Spark New Zealand Limited (SPK) Earnings Call Transcript & Summary

[Foreign Language] Good morning, and welcome to the Spark 2020 Annual Meeting of Shareholders. My name is Justine Smyth, and I am Chair of Spark New Zealand. On behalf of the Board, it is my pleasure to report to shareholders on Spark's progress over the last year. I'm appearing virtually from Spark City in Auckland, and joining me today is CEO, Director, Jolie Hodson. In light of ongoing uncertainty surrounding COVID-19 and the need to keep our shareholders and Spark's people safe, we made the decision to move to a virtual-only meeting for 2020. The Board and I very much appreciate shareholder support and understanding as we move to this new way of doing things during what is an unprecedented global event. Given this is a virtual-only meeting, you'll be able to vote and submit questions during the meeting. We will respond to questions on the resolutions when we get to that part of the proceedings, and we will also have time to respond to general questions following the resolutions. [Operator Instructions] Your voting card is open from the commencement of this meeting. We'd like to encourage shareholders to submit online questions as soon as possible, so that we can address them at the appropriate time during the meeting. Please refer to the online meeting user guide, which is available on our investor website or call the helpline for further assistance. Before we get started, I note that based on the information conveyed to me, there's a quorum of shareholders online, and the meeting is duly convened. Today, you will hear from me as Chair of the Board and from Jolie Hodson as CEO. We'll then put forward the resolutions as described in the Notice of Meeting and respond to general questions put to us by shareholders. Joining me in the room today are Jolie Hodson, CEO and Director; Stefan Knight, Finance Director; and Alastair White, our GM for Capital Markets. Joining us virtually are my fellow Directors: Ido Leffler, Alison Barrass, Warwick Bray, Charles Sitch, Pip Greenwood, Paul Berriman and our future Director, Ana Wight. Also present today are our General Counsel, Company Secretary, auditors from KPMG and Deloitte, lawyers from Russell McVeagh and our share register, Link Market Services, who will act as a scrutineer for the purpose of the polls. Now let's turn to Spark's progress over the past year. It's no understatement to say this has been a year like no other. It was filled with uncertainty and for many, a lot of anxiety. It has presented New Zealand with long-term economic challenges, alongside significant health challenges of COVID-19. In this context, Spark's purpose, to help all of New Zealand win big in a digital world, takes on a whole new level of meaning. The COVID-19 crisis has shown the vital role our products and services play in our customers' lives. Almost overnight, these services became the primary means of connection to the outside world for all New Zealanders, essential for learning, working and as an antidote to isolation. I'm personally very proud of our business, how our business has responded to the challenges of COVID-19, delivering for our customers who rely on us as a critical lifeline utility, modeling our values and remaining focused on our purpose in what were very difficult circumstances. Despite the challenges, Spark delivered another strong performance in FY '20. After 2 years of flat revenues, we returned to top line growth, with revenues up 2.5%. Combined with good cost management, this allowed us to deliver EBITDAI growth of 2.1%, placing our result above the midpoint of our range guidance at $1.113 billion. Net profit after tax increased 4.4% to $427 million, primarily driven by the growth in EBITDAI and lower tax expense. We announced an H2 FY '20 dividend of $0.125 per share, 100% imputed, bringing the total FY '20 dividend to $0.25 per share. FY '20 was the final year of our prior 3-year strategy. In this 3-year period, we transformed Spark from a traditional telco to an end-to-end digital services company. We are now a one-stop shop for our business customers, providing everything from basic connectivity, through to data analytics and cloud transformation. Back in 2017, we said we would do 3 things by 2020: Upweight our emphasis on wireless services and investment; better service price-sensitive customers through our multi-brand strategy; and thirdly, become the lowest-cost operator through radically simplified and digitized processes, products and services. In the past 3 years, we've delivered on all 3 of these areas. We have significantly improved our customer experience by shifting towards digital and self-service care options, freeing up our people to focus on more complex and meaningful customer care work. We've grown mobile service revenues and market share and continue to grow our wireless broadband product. This growth was underpinned by sustained investment in our network and technology, including the beginning of rollout of 5G wireless broadband services and more recently, 5G mobile services. The rollout of 5G will enable a step change in the number of customers we can support on our fixed wireless broadband. Our Skinny brand, which offers mobile and broadband to more price-conscious customers, has grown over 17% on that 3-year period and has received awards for its customer experience. We flipped to agile ways of working across the business, improving our speed to market, our customer experience and our employee engagement. And we've maintained cost discipline through simplification, digitization and automation right across the business. These achievements have allowed us to deliver industry-leading returns for our shareholders. We've paid consistent dividends and are ranked the highest of our international peers for total shareholder returns, with a compound annual growth rate of 13%. Spark has undergone a decade of intense digital disruption, and to keep succeeding the business must continue to adapt and transform itself in the years ahead. Our Board constantly assesses the trends and forces that will impact on our investment, on your investment, and we hope to guide and test company strategy accordingly. To do this well, the Board must be made up of people with diverse backgrounds and skill sets, from technology and industry experience to deep financial and commercial understanding. Today, shareholders will be voting on the reelection of Paul Berriman and Charles Sitch. Paul provides the deep industry and technical expertise our Board needs as well as a valuable international perspective. Charles is the chair of our Audit and Risk Committee and has significant strategic and industry experience. Both are essential to our discussions and robust decision-making, and I offer my full support for their reelection. I'd also like to acknowledge Ido Leffler and the contribution he has made to Spark during his tenure. As we announced last month, Ido has decided that after 6 years on the Spark Board, he will be stepping down at the close of this annual meeting to focus on the many other roles he currently fills. Ido has been a crucial member of the Board as Spark transformed from legacy telco to digital services company. And he has a huge, huge knowledge base and valuable insights, particularly around customer, innovation and new business models. And I want to say thank you, Ido, we will miss you. The Board has an ongoing succession program, focused on finding Directors with relevant skills and experience that complement the perspectives already represented around the table. With the resignation of Ido, we'll be looking at next steps in the context of this program and taking into account the skills required to deliver our new 3-year strategy. We also have a focus on diversity in terms of gender and cultural backgrounds, both on the Board and in Spark's senior management. Our target for Board and leadership gender diversity is a 40-40-20 ratio, and this refers to 40% men, 40% women and 20% of any gender. We set these targets and goals because there is clear evidence that greater diversity in key roles leads to better decision-making and better business outcomes. The current composition of our Board and our leadership squad is 50% female and 50% male, and women make up 39% of other senior roles. We're pleased with our progress on gender diversity and representation, but we still have some way to go. We are now looking to the next stage of our journey, and in September, presented to the market our strategy through to 2023. As the body elected by shareholders to protect and enhance the value of Spark's assets, the Board is responsible for setting strategy and has oversight of our 3-year planning process. We're engage in robust discussions with management around Spark's direction to ensure investment is going towards the things that will deliver the best outcomes for the company and for you, our shareholders. At its heart, this strategy is about accelerating the things we know will give Spark a competitive edge because they respond to the trends that are shaping our market and the evolving needs of our customers. This will help us to grow in both our established markets of wireless, broadband and cloud, and in future markets, where we see strong growth potential, including the Internet of Things, digital health and sport. Jolie will talk to the strategy in more detail shortly, but I wanted to touch on Spark's commitment to sustainability, which is a core pillar of our new strategy. We define sustainability at Spark as creating a positive digital future for all of New Zealand. Over the past year, we have reviewed and refined our approach, taking into account the need for New Zealand to recover and adapt in the context of COVID-19. The framework you see here sets out 3 focus areas. The first is creating a sustainable Spark. We want to continuously improve our own sustainability and performance. We know this is a baseline expectation of you, our shareholders, particularly our people and also our customers, and as I said, you, our shareholders. We are a founding member of the Climate Leaders Coalition. And in the past financial year, we have committed to the Climate Leaders Coalition pledge of a more ambitious science-based target, which will see us reduce Spark's emissions so they're in line with the global target of limiting global warming to 1.5 degrees. Our second focus area is to support New Zealand's economic recovery and transformation. As we recover from the shock of COVID-19, government will be looking to businesses like ours that have a scale to make an impact and support that recovery process. We'll do this through a targeted and sustained investment in new infrastructure, including continued investment in rural connectivity and in our 5G rollout, which will support New Zealand businesses to become more productive and more competitive. We're also focused on supporting Kiwi businesses to adopt the digital technology and skills they need to thrive in an increasingly digital economy. Our third focus is to Champion digital equity. The COVID-19 crisis brought New Zealand's digital divide into sharp focus. When society is suddenly reliant on digital channels for the basics of life, it can be stressful and frightening experiences for those who aren't connected. Unfortunately, this group includes some of our most vulnerable communities. The issue of digital equity is something Spark has been working to address for some time, particularly through the work of the Spark Foundation, but our work now has a new level of urgency. Our Skinny Jump-subsidized broadband product grew during COVID-19 -- the crisis to almost 10,000 connections, and we have an ambition to grow it further to a total of 35,000 connections by 2023. These targets and focus areas sit alongside the work of the Spark Foundation and Te Korowai Tupu, our Maori strategy. We will continue to update shareholders on our progress against each of these areas, which are vital for the long-term success of our business and our country. Spark, like any business globally, is operating amidst a high level of uncertainty, but we've built a strong platform for the year ahead. Today, I can reaffirm earnings and dividend guidance for the financial year ended June 30, 2021. EBITDAI guidance of between $1.090 billion and $1.130 billion; dividend guidance of between $0.23 per share and $0.25 per share, 100% imputed. I'm enormously proud of how the business has navigated the uncertainty of the past year. When Spark was most needed by our customers and New Zealand, we stepped up and delivered on our purpose. This is a testament to Jolie's leadership and to the capability and commitment of all of Spark's people. On behalf of the Board, I'd like to thank Jolie and the team for their hard work and dedication. But I'd also like to acknowledge and thank my fellow Directors and to you, our shareholders, for your support over the year. [Foreign Language] I now invite Jolie to address the meeting.

[Foreign Language] Thank you, Justine, and good morning, everyone. I recognize this is a very different format for the AGM this year, but we do value opportunity to engage with shareholders virtually today, and we look forward to your questions. In my section this morning, I'm going to cover 3 areas: firstly, our response to COVID-19; our financial performance and highlights from FY '20; and Spark's strategy to FY '23 and the role we will play when New Zealand rebuild as a more productive digital nation. I'm sure that many of you have personally been touched or impacted in some way by COVID-19 pandemic, and it's fundamentally changed how we work, how we learn and we connect as a country. So while Spark's performance was not as affected by the COVID crisis as businesses in more exposed sectors, we're not immune, and we did see some impacts materialize in the fourth quarter of FY '20. Travel restrictions and border closures saw our higher-margin mobile roaming revenues, which account for approximately 5% of our total mobile revenues, all but disappear. During lockdowns, our retail stores closed, we reduced revenues from this channel. And while broadband usage increased significantly, this didn't result in higher revenues because the majority of our customers are already on unlimited plans. And as part of our financial support package, we did not charge overage fees for those on data capped plans. We did see some benefits as well. For example, the increased demand for collaboration products to support remote working. But overall, COVID-19 had a total negative earnings impact of approximately $25 million in FY '20. There were also significant impacts on our people and our customers. Spark is a lifeline utility, and so must maintain critical services during emergency situations. As COVID-19 arrived in New Zealand, we quickly put in place protocols to keep our people safe and our critical services team members operating. The move into Alert Level 4 lockdown saw a huge shift from physical to digital across the country, and a corresponding impact on our network. Our technology teams monitored the network continually and increased capacity where it was needed. This approach, alongside our years of sustained network investment, meant that our network performed exceptionally well, so despite a 40% increase in broadband traffic and a 60% increase in calling volumes at peak. Our customer care teams transitioned quickly to supporting our customers from home, and we work with some of our larger business customers to help their people do the same. In some cases, this meant standing up new call centers, implementing digital transformation projects, which normally would have taken months, and we did that in a matter of weeks. Our retail stores were closed under Alert Level 4, but we repurposed 39 retail stores to act as emergency distribution centers. That allowed us to supply customers with essential hardware such as phones and modems through a contactless pick-up system. And for those Kiwis not connected, we ramped up our rollout of not-for-profit broadband service, Skinny Jump, and Justine touched on that earlier, almost doubling the number of households using this service with close to 10,000 connected at the end of FY '20. So we move now to our operational performance. As Justine mentioned, despite the unprecedented challenges in the second half of the year, Spark delivered what we said we would. We announced a strong financial result for FY '20 with EBITDAI growing 2.1% to $1.13 billion. We will now touch on a few of the key highlights that underpin that result. Firstly, the successful launch of our Endless data mobile plans and strong pay-monthly connection growth really helped us drive growth in mobile service revenue, and that was up 3.9%. And that's despite the loss of roaming revenues in the last quarter. The launch of our cloud and business transformation consultancy, Leaven, and the continued strong performance of CCL helped us grow cloud, security and service management revenue by 10.8%. We also grew wireless broadband connections by 16,000 over the year. Now that's fewer connections than we had aimed for and then the result of self-imposed limits on sales, both in the lead up to Rugby World Cup and when we first entered lockdown. However, the excellent performance of our mobile network during Alert Level 3 and 4 has given us the confidence to accelerate our wireless broadband growth. We've also continued to improve our customer experience, which was a big goal for us as we transition to agile. This improvement is largely the result of better digital service options, which allow customers to solve issues quickly and without the need to call us. In FY '20, monthly customer care volumes reduced by 28%. We also saw an 18% increase in our online chat interactions, and our chatbot, Ivy, is now resolving more than half of these chat interactions, which further improves resolution times. We continue to make great progress with our 5G rollout, transitioning our customers to more modern technologies that will help them keep connected into the future. So in November, we launched New Zealand's first commercial 5G wireless broadband service into 5 South Island communities. And in July, we launched 5G wireless broadband and mobile in Palmerston North. Since the end of FY '20, we've also launched 5G in downtown Auckland. The 5G launch follows 2 years of heavy investment into our network, including 150 new cell sites and the extensive rollout of 4.5G. So part of our network investment involves moving off our legacy public-switched telephone network, or PSTN. This is end-of-life and will not continue to work in the future. So we've now decommissioned 33% of our PSTN switches, and in FY '20, a further 140,000 customers have moved off the PSTN. We've also made some great progress on employee engagement during the year. Our employee NPS was up 25 points to plus 66, and our agile maturity increased to 90% of our squads at 3 or 5 or above. So if we turn now to the future and our new 3-year strategy. Fundamental to our new strategy is our capability-centric approach. We've identified 4 core capabilities that will make Spark truly world class: Firstly, simple intuitive customer experiences. Our customers are looking for Uber-like digital experiences, and they will move to brands that make their lives easier. So we need to give them an experience that just works, which means continuing to simplify Spark and the products and services we offer. Secondly, we need to deeply understand our customers and show up in a way that is timely and relevant. We will use deep customer insights to tailor our products to meet customer needs and improve our marketing, with a more sophisticated use of data, artificial intelligence and machine learning. Just one example. At any point in time, only 2% of consumers are actually looking to buy post-pay mobile. But traditional advertising targets a big proportion of the country to get their message across. So the companies who win in the future will be the ones who use the data they already have to be much more targeted and personalized in their marketing and product development. Thirdly, we're building smart automated networks, with a focus on resilience and technology evolution. We build resilience by investing in the next phase of our optical transport network and migrating customers to more modern technologies. We'll also invest in the next-generation of our mobile technology through our 5G rollout, allowing unconstrained capacity in wireless and responding to the increasing demand for data from our customers. So we aim to have 5G rollout to 5 to 7 locations by the end of '21. Growth mindsets is our fourth capability. And this is really about creating a culture, where our people lean into challenges, they champion the customer and they adapt at pace. We want a culture defined by its engagement, diversity and inclusion. We will support the growth of our people as individuals building the leadership and specialist skills we need to support our strategy. So these capabilities will give Spark a competitive advantage in our established markets of wireless, broadband and cloud services. We still see a big opportunity in wireless broadband, and 5G will allow us to grow a number of customers on this product even further. In fixed broadband, we will maintain market share using our multi-brand approach to appeal to different segments and differentiating with value-added services. Our bundling of Sky Sport Now with Spark Sport for selected broadband and mobile plans is a great example of this. We still see a lot of untapped potential in the cloud services market, and the arrival of COVID-19 has accelerated that trend amongst our business customers towards the cloud as a new way to access these services and collaboration tools. We've also chosen to focus on 3 future markets, where Spark has a clear competitive edge and where there is a significant potential for growth: the Internet of Things, or IoT, digital health and sport. So our ambition is to become New Zealand's Internet of Things platform partner of choice. Our rollout of 5G and our extensive B2B relationships nationally make this a logical extension of our current suite of products and services. We see a clear opportunity to support the digital transformation of the New Zealand health care sector. This is a $20 billion-plus industry that needs digital enablement. And through our existing Spark Health vertical, we already have relationships across health, biotech, pharma and health insurance. We're now the largest provider of cloud services to the New Zealand health sector. Our focus will be to accelerate this growth further and to move beyond connectivity and cloud services to supporting broader digital transformation. Spark Sport helps us own entertainment in the home and differentiate us more from our traditional competition. The platform has a range of sports fixtures, and later this month will broadcast the first cricket game in our 6-year partnership with New Zealand Cricket. So where do we aspire to be? So by FY '23, we want to be primarily wireless, digitally native and a leading cloud custodian. We want 5G and IoT deployed nationwide, delivering unconstrained capacity. And we want a culture defined by its engagement and inclusivity, and with the skills we need for the future. We will have made it easier for our customers to work, learn, connect and be entertained. We will have enabled businesses big and small to transform and grow through technology. We will have invested in our people and built a high-performing, inclusive culture that attracts the best talent. And we will have helped to lift digital equity, playing our role in creating a fairer and more inclusive New Zealand, and delivered consistently strong returns for you, our shareholders. So I'd like to close by echoing Justine's sentiments about the past year. It's certainly one we'll never forget. There is no doubt that 2020 was a challenging year, a year that highlighted the critical importance of digital connectivity to New Zealand. There has been a seismic acceleration of both public and private services online, and we don't see that abating. Spark has a significant role to play in helping New Zealand adapt to this change and in helping businesses to leverage digital to grow. So I'm very proud of the outstanding job Spark people have done for our customers, navigating their way through uncertainty and significant challenges to deliver day after day. So thank you also to the Board, our customers and you, our investors, for your continued support. [Foreign Language]

We now turn to matters requiring resolution as outlined in the Notice of Annual Meeting, with a poll to be called on each resolution. Each of the resolutions 1 to 3 set out in the Notice of Meeting are to be considered as ordinary resolutions. To be passed, they require the approval of a simple majority of the votes cast by shareholders entitled to vote and voting on the resolution. There will be an opportunity for shareholders to ask questions on each matter. There will also be further opportunity to ask general questions following the resolutions. Questions that relate to personal customer matters will be directed to our Investor Relations team, who will address these directly following the meeting. [Operator Instructions] For shareholders attending via the online portal, once you've clicked on get voting card and registered as a shareholder, you should also be able to vote in relation to each resolution. You can edit your voting card at any time up to the close of the meeting. Remember, you can also call the helpline anytime for assistance. Once you've completed your online voting card, submit the card to cast your votes. For those shareholders voting via phone, the operator will provide instructions and guide you through the voting process at the appropriate time during the meeting. Firstly, we turn to matters relating to the appointment of Deloitte as the company's auditor and authorization of the Directors to fix the auditors' remuneration. KPMG has been Spark's auditor since 2002. And while we have been extremely satisfied with their services, given the duration of service, the Board believes that now is the appropriate time to rotate external auditors. The appointment of Deloitte will bring in another Big 4 audit firm with broad experience in dealing with large and complex New Zealand clients as well as a team with deep industry experience in the telecommunications sector and experience working with New Zealand-listed companies. The Deloitte audit team for the financial year ended June 30, 2021, will be led by Mr. Jason Satchurski and Ms. Melissa Collier. The motion seeks shareholder approval to appoint Deloitte as auditor, and that the Directors be authorized to fix the auditor's remuneration. Spark's statutory audit fee for the financial year ended June 30, 2021, is $1,050,000. I propose that Deloitte be appointed as Spark's auditor, and that the Directors are authorized to fix the auditor's remuneration. Are there any online questions for the Board coming from the motion?

There are no online questions at this time.

Thanks, Alastair. Are there any questions on the phone.

Chair, I can confirm there are no questions on this resolution via the phone.

Thank you. If you could please now submit your vote on your electronic voting form, please select for, against or abstain. Thank you. [Voting]

The next resolution concerns the reelection of Paul Berriman as the Director of Spark. Paul is retiring in accordance with the New Zealand listing rules and offers himself for reelection. The Board recommends Paul to you as an Independent Director of Spark and unanimously supports his reelection. I invite Paul to address you. And I note that while Paul's address has been prerecorded, he is attending this meeting live and is available to answer your questions. I now propose that Paul Berriman...

[Foreign Language] Good morning, everyone. Fellow shareholders, I'm sorry that I cannot be there in person this year. I live in Hong Kong, which has been my home for 40 years. For the last 18 years, I've been Group Chief Technology Officer at PCCW, the largest telco and media company in Hong Kong. However, I started this year having more time for my Board and advisory roles as they are wound down to 2 days a week at PCCW moving from my full-time role. Over my 40 years in the industry, I'd like to think I have learned a thing or two about telecoms and media and have the experience and know-how as well as the scars to demonstrate I can and have provided sound advice and counsel within the Spark Board. I bring technology and operational expertise with international experience and perspectives, including network performance, security and risk. To that, I'm also an investor and Board member of another mobile telco in South Africa, also independent from PCCW. I also continue to represent PCCW on a number of global 5G and telco industry alliances, alongside other CTOs from telcos around the world. In my time on the Spark Board, we have successfully guided the company through some massive changes. I think our balanced approach, in effect, is a result of our diverse skill sets, mine being most technical and operational in telco and media. I have not missed a Board meeting in the whole time I have been a member. And during this time, we have seen the company through 4G, IT platform reengineering, agile organizational transformation, TV and sports, 5G and, of course, the recent response to the COVID crisis. I believe that Spark has a great future as we move into this new era of 5G and the benefits it can bring to society and industry. I hope that you've been happy with the way I've been able to contribute to Spark's progress to date. With that, I thank you for your trust and hope you will continue to support me with your vote today. [Foreign Language] Thank you.

I now propose that Paul Berriman be elected as a Director of the company. Have we received any online questions concerning the motion relating to Paul's reelection?

There are no online questions at this time.

Are there any questions on the phone?

Chair, I can confirm, there are no questions via the telephone on this resolution.

Thank you. If you could please now submit your vote on your electronic voting form, please select for, against or abstain. Thank you, again. [Voting]