Events & presentations

23/07/2002

Speeches to Shareholders at the mmO2 plc AGM

Speaking at the mmO2 plc AGM on Tuesday 23 July 2002, David Varney, Chairman, said:

 "I would like to welcome you today to the first AGM of our company. On behalf of your board, I want to take this opportunity to review what the company has been doing to benefit shareholders, and to give you a picture of where we are leading the company.

Firstly, I'd like to reassure you all that despite recent difficult market sentiment towards telecoms stocks, your Board believes that mmO2 presents a real opportunity to create shareholder value through above average growth for the mobile communications sector. You should be in no doubt that shareholder value is, and will remain, at the top of our agenda. Indeed , we, the members of the Board, have substantial personal shareholdings in the company, (over 1.4 million shares) a guarantee that our own interests are appropriately aligned with those of the company.

After the Board was recruited and appointed last year, our first task was to prepare mmO2 for full independence as a FTSE 100 company. The former BT Wireless was a division of BT whose mobile operations had only recently been separated from BT's fixed-line operations. We inherited a number of commitments from BT, which we have honoured.

As we prepared for demerger, we found important shortfalls in operational performance, lack of focus on key targets, and the absence of a widely instilled high performance management culture. A brand new corporate organisation had to be created.

On the positive side, it was clear that the mmO2 businesses had a number of significant strategic strengths. There was a strong track record of innovation and a willingness to embrace change amongst many of the staff.

The demerger was agreed by BT shareholders on 23rd October 2001, and then mmO2 began life as a separate listed company on 19th November 2001 on the London and New York stock exchanges.

We conducted a comprehensive series of presentations to the investment community, explaining the strengths of our wholly-owned businesses in the UK, Ireland, Germany and the Netherlands as well as one of the leading mobile, data and internet businesses in Europe.

I believe that the staff in all these operations deserve our appreciation and thanks for the way in which the demerger was executed in such a comparatively short time, and for the progress we've been able to make since then.

We are under no illusions about the scale of the challenges we face. Indeed, throughout our relatively brief existence as a separate company, the climate has been very harsh. However, we believe that mmO2 has delivered results in line with our expectations at the time of the demerger.

In January, following a highly successful bond roadshow, we completed the refinancing of the debt arranged prior to our demerger.

We've been particularly encouraged by the progress made in Germany and we continue to focus on the strategic goals we set out at the time of our demerger: to deliver improved operational performance, to achieve more cohesive management of all our businesses, and to build our lead in the market for mobile data services. Our financial performance since demerger reflects the initial progress we have made in each of these areas. In the full year recently reported:

• Our active customer base has grown by just over 12% to 17.5 million, with higher value contract customers now making up 35% of this total
• Service revenues have grown by nearly 18% to £3.7 billion, of which revenues generated by data services accounted for some 12%
• Earnings Before Interest, Taxation, Depreciation and Amortisation improvement accelerated to £433 million, from a loss of £(39) million last year. Our pre-tax loss was £(873) million, compared with a loss of £(3.5) billion in 2001
• We reduced capital expenditure by 28% to £1.1 billion and this, combined with tighter management of cash and working capital, resulted in a net debt significantly below expectations at the time of our demerger

Last week you may have seen the press coverage following the announcement of our first quarter results for the current financial year.

We continued to make encouraging progress in implementing our strategy across the Group and were able to demonstrate the continuing momentum in Germany and in the UK contract market, increases in the annual revenue per user and further growth in mobile data.

We have recruited a strong Board, developed a robust governance structure and were encouraged by the NAPF recent endorsement that mmO2 has achieved its aim of complying with best practice in this area."

At the mmO2 plc AGM held on Tuesday 23 July 2002, Peter Erskine, Chief Executive Officer, presented shareholders with a review of the year ended 31 March 2002, saying:

"Few industries have been more crucial for the development of the modern society than telecommunications. Mobile communication has transformed the way individuals can interact and even transact.

This has led to the high levels of penetration of voice-based services in our European markets. Penetration rates in the UK and Germany, mmo2's two largest markets, are now approaching 80 per cent and 70 per cent respectively, and this has affected growth in new registrations. In the future, growth for mobile operators will no longer primarily be driven by bringing new customers into the market - it will be generated by a new generation of products and services.

The challenge for us will be to forge closer relationships with our customers, and to win market share from our competitors. We will accomplish this by offering customers products that will improve their lives, the best available service, competitive pricing, and a higher quality overall mobile experience. We see exciting opportunities in mobile data services, where we are well positioned as a leader in Europe.

As traditional voice revenues per user level off, data services will become the primary source of mobile market growth. Data is already a reality today in the shape of the short message service. There has been staggering growth in text messaging, which at the moment it makes up the great bulk of the 14.6 per cent of our revenues earned from mobile data.

As David has mentioned, we set out a clear strategy at the time of demerger to deliver long-term superior shareholder value - namely - improving operational performance, managing the businesses as one and leadership in data. Let me now update you on our progress towards these goals.

IMPROVING OPERATIONAL PERFORMANCE

Operational excellence is central to our strategy. Each of our businesses must match and then exceed the best in customer satisfaction, network quality, and cost efficiency. You will have seen from our Preliminary Results in May and from last week's announcement of our first quarter key performance indicators that we have moved swiftly to improve our operational performance. In particular, we have grown our airtime revenues by 18 per cent and 10 per cent in the UKDuring the last year, we also announced a major restructuring of our UK and German businesses that reduced the overall headcount by some 2,000.

In O2 UK, we have already lifted EBITDA margins to over 24 per cent, and our aim is to increase them to above 30 per cent next year. We will reinforce the move to lower customer churn rates and were pleased to announce a further reduction last week to 30 percent from 40 percent only a year ago.. The drive is on to recruit high-quality customers in the post-paid, contract market, and our latest figures represented the best quarter performance we have had for 3 years with the addition of 110,000 new contract customers between April and June. In our successful O2 Ireland business, the customer base grew by 21% to 1.2 million during the last year, service revenues increased by more than 25 per cent, and the EBITDA margin improved from 22 to 31 percent. We have also just been awarded a 3G license in Ireland, so that we now have licenses in all of our territories.

We need to achieve competitive scale and profitability in our businesses in Germany and the Netherlands. We have significantly strengthened our senior management team in Germany, with the appointment of a new CEO and Chief Operating Officer, and last year grew market share by 1 per cent to 7 per cent, with EBITDA losses more than halving to £166 million from £343 million in the previous year. This was due in a large part to the success of our unique Genion, homezone product in the German market. In the first quarter of this financial year our success was maintained with O2 Germany adding another 195,000 customers and improving revenues- an excellent result.

O2 Netherlands achieved a significant milestone in 2002 - turning EBITDA positive for the first time in the second half. Our results also show improved traffic rates, a result of the innovative partnerships we have formed with third parties. We have already secured deals with Postbank and Tele2 in the Netherlands.

While Germany and the Netherlands represent major opportunities to create substantial value for mmo2 shareholders, we do not underestimate the challenges of effective execution in these intensely competitive markets.

Pioneering network sharing arrangements with T-Mobile in the UK and Germany have significantly reduced the future capital requirements involved in our transition from the existing GSM and GPRS technologies to 3G technology. They have also minimised the environmental impact of building new networks. We have also become the first Western European mobile operator to outsource our entire network management operations, as a result of our ground-breaking agreement with Ericsson in the Netherlands.

We will continue to exercise tight capital and cash management. As a result of this, our full-year capex stood at £1.1 billion, down 25 per cent on 2001. We spent £500 million less - £300 million of which was saved on our 2G networks whilst still focussing on improving network quality, and £200 million saved by the deferral of 3G spend.

RUNNING THE BUSINESS AS ONE

We are on record as saying that we intend to run our business as one and "do things once" - this will bring significant benefits in operational, customer service and financial terms. We now have a "products O2 " organisation that is responsible for establishing a single product roadmap to develop and market new applications and services across the group. We have announced a seamless mobile data highway with resultant rationalisation of our principal network suppliers that will deliver savings of some £375 million over the next five years. We also see opportunities for group-wide procurement in a number of other areas, including handsets, and we have recently appointed a new group Chief Information Officer who will drive further efficiencies in our IT systems to ensure we continue providing the highest levels of customer service in the most cost-effective manner.

A common face to our customers is vital. In May 2002 we introduced a single customer brand - O2 - creating a new force in European mobile communications. We are now engaged in the process of rolling it out in a consistent way across all our businesses. O2 is a brand that conveys freshness and life, freedom and clarity.

All of our research shows that the brand has been well received, with exceptionally high levels of brand awareness achieved across all our markets over the first two months We have introduced a change programme, Project Breathe, across all our businesses in order to build a customer focussed, high performance culture. Only in this way can we release the full potential of our 14,000 employees. Only in this way can we outperform the competition.

We are delighted that our O2 businesses won a number of top awards last year, recognising high performance in areas ranging from customer service to network excellence, training and innovation [state examples - awarded title of best GPRS network in Germany by Connect magazine, BlackBerry voted most innovative new product at ICT Expo in Dublin and O2 Ireland topped Excellence Ireland Consumer Satisfaction Index in the mobile comms sector].

We place great importance on the development of our employees and want everyone in O2 to embody O2 's core values - to be open, bold, trusted, and clear in everything they do.

DATA LEADERSHIP

Leadership in data is the third element that will drive the business forward.

The future is NOT about selling technology - its about providing the services/applications and devices that customers want and will go out to buy - whether it's mobile email, photo and picture messaging, multiplayer gaming or real-time web surfing. It's about making this an easy customer experience and having the quality of network to back this up. This is where we will be expending our energy.

Already today, half of our customers are using data services including text messaging, mobile Internet and mobile email ....... In the first quarter of the current financial year, the revenue generated from data was 14.6 per cent. It is our intention to increase the percentage of our data service revenues to 16 per cent this year, rising to more than 25 per cent in 2004 and to more than 50 per cent by the end of the decade. Data is essential to mobile industry growth. By the middle of this decade, it will account for more than 90 per cent of the total mobile revenue growth.

The appetite of the early adopters of data services using today's WAP and SMS gives us enormous confidence for the future. Our customers sent more than 5.3 billion text messages during the year, and our UK business ended the year as market leader in this service. SMS continues to grow and the recent success of our Big Brother sponsorship and World Cup promotion resulted in a record first quarter for mobile data revenues.

Now that we have the applications, and now that the devices are becoming available in significant quantity in the marketplace, we will continue to aggressively drive our GPRS revenues. GPRS uptake will continue building throughout this year and next as the adoption of more complex services comes of age. In turn, this will increasingly lead to the development of higher speed 3G services.

To many, the mobile handset has already become an indispensable tool for business and leisure.. It is therefore somewhat ironic that the market has become a disbeliever in the future of mobile communications just as the industry is on the verge of introducing a new breed of wireless devices equipped with colour screens, built-in cameras and web browsing.......Business users will find that they can deal with emails on the move as easily as they can from their PCs. Instant text messages will find their intended recipients whether consumers are using their PCs or their mobile devices. Consumers will adopt Multimedia messaging - the ability to send photos with text - which will be tomorrow's post card. We will be launching a range of camera phones in the shops before Christmas to meet this demand.

mmO2 already has more than 70,000 active GPRS connections as people began to realise the potential of services like mobile email. These include over 8,000 users of the O2 BlackBerry device. We have now shipped the BlackBerry to more than 420 large corporate customers. They start off with a small number of devices, and test them extensively. But our experience has been that the word spreads quickly about what this end-to-end mobile e-mail service can deliver, and the demand for them builds.

We have recently launched the first pocket PC/PDA/and phone capable of mobile internet browsing - the O2 XDA - across all our territories. It has been extremely well received, and we have already sold some 4,000 units in its first few weeks.

We believe that we are strongly positioned for development and roll-out of 3G at the appropriate time in 2003. We lead the European operators in demonstrating a live, working 3G network on the Isle of Man, a trial run that has proved to be invaluable to our understanding of network design and customer demand.

So we can proudly and confidently report real progress in our drive to lead in mobile data. You can be sure that we are not sitting back. The next twelve months will be critical to the development of the mobile data market, as a new generation of messaging products becomes available and other services and devices are launched. We are determined to build on our leading position, to attract and retain high value customers, and to deliver superior top line growth.

Mobile technology is also providing a solution to the complex issues surrounding the effective communication between the UK's emergency services. mmO2's Airwave business has a £2.5 billion, 20-year contract to be the sole supplier of core mobile radio services to the police forces of England, Scotland, and Wales. This will provide a fully secure, advanced digital communications system that will considerably improve the operational efficiency of the emergency services - helping to make Britain a safer place - for both the general public and officers alike. We are actively seeking new clients amongst the public emergency services. Our plans to complete the Airwave network by 2005 are on target.

CONCLUSION

mmO2 takes seriously its responsibilities to the community and the environment. The Group has detailed policies in place that address social, ethical, and environmental issues. Health and safety matters are of prime importance to us, and we co-fund a number of research initiatives into the health effects of mobile phone technology. In the UK we are also fully signed up to implementing the 10 commitments made by the mobile operators following the Stewart Report on Mobile Phone Health and Masts.

We are ensuring that all our base stations meet the international exposure guidelines. We have established a public database giving details of all our UK base stations and I am pleased to report that a recent Home Office audit of emissions from those masts located nearest to schools showed that these range from several hundred to many thousands of times lower than the public exposure guideline limits. We are however not complacent and are contributing to a new £7 million joint research programme into the health aspects of mobile phones.

We are also keen to address other concerns, and I am pleased that our UK business has maintained its ISO 14001 certification on environmental management. This is just the start. Continuous improvement is a critical part of this standard and, as we mature, we will be looking to improve our environmental performance.

We have sought to address other public concerns, such as crime, by investing in the installation of an equipment identity register, and fraud management systems that will inhibit mobile phone handset theft. These will be in place and operating from next month.

We are determined to add value to the communities in which we operate, not only through our commercial activities, but also through active engagement with society.

Trading in a highly competitive but genuine growth industry, mmO2 is a business of great potential. Although significant challenges remain, we remain confident that we are pursuing the right strategy, and that we will continue to grow revenues and see further substantial improvement in our EBITDA margin. The Board, the executive team, and all our employees are committed to realising that exciting potential, day-by-day, month-by-month, and year-by-year."

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