Events & presentations

24/07/2004

Speeches to shareholders at the mmO2 plc AGM

David Varney - Introductory comments to Shareholders at the mmO2 plc AGM

Ladies and Gentlemen, welcome to the third annual general meeting of your company, which is my last as chairman.

I am delighted to report that mmO2 had an extremely successful year in 2003/04, resulting in the first ever pre-tax profit of £95 million compared with a loss of £10,203 million in the preceding year.

Peter Erskine will take you through a detailed financial and operational review in a moment.

But I want to pay tribute to him, the executive team and to everyone within mmO2 who has worked so hard for this success. To have achieved profitability across all our operations just three years after demerger and some two years ahead of original expectations is a considerable achievement. It is one which was rightly recognised by the stock market where we were the second best performer in the FTSE100 in 2003.

We have pursued a clear strategy to reach this position. Our aim was to create sustainable profitable growth for the Company by attracting more high value customers and improving their experience of our voice and data products and services. We placed an emphasis on increasing loyalty, reducing churn and achieving higher average revenues per user.

We are continuing to win new customers in each of our markets and now serve more than 21 million in the UK, Germany and Ireland. Our brand goes from strength to strength supported by distinctive marketing and innovative sponsorships, notably with the amazing World Cup success of the England Rugby team and Arsenal's fantastic unbeaten run in the Premiership.

Manx Telecom continues to thrive and has recently negotiated a new 15 year license. Our fourth substantial business, O2 Airwave, is well on its way to completing the supply, on schedule, of secure communications to the police forces of England, Scotland and Wales and other emergency services. Last year we re-organised the O2 Group pushing many central functions back to the individual businesses, and rationalised our property portfolio. These actions will allow us to realise annual savings of some £40 - 45 million.

I am confident that mmO2 has real momentum and a great future ahead of it.

At the time of demerger in November 2001, our priority for the foreseeable future was to invest cash back into the development of the business. As a result we made it clear the Company would not be in a position to pay a dividend for some years.

Having achieved profitability we now think it is time to review that policy. The review is underway and we expect to update shareholders on our findings at the time of our Interim Results announcement in November.

The mobile phone market is mature and increasingly competitive. Our challenge is to continue to provide compelling products and services in ways that customers value. The year ahead will see the arrival of third generation or 3G mobile services. Although we believe a mass market for 3G is still a way off, this next step in the development of mobile nevertheless presents mmO2 with an opportunity to further enhance its offer and appeal.

But our appeal is not just about what we do in the market place. It is also about how we behave, how we manage and maintain our reputation and the contribution we make to the communities we serve.

As you know, we take corporate responsibility very seriously. We do so because it stands as proof of the sort of company we are. It's not just about trying to ensure we take our social, environmental and ethical responsibilities seriously - although that's vital.

We believe very firmly that the most responsible companies also tend to be the most innovative and dynamic in responding to the needs of shareholders, customers and the many other stakeholders they depend on.

The mobile phone industry has grown at enormous pace. In a little over a decade, the industry has come from virtually nowhere to be a major force in the economy.

Research we recently commissioned revealed that it now makes as big a contribution to the UK economy as the oil and gas industry, the equivalent of £22.9 billion each year or 2.3 per cent of the Gross Domestic Product. Follow up research just published indicates that this industry will continue to grow in significance with its contribution rising to 3.1 per cent of GDP or £51.3 billion by 2013. That's six times greater than the motor industry. Employment in the sector is also projected to rise from around 200,000 now to nearly 287,000.

We can be proud of the economic contribution we are making. But we also believe mobile is proving itself to be a useful tool to society. A small book we published last year listed 100 different ways that mobile phones are being used in public services to improve people's lives.

At mmO2 we are very proud to have been associated with innovative schemes like the "Teach UR MUM 2 TXT" campaign with Milly's Fund and in pioneering the use of mobile technology to improve the care of Asthma and Cystic Fibrosis sufferers. We are determined to continue using our " Can do in the Community" programmes to find other useful applications for our services and skills, particularly ones where mmO2 employees can become involved.

Equally important is how we manage the risks that face us as a company. Our Corporate Governance policies and processes have been carefully benchmarked against other UK and US companies and we are confident that we are among the leaders in the field.

We must now ensure that corporate responsibility is something that everyone at every level in the Company understands and applies. We have transferred day to day responsibility for our CR activities from our Advisory Council to the Executive Committee and to the individual operating businesses to make sure corporate responsibility becomes embedded in our organisation.

It's an important reflection of our commitment here that we continue to be rated highly in the FTSE4Good and Dow Jones Sustainability Indexes as well as the Business in the Community Responsibility index.

As a result of the reorganisation I mentioned earlier a number of colleagues left the Company. Among them Kent Thexton left to return to his native Canada, having completed the successful restructuring of such services as brand and product development. Kent was a valuable member of the Board and we wish him well.

As I said at the opening of my remarks, this is my last AGM as your chairman. I'm delighted to be able to hand over my responsibilities to David Arculus who has been a member of your Board for the last year. In that time I have valued David's skill, experience and support enormously and I'm very pleased that we have been able to organise a smooth and untroubled succession. I want to thank my Board colleagues for their support and stimulation during the past three years.

My time at mmO2 has been immensely rewarding. Although I am excited about what will be a challenging - some may say taxing - role in the public sector, I shall miss working as part of a talented team at mmO2.

As I hand over to Peter to give you his review of the year, I'd like to thank him, my colleagues and shareholders for all the support I have been given in the last three years.

Thank you. Peter...

Peter Erskine - Speech to Shareholders at the mmO2 plc AGM

Good morning ladies and gentlemen and thank you David.

This morning I plan to highlight some of the key achievements of your company over the past year; to talk briefly about the role of mobile phones today, and then to share with you our plans and hopes for the future.

But, before I do any of that I want to start by thanking you - not only for coming here today, but for the continuing support that many of you have given us since 19 November 2001 - the day we became an independent company.

I would also like to thank my team and, in particular, your Chief Financial Officer, David Finch, and the CEOs of all the businesses, Dave McGlade, Rudi Groeger, Danuta Gray and Pete Richardson, for their hard work and dedication in delivering an exceptional set of results in the last financial year.

I don't intend to go into detail on all the financials as you will have seen them published in the Annual Review. However, I would like to highlight some of the key achievements during the year

• The overall result reflects the fundamental improvement in performance that O2 has achieved across the Group since the demerger. During the year, we added 2.5m customers, growing the customer base by 14% to over 20 million with a top line revenue increase of 22% or, put more significantly, we added over a billion pounds of business. And this has been achieved against a backdrop of increasing competition across all of our markets.
  
• As David has mentioned, we have reported our maiden pre-tax profit of £95 million. This is 2 years ahead of original city expectations and was achieved after a one-off exceptional charge of £75 million from the recent restructuring.
  
• For the first time, we reported a positive earnings per share of 1.9 pence - again something no-one envisaged we would achieve before 2006 at the earliest.
  
• We have also reduced net debt by more than £180 million to £366 million - £140 million less than at demerger and a reduction of more than 25%, leaving us with a strong balance sheet.

I am delighted to report to you that in the last year all our businesses met or exceeded their targets :

• O2 Germany was the fastest growing operator in the largest European market for mobile services with a population of over 80 million.
  
• O2 UK recorded its best ever year

and in O2 Ireland we increased both sales and profits in a mature market.

In the UK the focus on attracting and maintaining high value customers is paying off and we now serve well over 13 million customers.

Reflecting our determination to deliver a better overall customer experience, O2 UK has focused on enhancing both network performance and customer service. A 25% improvement in network quality, as measured by indicators such as the number of minutes between dropped calls, brought independent recognition when Oftel confirmed that O2 now had 'the best ever' published call success rate of any UK mobile operator. In addition the growth of our own distribution channels has contributed to our success. O2 UK's own stores and online portal accounted for more than 40% of gross customer connections compared to less than 30% in the previous year and our online customer base has doubled to over a million - Europe's largest. In the year we have opened more than 40 new O2 stores and our brand awareness scores stand at an all-time high.

In Germany we turned in another tremendous year outperforming the market at nearly every key performance indicator. Growth accelerated again and we are driving ever closer to our nearest competitor, Our market share is now 9%, a year ago it was around 8%, and market share in terms of revenues is around 10%. O2 Germany grew its customer base in the year by nearly 25% or 1.2 million customers to 6 million.

In Ireland, we continue to turn a good business into a better business and delivered a strong operational and financial performance in the year. O2 Ireland has grown its customer base by 10% in a market that has nearly 85% penetration, and it has improved its EBITDA margin to just under 40% - one of the highest in Europe.

In addition, O2 Airwave is now a material 4th business within the O2 Group with the service delivered to 3/4 of the Police Forces in England, Scotland and Wales, 2 fire brigades and 2 ambulance trusts as well as a range of other public safety customers. The benefits of the Airwave Service are now becoming clear and tangible. When fully rolled out, it will provide a secure, national and interoperable voice and data service for its users. In a recent letter to the media, Della Cannings, Chief Constable of North Yorkshire commented that "for the first time, officers from the police forces of England, Wales and Scotland, with national agencies such as the British Transport Police will be able to communicate with each other. The overwhelming feedback to date both from users and senior officers is that they are very pleased with the service that Airwave provides".

And, only in June, we were able to announce that the O2 Airwave service used by Hereford and Worcester Ambulance Trust has already helped to save the lives of 26 heart attack patients in the few months since its adoption - through enabling paramedics to send real time patient details from the Ambulance back to the A&E doctors hence improving the diagnosis and treatment en route to the hospital during the critical first hour.

We are aggressively pursuing further opportunities to win the national Fire and Ambulance service contracts and other Public Safety business. O2 Airwave remains dedicated to improving public safety in Britain and remains on track to deliver the service to all Police Forces by Spring next year.

We have also successfully innovated in our markets by pursuing key strategic partnerships to strengthen our customer offerings and market presence at the same time as mitigating our relatively small scale compared with the likes of Vodafone, Deutsche Telekom and France Telecom.

The Starmap Alliance is a good example.

In October we linked up with other independent European mobile phone operators to provide a service, which makes it easier and cheaper to use our mobile phones abroad.

Starmap also gives us significant marketing and sales opportunities. Its members - which between then now have 46 million customers across Europe - are, for instance, beginning to sell our leading multi-function wireless PDA - the Xda II.

So, simply through one joint venture, some 50 million people now have direct access to our products and services.

Last September, O2 UK formed a new 50/50 joint venture with Tesco, the UK's, most powerful retailer. Called Tesco Mobile, this company is aimed at providing mobile services tailored for the family market and products are now available in more than 500 Tesco stores. By May this year, 250,000 customers had signed up - well ahead of our initial targets - and the growth continues.

And most recently, earlier this month, we announced a similar Joint Venture, this time in Germany with Tchibo which will launch services over the next 12 months. In both cases the choice of partner is critical to ensure a compelling customer offering complimentary and not competing with our own O2 brand which is focused on the higher value consumers and small and large business users. In essence, we have the benefit of two brands in the market place and I am convinced you will see the success of this strategy going forward.

This brings me on to mobile data - we have seen a significant uplift in the number of customers using our 2.5G or GPRS value added services, such as email, games, internet surfing, and music. Some 5 million customers across O2 are actively using GPRS - a six fold increase on last year. This fits perfectly with our 3G strategy in the UK where we will match 3G coverage and services later this year initially in areas where we're seeing the most demand for data.

In Germany and Ireland there are different license obligations and as a result, O2 Germany launched 3G consumer services and 3G Laptop cards for corporate customers from 1st July.

Throughout the year we have continued to see strong demand for text messaging and have maintained our number one spot in the UK. The volume of messages sent from an O2 phone is growing some 35% year on year and more than 11 billion were sent over the year. Whilst this still makes up the bulk of mobile data revenue, the increased penetration of multimedia, colour-screen devices has been instrumental in the adoption of other services.

By focusing on growing value added services, providing the best customer experience and introducing compelling, competitive services over 3G, the positive momentum we've achieved over the past year is set to continue.

Let me now move on, and look very briefly at the role of mobile phones in today's world.

We recently commissioned a series of independent reports looking at the contribution of mobile phones to our economy. The last such analysis was done five years ago so it was high time another serious study was undertaken.

As David has mentioned, the research by the Centre for Economic and Business Research clearly shows that mobile phones are making a huge contribution to the British economy, and their potential shouldn't be underestimated.

But what about other aspects of our lives - health and security, for instance.

On the issue of safety there are, of course, potential dangers as with any successful mass consumer product or service.

Driving whilst holding a mobile phone is not only dangerous - but also now against the law. Mobiles on the street can become a target for robbery and there are safety issues regarding children's access to the internet and chatrooms. A lot obviously depends on the user - but yes, there can be problems. And from a health point of view, most new technologies raise concerns, and mobiles are certainly no exception. But to date there is no evidence to show that radio frequency emissions pose any health risk.

But, whatever the reality, people have a right to be wary. And we as a company have a duty to take any concerns seriously.

And we certainly do.

That's why we publish leaflets with advice to car drivers and have introduced technological solutions such as hands-free kits.

We have also mounted a successful education and awareness campaign backed by the relevant childrens' charities to alert parents, guardians, teachers and the young to the safe use of mobile technology.

It's why we have invested in technology that allows parents to block, filter, and bar access to internet sites or mobile channels not suitable for children. Or, why we've tied up with organizations such as the Suzy Lamplugh Trust and Milly's Fund, to promote crime prevention awareness amongst teenagers.

And it's also why your company continues to fund research into the health issues surrounding handsets and masts.

Now isn't the time to describe everything we're doing in this area but we have documented our progress in our recently published CR report.

I hope it will make you proud of your company and the action we're taking.

Mobile phones are however also being used in the fight against crime and diseases.

I've already mentioned the success of Airwave which is helping police forces, amongst others, to operate more efficiently, contributing greatly to safer communities.

But there is a whole host of other ways that mobile phones are helping combat crime - for instance, by being able to track down criminals and monitor their activity, or connecting cctv cameras without the need for expensive wiring and the digging up of roads. And then of course there is the most obvious application of all - being able to call for help when in trouble.

When it comes to safeguarding our health, the applications of mobile phones are becoming increasingly imaginative - and important.

In O2 UK, for instance, we are helping individuals monitor and control their asthma with the use of mobile phones. This has resulted not only in better monitoring but in actual improvements in patients' conditions. We have now extended our work in this area to the monitoring and treatment of cystic fibrosis.

Overall, I believe mobiles are undoubtedly a force of good - and becoming more so day by day.

This leads me on to my final point - our future.

As an industry we have enjoyed phenomenal growth in a very short period of time. Twenty years ago nobody owned a mobile phone in the UK. Today one and a half billion people have one - that's roughly one in five of the world's population.

The big question now is whether there's really room for further growth?

The answer is a definite yes.

I see a number of growth opportunities for the industry - and for mmO2 in particular.

The product is already out there. We need to give people a reason to use it more. And one of the best ways of doing that is by becoming better at what we do.

For this reason, O2 is investing heavily in the quality of every aspect of our service - our network, our pricing, our shops, online activity, products and the whole customer experience.

Another important way of growing our market is by getting closer to our customers and really understanding their requirements.

And because we are now dealing with a mass market there are millions of different needs all requiring different solutions. The 'one size fits all' approach doesn't work.

At O2 we have decided to focus on those customers who depend on their mobiles for business and/or social reasons. We have invested in understanding how they think, what makes them tick and would add value to their lives.

By getting close like this we hope to grow our market with them - not by imposing technology on them, and hoping they'll find a use.

Linked with the idea of getting closer to our customers comes another major growth opportunity - partnerships.

By partnerships I mean working with different people - public service providers, suppliers, system integrators, content providers, industries and individual communities - such as football and neighbourhood watch schemes.

O2 has invested considerably in a range of new partnerships.

We have teamed up with leading music labels for the launch of our Digital Music service. Only last month O2 Germany announced a link up with Sony to offer customers new singles two weeks ahead of the CD's actually hitting the shops... and this year we have partnered with the re launched English National Opera.

And in sports, our partners include Arsenal and Bayer Leverkusen and BMW in Germany - and of course - the World Champion England rugby team. All of these are interactive partnerships - not traditional sponsorships - and all use mobile to improve the efficiency of their operations and to communicate more effectively with their supporters - not only delivering revenue opportunities for O2 but also reinforcing our strong brand - hardly a weekend goes past without the O2 brand on the front of our sporting heros leaping out of the newspaper pages at you.

But to me one of the huge opportunities for growth is the whole area of public service partnerships. Mobile is increasingly playing a key role in delivering a cost effective and quality service to a mass market.

The NHS, for instance, is using SMS technology to confirm doctors' appointments. The Met Office is using mobile telephony for flood and severe weather warnings. The Crown Prosecution Service has started texting trial witnesses with updates of the progress of cases, to help prevent cases collapsing and time being wasted.

The partnership opportunities are endless - it's up to us to go out there and find them.

The last major growth area is new technology, where there are lots of new developments in the pipeline.

3G is of particular importance. It provides capacity, capability and content. It will greatly enhance the delivery of a wide range of multimedia services.

3G won't, however, become a mass market until the end of 2005. And in order for it to do so, we need to get customers used to the experience of using mobile data services on our GPRS networks. When more of them are, they will naturally want to upgrade to a speedier 3G service.

So 3G is a significant evolution rather than a ground breaking revolution. But when it does come of age, it will - like GPRS today - play a critical role in our future growth.

So, there has never been a more exciting time for mobile communications.

We're entering a whole new era where the growth opportunities are bigger and more varied than ever before. And what makes it most exciting of all, is that your company is well positioned to make the most of it.

I would like to end by personally thanking David Varney for his wise counsel and leadership during our early years. I very much enjoyed working with you, David, and you'll be very much missed.

I would also like to welcome David Arculus into his new post. David has been a director for the last year and so the handover has been seamless - with one David taking over from another, I haven't even had to get used to a new name!

Finally, thank you, our shareholders, once again.

David Arculus - Speech to Shareholders at the mmO2 plc AGM

Thank you Chairman

Ladies and Gentlemen, I was delighted to accept the appointment as the new Chairman of your Company and, having been a Non-Executive Director for the past 15 months, I look forward to working with my Board colleagues to maintain the successful development and growth of O2. I would like to thank David Varney for handing your Company to me in such good shape. As you have heard this morning, we are financially strong and have built a powerful, iconic O2 brand. Revenue is growing fast, the Company has modest debt, a strong balance sheet - and we have so far outperformed most City expectations.

So, O2 is in a good position. Taking your company forward to the next phase of its development and further strengthening its position in Germany as well as in the United Kingdom and Ireland sounds a challenging but achievable agenda coupled with further developments at Airwave. As someone who has spent a good part of his working life in media I'm also fairly passionate about the development of media and content services on mobile, be they messaging, music, news, games, information or sport.

Having spent another chunk of my working life in utilities, I am equally passionate that our service to customers should be of the highest possible quality; both in terms of Customer Support and of network quality.

We must also continue to focus on better segmentation to gain a closer understanding of our customers' needs and behaviours. We will work even harder to differentiate our business by delivering intuitive, easy-to-use and fairly-priced products and services - particularly in the data field - that our customers value highly, based on proven technology.

I look forward to seeing you again at next year's AGM and telling you how we are succeeding in these objectives. In the mean time my thanks once again to David Varney, go carefully and be sure to tell all your friends and family about O2.

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