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

[Foreign Language] Thank you for joining us today as we share Spark's half year results for the period ending 31 December 2021. So I'm pleased to [ see ] a strong first half performance in it despite the ongoing COVID-19 disruptions that characterized the second half of the 2021 calendar year. We achieved a market-leading result in mobile without the benefits of global roaming revenues and stabilized our broadband base, with wireless broadband growth continuing to maintain our margins as we compete vigorously in a price-driven market. Businesses continue to digitize, growing our cloud, security and service management revenues. And our investments in future markets like digital health and IoT are paying dividends. We have been able to deliver these results through a combination of consistent execution, the benefits of our 3-year strategy starting to flow through to better customer outcomes and the market differentiation and the talent and adaptability of our people. [ Our pivot towards ] digital transformation is only going to accelerate from here. And we're well placed to support this journey, particularly through the significant investments we're making in the critical infrastructure that underpins our digital economy. Today, we'll share more about these investments, including our intention to establish Spark TowerCo. This morning, I'll take you through the overview of the results, and then I'll hand to Stefan to speak to the numbers in more detail before we move to Q&A. With that, now let me turn to Slide 4 for our financial snapshot. So we are pleased to report first half revenue, EBITDAI and NPAT all on growth. Revenue increased 5.2% to $1.89 billion, and that was driven by a standout performance in mobile. This led to a 7.6% increase in EBITDAI to $538 million. NPAT increased 21.8% to $179 million, driven by that growth in EBITDAI, a reduction in finance expense and lease liability interest and lower depreciation and amortization. We have declared an H1 FY '22 dividend of $0.125 per share fully imputed, and that's supported by our free cash flow of $183 million in the first half. We expect to be around the top half of our FY '22 EBITDAI guidance range of $1.13 billion to $1.16 billion; and confirm our total FY '22 dividend guidance of $0.25 per share, 100% imputed. I'm now going to move to the performance of our established markets, as outlined on Slide 5. So mobile service revenue grew 5% to $441 million, with Spark the fastest-growing mobile provider by both connections and revenues, a result we are particularly proud of. Growth in ARPU was underpinned by customer demand for data and precision marketing, with 48% year-on-year growth in our Endless plans. And while broadband revenue decreased 3.9% to $324 million in a highly competitive price-driven market, the launch of our new, simplified broadband plans stabilized our base at 702,000 connections. And our gross margin was maintained, as the benefits of wireless broadband growth offset higher fiber input costs. So we're building on this momentum with further competitive wireless broadband offers already launched in the second half. Our accelerated 5G rollout is progressing to plan and supporting future growth in both mobile and wireless broadband with 10 additional locations launched since the conclusion of FY '21. We also welcome the government's announcement that it's reached agreement with Maori on spectrum allocation, which will pave the way for the C-band spectrum auction. Cloud, security and service management revenues increased 3.2% to $224 million. That was driven by demand for public cloud and growth in the health sector. Overall, that growth was lower than we would have liked it to be, with the shift in portfolio mix towards public cloud continuing to put pressure on our [ IaaS ] pricing. And our service management growth trajectory was impacted by access to cloud sites due to COVID. We have a solid second half pipeline in place for service management. And while Omicron will continue to create disruption, we believe it should be more manageable in these new settings. The material upgrade of our Mayoral Drive exchange and the construction of a new data hall at our Takanini data center are underway, with up to 8 megawatts of capacity already contracted. These are multiyear investments that will support future cloud growth and the development of multi-access edge compute capability. So I'm now going to move to our strategy update and our progress in building the 4 core capabilities that will differentiate us in the market, as outlined on Slide 7. We're making strong progress delivering simpler, more digital and more intuitive customer experiences. We've removed 38 legacy mobile and broadband plans during the half, and we've moved 66,000 customers in the process. We're piloting a single digital interface across our frontline teams and our customers, which will improve speed of resolution and customer experience. And enhancements to our [ Spark App ] functionality are also supporting self-service more. In deep customer insights, we continue to scale a more sophisticated use of data and artificial intelligence across our business. We can already see the benefits of our [ service ] precision marketing and our mobile service revenue growth because -- as machine learning has enabled highly targeted campaigns and a 16% improvement in both conversion and marketing efficiency. It's the combination of these 2 capabilities, simple intuitive experiences and deep customer insights, that is particularly powerful and will ultimately differentiate Spark by enabling us to better understand customer needs and to deliver them -- on them with a frictionless experience. We continue to invest in smart automated network that underpins our success in the market with 5G launching in 10 locations, as I've noted; rural connectivity expanding; the optical transport network 2.0 build now more than 50% complete; and an acceleration of our shift from legacy to modern technology, with a target of 50 PSTN switches to be decommissioned by the end of FY '22. As we build our high-performance culture, we're continuing to create a growth mindset across our business. We've delivered our highest people engagement during the half. And we continue to invest in our people's learning and development and well-being while creating a place where everyone feels they can belong. We're on track to deliver our FY '23 operational aspirations across all 4 capabilities as well as our FY '23 revenue growth aspiration of $30 million to $40 million. We're also making solid progress towards the collective $95 million to $115 million of cost efficiencies we aspire to. So as we look at our future markets now, on Slide 8, where momentum is building in support of long-term growth. And IoT connections grew 31% to 623,000, supporting strong revenue growth with uptake across metering, transport, emergency services, smart environments and asset management. Our enhanced platform and product solutions in smart environments with water, soil and air quality management have been developed and will support further growth in the second half. Spark Health's revenues grew 25%, excluding procurement, or 51% if you include it, as the health care sector continues to digitize. Spark Health won the first national contract for digital services under the newly established Health New Zealand, and we're aiming to onboard [ vendors ] and customers to its new digital health platform by the end of FY '22. Our subsidiary MATTR also played an important role in the Ministry of Health's creation and implementation of COVID-19 vaccine passes for both domestic and international settings, which have been a critical enabler of increased [ freedom for ] New Zealanders. Spark Sport revenues grew despite the sporting calendar being significantly impacted by COVID-19, which is expected to continue for some time. Future revenue growth is likely to be slower than originally expected. We are considering the implications of the loss of Premier League. And we're accelerating our strategic partnering options to drive improved returns. We are on track to deliver our overall FY '23 future market revenue aspirations through continued momentum in health and IoT. So if I move now to sustainability on Slide 9. We are pleased to see continued improvement of our ESG performance during the half, which is a strategic priority for Spark. Our science-based emissions reduction target requirements have been embedded into our new electricity purchasing agreement, and we're in the process of designing an emissions reduction and energy efficiency plan alongside this. We've made particularly strong progress in the -- on our inclusivity, sorry, with Skinny Jump connections up more than 5,000; and our ethnicity data capture among our own people up 12 percentage points, which will enable us to do more targeted interventions to improve representation in our business. And we launched the Beyond Binary Code earlier this week. This is an initiative to improve gender representation and data collection online for Kiwis of gender-diverse backgrounds. So a key focus for the remainder of the financial year is strengthening our supply chain risk management processes and aligning our assessment and audit processes with our global industry peers. So looking at our indicators of success on Slide 10. So we're on track to or exceeding the vast majority of those meters. As noted earlier, improvement is needed in our cloud, security and service management revenue growth in the second half. We also experienced some delays in the development of the health digital platform, with the full launch now to take place in the second half. We are pleased, however, with the quality of the platform itself. And we already have a number of health providers engaged in pilots and onboarding discussions. I'd now like to share more about the next stage of our infrastructure asset review. So during FY '21, we commenced a review of our portfolio to focus [indiscernible] investment on our most strategically important assets. As you know, since that time, we've announced a series of investments in our critical infrastructure, including accelerated 5G rollout, a material upgrade of our Mayoral Drive exchange and a significant increase in capacity at our Takanini data center. We continue to optimize our investment in assets that are important to network resilience. That includes the Southern Cross NEXT build, which is on track despite COVID disruptions, with the final equity contributions expected to be paid on April '22. Today, we have announced plans to establish Spark TowerCo as a subsidiary to improve the performance, utilization and capital efficiency of our passive mobile assets. We can see globally that shared ownership models are an effective way of improving returns from infrastructure assets that are not critical to competitive advantage. And mobile active assets are what drives our competitiveness, including our core network and radio equipment. These assets leverage our spectrum holdings, provide differentiated customer experiences and support our wireless aspirations. Our passive mobile assets, on the other hand, are the physical towers that support this active equipment. By separating these assets into a subsidiary model, we can improve utilization through coverage expansion, future service innovation, increased tenancy while still delivering efficiencies in build, maintenance, technology and lease costs as we expand mobile coverage across Aotearoa. So we intend to commence the process during the second half of FY '22 to explore the introduction of third-party capital into Spark TowerCo. However, there's no certainty that a transaction will proceed. Should we introduce that third-party capital, we intend to retain a shareholding and will be a key anchor tenant, with appropriate agreements in place on arm's length terms for operations and services. There will be no change for our customers. And we'll continue to invest in modernizing our mobile network and improving coverage for Aotearoa. So we'll provide more information on Spark TowerCo in the second half of FY '22. So when I stand back and look at our performance during the half, I'm really pleased to see that our 3-year strategy is delivering [ annual ] returns while also laying the foundation for future growth. We've set up clear ambitions to deliver that growth by focusing on a set of core capabilities that would differentiate us in the market. And we're now seeing the benefits of this strategy flow through to strong momentum in our established markets, while future markets are now making a more significant contribution to our revenue growth. We're simplifying our business; and delivering better, more digital customer experiences. Our investment in data and AI is delivering a higher return for our marketing investment, and it's further improving customer outcomes. We're making a significant investment in New Zealand's critical infrastructure and opening up new commercialized opportunities in that process. Our plans to establish towerco will improve the utilization and cost efficiencies of our passive mobile asset base while allowing us to explore the introduction of third-party capital. We continue to focus not only on accelerating -- excelling at what we do but also how we do it. Our ESG performance continues to improve as we improve the sustainability of our own operations, support the digitization of our [ economy ] and champion digital equity and inclusion both within Spark but also across Aotearoa. And as we have delivered these market results, we've not lost sight of what's most important to our success, and that's our people. We continue to build a high-performance culture and invest in the capability and well-being of our [ Sparks by now ] while creating a workplace where all people feel they can belong. So I'd like to close by acknowledging and thanking our people, who despite working in a variety of different COVID settings during the half, turned up each day to keep our customers connected at a time when this was more important than ever. So I'm now going to hand over to Stef to talk through the financials in more detail.

Thanks, Jolie. And morena, everyone. So I'm now going to step through the key financial summaries of what's been a really strong start to the year, so let's start with a summary of the key financials as set out on Page 17 of the results presentation. Spark generated revenues of $1.89 billion, up $94 million or 5.2% compared to the prior year. EBITDAI was $538 million, up $38 million or 7.6% on the prior year. Net profit after tax was $179 million and up $32 million compared to the prior year. And free cash flow increased $70 million to $183 million, and as a result, we've confirmed the H1 dividend of $0.125 per share fully imputed. So I'll now go through the key elements of the results in a bit more detail just to provide some more color. So let's start first with revenues. The $94 million increase in revenue was primarily driven by 3 things. Firstly, our mobile revenues grew by $27 million, and within that, service revenue grew by $21 million or 5% and above our 2% to 4% aspiration. This is really pleasing and reflects strong customer demand for data across all of the Spark brands and the benefits of our investment in deep customer insights enabling precision marketing. During the half, we saw the pay monthly base grow by 61,000 connections, with continued strong upsell from our prepaid base. Our pay monthly ARPU grew by $0.20 as we saw 220,000 more customers join our Endless plans. And data usage increased 25%. Prepaid ARPU increased by $1.89, with strong growth in Skinny and where customer data usage was up 33%. The second driver of revenue growth was in procurement and partners, which increased $65 million. During the period, Spark Health was successful in winning a large software licensing contract with the newly established Health New Zealand, which is important in securing strong sector relationships and creates ongoing opportunities to sell other products and services. The third driver of the overall revenue growth was our continued growth in established market of cloud, security and service management combined with the revenue growth momentum in the future markets of health, IoT and sports. During the half, we saw ongoing growth in cloud as well as 51% revenue growth in health, 39% in IoT and continued growth in Spark Sport. It's really pleasing to see future markets now making a significant contribution to revenue growth. As Jolie noted, our revenue growth in cloud, security and service management of 3.2% is lower than our aspiration, so while cloud growth of 5% has been driven by ongoing demand for public cloud, we're seeing slower growth in security than we expected as well as COVID restrictions impacting our ability to get critical team members on to customer sites. The demand for cloud and the pipeline for service management work remained strong in the second half. And lastly, just a reminder: that the prior period included a nonrecurring $17 million provision for wiring and maintenance refunds that we're now cycling. So as revenues have grown, so too have costs. Operating expenses grew by $56 million or 4.3%. And the primary driver was a $59 million increase in procurement and partners expense, in line with the increase in revenues. Excluding the cost increase for procurement and partners, costs actually remained broadly flat, with declines in mobile and voice being offset by growth in cloud, security and service management as [ low-margin ] public cloud becomes a larger part of the portfolio. We've seen some impact on our business from inflation but believe we're well positioned to manage through these increases. Many of our supply contracts are multiyear deals with agreed pricing, so inflationary pressure phases in over time. Labor costs during the half were up $7 million compared to the prior period. And that was driven by higher salary costs as we bring on additional people to support our growth businesses at MATTR and Spark Health and our investment in data and analytics but also the need to manage talent scarcity in a tight labor market. We continue to drive our cost-out and efficiency programs with the same level of discipline that we always have, as this program ensures that [ we balance ] our business in a considered manner and drive efficiency into those areas that are stable or in decline, to fund the investments we're making into new growth areas while also offsetting inflationary pressure. We continue to see opportunities for cost efficiency by growing our wireless broadband base, driving customer interactions to digital channels, increasing automation and removing duplication from across the business. Moving now to EBITDAI, which was $538 million and up $38 million or 7.6% against the prior period; and with the main driver being the strong revenue growth, particularly in mobile. Also impacting the result was the fact that the prior period included a nonrecurring provision for wiring and maintenance of $17 million, which we're cycling in this period. There was also a one-off gain within the period relating to the renegotiation of property leases. However, this was largely offset by similar one-off items in the prior period, where we also had lease adjustments and bad debt provision releases. As we look ahead to the second half, we believe the current momentum we have will result in EBITDAI around the top half of the guidance range. We expect to see our strong mobile performance continue, and we've only assumed a modest increase in roaming revenues for H2. However, as we look ahead to FY '23, with the opening of borders, we expect this to provide a good tailwind. We expect growth in cloud, security and service management to improve. And while the impact of Omicron is difficult to predict, the current traffic light settings make access to client sites a lot more manageable. We continue to drive cost efficiency to underpin our earnings and provide flexibility. And we'll continue to invest in future growth businesses. The growth in EBITDAI has also translated into NPAT growth, which was up $32 million or 21.8%. Our finance expense reduced by $6 million, as we had lower lease interest following changes to property leases and [ lower ] interest rates. And depreciation and amortization reduced by $5 million, reflecting an increase in FY '21 of the value of assets that were fully depreciated but also lower customer leases. We continue to expect total depreciation and amortization to be broadly flat on FY '21. So shifting now to CapEx, which was $218 million for the half, up $28 million or 14.7%. Spend of $218 million is in line with our full year expectation of around $400 million. And the profile of spend is broadly consistent with the prior year, where we typically spend around 55% in the first half and 45% of the total in the second. Spend was focused on the accelerated rollout of 5G and investment in IT systems such as the replacement of our ERP. Looking forward, we continue -- we expect to continue to invest strongly in infrastructure assets, specifically 5G mobile and data centers, with the build at Takanini now underway. When we look at free cash flow. In the first half, it was at $183 million and was up $70 million on the prior year. This was primarily driven by EBITDAI growth; and improved working capital, which was $39 million lower than H1 FY '20. The working capital improvements have been favorably impacted by the timing of receipts for large procurement deals which will be paid for in the second half. We remain focused on driving ongoing improvements in the space and continue to see good opportunity for improvement. As we look ahead to H2, we remain focused on delivering free cash flow of $420 million to $460 million. Second half free cash flow is expected to be significantly greater than the first half, as around 55% of EBITDAI is weighted to H2 versus around 45% in H1, whereas CapEx, [ as far as the opposite hand, were ] 45% incurred in H2 versus the 55% already spent. We've retained the dividend reinvestment plan, [ as it's a ] useful capital management tool. And it will operate at a 0 discount. Shares issued under the DRP will be issued at the prevailing market prices determined around the time of issue. If we look at net debt. We saw an increase in our debt levels of $77 million compared to H1 FY '21. The increase was driven by investments into Southern Cross NEXT; and a top-up for the dividend, which is not quite funded out of free cash flow yet. The prior period saw greater DRP participation, but with improving debt headroom, the discount was removed and participation has reduced. Our reported net debt-to-EBITDAI ratio was 1.2x. And we remained within S&P's A- credit rating, with sufficient headroom to execute on our strategy and fund our investments. So lastly, I'll now confirm guidance for FY '22. Our EBITDAI guidance remains unchanged at $1.3 billion to $1.6 billion (sic) [ $1.13 billion to $1.16 billion ]. However, we expect to be around the top half of the guidance range, reflecting the strong business momentum delivered in the first half. There's no change to the CapEx guidance and it remains at around $400 million. Total FY '22 dividend guidance of $0.25 per share fully imputed is also unchanged. And so that now concludes the financial summaries, so we'll open the line for questions. And I'll pass back to the operator. Thanks.

[Operator Instructions] We have multiple questions in queue. Our first telephone question is from Arie Dekker from Jarden.

Congratulations on a solid first half. So first question, just on the free cash flow aspiration for FY '23. You're obviously a decent period -- a decent way through the 3-year period now. Are you still confident in your ability to deliver that in FY '23? And, I guess, what are the things that will sort of support the growth of the $420 million to $460 million base in FY '22?

So yes, we remain committed to the $500 million free cash flow aspiration. And looking forward, the drivers remain consistent with what we've talked about previously, so we still see opportunities for ongoing EBITDAI growth, managing our CapEx really tightly and continuing to drive improvements in free cash flow. We think a -- sorry, not free cash flow, working capital. And we think the combination of those 3 things puts us in line with that aspiration.

Yes. And so on the investment and -- I mean because obviously you're accelerating 5G, but on that investment and Takanini and also at Mayoral Drive, you mentioned multiyear, so what you're sort of saying is that that's going to be staged over sort of 2 or 3 years. Is that right?

It is phased over multiple years. It obviously has peaks and troughs as we stand things up, but if you -- I guess, if you stand back from it: We're confident we can manage that spend within that ongoing CapEx range of 10% to 11% of revenues. We would -- our intention is to manage it within that envelope.

And Arie, if you think back to -- over the years, we've always had a number of significant programs that sit within our CapEx program, whether that's been reengineering, new trans-Tasman cables, converged comms. We've always had significant elements within that and managed that within the envelope, so I guess this is no different to that [ in terms of how ] we're thinking about it.

Sure. Just on fixed wireless, you made some further progress in getting the mix up there. And it's now at 26.5%. I mean obviously it's pretty dynamic, what's happening in that space. On your side, you'll -- by the end of this year, you'll have pretty good critical mass in urban areas with 5G. On the other hand, the Com Com is putting a bit more focus on the market of -- marketing of alternate technologies. And you've got Chorus, I guess, increasing their anchor performance and also introducing the [ 50/10 ] product. Can you just sort of talk a little bit about what you're thinking, as you've previously talked about a 30% to 40% range for fixed wireless? Just what you're going to be doing over the next sort of 12 months; and where you're sort of sitting, with what's happened in the industry, on that 30% to 40% range.

Yes, sure. So if we stand back from our own performance, as you touched on, we've seen an improvement in that in wireless in the first half, but we've also, since the end of that half, relaunched further wireless plans, which we're seeing good takeup of. The coverage and increasing capacity on 5G as we roll out through that, so 10 new locations in the first half, are continuing to progress that. And if you look ahead to FY '23, ultimately we're looking, by the end of calendar, with 90% or high-90% coverage across population. So the base is growing with the opportunity. If we look at the range of plans that are there, there are already low-priced fiber plans in the marketplace that compete there, so we don't see that this initiative creates a substantial shift in competition. Obviously it is a competitive market, as we've touched on in our own overview of the results and what we see, but we believe from our point of view that the -- both the network moves that we're making, the experience shifts we're making in journeys but also the pricing in which we're looking in our plans will enable us to be at that low end, as we've said, indicated, I think, last year, around that, the lower end of the 30% to 40%. And I don't think anything has changed from our perspective in relation to that.

No, that's great. Just a couple more. Just quickly, on labor costs, obviously you do highlight the ongoing moves you're making on the automation and that sort of thing. I mean, on a net basis -- and there's probably reasons for it, but can you just sort of talk about what's happening in labor costs; and whether you do -- as pressures sort of eased, whether your expectation is that on a net basis you can deliver sort of labor cost savings from here over the next 18 months?

Yes. So I think maybe we'll just start with the context of where -- what's driven the increase in the first half. So we've continued to invest in our growth businesses, MATTR, health, but also in our capability around data and analytics. So that's been a part of the driver. Obviously the labor market is very tight at the moment. It's no [ secret on the call ] the great resignation is in flight, and so we've been very mindful of that. That's had an impact on our labor costs, but when we look forward, we still see plenty of opportunity. There is a lot of work that we have and plan around looking at automating some of our journeys, driving better digital experiences for our customers, which only helps encourage more of that volume online. And so we are absolutely committed to driving those ongoing efficiencies and automation to improve our labor costs as we look ahead.

I think probably [ the other area ] of automation is also in network and technology in terms of our own networks. And you can see the work we're doing to invest in whether that's OTN or others, access and aggregation. And so all of those things lead us to put in more automation that enable things to be provisioned, for example, in a much simpler way. And we're also reducing the amount of technologies that we have in place [ and that therefore are ] supporting. So all those things can contribute to the points Stef made as well in terms of a desire to make sure that we maintain that labor cost in line with the business that we are effectively.

[indiscernible], yes.

So we will invest in growth where we need to, but we will also make sure that we are being as efficient as we can in other areas.

Yes.

So, I mean, last one. And I'm sure others will have more questions on this, but just towerco. I mean it has been a year since you started the review. So just sort of interested in what additional color you can provide on a couple of matters. So I guess the first one is do you expect, like, interest in the towers to be enhanced by collaborating with, say, Vodafone and/or 2degrees and putting a transaction together? Or are you very much expecting that you would be doing something standalone from the other industry players in NZ?

Well, we have announced the stand-alone Spark TowerCo [indiscernible]. That's what we're working on at this [ basis, but I guess ]...

So that is the intention, yes. So yes. So you've actually made that decision that you will be progressing that standalone.

Yes.

Yes, okay. No, good. And then just in terms of, I guess, sizing the earnings stream that this towerco could deliver, is there any color you can provide on that?

It's too early in the process, Arie, to get into that level of detail. We can confirm obviously that we're going to look to commence the process in H2. And when we've got more meaningful information this year, we'll obviously do it at an appropriate time.

The next telephone question comes from the line of Kane Hannan from Goldman Sachs.

[ Nice to get a question ] [indiscernible]. Maybe just starting on the mobile GP margin. [ This was the ] strongest first half margin you guys have done, and that's without the roaming revenue, so I'm just hoping you can step through some of the drivers of that. Is that the service revenue momentum, the network automation you touched on? And then how do I think about the seasonality in mobile GP margins, which has typically been second half skewed?

So I think, if you think about what's driving that: So obviously it's been in growth in our -- both postpaid or pay monthly and also prepaid, but postpaid -- and both of those [ category fees ], what you're seeing is that continued drive for greater data and more usage on the network. So that's driving people up to broader plans. We've also -- through the AI and data work, the precision marketing has really helped us to be much smarter around where we're putting those plans [ and run off ] people at the right times. And that's improved conversion. And then -- sorry. What was your other question?

Seasonality...

Oh, seasonality. So normally what you see is...

We see some upfront acquisition costs prior to the Christmas period, and then you see the benefit of those customers coming on in the second half. And sort of that drives some of that [ shift behind that ] you're talking about in the margin.

Yes, perfect. Maybe just prepaid mobile's, just hoping you can talk about obviously a lot of ARPU expansion in the half. Is that a sort of sustainable number going forward, that $16 price? Or just are there any things I should be thinking about forecasting that out?

I think that's just people looking for more data. Again it's just another different form of payment, I suppose. What you do have, and it's been well, I guess, discussed previously, is -- without travelers and other maybe shorter-term people in the country, sometimes in prepaid that can result to kind of a reduction in the ARPU because obviously [ they're shorter period of time ], et cetera. What you're seeing here is probably more underlying and reflective of the domestic economy and people continuing to seek out data.

Yes. And I think that in prepaid we saw over 30% increase in data usage. So that's -- that trend, I don't see any sign of slowing.

Yes, perfect. And I'm sure it had been asked a bunch of times, but just interested if there any's thoughts you can share around potential consolidation in your market, how that impacts Spark looking forward.

So you're talking around the 2degrees-Vocus merger.

Yes.

Yes. Look. I think obviously it's been well publicized, again, in terms of those two coming together. We're focused on our strategy here. [ And if I look at it ], they've got a mobile business. They're going to bring together a broadband business which has a reasonable market share. Nothing sort of changes in the competitiveness of those markets as a result of that, I don't think. And so from our point of view, we will focus on our game. I'm sure they'll be bringing together their game over the next few months. And the market, to my point of view, stays fairly similar.

And our next telephone question comes from the line of Lucy Huang from Bank of America.

I just have 3 questions as well. So just following on from Kane's question on mobile. So I was interested in some color around proportion of customers that are now sitting on some of these Endless plans. And what are your thoughts as well on underlying price increases potentially in the mobile business moving forward, given we are seeing a lot more takeup of data usage [ that drove this growth ], to put through more kind of recurring price increases into that base? And then just secondly, in terms of Spark TowerCo, I know it's early days but just wondering if you can give us any color at all on metrics, for example, like tenancy ratios of your mobile assets. Or any color that you can give on that would be greatly appreciated. And then just lastly, on broadband. Just wondering if you can talk through more around the competition. And where is it coming from? Which players in the market, et cetera?

Okay, we'll try and pick those off one by one, Lucy. We might have to circle back just to -- so the first one, around Endless mobile. It's around 48% of our base are on those plans, but in creating those plans, I guess, we've created a structure across the different components of both price and data included. So what we're really seeing is the shift up through our portfolio, both from either low-end prepaid or lower-end postpaid accounts, up into those Endless programs. So there's nothing that would suggest to us at this stage that that's likely to cease, but we also already have [ price put in the ] marketplace. So to your question around is there a significant price increase off the back of it, I'm not sure that we'll see that right now, but...

Yes.

It -- maybe just on broadband while we're talking about established markets. So there's over 80-plus RSPs, so retail service providers, in New Zealand. And that's a combination of both pure [ telco ] players but also converged. So [ energy ]. You also see [ media ] and others entering that space. Nothing has really changed in that dynamic over the last 6 months. Obviously we've changed some of our plans, our pricing, how we're thinking about it. We continue to expand our wireless footprint. And that also contributes to us being able to offer a competitive offering to our customers, but I think, in terms of the actual dynamic of that marketplace, it's not -- there's little that's moved really in that regard. [indiscernible]...

[indiscernible].

What was the last -- I missed the last question. Sorry. Could you repeat the last question maybe, Lucy? We missed...

Yes. Just with towerco. Any color on metrics like tenancy ratios, for example, on existing towers? Or anything that you can provide in terms of [indiscernible].

So if you look at existing tenancy ratio. We sit at 1.07. I think our portfolio of towers is about -- just over 50% urban, 15% regional, 32% rural; and then a combination of macro being 70%, 15% on buildings and then about 15% on light poles, say, sort of in terms of the mix of those towercos -- sorry, towers that we have today. And probably to Arie's -- well, the same response to [ Arie's like question ], until we've worked through the process, assuming the process commences, then that -- all the terms and the different components of build-to-suit and all the other things that would go with that will be part of what we'd share later in the year.

[ Yes ], yes.

Our next telephone question is from the line of Entcho Raykovski from Crédit Suisse.

Jolie, Stef, I've got one question on guidance and then a bunch of questions on towerco. So just the slight upgrade to full year guidance. What have been the key areas where you've done better relative to 6 months ago? I mean it looks like it is in mobile, but I'm just interested [ in that as a ] key factor. And then procurement looks like a good outcome, but it is obviously a much lower-margin business, so any further color would be useful.

It's primarily -- so to your point, it's primarily mobile. I mean that is where we have momentum. And so that has been a big part of the driver; and also, secondly, really the contribution of our future businesses, future markets. So we -- if you look at health as an example, revenue up 51% including procurement, 25% excluding. IoT is growing very strongly. So I think a combination of both mobile business and those future markets have really been the drivers of the performance to date. And then when we look ahead, we would expect those to continue, but also we're looking for an improvement, I guess, in the rate of growth around our cloud, security and service management business driven off that H2 pipeline.

Okay, got it. And maybe a follow-up to that, just your level of comfort you can get to your aspirations for growth in cloud, security and service management given the 1H growth rate was, I mean, as you flagged, lower than your aspiration, only about 3%.

Yes, sure. Look. The -- so if you look at -- if you kind of look at the component parts. Cloud is continuing to grow. The mix there is a little different with public growing strongly, private not quite we want, but we still see really good demand for hybrid. And there's opportunities there to drive volume growth to help manage some of the price pressure we see in private. I think the area where you've seen the growth rate slow a little has been in service management. And that really has been impacted by our ability to access client sites in this environment, but when we look forward, the pipeline there looks strong. So it's always a challenge, but we have absolutely got that aspiration of the 5% to 8% and we're continuing to work towards that.

Okay, great. And then maybe just a couple on towerco, to the extent you can answer. If you are successful in monetizing towerco, your priority at that point: debt reduction, or capital management? Using some of those proceeds.

Well, none of -- obviously until a transaction occurs, then we won't be talking about how we would use proceeds, but on any -- if you think ahead, on any combination of that will be a combination of both investment on our priority assets and growth but also looking at capital management options around that.

Yes.

Okay. I appreciate it might be too early, but again I don't know whether you can answer this one. But is the intention to maintain a majority interest in towerco? Or could it depend on the sort of price you can obtain? And you'd be happy with a minority as well.

I think our ownership interest will reflect in terms of the broader transaction as it stands in the terms and things that are in front of us. That's too early to say at this point.

Yes, but we do [ know ] that we will retain a shareholding.

A -- yes. Sorry. Yes, we will retain a shareholding. [ That's the effect ]. The size of that shareholding will depend on all of those factors, yes.

Yes.

Okay. And it sounds like both a majority and minority stake considered as the range of options at the moment.

Sorry. Could you just repeat that?

Sorry. It sounds like, both a majority interest or a minority interest, that's sort of being considered as the range of options you've got right now.

Well, look. I guess, as we've said, we'll consider all the options based on the terms in front of us, but the key point we want to reiterate is that we'll retain a shareholding. And we'll update you as have -- more detail comes to hand. I understand your desire [ to ask more ], but it's pretty early in the process, right? Yes.

Yes. Good one. Sorry. I won't push that part anymore. Final one: Is in there -- is there also any intention to monetize the fiber assets? Given you flagged at the last results they were part of -- also part of that passive infrastructure. Or is really the focus now on towers? You're not really considering much else.

I think, in the immediate -- if you look at the immediate time ahead, then it's on towerco. We will always consider exits like fiber, around where it makes sense for us to own alone or where there's opportunity to share. And fiber plays an important part around our infrastructure as we go ahead, particularly when you think about backhaul and also our [ mobile edge compute ] and so forth. So that would be further out where we're looking at fiber.

Yes.

Next telephone question is from the line of Aaron Ibbotson from Forsyth Barr.

Unexpectedly, I also have one question on tower company, so I'll start with that, yes, and -- but slightly different angle. I believe the book value is something around 100 million or thereabouts, but my question is if it's possible for you to give an estimate of replacement costs and, failing that, gross cash invested or how much you've spent on these passive parts of the towers but ideally sort of "replacement costs," just to get an idea of magnitude of the assets here.

Look. That's not information that we are sharing at this point in time. So you're right that the current book value is around 100 million. And we've laid out a few more details, as Jolie talked through before, around the number of towers and the composition, but we're just going to focus on the book value for now.

That's fine. Secondly, on roaming, you did mention that you expected some good tailwinds in FY '23, which I think we all are, but it's been -- or it will have been almost 3 years since we had a full year of roaming, so I just wanted to know. Has anything changed in that market? Using the assumption -- if we assume that travel and tourism sort of both inbound and outbound go back to pre-pandemic levels, should we expect roaming to go back to that level more or less? Could you just maybe update us as well on what the total impact was? There was a lot of half-on-half, if I recall, and I got a little bit confused.

I think, if you think about roaming overall and in that range of sort of $30 million to $40 million, around $40 million previously in our full year, I'm not sure that you'd say everything would return back to how it was before in terms of traveling and the ability to do that, but even within that there's also an opportunity always to be looking at market propositions, making sure they're competitive. And so we will be doing that as we come into that phase. I think, as Stef indicated, with the announcement the government has made to date, it's unlikely to occur before July this year, so we're really talking about a 2023. And so leading into that, we'll be making sure we're market competitive within that, but to give you a sense: That was previously sitting up around on a -- or up around that $40 million range.

Yes.

Yes. And I wasn't asking you guys to forecast travel patterns. Just if they did return, you would expect those $40 million to come back. Is that roughly right?

What I'm saying is you probably -- ultimately over that time, there's probably been changes, so we'd be looking at our -- market competitiveness of our roaming propositions and so forth. So I suspect it will be -- more likely to be a bit less than that would be my read on that but still a material number when you think of the context of our earnings.

Okay. And I know this is sort of nitpicking, but I'm a little bit surprised that, say, for instance, security is not growing. And I appreciate maybe this was COVID restrictions, but more broadly you seem to have strong growth in, say -- or health, IoT, public cloud, et cetera. But could you give us an update or an idea of what proportion in your cloud, security and service management business is within growing business lines? And what proportion is sort of stable and versus declining? Is there a small and fast-growing business and a large and shrinking? Or what are these proportions? I'm just -- it feels like 3% doesn't paint a proper picture of what's going on there, yes. And it feels like there is a small bit that's growing very fast, but I would like to know roughly how big that is and if that bit is potentially increasing over time. Or could you give some color there?

Yes. Look. So you're right. There are multiple moving parts within cloud, security and service management. And I'll just kind of give a bit of a flavor for them. I think, if you look at cloud, obviously there's a -- as we've talked about, a shift in composition of mix there, where you've got growing public cloud and price pressure on -- in the private cloud. And if you then went to kind of the composition within that: There are certain parts of the business, for example, health, which are growing strongly on the back of digitization of the health care sector. I'm -- I can't -- I'm not going to answer at kind of specific amounts, but that is a part that is growing well. When we look at some of our other private cloud business, our focus there remains on taking advantage of the opportunity for hybrid cloud. That is still a market where we see really good potential. As customers look at things like legacy applications, not all of it can go to public cloud, so the ability to continue to grow in private cloud there remains strong. And then I think, when you look at something like service management, which is really the other material line within that part of the business. There is a mix between kind of projects and annuity. And in the past, we had some very strong project activity. That's been a bit more -- a bit slower in this period. What we'd expect is that project activity to pick up. We don't see any sign within the economy of less demand for digital transformation. It's just kind of accessing that ability to grow it and get it -- our people on to a site. So we still see potential here. So hopefully, that gives you [indiscernible].

And I guess, if you break it into the half, split that number, 120 million is cloud. And just shy of 90 million is service management and shy of 20 million is security. So you get a context of scale in there as well.

Yes, yes.

Okay, I'll settle for that. Finally, I've got a question which I expect you not to answer, but I'll give it a go. And this is your seventh year of $0.25 dividend. I appreciate it's gone sort of from special to ordinary, but looking at your free cash flow growth, return of roaming, CapEx profile being contained and -- what's -- how should we think about your expectation over the next 2 to 3 years? Is it realistic to assume that, that is going to start to tick up by [ $0.01 or $0.005 ] a year? Or is -- should we just get used to this $0.25?

So what we've always said around our ambition is, with growing earnings, growing free cash, we would look at our dividend profile. Clearly I'm not providing dividend guidance out for 2 to 3 years at this point, but our ambition is to continue to grow that. Our 3-year plan had us reaching a $500 million free cash flow end of FY '23, which Stef touched on -- and our belief -- or ambition to deliver on that. That then puts us in a position, as we look ahead, to think about what else might change then in terms of our capital management around dividend, but as said, that's too early to say now. But we do have an ambition to grow.

Okay, I'll settle for that.

And our next telephone question is from Brian Han from Morningstar.

Jolie, let me have a go on the towerco.

[ Okay, go on ]...

So Vodafone has also -- Vodafone also recently said it wants to release capital from its towers. And I don't know what 2degrees' plans are, especially with the merger, but they're probably thinking along the same line, so my question is do you think all this rush of towers to the market could impact the multiples you have in mind. And is it possible that you may not go ahead with any partial sale because of that?

I think obviously, any transaction, we'll look at the value that's there and that -- and really the terms and services that sit alongside that because ultimately this is a long-term arrangement if you're an anchor tenant there. If you look at other markets offshore and Australia, we've seen a range of transactions come to market. And I guess you can look at those sort of multiples and implications as we can, so from my perspective, I can't forecast what will happen in terms of that, but there is -- I think the only thing I would say is there's significant interest. You can see it globally and infrastructure assets generally. These are high quality. We're a good counterparty, so I think from my perspective that's a good opportunity should it come to market.

Great. And Stefan, can I please clarify the guidance you've provided? Even though there's effectively no change, it absorbs about $5 million in higher costs because of the SaaS cloud accounting change. Is that right?

Yes, but we also restated the prior periods, so the impact is...

Like-for-like...

Like-for-like is relatively small.

Right [indiscernible]...

But your point -- your question is, is the guidance -- yes. The guidance range is unchanged in terms of [ our guidance ] to the top half of that. So nothing is shifting on that. We're not making an adjustment of $5 million [indiscernible], yes.

No. That's right, yes.

Yes, but you're absorbing that accounting change in the -- because you only made that accounting change in the half that you just reported.

Yes, correct.

Correct, yes, yes.

Right, so you are absorbing the $5 million costs...

Our prices tend -- yes, yes. Sorry. Yes.

Yes, yes, you're right.

Our price tends to be, whether it's -- we were maintenance last year. All those things always are in our operating results. We never treat them as not in the underlying, so we manage the ups and the downs that go with that and delivering the result and [ then the ] guidance.

Yes, yes.

And our next question is from Phil Campbell from UBS.

Yes. I was just wondering, Jolie, if you could give us a little bit of an update on the C-band spectrum auction. Obviously we've had the [indiscernible] deal announced a couple of weeks ago. Just some of the kind of industry stuff I was hearing was that the government may not be as focused on maximizing revenue from those auctions, so I'd just be interested on your kind of take on that at the moment.

Yes, sure. So we are yet to get the details of the spectrum auction, including the date. However, they have -- I think what you're referring to is are there any network deployment requirements and return for potentially a lower cost. And so we haven't -- it has not been clarified with us, but if that were to occur, naturally you would have a lower cost for the spectrum than perhaps we've had in the past; like the 700 megahertz auction, for example, if there were deployment requirements [ for, say, rural ], for example, as part of that. So we are eagerly awaiting that process. And obviously the biggest thing with the news around the Maori spectrum is that, that can now progress. And so we hope that will be completed. We'll move forward within that in the second half.

Okay, awesome. Just had a couple of follow-ups on towerco as well, and the first one is kind of why you decided to go standalone. And the second one was just if you were able to make some comparisons to what are the differences of towercos in New Zealand or your towerco versus some of the Australians. And the other one is, if you don't decide to bring in a third party, will you be separately reporting towerco in the Spark accounts?

Okay. So in terms of the differently reporting, look. We will look at -- as we've normally done with our KPIs, we pull out the segments that are useful for people to understand. And I expect that would be something that we do regardless of whether we have third-party capital in that or not. In terms of offshore, so if you compare to Australia or, I guess, the towercos that have been announced: So you've seen Telstra, which had a 49% shareholding, [ is it not, to ] -- I think, with a minority in terms of that, 30%. So there are a range of different options out there in the marketplace at the moment. Again it will come back to, if a transaction were to proceed, we'd be looking at the terms and things that are in front of us in relation to that to determine whether that occurs. I think from a standalone perspective our view is, with the improvements and efficiencies, we want to see utilization and coverage expansion. That serves us best at this point.

Yes.

Okay, awesome. I suppose just again a kind of a follow-up is if you look at the kind of operating metrics in Australia versus, say, New Zealand for towercos. Is it fair to say that you would look for kind of implied -- given low occupancy ratios and probably lower growth, you would get lower multiples in Australia. Or is there other factors within New Zealand towercos like higher lease costs or stuff like that which would make an argument you could get similar multiples to Australia?

Look. I'm not going to speculate on the multiple that might be available if a transaction were to proceed. I think what you also have to think through is there's obviously also this tenancy, but there's also densification as you look ahead with 5G, increasing infrastructure requirements within that. So looking at how those factors affect the impact [ to ] the towercos was an important part of it.

Yes. Value is driven by a lot of different factors, and there are so many that are still at play. It's really too early to call.

Yes. And I suppose just -- again, just a quick follow-up, in terms of the third-party shareholding. So obviously most people will be thinking of a private investor or investors coming in. Obviously what we've seen in Europe with [ Vantage ] is IPO of a tower businesses. Is that something that's also on the table?

So that's not our focus at the moment. The focus is running a process kind of more akin to what we've seen in Australian markets, I guess, and other markets.

Our next telephone question is from Wade Gardiner from Craig (sic) [ Craigs ] Investment Partners.

I'll just have my go at towerco just to follow up to Phil's question around why standalone versus doing a deal with others. Did you actually explore, say, with Vodafone given they have announced a sale process? Did you actually explore what it would look like if you went down a route with them and actually discussed it with them? Or was this totally sort of done in isolation?

I mean we've got nothing to say on in terms of -- we've done our own work looking at this and making our own decisions on that. So no comment in relation to that.

Okay. Next question, just in terms of dividends. Can you give a bit of guidance around where you see imputation [ availability ] going forward?

Look, we -- for the half, it's fully imputed. For this year, we expect to be able to fully impute the whole dividend. That's our current expectation, but I can't predict further forward than that. But obviously if we drive dividend out of free cash flow, then that generally supports a well-imputed dividend.

But not necessarily 100%.

Well, that's clearly our goal, but I'm not -- I can't give you forward-looking dividend guidance. That's obviously a discussion that we'll have with the Board and give guidance on at that time.

Okay. And finally for me, just in terms of the guidance range that you've given. In the first half, there was -- as there has been in previous years, there's some property-related revenue in there. What should we assume in the second half in regards to that?

So just, I guess, context-wise, if you look at the first half: We did have some gains. We specifically called them out, but I think it's important to note that there are other one-off items that sit within other lines within the P&L. And if you actually look at the property gains we had this period, it's actually broadly consistent with other one-off items we had in the H1 of the prior period; for example, things like bad debt provision releases. So in our mind, the way we think about it is really wiring and maintenance is the one-off factor that's kind of distinct that's worth calling out. The rest of it is broadly consistent with prior periods. If you look then ahead, you can see that we typically have other gains in the second half. It's the nature of our business, depending on what type of lease changes may happen, whether there's things like property sales or mobile hardware, equipment sales. So we would expect to have some, but clearly I can't give you a specific number at this point in time.

There are no further questions at this time. I would now like to hand the conference back to today's presenters for closing remarks. Please go ahead.

Okay, well, thank you, everyone, for joining the call. And we will see you soon.

Thank you for everyone for joining. You may all disconnect. Have a great day. Goodbye.