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

[Foreign Language] Good morning, and welcome to Spark's 2023 Annual Meeting of Shareholders. My name is Justine Smyth, and I have the privilege to be the Chair of Spark New Zealand. On behalf of the Board, it's my pleasure to update our shareholders on Spark's progress over the last year. For those of you joining us virtually, you will still be able to vote and submit questions during the meeting. Before we get started, some housekeeping matters. Bathrooms are located in the atrium behind the food court. In the unlikely event of an emergency, please leave the venue using the nearest exit and follow the instructions of Spark employees who will be on hand to direct you to assemble outside on Harding Street. With that taken care of, I'd now like to declare the meeting open. Based on the information conveyed to me, I confirm there is a quorum of shareholders and the meeting is duly convened. Today, you'll hear from me as Chair of the Board and from our CEO, Jolie Hodson. After this, we'll then put forward the resolution as described in the Notice of Meeting and respond to general questions put to us by shareholders. I'd like to introduce my fellow directors and management who are here with me today. We have Warwick Bray, Sheridan Broadbent, Gordon MacLeod, Jolie Hodson, Director and CEO, and you'll notice, Jolie fractured her leg recently. So we'll have a little bit of extra logistics on the stage today. We've got Charles Sitch, Alison Barrass, David Havercroft, and Stefan Knight, our CFO. Also present today is our General Counsel, our Company Secretary, auditors from Deloitte, lawyers from Russ McVeagh and share registrar Link Market Services. Now let me turn to Spark's FY '23 performance, which marks the conclusion of the last 3-year strategy period. It's been a challenging period to navigate with high inflation and low business confidence being a hallmark of the last year. As a country, we've also experienced firsthand the very real impacts of warming climate with the floods in Auckland and Cyclone Gabrielle causing devastation in local communities. During these challenging times, we are conscious of our role as a lifeline utility. We continue to make significant investments into network resilience, while exploring new ways to prepare for increasingly extreme weather events alongside our industry peers and with other sectors. Our FY '23 result needs to be reviewed in 2 parts. Firstly, the Tower Company transaction and exit of Spark Sport resulted in a net EBITDA gain of $529 million, which drove significant growth in our reported revenue and earnings. This has enabled us to invest in digital infrastructure and future growth while also returning proceeds to shareholders. At the end of October, approximately $220 million have been returned to shareholders through our own market share buyback. When you adjust for the benefit of the TowerCo transaction, we also saw strong adjusted revenue growth of 5.1% to $3.9 billion, which was largely driven by our standout performance in mobile, where Spark leads the market by both service revenue and total connections. When overall revenue growth was combined with our long-term focus on disciplined cost reduction, we delivered adjusted EBITDA growth of 3.7% to $1.193 billion, in line with our guidance. Adjusted net profit after tax increased 5.6% to $433 million, driven by our EBITDAI growth, lower depreciation and amortization costs, and partially offset by higher tax expense. Capital investment increased 25.6% to $515 million as TowerCo proceeds were reinvested for future growth. We generated free cash flow of $489 million towards the top end of our aspiration and largely funding the dividend, which was pleasing outcome, given it's a goal Spark has been working towards for some time. The Board declared a total FY '23 dividend of $0.27 per share, 100% imputed, an increase of 8% or $0.02 per share year-on-year. Finally, we were pleased to complete FY '23 and the strategy period with Spark ranked #4 for total shareholder returns against our international peers over the last 3 years. Turning our attention now to our current performance and market momentum. We are closely monitoring the macroeconomic environment. And while conditions remain challenging, our business is highly resilient, demonstrating the strong demand for core mobile, broadband, and IT services. In particular, mobile service revenues continue -- we continue to experience strong growth and is in line with our expectations for the full year. Broadband margins have stabilized as increased fiber input costs are reflected in our market pricing, and we are seeing positive signs in cloud margin while voice margin continues to decline. Finally, we are actively focused on managing down our other operating costs to offset this and any impacts we see from inflation. Therefore, I am pleased to reaffirm guidance for the financial year ended 30 June 2024, including EBITDAI of between $1.215 billion and $1.26 billion. CapEx of $510 million to $530 million and a dividend of $0.275 per share, 100% imputed. This reflects the confidence the Board has in Spark's strategy and future growth potential. Looking to the future, we have a clear plan to continue growing value for our shareholders. We are investing $250 million to $300 million into datacenters, a market which is expected to rapidly expand over the next 3 to 5 years. Spark is well positioned to continue to grow its share of this market, and Jolie will talk you through this more in more detail shortly. We've also committed an additional $40 million to $60 million to invest into 5G standalone, which is on top of the $100 million we invest annually in our mobile network. This will provide greater coverage and capacity, increase the addressable wireless broadband market and provide new opportunities to monetize the network for our business customers. Our goal is to have 5G standalone deployed nationwide by the end of FY '26. Finally, we will continue to invest in our digital identity business, MATTR, which is now operating across the U.S., Canada, Switzerland, Australia, and New Zealand and recently won a multiyear contract with the New South Wales government as the technology partner for its digital identity and verifiable credentials program. Our strategic focus on sustainability continues, and we remain committed to maturing our practices further in the years ahead. We were pleased to be accepted into the Dow Jones Sustainability Australia Index, while ranking in the top quartile of the worldwide benchmarking, Alliance's Digital Inclusion Benchmark. Our emissions reductions are on track against our science-based target pathway with Scope 1 and 2 emissions down 29.8%. This was driven by a higher share of renewables on the grid, and we continue to focus on opportunities to support new renewable electricity production. As a technology company, we operate in a global supply chain with suppliers in some geographies that are at higher risk of modern slavery. Through our membership at the Joint Audit Cooperation, we've completed 4 of the 5 audits we committed to complete during the calendar year 2023. We are currently in the process of assessing these findings and agreeing a process of remediation with our suppliers where it is needed. We've also maintained our focus on diversity and inclusion and are proud to have reduced our gender pay gap from 28% in FY '20 to 21.6% at the end of FY '23. We still have more work to do to increase female representation within Spark and to meet our 40/40/20 target, with women currently representing 34% of our workforce overall. Recognizing the critical role our senior leaders play in the achievement of our ESG ambitions, our emissions reduction target and our diversity targets have been integrated into our long-term center of plans for senior executives. Before I wrap up, as we recently announced, Charles Sitch will be stepping down at the close of this annual meeting. I wish to thank Charles for his huge contribution to the Spark Board over the last 12 years. He's been a unique -- he's played a unique role in guiding the business from telco origins to the digital services provider it is today. He will be sorely missed. Gordon MacLeod has been appointed Chair of the Audit Risk Committee effective from the close of this meeting. On behalf of the Board, we thank you, Charles, and wish you every success for the future. I'd like to finish by thanking all of Spark people for their commitment to our customers and our strategic ambitions over the last year. I'd also like to acknowledge the extraordinary efforts of the teams who supported our customers during Cyclone Gabrielle, working around the clock to restore connectivity to communities and to ensure customers were able to reconnect with loved ones as quickly as possible. Finally, thank you to my fellow directors and to you, our shareholders, for your ongoing support. [Foreign Language] I'll now invite Jolie to address the meeting.

[Foreign Language] Thank you, Justine, and good morning to everyone in the room and online today. FY '23 marks the completion of our last 3-year strategy, and I'd really like to quickly reflect on what we've achieved over that time. Our customer, people, brand, and sustainability fundamentals are healthy and growing. We've achieved market leadership in mobile. We've maintained our #1 position in broadband and grown our IoT and health revenues to over $290 million. We've focused our portfolio by exiting the sports streaming market, allowing us to direct capital and resources to growth opportunities with the highest potential value to our shareholders. We're a much simpler business today than we were 3 years ago. We've retired 350 legacy plans and migrated over 420,000 customers to new and more intuitive plans that better reflect their needs. We now have over 1.57 million unique users on the MySpark app and digital journeys have increased by 50%. Our locally unique data and AI capability is a competitive advantage. By better understanding what our customers need and when they need it, we delivered a 17% annual improvement in conversion and 9% efficiency gains. We have delivered these simpler, more digital, and data-driven customer experiences while improving our interaction net promoter score, INPS, by 9 points to plus 31 over the last 3 years. We now have 5G in 77 locations across the country and continue to make significant investments into resilience. I'm proud of the progress we've made building a strong culture at Spark. Employee engagement scores of 70% is approaching top quartile performance in New Zealand. Our market-leading learning and development programs have delivered high levels of internal progression and career development for our people, and importantly, during years of significant upheaval within New Zealand, we've matured our approach to well-being through our Mahi Tahi strategy with 89% of our people saying that they feel like their well-being is well supported at Spark. So when I stand back and I look at our overall performance, I'm pleased that we've been able to shift from that traditional telco origins to digital services over the last 3 years with legacy products like our landline now less than 6% of our overall revenues and a growing high-tech portfolio. As a result of this Mahi, we've started in FY '24 in a strong position. And as we look to the future, we know the pace of change and disruption will only accelerate from here. And as the world changes around us, we need to change with it. Aotearoa is growing, it's getting older and becoming more diverse. Our customers are facing inflationary cost pressures, which is forcing a focus on efficiency and productivity. The opportunity for Spark is to harness the power of emerging and converge technologies to provide new solutions to these challenges that haven't been possible in the past. We shaped our new strategy to position Spark for success in multiple potential features. Our 3-year focus is all about empowering the people and the businesses that are creating Aotearoa's tomorrow. As an enabling business, our success will be measured in the success of others. And we will bring New Zealand as the best digital-first experiences curated to their needs and will support local businesses, big and small, to become more productive and sustainable through technology. Mobile will continue to be a key driver where our investments in digital infrastructure, including datacenters, converged technology solutions and digital identity through MATTR will generate new revenues over time. We'll build on the progress we've made over the last 3 years through our capability-led approach by continuing to invest in key sources of differentiation, our data and AI capability, simpler and more digital customer experiences and our network and technology investment and the strength of our people and culture. Finally, how we do business will remain just as important as what we do with our focus on Toitu sustainability at Spark and Maori strategy Te Korowai Tupu. So with this focus, we aspire to continue delivering strong growth for our shareholders over the next 3 years. We're targeting revenue growth of 2% to 4%, low to mid-single-digit EBITDA growth and a cumulative 10% lift in free cash flow. These ambitions create an opportunity for Spark to grow our earnings and our dividends over time to generate top-decile returns to our shareholders. As Justine touched on ,the majority of the $350 million we set aside from our TowerCo proceeds will be reinvested into expanding our datacenter footprint. Because of the scale of this investment, I wanted to provide more background on our datacenter business today. We already operate the country's most extensive network of customer datacenters across 16 sites with the ability to add additional capacity. The diversity of our datacenter assets mean we can meet a very broad range of requirements, and we have the technical, engineering, security, and infrastructure capabilities needed to deliver. Our core business is highly complementary and sets us apart from pure-play datacenter operators. We can add additional value at the connectivity layer, providing international subsea, national and metro fiber services as well as across the top at the product and sales layer through our extensive IT and cloud capabilities and by acting as a sales channel to market for global providers. These investments will generate long-term annuity revenues that benefit from inflationary pricing protections and supportive market tailwinds. Our Takanini expansion was completed in August 2023, and this revenue will begin to scale in FY '24 and then grow for several years until it reaches full billing. Our total datacenter build capacity will reach 22 megawatts in this financial year, and we have land held in existing sites for an additional 19 megawatts capacity available for further development. A decision to proceed with further builds will be based on meeting the investment criteria outlined in our capital management framework. I also wanted to provide an overview on satellite technology, which has been topical lately in how we are expecting our portfolio or expanding, sorry, our portfolio in this growing area. Satellites complementary to our existing connectivity portfolio that will enable us to reduce coverage -- gaps that may exist for customers and deliver greater resilience while we continue to invest in expanding rural connectivity through mobile network investment. In mobile, we've announced a new partnership with Lynk Global, which will allow our customers to use their phones in areas that are not easily reached by traditional mobile coverage. It's important to stress that the satellite capability is still evolving. So we'll be starting with a trial of a text-only satellite to mobile service, which will be underway soon with a further rollout of the tech's capability and vision to 2024. For our business customers, we announced a partnership with Netlinkz to provide enterprise-grade Starlink Satellite broadband, and a trial is currently underway with select customers with a full rollout planned for late 2023. And in the wholesale business, Spark has owned and operated New Zealand's largest Earth Station in Warkworth for a number of years now, and we provide a full suite of satellite services to our customers. Of course, when it comes to new technologies, it would be remiss of me not to mention generative AI. The potential benefits of this technology are significant, and we are actively exploring how we can leverage these capabilities within our own business and for our customers. We see GenAI as a copilot. It's not just about automating tasks, but it's about improving the quality of our work, improving customer experiences, and boosting productivity and efficiency. Our plan is to build on our market-leading existing AI capability that we already use to market our mobile and broadband products to our customers by applying it more broadly across our business portfolio and then into our own operations. This will not only improve the experiences of our people and customers, but also make us more competitive in the market. We have several activities underway. And as we deploy these new applications, we'll be guided by ethical AI principles, which will ensure we uphold our very high privacy and security standards. So in closing, I'm excited about the opportunity ahead of us to harness the power of technology to help businesses transform to help Aotearoa transition to a low-carbon economy and to keep delivering great experiences for our people and customers and great returns for our shareholders. I wanted to finish by thanking our people for the pivotal role they have played in delivering these results and for their enduring commitments to Spark. We have an important role to play as New Zealand transforms in the years ahead, and we're only able to fulfill our purpose as a business with the support of our shareholders, our customers, our people, and our communities. And I thank you for your ongoing support. [Foreign Language]

We now turn to the sole matter requiring resolution as outlined in the Notice of Meeting with a poll to be called on the resolution. The poll will be conducted at the end of the resolution and your ballot papers and online voting cards will be collated by our share registry, Link Market Services. The resolution set out in the notice of the annual meeting is to be considered as an ordinary resolution. To be passed, it requires the approval of a simple majority of the votes cast by the shareholders entitled to vote and voting on the resolution. There will be an opportunity for shareholders to ask questions both on the matter and more generally at the end of the resolution. When I call for questions, for those of you who are attempting -- attending in person, can I please ask that you move to the microphone nearest to you and clearly state your name prior to asking your question. We'll also be responding to questions from shareholders attending virtually via the online portal and those attending on the phone. For shareholders attending via the online portal, please submit your questions on the resolutions or general business now. For shareholders participating by phone, please press "*" "1" to queue for question. The operator will ask your name and you will be introduced at the appropriate time during the Q&A session. If there are any questions that relate to personal customer matters, these can be directed to customer support we have available at the rear of the room once the meeting has closed. I'd like to take this opportunity to remind everyone that this meeting is being webcast, so will also be heard by an audience outside this room. We turn to the matter relating to the company's auditor, Deloitte. The company seeks out the procedure for reappointment of auditors. Under that procedure, the auditors are automatically reappointed. Deloitte was first appointed as auditor in 2020 and Spark's policy requires that the lead audit partner is changed every 5 years. The motion concerns the fixing of the auditor's remuneration and seeks shareholder approval that the directors be authorized to fix the auditor's remuneration for the ensuing year. I propose that the directors are authorized to fix the remuneration of the auditor, Deloitte, for the ensuing year. Are there any questions for the Board concerning the motion? Are there any questions online?

We have an online question. What will happen -- excuse me. We have no questions online at this time.

Thank you. Are we sure? We can come back to that. Are there any -- any questions on the phone?

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

Okay. Are there any more questions relating to this motion then?

We have a question online, from [ Eva Caulding ]. What will happen to the resolution if the majority shareholders' voting decision is against the resolution?

The resolution would then not pass. What I can say in terms of the proxy votes we have in so far, the resolution will be passed. Okay. Can you please now submit your vote for the resolution on your electronic voting form, or for shareholders attending in person, you should have a ballot paper which was given to you when you registered. Please select 4 against or abstain. Representatives from Link Market Services will now collect your voting cards. If you require further information and guidance on the voting process, please refer to the Notice of Meeting. Please note that the company's auditors will act as scrutineers for the polls. Thank you for your participation. Voting will be open until the conclusion of the meeting, and the results will be released to the NZX and ASX following the meeting. Before we take general questions from shareholders, we need a few short minutes to ensure that we've captured all the questions relating to the resolution submitted by shareholders participating by telephone and online. [Presentation]

So I'd now like to offer shareholders the opportunity to raise questions -- general questions. Any person wishing to speak, if you could move to the microphone nearest to yourself and clearly state your name. A reminder, if you're attending by phone, please press star one to queue for question. Remember to please keep your questions succinct. And in the interest of time, questions dealing with similar topics may be combined into one question. Are there any questions?

[Indiscernible]. The question is what is happening to the landline system? Some years ago, I changed to Wi-Fi on my phone, but the whole system of the landline system, is that continuing indefinitely? Or is it to be phased out imminently?

So we are in the process of removing the PSU into the landline system from the market. That's basically because it is so old now that even the parts aren't being manufactured anymore. So we are going through a process throughout the country and working through that area by area. And -- so that is underway now. And then what we are also doing, obviously, for things like 111 calls and things like that, we suggest that people have a basic mobile available, that 80% of our calls already come in on mobile through that. And we continue to work with customers who have any -- for any reason where they still require that. We've got vulnerable customers register that they can register on and we'll work with them on other alternatives for that.

I understand that you -- once you switched over to the -- either by Wi-Fi or some other means, the whole system is continuing.

So you could have voice over other forms of sort of fiber or the Internet. So that -- so you can still have a voice number, just the PSU in the old copper line component of that is no longer -- once it's fully removed from market will no longer be available.

And the [indiscernible] White Pages, is it to be terminated shortly?

We don't own the White Pages, but I think as long as people still want to have their numbers listed, I'm sure that they will be able to. Yes.

The other question I have or compliment to you is that a few years ago, we did have a problem. I was so impressed when it was speedily resolved by Spark. It really was very satisfactory, and I'm sure it's very good for other customers too.

Thank you very much.

Thank you. Certainly, what we aspire to.

Hello. My name is Neil Anderson. I'm a shareholder, but I'm also representing the New Zealand Shareholders Association. I note that the share price has been lower than the NZX average over the last 12 months, which is disappointing considering that there's been quite a significant sum put into share buyback by the company as well. Do you have some comment on that? And what would the company be trying to do to improve the share price, please?

Yes. I think certainly it came up a bit yesterday, which was pleasing. I think that it isn't -- I don't think it is less than the NZX average as we stand here today. But certainly, we've -- as you know, we've -- our plan is to return $220 million to shareholders of the $350 million committed. So we've got $130 million to continue to buyback of shares. We also lifted our dividend during the year. So there was another $0.02 per -- I think, in total that-- in '23. So I mean, certainly, the whole NZX market is down, but we don't think on a relative basis that we have suffered more than others and in fact during that time have returned to shareholders as well.

And our focus on resetting the strategy in April this year has really been around setting a strategy that is appropriate for both resilience that's required in more inflationary markets and challenging markets, but also for growth opportunities. And we touched on some of the areas that we're looking to invest further for growth to be able to replace revenues that may have declined or lost, and that's our focus on making sure we're operating and running the business as effectively as we can and moving into newer areas that will help us continue to grow into the future.

Hello, I'm Thomas, and I'm a shareholder through [ Chassis ]. And my question relates to your datacenter. With you looking to create NZ's most extensive datacenter, how are you looking to protect customer data through that?

So we have strict privacy and security control, sorry, around all of the data that transits our network. So in building datacenters, obviously, customers' data is stored within there and also their equipment as well. So we may own the datacenter. They may have their own equipment. And then we may also have our equipment. They have stringent security requirements around those in terms of both physical protection at the datacenters, but also from a cyber perspective, we have over 100 cybersecurity people within our organization, and we're constantly both looking at our protection, but also defense capability and working with international experts as well to ensure that we continue to lift there.

And what is your strategy if any data does get comprised?

Well, like any business, we will manage that as effectively as we can in terms of that, both from a transparency with our customers and the communities that we work with, look to -- obviously, we have a number of procedures that we would take in an event of an incident that we follow through in terms of making sure that we can protect that data and resolve any issues as quickly as possible. Do we have any other questions from the audience on the floor? Okay. Do we have any questions online?

We have no questions online at this time.

Do we have any questions on the phone?

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

Okay. Well, if there are no more questions, ladies and gentlemen, thank you all for coming today. And also for those of you who attended virtually, we value your input as shareholders. We will announce the results of the poll to the stock exchanges this afternoon. For those of you attending the meeting here at Spark City, I do invite you to join us for the morning tea in the function room at the back of the room. The meeting will close on completion of voting procedures. [Foreign Language] Thank you.