27/07/2005
Speakers: David Arculus (Chairman, O2 plc), Peter Erskine (CEO, O2 plc)
Ladies and Gentlemen: Welcome to the Annual General Meeting of O2 plc. It is now after 11.00 a.m. and we can start the proceedings. I declare the meeting open.
We have an apology today from Rudi Lamprecht who unfortunately is unable to be with us due to Siemens AG, of which he is a member of the Management Committee, having an important meeting in Germany.
The business of today's meeting is set out on pages 3 to 5 of the Notice of Meeting, which was sent to all shareholders with the 2005 Financial Statements, and, in accordance with conventional practice, I propose to take the Notice of Meeting as read.
Since it is exactly one year since I became your Chairman, this is quite a special day for me. I look forward to your support as we go through the business of the meeting. We will try to keep this as straightforward as possible although there are no less than 13 important resolutions which we would like you, our owners, to approve.
In the last year all of O2's businesses performed well. The Group delivered another year of strong revenue and profit growth. Turnover was up more than 18% and underlying earnings were up 64% on last year. Since the de-merger from BT there has been a huge improvement in the Group's operational and financial performance. We have been delighted, that following the programme of capital reorganisation, we are now able at this relatively early stage to establish a sustainable dividend policy.
We have proposed an inaugural final dividend of 2.25 pence per share, which on an annualised basis would represent 40% of underlying earnings. This will be paid in late August, subject to approval by shareholders at this meeting today. Our aim is to grow the dividend towards our medium term target of 50 percent of underlying earnings. Our aim is also to steadily increase those underlying earnings. You will no doubt be pleased to hear that your Board's commitment to delivering attractive returns to shareholders is a strong one.
But, before I go any further, I would like to introduce you to the members of your Board, starting with those who have joined since last year's meeting:
Kathleen O'Donovan who joined the Board in March has wide financial and business experience. She has been Chief Financial Officer at Invensys Plc, chair of the Audit Committee at the Bank of England and now holds a number of Non Executive positions - besides O2, she is also a Non Executive Director of the music group, EMI and Prudential plc as well as being deputy chairman and senior non-executive director of Great Portland Estates plc. Kathleen has become a valued member of our Audit Committee.
Patrick Lupo who joined your Board last August was formerly Chief Executive and Chairman of DHL Worldwide. Pat is a non executive director of Hilton Group plc and was until recently a non-executive director of W H Smith plc. Pat chairs our Remuneration Committee.
And lastly, Rudi Lamprecht who joined O2 as a Non Executive in March of this year and is based in Munich. As I mentioned a moment ago, Rudi is unfortunately unable to attend in person. Rudi is an expert in technology, international business and marketing and will of course give us particular insights into one of our fastest growing markets - Germany. Rudi has recorded a short message which will be played later on in the meeting.
Now moving to our longer term Board members, I should like to introduce
Stephen Hodge who became Deputy Chairman on 1st January of this year having been a Non Executive Director throughout the life of your company, Stephen is also Chairman of the Audit Committee and our Senior Independent Director.
Many of you will also know Andy Sukawaty a telecoms industry specialist who was Deputy Chairman of the company from its spin off from BT up to December 31st 2004. Andy stood down from the Deputy Chairman role and Chairman of the Remuneration Committee because of his many other commitments not least as Chairman of Inmarsat which floated last month. But we are delighted to continue to benefit from his experience and expertise as a Non Executive Director. Andy continues to be a member of the Remuneration Committee.
And David Chance, who has been with us since January 2003. David has an in depth understanding of the broadcast industry following his time at BSkyB. Amongst other directorships, he sits on the ITV Board. David is a member of our Audit Committee.
And that brings me to our Executive Team:
On my left Peter Erskine - your Chief Executive who will be well known to many of you.
And further to the left, David Finch - Chief Financial Officer and another veteran of O2 having been with us since before the demerger from BT.
On my right, Rudi Groeger who heads our highly successful German business and Philip Bramwell, Company Secretary and General Counsel and the man who will guide you and I through the thirteen resolutions which we have today.
Well, as new people have joined the Board, others have stood down.
David Varney - our previous Chairman who is now Chairman of Her Majesty's Revenue and Customs.
Neelie Kroes who has become the Dutch EU Commissioner.
Paul Myners who has become Chairman of Marks and Spencer
And Ian Meakins who has become Chief Executive of Alliance Unichem.
The sharp eyed amongst you will have noticed that we have one less Non Executive Director than we did this time last year. So I am anticipating I may recruit one more Non Executive Director to the Board some time later this year.
Well, other changes - Dave McGlade who headed our highly successful UK business has returned to his native USA. He has been succeeded as Head of O2 UK by Matthew Key. Matthew was formerly UK Chief Financial Officer. Matthew has also joined the Executive Committee of O2 and is here in the hall today.
Moving on to our recent reorganisation.....
Having declared our intention to pay a dividend sooner than originally expected we had to make a capital reorganisation in order to facilitate this payment. We were delighted that shareholders approved the Company's proposals at the Extraordinary General Meeting in February.
At the same time, we were faced with the costs of servicing our very large shareholder base - some members of which had never actively "chosen" to be shareholders but inherited shares following the demerger from BT.
That's why we offered you, our shareholders, the option to exchange your mmO2 shares for O2 shares, or to take a cash alternative. Any shareholder owning up to 1,000 shares, who didn't take action was deemed to have chosen the cash alternative and received 125p per share plus a 5p premium and no dealing costs. The 130p per share received was close to an all time share price high and delivered a significant increase in value since demerger. To all of you here today, thank you for making a continuing commitment to O2 plc. I hope you'll agree that, with the level of performance we are reporting on today, your continuing support is more than justified.
I am delighted that we are still one of the top ten most widely owned companies in the UK. Nine out of ten of our shareholders are retail shareholders.
Retail shareholders are important to any company but particularly in this day and age when the big institutions wield considerable power. These institutions are often acting as agents for the real owners of the business. I value the opportunity to hear directly the concerns of the owners themselves.
I'd now like to turn to your company's performance over recent years.
At the time of the demerger, BT management made it clear that the objective was to deliver an increase in shareholder value. We are glad we have helped in this regard. This slide shows the share price performance of O2 and BT since demerger.
O2/BT SHARE PRICE SLIDE DISPLAYED
It's also worth looking at this performance relative to the only other UK quoted Network Operator - Vodafone - as this slide demonstrates.
O2/VODAPHONE SLIDE DISPLAYED
Over the last three years, as a result of O2's performance, shareholders have seen the value of their shares in the company roughly triple, rising by over eight thousand million pounds, from approximately £4bn to approximately £12bn. Over this period, in terms of total shareholder return, out of the entire FTSE 100, O2 ranked number one by a long margin. I am delighted that you and many, many of our shareholders will have benefited from this strong performance, including a large number of our employees.
TOTAL SHAREHOLDER RETURN SLIDE DISPLAYED
Earlier this week, a performance related share option plan established 3 years ago following shareholder approval has matured.
In July 2002, more than 1000 of the company's top managers were granted options vesting this month subject to the Company's total shareholder return performance relative to the FTSE 100 over the succeeding thirty six month period.
These options, at the 46p share price prevailing at the time of the award, have vested in full because the returns generated by the company for its shareholders over the three year period in question have placed it at number one position in the FTSE 100.
For the executives leading O2, emphasis will continue to be placed on rewarding business performance, with incentives to drive and reward superior performance and align the interests of the leadership team with those of the company's shareholders.
Executive reward levels are set by a Committee of independent non-executive directors, headed by Pat Lupo who you will hear from later. They take into account the UK market both within and beyond the telecommunications industry.
All of O2's staff have the opportunity to share in the success of the business. The Sharesave scheme operating over the same period and open to all employees, provides participants with the opportunity to buy shares at 44p. At the current level of the share price around 140p those saving the maximum monthly amount of ?250 are in line to receive a tax free gain of just under ?20,000 when the relevant scheme matures next February. I am delighted that some 40% of the group's entire workforce participates in this plan.
Improving standards of customer service is a major preoccupation of mine as I mentioned at last year's meeting and to this end, we have recently announced the creation of some 2,000 new jobs in the UK - split across a new customer call centre and our retail shops.
To make an investment like this in the UK we must have the right conditions - we need to be able to pay market rates and to be able to react to changing conditions and customer demands.
With this in mind, you may be concerned by recent press reports that we have been unable to reach an agreement with the CWU on the current pay review for our non managers. The disagreement is more about the distribution of money, as opposed to the level of the award, which is a 6.2% increase over last year's pay bill. The total offer is more than last year and more than the equivalent offer at BT this year.
We are committed to 'performance based pay', with our best performers receiving the best pay and rewards, and 'market based pay', where pay bands for each role are benchmarked to the wider market. These are the pay principles we have applied successfully over many years with our managers and we want to extend this practice across the company.
O2's approach to pay is founded upon encouraging superior performance at all levels bearing in mind that our business operates in extraordinarily competitive markets.
Well over half of our non-managers are entitled to performance related bonuses which pay typically between 10 and 25 percent.
You will all have received a copy of the Annual Review, and you'll be relieved to hear I don't intend to reproduce my statement here. But this past year has seen some particularly significant developments, and I'd like to take this opportunity to expand upon a few of these.
[O2 Germany]
Clearly, one of our most exciting opportunities for growth lies with O2 Germany. About two years ago, when we were at a bit of a cross roads we decided to sell our Dutch business and to commit strongly to our German operations.
Since the sale of the Dutch business O2 management has successfully been able to devote more time to creating shareholder value in Germany. In April 2003 analysts on average valued O2 Germany at some 1.1 billion euros compared to the current average in excess of 5 billion euros.
Although Germany is Europe's largest mobile phone market, we were the smallest operator in it. It was considered to be a market in which only a few established companies like Deutsche Telekom and Vodafone could play. Some thought it was a bold move on the part of the Board to commit to investing in Germany, take on the big operators and accelerate our growth there.
And how that boldness is paying off. Over the past year particularly, O2 has established itself as the most dynamic and innovative operator in Germany. We've outstripped our competitors in terms of both revenues and customer acquisitions.
Let's ground this achievement in some figures. When we demerged from BT at the end of 2001, we had some three million subscribers in Germany. That's a 6 or 7% share of the market. Today, our subscriber numbers are well over eight million and since March we have moved from 4th to 3rd position in terms of sales in the German mobile communications market.
And with our continued emphasis on targeting high-value customers and introducing customer-driven services like O2 Genion Homezone, I can almost foresee a time when O2 Germany will be as important as O2 UK.
Which brings me on to your company's performance in the UK.
The UK mobile market is more developed than that of Germany. However, the competitive pressures here are fiercer, and there are fewer opportunities for profitable growth.
Against this background, O2 UK has delivered another strong performance. We have seen growth in customer numbers and revenues. Overall, our profitability has increased 14% year-on-year.
But this is no cause for complacency, because, like the rest of the highly competitive UK mobile industry, we are also suffering the effects of churn (when customers leave us to join another network) - resulting in the annual loss of about 30% of our customer base.
In a way, it's a tribute to our sustainability as a business that we continue to grow. How many other businesses could survive the loss of a third of their customers every year, let alone expand while doing so?
Nevertheless, the fact remains that success in the UK market will in future be as much about keeping your existing customers as attracting new ones.
So what are we doing about it?
The key, as those of you who were here last year will remember me saying, is to differentiate O2 by the strength of our customer experience.
Quite simply, we will retain our customers by looking after them better, and giving them better experiences, than any of our competitors. Reducing churn is a little like turning a supertanker, however, I am delighted to be able to report that our recent initiatives in this area are demonstrating encouraging progress.
Prompt, efficient service is vital. That's why we are opening the new customer service centre in Scotland. And we're increasing the number of O2 shops, because we know our customers value face-to-face contact.
Product reliability is another huge issue for customers.
We all know how annoying it is to buy the latest must-have gadget, only to find that technical glitches make it too unreliable or too difficult to use. O2 is committed to things that work first time as opposed to being first with things that don't work first time.
Peter will tell you more about the rewards and discounts campaigns we're running to encourage customer loyalty.
Looking further ahead, we have to ensure that we're the kind of business that people will want to give their loyalty to. And I'm not just talking about customers here, but also employees and investors.
I believe, and O2 as a company believes, that it's by meeting our social, environmental and ethical obligations that we will earn the long-term loyalty of all our stakeholders.
So what are these obligations? On the social side, we have a duty to contribute to the well-being and safety of the community. That begins with being open about the issues that concern people.
We put a great deal of thought into making mobiles suitable for usage by children and the vulnerable. We produce information leaflets and hold texting clinics.
We have introduced filtering and other technologies to stop children accessing inappropriate content, or making undesirable contacts.
The effects on health of mobile phone usage and masts are a key concern for many. We hold public meetings and consultations on this issue, and have a dedicated phone line for enquiries. We make the best possible information available to our customers, and have recently committed further funds to independent research.
WESTON SPIRIT SLIDE DISPLAYED
In addition we support active community engagement.
This work is focussed on disadvantaged youth.
In the UK for example, we have entered into a partnership with Weston Spirit, a dynamic youth charity tackling issues faced by young people using an innovative range of personal development techniques.
POLLY AND FRED SLIDE DISPLAYED
In Germany, O2 supports "Polly and Fred" - a learning software which teaches schoolchildren to handle their mobiles properly. The CD-ROM has been designed with eight chapters - each an adventure featuring Polly (an octopus) and Fred (a carrier pigeon) - which form the basis of a teaching unit.
The project is supported by the German media authorities and the FWU which is an official organisation of the 16 German Bundeslander and part of the Ministry of Culture - the FWU is responsible for producing every film/educational tool which is distributed to schools.
Looking at our environmental obligations, we can see that our efforts are beginning to get results. I am pleased that we were the first mobile operator to achieve Group wide accreditation to the environmental management standard ISO 14001 - but there is more to do.
There's no doubting the enthusiasm of O2 people about our business as a force for good. Over 80% say they are proud to work for O2.
We have also won external recognition, becoming the top-scoring mobile phone operator in the Dow Jones Sustainability Indexes.
To end on a serious and sad note, following the horrific London bombings on 7 July and subsequently, we worked extremely closely with the Emergency Services whilst ensuring that the O2 network was upheld.
To this end we doubled the capacity of the network in the relevant areas. Our O2 Airwave business rapidly deployed services into the Underground to enable the British Transport Police and Metropolitan Police to communicate in the tube tunnels. A significant donation was made on behalf of The O2 to the London Bombings Relief Fund and O2 donated and delivered phones with unlimited free call time to the Bereavement Centre set up by the London Resilience Team and Westminster Council.
Now I'll pass you over to our CEO, Peter Erskine, who I would like to congratulate on your behalf for O2 being the top performing FTSE company over the past three years. Peter will look at our operational performance over the past year in a little more depth.
Thank you David, and good morning ladies and gentlemen. I'd also like to thank you all for making the effort to attend today's meeting - I'm delighted to see so many of you. I will briefly present your company's performance over the last year, and set out our plans for the future.
Before we take our tour of the business, I'd like to take a moment to thank my executive team.
My thanks are due in particular to your Chief Financial Officer David Finch, and to the CEOs of all the businesses, namely Rudi Groeger, Matthew Key, Danuta Gray and Pete Richardson.
Their hard work and dedication has resulted in an outstanding set of results in the last financial year.
So now let's look at the year's many highlights.
The first thing to say is that all our businesses have performed, and continue to perform, ahead of the market.
I'm delighted to be able to report that your company's pre-tax profit more than trebled, from £95 million to £309 million. We also saw a significant increase in operating profit and EBITDA, the base measure of our earnings.
For the second year running, we grew total revenue by more than £1 billion. It now stands at nearly £6.7 billion.
It was also a record year for customer additions. We acquired three and quarter million new customers, bringing us to a total of 24 million at the end of March - and the momentum has continued in the first quarter of the new financial year with the company announcing a further 646,000 customers gained during April, May and June - taking us close to 25 million customers overall.
Most of the additions over the last year, two million in fact, were in Germany, where we now have well over eight million customers. This makes O2 Germany the fastest growing operator in its market, and probably in mainland Europe.
In the UK, around a quarter of the population are O2 customers and one in three text messages are sent over our network. The turnover of O2 UK has risen to £4 billion, putting our relatively new company ahead in revenue terms of many established names such as Pearson, BSkyB, Guinness and Cable & Wireless.
Our joint ventures, Tesco in the UK and Tchibo in Germany are also performing strongly and already have over a million customers between them.
Mobile phone usage in Ireland is already more than 50% higher than in our other territories. Despite this, our Irish business continued to grow strongly - increasing subscriber numbers and turnover, whilst significantly improving customer satisfaction.
During the last year we also completed the rollout of the O2 Airwave network to all 51 police forces throughout the UK and only last week we were awarded the contract to supply our service to all the Ambulance Trusts in England. When the system is installed, patients will benefit from reliable voice and data services that will improve care delivery by paramedics at incident scenes and help to improve ambulance response times. We hope this will be followed shortly by similar orders from the Scottish and Welsh Ambulance Trusts and indeed the nationwide fire and rescue service. We already have some 150,000 users of this secure network and are contributing to increased public safety within communities the length and breadth of the country. With 78 other Public Safety related organisations - such as the Highways Agency and Ministry of Defence - already signed up to the service, the potential number of UK users is now well in excess of a quarter of a million.
Data is another success story. Data is all the non-voice services such as texting, and more sophisticated services that customers can access, such as email, games, internet surfing and music. It is a significant part of your business, and three years ago we set ourselves the target that it should account for 25% of revenue by 2005. We've exceeded that target, and now data alone accounts for almost £1.5 billion per annum in revenue.
Although still early days, we have seen a strong start to the current financial year in all our businesses. We have continued to add new customers in the UK and Germany and have increased the base by 15% year on year. Revenues have increased across the board, and the underlying voice and data growth trends in all three mobile businesses are strong. As mentioned by David, we are also seeing encouraging progress in our drive to get churn down in the UK. Overall, we are now increasingly confident that we will achieve all our year-end growth and margin targets.
Looking forward, all our markets are increasingly competitive, particularly in the UK.
Today, around 75 percent of the population in the UK has a mobile phone. As David has indicated, it's a mature market with a high level of customer 'churn'. In such a market, it makes sense to expend equal if not more effort on keeping our existing customers happy as on attracting new additions for revenue growth.
So we listen to what our customers want. And that boils down to three things:
- Firstly, excellent service - great products, network quality and customer service
- the second is - value for money and more rewards for staying with O2 ....
- and lastly more face-to-face contact.
In response to these needs, we are opening a new customer service centre in Glasgow and are taking on 2,000 more customer-facing and shop staff. This means that some 80% of our staff are now customer facing.
To improve efficiency, we are in the process of implementing one of Europe's largest Customer Relationship Management and billing system deployments.
This has allowed us to introduce new O2 loyalty programmes, designed to reward and retain existing customers. I'm sure you will have seen some of our advertising campaigns. Although it's still early days, we are pleased to report that large numbers of both pre- and post-pay customers have already signed up to the programmes, and we are seeing the first signs of churn starting to reduce.
Another area we're focusing on in the UK is increasing the proportion of our business done through our own O2 stores and online. Selling through our direct channels gives us much more control over the customer experience than when we sell through a third party like Carphone Warehouse or Phones 4 U. In the last quarter, more than half of our connections were acquired through our direct channels.
This is set to increase, as we expand our network of high street shops from around 260 O2 shops today to more than 300 over the course of this year.
Overall, despite competitive pressures, revenue in the UK is on an upward curve. And we shouldn't lose sight of the fact that we continue to grow ahead of the competition. This year we have forecast the UK business will continue to grow its service revenue by mid single digits whilst maintaining the margin - and we are on course to achieve this.
Now to O2 Germany.
Our performance in Germany last year was, quite simply, outstanding.
And the even better news is that, despite being the fastest-growing operator, O2 Germany still only has an 11.5% market share in the largest market in Europe - so there is plenty of opportunity for growth. Judging by our performance so far, we are confident that we will continue to make real inroads into this market.
In the last financial year, the business reported a 28% increase in service revenue, a total turnover of €2.5 billion and actually finished the year at a run rate of close to €3 billion. Looking at recent valuations of similar sized European operators, the potential upside in terms of value is clearly significant if we continue to improve the performance of our German business as we have been doing.
In Germany we have a strong brand and track record in product innovation. To give you an example, O2 Germany recently launched surf@home to take on large, established fixed Internet providers. And although it has only been on sale for a matter of weeks, we are already seeing high levels of interest in the product. It is also making waves in the business market.
Going forward, our major investment in a German 3G network will allow us to drive up longer-term margins, and enable O2 Germany to grow its business even further. This year we expect to see continuing fast growth in the customer base and revenues and the margin improving to 20 percent.
Now, turning to Ireland, I am confident that O2 Ireland will continue to maintain its edge in an increasingly competitive market.
Key to this will be the exclusive introduction of the i-mode mobile internet service later this year - providing a completely new experience for Irish consumers.
And finally, to O2 Airwave.
As mentioned earlier - with the Airwave roll-out to 51 police forces now complete and having secured the Ambulance contract, we can look forward to other growth opportunities.
And what of 3G?
Looking at 3G generally: as we've said many times, we wanted to make sure that crucial elements of the service, like network quality, functioning handsets and compelling content, were in place before we rushed into launching it. We are approaching 3G as an evolution of our successful data services strategy, rather than a stand-alone service.
In the UK, we are on course to achieve our target of 3G coverage for half the population by summer 2005. Early take-up has been modest, as we expected. We expect it to start building up later this year and early next year.
In Germany we will have 50 per cent population coverage by the end of the year and in Ireland, we have met all regulatory requirements and are on track to launch a commercial service later this year.
Our data offer continues to grow. We are particularly excited about i-mode, the world's most popular mobile Internet service.
We are launching this service exclusively in the UK and Ireland later this year and in Germany early next year. This will give us clear differentiation from the rest of the data services market.
Our peers in Spain and France have seen significant increases in revenue since introducing i-mode. We look forward to replicating their success.
Elsewhere in the business, I mentioned earlier the success of Tchibo and Tesco Mobile.
Both have quietly and very effectively got on with it, and both are attracting impressive numbers of customers each month.
We see no signs of that abating.
Finally, our membership of the Starmap Alliance, which provides travellers with a "home away from home" seamless voice and data service across Europe, has become operational.
We're seeing tangible benefits already, with inbound minutes up 200% from our Alliance partners over the last six months.
Our German customers, meanwhile, have benefited from the introduction of a competitive flat fee for roaming. We are looking at extending this elsewhere.
Before I close, I want to leave you with this thought: that O2 is more than just the sum of its parts. Which brings us to issues that generally come under the banner of Corporate Responsibility.
David has spoken about our social, community and environmental obligations. I want to talk about our employees.
The best-laid Corporate Responsibility plans are worthless without committed people to deliver them. So last year we made it a priority to communicate with employees about what 'acting responsibly' means to O2.
After all, it touches on every aspect of our operation, from the satisfaction, safety and well-being of our customers, to ethical procurement practices, to getting involved in the community.
In 2004/05 our total charitable donations reached £2.2 million. There was overwhelming support from our employees and customers for the victims of the tsunami disaster and all in all our direct contribution to this appeal amounted to £414,000 with employees contributing £133,000. Through our Can Do Matching and Can Do Giving schemes we support employee fundraising activities by matching funds and I am delighted to report that the take up has risen by 25 per cent.
Critically, we recognise the huge importance and contribution of all of our employees and our responsibility towards them.
Responding to feedback from our regular 'Reflect' survey conducted among all employees, we have introduced a new package of benefits. Through our 'Balance' programme we are helping employees maintain a healthy work-life balance. And we're also looking at how we can improve the working environment, through everything from refurbishment of our premises to our employee assistance programme, through to the introduction of a new flexible benefits package.
I feel privileged to work with such a talented and highly-motivated team of people across all of our businesses, whose commitment to the company is clear to see. I am delighted that so many of our staff have chosen to participate in the success of O2 by taking up our all-employee Share Save scheme and am immensely proud that, in the past 12 months, we have been voted 'Best Large Company to Work For' in Ireland, in the top 5 best workplaces in Europe, and listed in the top 15 medium-sized employers in Germany.
There's much more going on in this area around the business than we can cover today. You'll find details in our Corporate Responsibility report published earlier this month, copies of which are available here today.
So, in conclusion, this is O2 in 2005.
There is plenty of opportunity to deliver further profitable growth which in turn will deliver the value to you our shareholders.
We have just announced an encouraging start to the new financial year with a good set of first quarter numbers and are now increasingly confident that we will achieve all our year end growth and margin targets.
Yes, we still have much to do - we are not at all complacent, and are focussed on building on our successes to date. You have good reason to be confident that we will take the necessary action to ensure your company's future success.
Finally, I'd like to thank you for your investment, in every way, into O2 plc.
Thank you.
