question comes from Nick Delfas from Redburn. Nick, please go ahead.

Philip Jansen

Hello, Nick.

Operator

Nick Delfas has just disconnected. Let me proceed to Polo Tang from UBS. Polo, please go ahead.

Polo Tang

Hi. Firstly, Philip best wishes for the future for life after BT Group. In terms of my question, it’s on Openreach. So the minimum volume deals on FTTC or the Openreach 112 deals that you had with the largest ISP has recently expired. Are you seeing any change in terms of how these ISPs are behaving in the number of lines that they’re delivering to Openreach? And also, if you look at some of the largest ISPs, Sky is exclusively with Openreach that they recently signed a wholesale deal with Virgin Media in Ireland, therefore, are you worried about the risk of Sky shifting some of its business away from Openreach to other players in the UK. Also, how do you think about the risks to Openreach from Virgin Media revisiting M&A discussions with TalkTalk? Thanks.

Philip Jansen

Yes. I mean I’ll let Simon talk about 112 and the effect on Openreach. And maybe I’ll take the question on Sky and VMO2 and TTG. I think, clearly, it’s really important. I think what I’d point to is we’ve built the 12 million, connected 4 – of the 4 million, Sky is 1 million. So the market is moving pretty rapidly, obviously. And so for me, one of the things that Clive and openings team have done really, really well, they run it as an independent company that like any great company thinks really carefully about its customers. And Sky is one of the biggest customers as is TalkTalk group. So the question is always how do we make sure that our large customers for Openreach feel comfortable with what we are being offered – what is being offered to them. So we’ve had Equinox 1. You know there is Equinox 2. Those things have worked for our customers and for Openreach. And I think it’s working for everybody, all stakeholders, the country at large, getting more digital infrastructure. So – this is a scale business. And I think our customers understand that. They understand the scale is required to be successful. And networks is complicated at one level, but actually, it’s very simple. It’s a heavy investment, massive CapEx, and you need to fill the network, and it’s a scale business. So I think that allows us to be very competitive across the board. I don’t just mean price, but of course, I do include price in that, but making sure that we get people on to FTTP quickly, early with a great product, with great service at very attractive pricing.

And as the Openreach initiative continues to roll out the financial picture for everybody should work. And what I’m hoping for is that, that both Openreach makes a great return, it deserves to on a £15 billion investment, but also our big customers like Sky and TalkTalk and Vodafone and many others, by the way, get not only exceptional value and great things for their customers, but they get a chance to make a very fair return too. And that is the way it’s set up, and that is the fair bet, by the way. So that’s what we’re doing, and I think there is every chance that our large customers will retain confidence in what we’re doing if we can keep delivering in the way that we are. And that’s why we are going so fast. And again, I would say just since you raised it on VMO2 and others, I think it’s really good that we have strong competition and having another very big player building fiber, competing hard, I think, is a good dynamic in the country. And again, as I say, we are I think, leading in the race for fiber. I hope we are comparing well to others. I think we are, and that’s the way it’s going to continue for the foreseeable future. I really do believe. Simon, do you want to think about the 112 deals with respect to that coming to an end?

Simon Lowth

Yes, really quick. I mean, ahead of its expiry. We took the decision to provide our CPs with 2 years advanced notice of pricing. And so essentially, we’re rolling forward those offers on the FTTC products with a sort of 2-year advanced window. These are not – and that’s at our election. Clearly, these are not subject to volume commitments, but I think it’s worked very effectively in helping CPs continue to run the FTTC platform, but it also means that the FTTP platform is very competitive for them, particularly with Equinox. So it’s a big driver of support from CPs and also why we’re getting such strong take-up on the FTTP platform.

Polo Tang

Thanks.

Operator

The following question comes from Robert Grindle from Deutsche Bank. Robert, please proceed.

Robert Grindle

Thank you. Can you hear me, okay?

Philip Jansen

Loud and clear.

Robert Grindle

Right. Philip, thanks for your humor and punching us with us on these calls, much appreciate it. My question is about One Touch switching, which was delayed until March. Does this improve your ability to take share from VMO2? Is this something you’re looking forward to after all you’re doing quite well already with fiber? And I might just jam one in to Simon. You’ve put in a significant summary on the class action suit, but you haven’t taken a provision why the profile given to it now? Is it because it’s so close? Or is there a change in thinking on the outcome risk? Thanks.

Philip Jansen

Robert, I’ll do the first one and let Simon do the second. Thank you by the way for your comments. I’ve really enjoyed all our conversations. So the short answer is a short answer. So the One Touch switching is, yes, you’re absolutely right. You answered that was happening there. That does make a difference. And again, I support that, by the way. You want to – in this kind of market, we want to make sure the customers get the opportunity to buy the best services and encourage people to compete like fury. So yes, that One Touch switching is going to make a difference, and I’ll let the best man win as they say. Simon, second part of the question?

Simon Lowth

Yes. I mean we simply updated our disclosure on that matter, Robert. I think as you’ve seen – we continue to believe that the claim is about merit. And on that basis, the accounting standards don’t require a provision, don’t deem it sensible or required at this point. but we provided you with a full disclosure of where we are.

Philip Jansen

Thanks, Robert.

Robert Grindle

Thank you.

Operator

Up next is David Wright from Bank of America. David, please go ahead.

Philip Jansen

Hi, David.

David Wright

Thank you. Hello, can you hear me, guys?

Philip Jansen

Yes. Loud and clear.

David Wright

Great. So a very simple question and then a question for yourself, Philip, just on the unit cost efficiencies of Openreach. Just trying to understand to what extent we can extrapolate those. If anything, I might have thought that the unit cost would trend higher as you start to move a little bit more rural perhaps with the build? And then just my question to you Philip. Again, you’ve done your time now with BT and you arrived promising to be braver and boulder, and I think you should be congratulated for your success there. And there have been many, many achievements. I guess, one thing that stands out a little low is despite all of this, the share price has not really performed so well. So I guess my sort of parting question to you is why do you think that really is? What do you think are the headwinds to some very obvious advantages that can be understood in BT in terms of the share price? And I know you mentioned before about Clive running Openreach as an independent company. Do you think it needs to be more independent to really realize value in the wider BT group? So just any perspectives on that would be appreciated.

Philip Jansen

Yes, sure. I mean, Simon, do you want to – I’ll say a couple of things on unit cost efficiencies first and Simon may want to speak to that. Look, obviously, it’s the first half, right, it’s 6 months. This is a multiyear program. There are lots of moving parts. We started and then we had the COVID crisis and supply chain challenges and then inflation and a tight labor market, which we all have to sort of really deal with in what was a very challenging environment. I think things have obviously progressed and these first 6 months on Openreach of this year are hugely encouraging.

Literally, I think you if were driving it. It is a window to future Openreach. It’s a little window of what it is, and it’s the leverage in that company and the cash flow implications of a company that’s growing like it is based on new FTTP. On the costs, the £12 million includes £3.5 million in Area 3, that’s why we reiterated that. So we’ve got a blend here of all types of builds. So they have done a fantastic job on that. I would say to you that the provisioning is stubbornly stayed the same. And I’m determined and Clive is too, to try and find a way of bringing that down, which we hope we will be able to do over time.

So look it’s still early days on that because things are stabilizing a little bit to my point on the macro, supply chain is much easier than it was before. The chip shortage setting is not – has pretty much gone away. So look, I think we need a bit more time to make sure that we’re comfortable that there is a new normal on this, and we will have to wait and see. But it’s hugely encouraging, I think. But let’s just give it a bit more time for Clive to bid in the processes that are at his level. I mean, Simon, do you want to add anything on that?

Simon Lowth

I mean I think you’ve captured it Philip. We set out £250 million to £350 million and it’s about 3 years ago now. And the fact that we’re operating within that range given the inflation we’ve had, I think, is a testament to the Openreach team and the work they have done particularly as we’ve heard, as you said, a pretty broad mix. This year, it’s important to say we have benefited. The supply chain has a bit more capacity in it. Do remember, you can get an improvement by some tilt in the mix in the first half. And we did remember build a fair bit of WIP at the beginning of last year. But anyway, this year, lower end of that range, we’ve brought our CapEx down to £5 billion, and that’s given us the cash flow uplift. But I think as we look forward, we’re going to stay firmly in that range exactly where will depend upon mix. We will keep driving efficiencies to stay within it. And we’ve reiterated peak CapEx between 5 and 1. But clearly, Clive is always driving to see if we can do better than that, what’s the future.

Philip Jansen

Yes, look, look, so acutely positive, let’s see how it evolves. But I think you can sense things are well under control in Overreach, and it’s really encouraging. I mean, David, on your bigger question, again, thank you, appreciate that. I hope I’ve been as long as one can be in this job and maybe, brave, I don’t know. I hope not foolish. I’m pretty sure not. I guess what do I think? I think that I’m pleased that we have the right strategy, and we’ve been able to invest and stick the course despite all these very difficult challenges that have been thrown at us. I won’t reel them off again. You know what they are. Life – the last 5 years have experienced hugely challenging situations that no one expected is the truth.

And so despite that, we’ve had the courage and conviction to stick the course because we believe in the strategy. And the strategy is the right one investing heavily to create a business that is better for customers and stronger for the future. So I think we’ve done that. I look at it and go, the company is growing for the first time in 6 years, revenue and EBITDA. And I think you can see that’s pretty stable. And we talked about FTTP and 5G and customer experience way, the better relation with the regulator. And indeed, the whole public set of the government policymakers, I think we’ve got that balance right.

We’re getting off legacy really quickly. We’ve built all the new tech. Now we’ve got to make the most of it. The digital capability is really much stronger. 80% of our data is in the cloud. I think as I said, I’m pleased that we’ve helped keep the nation connected through difficult times. And we’re putting the network that people will need as these new technologies take off, AI and virtual reality, augmented reality, and they come with these new headsets. You’re going to need all these devices that will be connected are going to need great network. And I think we’re going to have that. So and all the stuff we’ve done across the ESG agenda.

I look at that and go that’s important too, and I mentioned it in my remarks, significant changes on sustainability and power usage and getting electric vehicles really going at scale and more to do, obviously. But so bringing the power consumption down, making sure that we’re trying to do the right thing by in society with all our digital skills activity, but also focus on diversity inclusion, really believing in it. We’re not perfect, we’ve got more to do, but the purpose of – we connect for good is alive and well and kicking and it’s really, really strong in the BT Group. So I think about all those things. And then I look at the share price and I go – that’s very disappointing.

And I’d rather hope that I always expected it to be difficult, knowing that we were going to have to invest heavily. I knew that when I came in. I always expected it to be challenging. I’d rather hoped the share price. I would have had the question Philip, you’ve been here 5 years, you’ve achieved a lot, but the share price hasn’t moved forward at all. Unfortunately, I can’t even achieve that. So I just have to take that on the chin which I do because I believe in the end, the market will recognize a good strong company that is more competitive structure advantage, the market leader and has bright prospects. And that’s the bit that I think is absolutely self-evident in these results. And over the also the last year’s results is BT is a stronger, better business, more competitive, structurally improving its advantages and therefore, having brighter prospects. So I hope.

The reason why is the share price down is because our cash flow is down. I mean at the end of the day, you can’t have it both ways. We’re investing at an all-time high in stuff that really matters that I think no one is debating whether it’s right or wrong. We’re not blue sky stuff. So I hope it will come back. There are not enough people willing to buy the shares today. I hope as the structural cash flow step change becomes nearer and nearer, I hope there will be more people who can see that, and will be convinced of it.

I don’t think necessarily, by the way, that making Openreach more independent is the answer. I think what you’ve seen today that the window to the future of Openreach has been opened. And I don’t think anyone can doubt hopefully the success of that proposition. And again, as that builds and becomes a bigger picture, I suspect and hope that more investors will join the bandwagon because it’s going to be a good return on a massive investment.

David Wright

Okay. Appreciate it. Thanks, Philip. Goodluck.

Philip Jansen

Thanks, David. Appreciate it.

Operator

Our next question comes from Nick Delfas from Redburn. Nick, please go ahead.

Nick Delfas

Thanks so much. Hopefully, you can hear me, this time?

Philip Jansen

Yes, loud and clear.

Nick Delfas

Best of luck for the future. And I just had a question on what the regime is likely to look like in the UK for an operator of last resort, as and when stressed competitors go out of business obviously, one can look at various people’s quoted bonds or what’s going on in the alternative fiber network. So what’s your understanding of how consumers will be protected and transitioned to a new more secure operator? Thanks very much.

Philip Jansen

Nick, thanks for the question. Look, thank you for your sentiments to me personally. I appreciate it. Look, I – first, I’d say you’re pushing a subject, which obviously is hugely challenging for lots of people. I mean, inevitably, in this environment, when you’ve got inflation running at the level it is and interest rates where they are. And you’ve got the dynamic in our industry, which obviously you’re poking at, there are implications of that. And therefore, I think certainly, from what I understand, there is a lot of thinking going through about how the market plays out in the future and how do we make sure that, overall, the whole country gets digital infrastructure and customers are not anyway put at risk for that such, having access to what is a fundamentally important service.

People can’t do without it. We know how people rate connectivity, both mobile and fixed, it’s very, very high up on the list. So look, I know there is a lot of thought on that. Clearly, there are going to be some changes in the industry over the next few years. All I can say is BT is perfectly positioned. I mean in every regard, financially, build-wise, technology-wise, footprint-wise, to make sure that if any customers have a challenge in getting the connectivity they need we will be there for them.

Nick Delfas

But there isn’t a formal booklet we could refer to on what happens when it’s 100,000 or 3 million customers who suddenly need a new home?

Philip Jansen

No. Look, that’s – that’s true. It’s probably – that’s more a question for other people. But what I would just say to you is BT is a company. We’ve built 800,000 new homes, FTTP. We’re going to build more than 900,000 next quarter and so on. We’re connecting at a massive rate. So if there are a few hundreds of thousand customers, they need to be moved at some stage. We can do that, and we can do more as well. So look, we’re ready and waiting if every required.

Nick Delfas

Okay, thanks very much, indeed.

Operator

The following question comes from James Ratzer from New Street. James, please go ahead.

Philip Jansen

Hello, James.

James Ratzer

Yes. Can you hear me, okay?

Philip Jansen

Yes.

James Ratzer

Yes. Good morning, Philip. Yes, and just to echo the sentiments from others as well, very best of luck for everything in the future. So it’s maybe kind of a bit behold when we have to only ask one question to bring it down to just one simple question, please. But just on your energy costs, that’s obviously been a headwind that you have been having to face over the past few years. A couple of years ago, that was running at around just over £1 billion a year. The current run rate it’s nearer £1.3 billion a year. That’s your property and energy cost line in aggregate. How can you – what guidance can you give us on what tailwind, if any, you might get over the next 6 to 24 months on that cost line and the potential magnitude of the savings you could get. Thank you.

Philip Jansen

James, I’ll let Simon. Thanks for your kind comments. I appreciate it. Simon, do you want to sort of give James the energy situation?

Simon Lowth

Sure. I mean, the – obviously, we have seen a big spike in energy prices, which we hedged against last year – we are also, I think, about now 95% hedged for this year. And clearly, we had to hedge in at prices in some cases that were on average higher than the price from last year because of the pace of the hedging. And we have also hedged at this point according to our policy, we are about 50% sorry, about 70% for FY ‘25, and we’ve also got hedging in place for FY ‘26. So, I certainly think we have sort of at the point from a pure commodity cost standpoint, I think we are well protected and probably at sort of peak energy commodity costs, but do bear in mind the non-commodity costs continue with pressure as we move to a lower carbon economy. So, the real pressure for – the real focus for us actually in management of our energy cost is energy consumption and we have made good progress in driving down energy consumption just through really tight management of it across the states and the network. The big prize for us is obviously closing down legacy networks, both the PSTN, but also FTTC and so forth.

James Ratzer

So, on that, Simon, can I just sort of just push you a bit more – if possible a bit more quantitative on that. I mean given you have hedged 70% for FY ‘25 and you presumably know roughly how your energy consumption is going to play out. For FY ‘25, how should that energy cost then develop against the current £1.3 billion run rate?

Simon Lowth

I mean I think it’s going to depend upon the what the energy price does on the un-hedged component, which I am not going to speculate on at this point, but certainly, given our hedging, I don’t think it’s going to be a continued headwind for us. The key issue for us is improving consumption.

James Ratzer

And if energy spot is flat, the £1.3 billion would come down to roughly what for next year, please?

Simon Lowth

I am not going to give you point estimates on our energy cost for next year.

James Ratzer

Okay. Alright. Thank you.

Operator

The following question comes from Nick Lyall from Societe Generale. Nick, please go ahead.

Nick Lyall

I hope you can you hear me.

Philip Jansen

You are clear, Nick.

Nick Lyall

Great. All the best from me too, Philip.

Philip Jansen

Thanks.

Nick Lyall

Just on the – to come back to the consumer ARPU, please. I mean broadband was a little bit weak, just sequentially this quarter. So, you saw that attenuation effect, but postpaid mobile stayed pretty strong at about 11% growth. So, could you just – I was a bit surprised that broadband was the weaker one of the two. Could you tell us why that is? You are seeing quite a lot of spin down in consumer broadband, you are having to work hard to keep the churn down, and why is it…

Philip Jansen

Yes. Nick, it’s – I will get Simon to give you the answer on consumer ARPU, mobile versus fixed. There is specifics what to say about that. But I should just step back, I am actually – I think Mark, and the consumer group, have done a bad job here, right. So, we have obviously put some pricing through. And obviously, a headline level, that’s quite high. We all know who understand the industry how it plays out over the year. So, we also – what that does that drop through to EBITDA, somewhere between 30% and 50%, we think the lower end this year because the price was higher. But what they have done so well in the consumer team is despite these big price increases, we have kept churn very low and satisfaction exactly where it needed to be. So, the NPS is strong still. So, I am really pleased about that, but it’s not – one size does not fit all. So, we speak to our customers and understand the segmentation really, really carefully. So, there is a customer segmentation and there is a financial segmentation. So, what’s happening in the fixed line, Simon will explain about some of those people who haven’t got price increases. So, I will let Simon explain what’s happened in the mobile and fixed as you are right, they are different, but the overall picture is exactly what we sort of expected and we are really happy with it, although the mobile number is very different, and you could argue much more positive. You are looking in the round, it’s really good. So, Simon can you explain that?

Simon Lowth

Yes. I mean I think both – in terms of both the broadband base and the mobile base, we have obviously put through the CPI Plus 3.9% price increase. That is, I think landed as well as we could have hoped and churn remains low. The mobile business has benefited from some enhancement year-on-year associated with high levels of roaming and roaming activity. We have also had reasonably strong revenues on to interconnect messaging business as well. So, that’s amplified the ARPU expansion on mobile. On broadband obviously we haven’t benefited from those two aspects. And the other thing to bear in mind, of course, is that there is a portion of our customer base that don’t benefit from the CPI Plus and about £3 million and a fair chunk of those are actually in the broadband side, things like our Home Essentials product, where we are the share leader in providing essentially subsidized product to customers in certain categories. So, that’s obviously had a bearing on the broadband price. So, I hope that gives you the drivers, roaming into get enhancing mobile customers protected from the CPI Plus having a slight damper on broadband.

Nick Lyall

Thank you.

Operator

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

Maurice Patrick

Can you hear me, okay.

Philip Jansen

Maurice, we can hear you.

Maurice Patrick

Alright. Always checking around our telecom conference call. First of all, yes, good luck for the future, Philip, I am sure we are all looking forward to the invite to your leaving do. Maybe if I could ask just kind of a simple question really on pricing for next year. You have got the CPI Plus 3.9% in consumer. Most Openreach products linked to CPI, you have talked about pressure on household spending generally during the call. Maybe it’s in your gift as CEO put pricing up for next year, maybe it’s Alison’s job, but just to get your thoughts in terms of do you think it’s right to be jumping to a 10% price increase again through next year given where we are with the financial stresses where there are? Thank you.

Philip Jansen

Yes. Look, because it’s an important question. In terms of expecting the two parts, there is Openreach and then there is new retail. So, Openreach pricing will go up with CPI as agreed in the WFTMR. And by the way, that’s so important to fund the new build program, right. So, that’s something which I think a straight line correlation, if you like, or connection is those price increases. And if we didn’t have CPI, we wouldn’t be able to fall to build the network in the way that we have. So, that’s a long-standing agreement that lasts over multiple years at the regulatory level. And I think it’s important to encourage – allow everyone to build and be encouraged to build because the financials are attractive enough. So, there is that part of it. On the consumer side, again, it’s – from a total BT point of view, we are investing so heavily. It’s the same sort of story, which is we do need to fund our investment, but also we need to take that – a return for our shareholders, right. And our cash flow is way down. So, let’s not forget that. So, the cash flow has been impacted by this investment program, which is fine, but also our customers get extraordinary value for money. And I repeat, you can buy 100 megabits per second service and pay less than £1 a day. Think of all those people who are home – families who are getting fantastic connectivity and all the things they want to do on their computers, on their mobile phones, that is our new network. That is our network providing that service. So, the value for money is less than £0.50 a day, sometimes a mobile and a £1 a day for fixed is exceptional, and the data usage continues to go up by 40%. And by the way, that’s not going to slowdown any time soon. All this talk of AI and the new technologies, they are going to – it’s all about data. So, these new devices and all these new technologies are going to consume even more data. So thank goodness, we have built these new networks that can be able to deal with it relatively easily and not have incremental costs associated with it. So, when you put it in the round, that’s why our price increases are going to continue to go through both the retail and at the wholesale level because we have got the balance right now and the value for money for our customers is exceptional. The good news is inflation is definitely coming down, and we all hope, really hope that we get to that 2% target as quickly as possible and then that pricing will no longer be an issue for any of us.

Maurice Patrick

Thank you.

Operator

The following question comes from Adam Fox-Rumley from HSBC. Adam, please go ahead.

Adam Fox-Rumley

Hello. Thank you for giving me the second chance. Thank you. I wanted to kind of ask about CapEx and the investment case tying a couple of the other questions together, really. I think you have seen the share price reaction today, CapEx down, free cash flow up. I know the fiber build and the CapEx that’s associated with that is locked in. But I wanted to ask you if you think there are opportunities for optimizing the rest of the CapEx budget, given its scale and the fact that fiber CapEx is plainly going to remain high for the next 3 years. Thank you.

Philip Jansen

Yes. I will let Simon give you his perspective on that. I would just say one thing before Simon gives his view on sort of – if I step back a little bit. Of course, we understand it, and you are absolutely right. Of course, we get that. My main view is BT needs to be as strong as possible, as competitive as possible, as structure advantaged as possible. And I think if we hadn’t built as fast on fiber, it could be a very, very different story. So, I think that although it’s painful for the reasons that we know, and it is all about the cash flow, this is the decisions we took as a Board, as a company and as Simon and I proposed are the right things for this group in the future. So, we need to continue to keep that momentum, which is why we said today that we are going to increase the build in quarter three and target increase again in quarter four on build. And the connection rate is also going to tick up a little bit. So, that has implications from a CapEx point of view, notwithstanding the huge progress we are making on the build costs that we announced today where you can see we just lowered our CapEx outlook a little bit for this year. So, it’s trying to get that balance right, but always making sure that every pound we spend is the right pound is a program of work here that Simon leads. So, I will let Simon give his respect on optimizing the rest of the CapEx budget.

Simon Lowth

Yes. I mean look, thanks for the question. I mean the – clearly, BT is investing at a very high level. And we remain very confident that as we bring down past peak FTTP, CapEx will drop by at least £1 billion. The components of that capital program, of course, FTTP is the largest single component. But don’t forget, we are also investing in our 5G rollout, and we have got the broadest coverage. We have got 9 million customers or so on consumer onto the 5G network. And that incidentally is underpinning some of that ARPU strength that you saw. We are also investing in a converged core, and that’s going to become increasingly powerful for us with new EE. But we are also investing in IT. I talked earlier about the further opportunity to drive NPS, which drives the better churn. And we are in the midst of a major program to upgrade our IT systems. And in addition to that, we obviously capitalized customer connect and some customer particularly in the consumer space as we move people onto better product, new routes and so forth, there is a capital charge. So, there is – it’s an extensive capital program. We are very confident that it is driving quality returns for our shareholders, albeit a chunk of it in network longer dated return. Now, we clearly challenge every year that level of capital investment in two respects. Firstly, it needs to be demonstrated that we are implementing the capital projects at lower unit cost. And I think we are making good strides on that across the board. And secondly, of course, we test and pressure each element of the capital program to ensure it provides a return that underpins the strategy. We have guided to 5% to 5.1% peak CapEx. We reconfirm that. We have guided to it, it will come down by at least £1 billion. We are absolutely clear that will happen. If there are opportunities to deliver the same returns with lower CapEx in the interim, we will – the market will be the first to hear if we arrive at that.

Philip Jansen

Yes. It sounds right, Adam. Just I mean, you are pushing in, obviously, a very important topic, cash flow, and then we have suffered through the years of spending so much and therefore, having a depressed cash flow for a number of years before we get that £1 billion that Simon referred to. Of course, you can – mathematically, you can reduce the build a little bit, and then we will get another share price leap. The good news here is we have had a cash flow sort of minor change upwards and we have built more, connected more and we have lowered our cost of build. I mean that’s a fantastic outcome. So hopefully, more of that in the future.

Adam Fox-Rumley

Thanks very much.

Philip Jansen

Thank you.

Operator

Our final question comes from Andrew Beale from Arete Research. Andrew, you may proceed.

Andrew Beale

Hi. Sorry to ask another CapEx question, but this time on the fiber unit efficiencies. But can you give us some sense of how much of the benefit in unit costs comes from pre-building the Spine and WIP? How much is exceptional COVID supply chain, inflation starting to unwind and how much is new techniques and what are those new techniques? I guess what I am really asking is if the upside risk to fiber CapEx from inflation is something that we need to worry about much less going forward as you accelerate the build pace because you have got permanent unit cost reductions, or is it more about a temporary benefit from pre-build?

Philip Jansen

Very good question. You are going to get a bit more detail on this in December on the new technologies that Clive and the Openreach team have developed, and we won’t share them at a headline level. But this is an example of the expertise that sits in BT and within Openreach, specifically in this case. So, we will give you a sense of some of the new techniques and some of the activities we put in place that have delivered the results you have seen. You will understand we can’t share loads of detail because by definition, it’s part of our competitive advantage to an earlier question, but you are right to probe that. The truth of it is, it’s a mixture of all the things you talked about. And Clive is working really hard to sort of embed those, if you like, into the way of doing things at the higher build rate and hopefully, a continuing growth in connection rate. So, it’s a combination of all of those things and the environment is, you are right, a bit better. The labor market is less problematic for us than it was, obviously. And I think you might see that continuing, maybe because many people think unemployment is going to rise and maybe it does in which case, that trend will continue. And yes, you are right, the supply chain challenges that we did experience and the combination of those two are very significant, are no longer there, now of course, no complacency. You never know what’s around the corner. We are living in a very, very difficult situation in terms of a geopolitical without even talking just terrible situation from a war point of view, that has unknown implications for all of us. So, I think we are just very cautious, super careful, but we are making great progress. And I am absolutely delighted with what’s happening in my company, but specifically in Openreach. But these are really, really strong KPIs in Openreach that, as I keep repeating, gives you a, hopefully, a window, a picture of what the future holds. And I think it’s firming up very nicely. Simon, do you want to add anything on the mix of…

Simon Lowth

No, I think you have capped it. I mean obviously, drawdown of where supply chain capacity, new techniques, it’s a formidable engineering team in Openreach, and they continue looking at how they can build and provision better, how they can work more effectively with contractors. And so I think there is a whole set of innovations that drive mix. They have all played a role. I don’t think there is only one overarching factor. I think the key point to make is that despite traveling through a very inflationary period, we have maintained our build cost at the £250 million to £350 million range. And we are actually operated in the first half at the lower end of that. We have a very high degree of confidence we can stay within that range. And I think given, and that’s a range we set 3 years ago. I think that should give everyone real confidence the CapEx in Openreach is completely under control.

Philip Jansen

Absolutely. Andrew, one little thing for when you are in the briefing with Clive, we – the topic of the day is AI, obviously, we will be able to use AI. We are using AI, network planning, fiber build, fiber provisioning and many other areas, Openreach is right for making, taking advantage of some of the new technologies in AI and have been doing it for a little while. Robotics, so we – all of this money we are investing is making sure we are delivering for our customers at the leading edge and increasingly, we are delivering more on that front. So, he will give you a flavor of that, but I will make sure he doesn’t give you too much detail. We don’t want other people stealing that.

Andrew Beale

Okay. Thanks a lot.

Philip Jansen

So, I think that’s – I think we are done, yes. Let me – look, thank you everybody. I think we have got all the questions that people wanted to ask and just checking on the screen, looks like it. Can I thank you all very much for today, but more importantly, thank you for all the interactions we have had over the last 5 years. Genuinely, I really have enjoyed the – not always every single pie of it, of course. But the scrutiny, the challenge, the questions, the debate, I know all of you care deeply about what’s happening at BT and certainly understand a lot of the detailed moving parts within the BT Group. So, it’s a pleasure talking to people who know what they are doing. Thank you very much. Really appreciate our interaction. I wish you all the best in your future careers. All the best. Thanks very much. Bye.