AGL Energy Limited (ABB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Aussie Broadband Limited briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Brian Maher, CEO. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to this Aussie Broadband Group Investor Call. I'm Brian Maher, the CEO of Aussie Broadband, and I'm joined today by Jonathan Crosser, our Group Executive Residential, who will have operational control of the business we're going to talk about today. While we're only a couple of weeks away from the release of our half year results, the significance of this announcement meant I thought it was appropriate to hear from me on the strategic rationale of the transaction and to give investors the chance to ask questions ahead of that time. We will not be discussing the first half FY '26 results on the call today. We're very proud and excited to have announced an agreement with AGL this morning, which consists of the acquisition of AGL Telco and its associated customer assets, including telecommunication services under the AGL and Southern Phone brands and importantly, an exclusive long-term partnership with AGL. This agreement represents a significant stepping stone in the execution of our Look-to-28 strategy with a material uplift in owned customer connections. It offers a new channel for growth in the residential connectivity segment through this long-term partnership with a major player in the energy sector. In the past few months, we've been able to secure both indirect and direct channels to market through banking and energy partnerships. So we're well placed to continue to drive our growth story. At the completion of migration, we estimate the AGL Telco acquisition will have 350,000 broadband and mobile connections to Aussie Broadband's user base. Those connections are broken down to an estimated 210,000 broadband services and 140,000 mobile services. It's worth noting that the current connection count is 362,000, but we've allowed for some migration loss. . In addition, more than 40,000 voice services will also be acquired, but as has not traditionally counted voice celebrities as connections. . Under the long-term partnership, AGL will continue to market and promote AGL branded telco services to its 4.5 million existing customers. and the wider market. AGL's existing large customer base represents an exciting growth opportunity for ABB to deliver telecommunication services through Aussie Broadband's award-winning customer service and network capabilities. We are expecting the migrated connections and voice services to generate approximately $235 million in revenue and at least $21 million in annualized underlying EBITDA in the 12 months post migration. SP1 Which will be EPS accretive. Excluded from this EBITDA calculation are one-off costs associated with the transaction, the migration and the establishment of the service and any contract incentive amortization. Over the medium term, we expect AGL Telco to exceed 0.5 million connections and this will deliver further upside to our earnings and is expected to deliver an EBITDA margin consistent with our outlook to '28 target of at least 12.5%. Following the migration, which will take place during the first half of FY '27, Aussie Broadband will be responsible for managing the service provision and customer experience by AGL's telecommunication services. As part of the partial agreement, AGL will continue marketing AGL Telco branded products through its existing channels. ABB will pay customer acquisition fees to AGL for new sales and fund routine promotional activity. The cost of customer acquisition is expected to be comparable to ABB's recent experience. ABB will also fund the bundle discount, which is a feature of the current offering. With the AGL telco MBA connections and the more Tangerine connections, which are being migrated to the LG network in the coming months, ABB expects to exceed 1.25 million NBN connections by the end of this calendar year. This reply Aussie Broadband as the third largest NBN service provider in Australia based on the most recent quarterly HMC reports. This would be a tremendous achievement and a testament to the continued commitment to high-quality service offering we provide to all our partners and end customers. Along with strengthening the company's financial and strategic interest as one of Australia's largest NBN providers, this acquisition will also expand ALG's presence in the growing MVNO mobile segment through multiple sales channels. Adding more than 140,000 labor connections from Agile will bring the total number of ABB mobile connections to almost 400,000 across all 3 segments. In consideration for the acquisition of AGL Telco, Aussie Broadband will issue $115 million in equity to AGL, which is expected to occur in June 2026. This amounts to 22 million fully paid ordinary shares based on the 90-day volume weighted average price to the 9th of February 2026. These shares are subject to certain standstill and disposal restrictions, and controlled transaction voting restrictions and account for approximately 7.5% of the current issued capital in our company. Using the estimated underlying EBITDA for the first 12 months post migration ownership of $21 million, we're acquiring AGL Telco on a multiple of approximately 5.5x. This excludes the value attaching to the long-term exclusive partnership with AGL. AGL will become a substantial shareholder in the company through the issuance of ABB ordinary shares. We have further incentivized AGL to deliver future net growth in connections as will also be hangable for an issue of up to a further $10 million in ordinary ABB shares in tranches of 2 million, contingent on meeting net connection growth over time. These tranches will be issued at prevailing 90-day VWAP once the $10 million has been issued, future growth incentives will be negotiated subsequently. We are incredibly proud of what this deal represents for our company and I look to 2 our ambitions and the prospects it presents for the years ahead. We're excited to expand the Aussie brand even further through this acquisition partnership, and we look forward to sharing more on our current train force with the release of our half year FY '26 results on February 23. I'd also like to thank our new partner, AGL and all or team that worked on the transaction. These agreements require extensive negotiation, and we appreciated that collaborative manner. We look forward to working closely with them to deliver mutually positive outcomes into the future. But for now, we're ready to take questions on this latest announcement. And please note that as our half year results are just around the call any questions not related to our agreement will be answered on our February 23 investor call. Thank you.

[Operator Instructions] Your first question comes from Liam Robertson with Jarden.

Congratulations on the deal. Just 2 questions from me. I mean, am I focused on the outlook and the ambition to grow those subscribers from 350,000 to 500,000 over the next 5 years. I guess NBN [ Brian ] is your bread and butter. So if I look at that component of the ambition, if we assume growth, if there's a slight skew to NBN growth it sort of infers you're looking to add close to 20 net new NBN subs per year. Conservatively, if I assume sort of 2% monthly churn, that number is closer to 70,000 growth. So I guess my question is, have you got enough confidence in the market and the competitive environment to suggest that that's realistic to achieve in a profitable manner? And then maybe my second question, I'll ask them up front. Just keen to understand the telco infrastructure that exists within Southern Phone. I guess, is it fair to assume that the focus for incremental synergies post deal completion will be around the network components of that business. I mean, from our perspective, I probably assume that there's nothing you current network can't already handle from an additional traffic perspective? So if you can just provide some color on that, that would be great.

Thanks, Liam. Yes, if you look at the history of AGL's telco book, I think it started off relatively small and I think it's grown and 360,000 in 5 years. So there is a track record there of that in fact, higher level of growth being achieved. As we all know, as your book gets bigger, you've got to sell more to grow, so we understand that. We've had extensive discussions with AGL about what we think we can achieve and we're confident in those. And those are otherwise we wouldn't share them with the market. So have said that 5 years and lots can change in 5 years. But as we sit here today, we're confident in the. In terms of the Southern Phone telco infrastructure, that's sort of not a material issue for us, but the connections were being brought onto our network. We've been upgrading our network this year in anticipation initially largely the more to Tangerine onboarding, we also had 1 eye on the potential for this agreement to be finalized. We're about halfway upgrade at the moment. it will be completed in the second half of the year. And that gives us plenty of capacity for growth over the next few years. So we're reasonably comfortable about that. And in terms of the synergies question, the network costs sort of our network as a sort of sort effect which is the highest unit cost will be this year when you put all the new capacity on. You've got a lot of capacity -- extra capacity that you're not using, and then you grow into that capacity over time. So your unit cost metrics actually improved over the years until you then get to the next point, where you have to reinvest at and to get the sort of effect. So that's how we see the future on the network costs.

The next question comes from Jonathan Higgins with Unified Capital Partners.

Well done on doing the deal and investing alongside it and such. So maybe just a couple for me. Just firstly, I mean sort of 12 months ago, we didn't really have -- we obviously didn't have the more and Tangerine deal. We had more just a pure place sort of RSP business of yours. You had the Buddy brand, which now looking at obviously exiting to those guys. Can you maybe just stepping back a bit, can you tell us a little bit about how you feel your acquisition channels are set up now from an alternate high speed, high speed and sort of more wholesale manner?

Sure. I mean since look at it, Jon, obviously, we restructured back in July business segments, residential business in NG and all. Those 2 transactions are really fueling growth in 2 of those segments. So there's still adds momentum to the residential segment and the more tendering adds momentum to the wholesale segment. So that's sort of consistent with strategy and rem restructure. But there's also been a look at the market and how do we segment the market, obviously. And we've now got multiple sort of channels and approaches to the market. We've got an energy partner now in AGL. We've also got our existing arrangements with the rest. We've got especially an indirect banking partnership through more Tangerine and they're all talking to different segments of the market. And AGL has 4.5 million customers for us to sort of still patent only got 350,000 of them in the Mono 360. So we've got multiple limbs to how we're going to the market and under that trial, whether you've got anything to add to that in terms of how you look at the market.

And again, a fantastic name. The way that we look at this is heavy access into what is more price-sensitive components of the market through both the AGL partnership and obviously, indirectly through Tangerine and more is an incredibly important part of our longer-term strategy. it's important for a bunch of reasons, but one of them is that it will enable us to maintain a premium position with the main brand as well. And so we have quite a multipronged attack now in terms of how we can go to market, how we can attract different types of customers into the broader Aussie broadband network and enjoy that experience. And I think the other really important part of this as well is we continue to find ways to really demonstrate the exceptional customer service that we can provide both to our own branded customers and now to nonbranded customers as well. So really clear that out there in the market as a point of difference.

Excellent. A couple more, and I appreciate some of the context there in regards to the less reliance obviously, on the direct NBN for yourself. Just one more qualitative 1 and then I ask a financial one. But on the qualitative side of things, can you tell us a little bit about where their subs currently sit in terms of tiering and like you guys obviously over-indexed on ultra-high-speed subs have more exposure to the lower end?

They do have a skewed to the lower end of the market versus where we sit. But what is also important in that SKU is it's a greater reflection of where more of the mass market transaction activities happening. So in terms of where we play in the NBN acquisition marketplace, as you know so well, we do skew to the right in terms of the higher speed end of that marketplace. When you look at the pure volume of transactions that are done week in, week out within the NBN market there is still a huge amount of volume that flows through in the 25 and the 50 plan, which is where we, as the main brands are underrepresented. AGL currently has a very strong holding in their base within that particular planned suite. And obviously, that's a really important part for us to really understand how to increase growth overall. So really, what we have now is the shape of a business that reflects where a lot of the market activity really sits and gives us more opportunities through using different bundling and discounting mechanisms and promos through the AGL broadband brand to really go after a very high growth cycle within those portfolios.

Excellent. Last question for me. And this might have been partially answered by Liam. But in terms of -- in answer to his question, sorry, but in terms of like you've obviously called out the initial 12 months following the transition sort of earnings. Is there any reason based on volumes and the like that if you've looked at effectively take the subs from where they are at up to 500,000 that the earnings wouldn't hear in the same sort of manner over the longer term?

No, I mean, we've called out that we think we can -- it's currently a low gross margin business. And we're very sort of conscious that is outgoing change that overnight. And we think we can incrementally edge that gross margin up over time, which will contribute towards the EBITDA margin we refer to 12.5%. But we also want to balance the churn impacts of that and also the interest of our partner AGL. But we do think there's real for us to move the gross margin over time. And then just on earlier some of the network costs we will grow into, but then there may be another investment tract. And there's a range of other initiatives where we think we can get more efficient, not only in this part of the bus our overall business as well.

The next question comes from Ian Munro with Ord.

[ Jonathan ], congratulations on the acquisition and our partnership. Just maybe to clarify, just looking at the EBITDA guidance for 12 months post integration. Just checking that $21 million is going after allowing for marketing expenses above the line? And then secondly, just interested in terms of that marketing import from Aussie, just the discounting portion purely just checking that, that purely relates to the telco portion of the plans. And also interested in whether there's any kind of revenue sharing arrangements under the agreement?

Thanks, again. Yes, to your first question, that's after land for what that direct marketing cost or the fees we pay to AGL for marketing. It's after any promotional discount, and it's after any bundle discounts. But it's before any amortization of any contract incentives or growth incentives they'll go into the canister shares, so it will be unfair to account both the cost and the increase in shares from an EPS perspective. Sorry, I missed your second point. What was the second question?

Just trying to clarify whether there's any revenue sharing agreements within this? And then also -- yes, okay. That's fine. .

No revenue share we own all the economics of the customer. We're also accounting for -- well, sorry, we are -- we have agreements to support the routine national discounts. That does not preclude AGL from time to time offering to invest in additional promotional discounts. But that would be in their expense on us, but that's not committed to. But we cover the, if you like, the routine running of the business and all the pricing.

And just one to follow up, please, with respect to the churn rate that's been observed through the AGL customer, mix take your point that it kind of more assembles the overall profile in terms of customer speeds and demand? Just trying to understand, I guess, that churn profile and how that's performed, you think more recently in the kind of heightened competitive environment?

Yes. So I think historically, the churn because it was relatively high and we do this different profiles between the 2 brands, but AGL [indiscernible]. The AGL team has done a pretty good job in bringing that down over time. It's still a bit higher than ours. And so we agile where we'll be able to mitigate that further over the next 12, 24 months.

The next question comes from James Wilson with Macquarie. .

Just first, you mentioned earlier your most recent answer as well, just around Aussie bearing the cost of customer acquisition, including bundling -- are you able to give us a little bit more detail maybe about some of the guardrails or price floors that you have built in to determine what is extra normal and would be borne by AGL as opposed to being borne by Aussie Broadband to protect your margins, particularly given AGL's now being incentivized on growth?

Yes. We have complete control over pricing and other discounts. There are some obligations in there as they can't be -- there's a requirement we have to bundle this and as a requirement that it can't be trivial. But beyond that, the pricing discount. The gross price, the oil pricing and the bundling discounts are decisions to make. We will naturally do that in consultation with that partner. But we have we have complete control of our own financial performance. So a I guess that's part of the answer, yes.

That's clear. And just 1 more for me. Apologies if it's been touched on earlier as well, but does the $21 million of EBITDA that you've spoken to, has that already been adjusted to be stripped out of the wholesale charge currently being paid by AGL to [ Super loop ]? Or is that incremental to the $21 million?

The $21 million includes the cost of running our own network running those costs in network so it's inclusive of that in the common savings not citing to us because we were never incurring it, but it includes the cost of servicing those customers on our network.

Okay. Great. And just maybe just one more for me then. Just on sort of the tax and the D&A expectations for the business. Are we right to think that in terms of tax, it would be paying a similar rate to the Aussie group rate. Is that a fair assumption?

Not so a lot of something at. yes, and something to do with looking very closely.

Okay. And similarly, I mean, I think in Liam's question, you touched on in your answer that potentially you're going to now be using the Aussie broadband network and the infrastructure rather than the existing infrastructure. Are we right to then infer that the DNA to sales of this business will be significantly lower than the existing Aussie Group?

Well, we don't be attributing incremental CapEx to this business. The incremental CapEx will be relatively modest. There's the first year will be the highest. We've got a little bit of message setting up a new building company and those sorts of things. There's a little bit of upfront cost just to get enough in the but hardware boxes on the network that are volume-driven. So we've got a bit of cost there and then they just incremental out of time. So in terms of what the D&A looks like for this business, we're looking at about -- I think early years, it will be around $1 million to $1.5 million. maybe going up to about $3 billion over the 5 years that we've talked about.

Your next question comes from Eric Choi with Barrenjoey.

Maybe just 2 as well. First one, just a follow-up on the cut through the $21 million EBITDA to NPAT. Sorry, can I just confirm, I think -- given you haven't called out any cash rebates like audio, just wanted to confirm there's nothing like that in this. So really, we've just got to take away the D&A that you just called out. So the dirty math would be like $21 million of EBITDA takeaway to of D&A gets you $19 million pretax and the most tax that's like a close to 20% NPATA uplift?

That would end it depends on how you want to treat. If you exclude any treatment of the growth objectives and that's not within those numbers, the equity tranches, which I won't exclude because you're going to get the share uplift for that. So yes, the $21 million is after we've paid all the marketing fee to AGL. And then the other thing that are entitled about for that is that growth incentive.

Got you. But if I exclude that growth incentives, then it looks like that looks like a high teens NPATA uplift versus a high single-digit share count increase, which means on an FY '26 basis, is it like 10% EPS accretive, obviously, less than that of the impact.

That's broadly consistent with our own capture.

Great. Just next question, you said you expect significant earnings upside from sub gross scale and synergies. I also said it's consistent with your 12.5% margin target. I just wanted to confirm -- this means you expect the AGL deal to eventually reach 20, 12.5 as Great. And then I just wanted some help to see we're thinking about what that eventual upside looks like because like if you get 150,000 subs and let's say you get 100,000 of them bat $20 GP per sub and you get 50,000 single-dollar digit per subs. That's $30 million of GP by itself. And even if you're like putting in some marketing costs, whatever -- we're probably talking $20 million of EBITDA cut through. So like year-end EBITDA for this could be north of $40 million once you get those 500,000 subtargets, and I haven't really put in network synergies or anything else is like I might think about it right way?

Your logic seems fine to me.

Okay. Last one, I do want to ask this, but no one else has asked, just can you comment on if your deal today impacts any of their existing deals. And I apologize if it's not really for you to comment on.

I think you should ask them that question.

Your next question comes from Benjamin Jones with JPMorgan.

Congrats on the deal. I just wanted to ask on the sale process. I mean, talk us through the discussions you've had with Anis there's any consideration at any point for this being like a wholesale contract rather than a full acquisition of the telco business?

We've had many conversations in a very extended period of time, and this is where we landed.

Got it. And then just on the one-off costs that you've mentioned. Can you just talk us through what those one-off costs and if you can provide a one-to-one of those costs and maybe some timing of what you'll expect to incur?

What we just tried to is trying get to a normalized position. So when you're running through migration as a whole heap of things you got to do. We've got project teams to set up and all these sort of things. So as a range of things, what we're just trying to do is ultimately, the market must know what does this business look like on onset trading as normal. So it's anything that occurs that won't be what we get to the end of migration and carry on going forward.

Your next question comes from John Campbell with Jefferies.

Just a couple Firstly, just back to the D&A charge. So you don't -- am I right in saying you don't have to amortize the value of the acquired customer base?

No, we will. But we're not -- we're focused on NPATA, not NPAT.

Right. Okay. So we're talking in pet. So when you gave us those figures, you're talking NPATA?

Which figures? The D&A, yes, because the amortization of the customer contracts will be a big number. Because if you do that, and you can't have the shares of the EPS calculates is affected at the same thing. It's the cost of the shares is what goes through that line, yes.

Yes. Yes, sure. I understand. No, that's fine. That's just to clear. And given -- sorry, given you've described the termination events relating to this agreement. Are we right in thinking that this is a perpetual partnership unless a termination event is triggered on either side?

That's correct.

Okay. So that's probably different to the more telecom arrangement?

Yes. Well, on that complete difference. So more on its own customers -- sorry, I don't like to say adding customers on that to turn us to the contracts. We own our customer contracts in this instance. The partnership with AGL is a marketing partnership our marketing brand. So we get to use their bank. They do the sales and marketing services for us, and it is perpetual until terminated. .

Until there is a termination event, so we can assume I mean, yes. So all those termination events look pretty unlikely. So this looks like it's a long term -- very long-term partnerships?

It did. As often come up through negotiations for every as a long time.

Yes. Yes, indeed. Okay, that's terrific. That's most of the other questions have been asked.

Your next question comes from [ Evan Karatzas ] with [indiscernible].

Maybe just one for Jonathan. Can you just provide some perspectives on how you're thinking about the pricing or promotional offers for the AGL telco product going forward, just given the AGL unit economics would be a fair bit different to Aussies, given the bundling or the churn reduction benefit they received in their unit economics equation?

It's a great question. So what we've been doing through this process is learning from the history in terms of where they've done well versus where they really haven't got the volume penetration that they've needed through discounting. And there's a lot in that. You can also learn a lot by what other similar players are doing in the market at the moment. What we need to be able to find through this is, yes, price will play a very important role, particularly in the bundled realm. We know that, that price post-bundle will need to be lower than what we have for our own ABB owned brand. big question that we now need to go through and really it's going to be a little bit of an experiment for the first 6 or so months is understanding how not to really lead that price pressure further down in the overall market. It's very aware of the price sensitivity that is out there. We're very aware of the current promo cycles, which are kind of diluting their value that's available in the market. And we do think that we have an opportunity here through the right pricing strategy as well as the right proposition approach in partnership with AGL to start to turn the course on that pale division overall in the marketplace.

Okay. Good one. That's good perspective. And then just help me bridge out in a bit more detail how you expect the telco margins to go from sort of the 9% today to 12.5% by, I guess, end of FY '28, please?

Well, I think I've touched on that earlier. It's probably a low gross margin book. We think the scope in the context of John answer just then to gradually increment gross margin up over time. As I said before, so we've got control over the pricing. We do -- we've got the growth into the network costs that I referred to. There's a range of ownerships that we're doing in our service area that we have will make us more productive and efficient over time. And then there may be other elements in terms of mix and things like that. So I don't know if you want to touch on the broad strokes of your productivity initiatives?

And so there are quite a few broad strokes in those initiatives. I think one of the most important things is, overall, bringing these customers into particularly the customer service environment will give us productivity benefits overall at a group level. So that's a really important part to this deal for us in terms of the economies of scale that we now get. So there's a natural benefit there. We also know that we have a great opportunity to drive down the inbound calls that we get through that current base based on the understanding we have of why they are calling currently into AGL. We believe we can solve for a large proportion of that. We also know that we have a very powerful omnichannel solution right now in terms of our ability to service customer demand and query through Live Chat, which is an increasingly important channel overall for us as Aussie has marked efficiency differences between the telephony-based channel versus the live channel. And the third element is really the innovation that we're continuing to push through our app. And so all of the app features that we have available to our Aussie Broadband-branded customers will also be available to the AGL Broadband customer base. and the driving of self-service into that customer cohort isn't something that had previous access to and is again something that we believe will, in the very near term, really help from a productivity perspective. Now none of that then talks to the broader initiatives that we have across real customer service domain, again, where we are actively experimenting right now with how do we use AI in our tooling to really help better understand core demand, core deflection, increase our agents capability during an interaction as all that experimentation is going on right now. we are still not yet seeing the deployment of that at scale. And when we do, again, we think there's productivity benefits flowing through there as well.

Yes. Okay. And I appreciate you expanding on that. Just one more quickly, if I can. Is there any chance you can give us the ARPU between the broadband and mobile, just so we can, I guess, better forecast the earnings contribution going forward for the different subscriber bases?

I don't have that at hand at the moment.

Your next question comes from Brian Han with Morningstar.

Brian, just a quick question. Can I please ask who initiated the conversation to make this deal? Or is there some sort of a solid auction?

I can't empty honest. It was quite a while ago. I actually don't that answer that, but there was certainly no auction.

Right. Okay. Just a second very quick question, Brian. Can I just confirm that the current last 12-month EBITDA margin for these AGL assets, they were 8.9%?

The current performance?

Yes, current EBITDA margin of those AGL assets that you're buying, was that 8.9%? Because I know you...

Sorry, that's an AGL, but that's not for me to disclose I'm afraid.

Right. Because the 8.9% target that you've given, that's your projection months after you've upgraded?

Correct.

Your next question comes from [ Nick Maclean ] with [ Sari Asset ]. Your next question comes from James Wilson with Macquarie.

Just to realize my question, my hand have been raised again but seeing as I'm just maybe one more for me. [indiscernible] and said that they're expecting that there's a $4 million gross profit to them in the event of subscribers run to 0 on their wholesale contract. So just to confirm, there's no penalty to AGL or broadband in the event that the agreement with [indiscernible] is terminated early before 2029, which is at a decline?

We have no contractual relationship with [indiscernible] customers. And that's a question that should be discussed to AGL in terms of their contractual arrangements.

There are no further questions at this time. I'll now hand back to Mr. Ma for closing remarks.

Thank you. Thank you all for joining us. Really recite it I know to be time for you all, and we look forward to seeing you in a couple of weeks. We're really excited by the opportunity that's presented itself with this acquisition, and we're really, really in for working with AGL. They're going to be great partners. And we think we can do a really outstanding results both for our business financially and also for AGL in terms of crafting stickier and stickier customers because they're getting such an outstanding telco service from Aussie Broadband. Thanks very much, for your time.

That does conclude our conference for today. Thank you for participating. You may now disconnect.