Telstra Group Limited (TLS) Earnings Call Transcript & Summary

Hello, and welcome to the Depositary Receipts Virtual Investor Conference for the dbVIC. I'm pleased to announce that the next presentation will be from Telstra, headquartered in Australia. And before I introduce our speaker, a few points to note. Please remember that after the presentation you will be directed to the Telstra booth, where you can submit questions via the email. And then a final note all the today's presentations will be recorded and can be accessed via the Deutsche Bank website adr.db.com. At this point, I am very pleased to welcome back Ross Moffat, he is the Head of Investor Relations for Telstra Corporation, which trades on the ASX under the symbol TLS and in the U.S. on the OTC markets as TLSYY. Over to you, Ross.

Thank you, John. Hi, nice to speak with you today. I'm going to provide you with an overview of Telstra's business, our financial performance in FY '20 and our corporate strategy, including a summary of our recent Investor Day. To begin, I want to give a brief introduction to our business. Telstra is Australia's leading telecommunications and technology company, and our purpose is to build a connected future so everyone can thrive. We have approximately 1.2 million shareholders and a market capitalization of AUD 36 billion. We enjoy an A band credit rating from Standard & Poor's and Moody's. We have 18.8 million retail mobile services and 3.8 million retail bundle and data services. Earlier this year, we announced new climate change targets, including to be carbon-neutral in our operations from this year, which we achieved in July, also to enable renewable energy generation equivalent to 100% of our consumption by 2025, introduce our absolute emissions by at least 50% by 2030. Our most recent financial results for the year ended June 30, 2020, were released to the market on August 13. Let me now take you through the key financial results and achievements of the year. Our results were in line with guidance, notwithstanding the impact of the bush fires and an estimated negative financial impact from COVID-19 on underlying EBITDA of around $200 million. The COVID-19 impacts arise mostly from our reduced international roaming and professional services revenue, increased financial support for our customers and additional bad debt provisions. Total income for the year decreased 5.9% to $26.2 billion on a reported and guidance basis. EBITDA increased 11.5% to $8.9 billion on a reported basis. After adjusting for lease accounting on a like-for-like basis, EBITDA decreased 0.3% to $8.4 billion. Underlying EBITDA on a guidance basis which excludes one-off nbn income and restructuring costs decreased 9.7% to $7.4 billion. Excluding the in-year nbn headwind, underlying EBITDA grew by approximately $40 million. This growth was at the bottom end of the range we guided for FY '20 and is after the COVID-19 and bushfire impacts. Net profit after tax decreased 14.4% to $1.8 billion on a reported basis. Capital expenditure declined 22% to $3.2 billion. CapEx was towards the top end of guidance due to our decision to bring forward $500 million of investment into 2020. That had been planned for in the second half of FY '21. Importantly, we paid a $0.16 dividend in total for FY '20. Turning to our operating highlights. In mobile, we added 240,000 net retail postpaid handheld mobile services, including 86,000 branded and 154,000 from Belong. In Fixed, we added 80,000 net new retail bundle and data services, including 79,000 from Belong. Belong now has more than 730,000 services, making it one of the largest operators in Australia in addition to Telstra, with more than 400,000 mobile services and more than 330,000 Fixed services. On costs, underlying fixed costs were down $615 million or 9.2%, bringing our annualized cost reduction achieved under our productivity program to $1.8 billion. We held our 2020 Investor Day on the 12th of November, during which we outlined a new corporate structure, plans for mobile tower's business monetization and provided a core business update. The proposed restructure would enable Telstra to take advantage of potential monetization opportunities for our infrastructure assets where this might create additional value for shareholders. The restructure is expected to be completed by December 2021 and would consist of 3 separate legal entities within the Telstra Group. InfraCo Fixed, which would own and operate Telstra's passive or physical infrastructure assets the DUCs, fiber, data centers, subsea cables and exchanges that underpin Telstra's Fixed telecommunications network. InfraCo towers, which would on and operate Telstra's passive or physical mobile tower assets which Telstra will look to monetize over time, given the strong demand and compelling valuations for this type of high-quality infrastructure. And ServeCo, which we continue to focus on creating innovative products and services supporting customers and delivering the best possible customer experience. ServeCo would own the active parts of the network including the radio access network and spectrum assets to ensure Telstra continues to maintain its industry-leading mobile coverage and network superiority. InfraCo Towers will enable greater utilization and commercial use of our tower assets and ultimately drive more value for our shareholders. We intend to start seeking investment from third parties while maintaining control of our strategic towers and preserving our competitive differentiation for our mobile business. We anticipate this will begin in 2021, and I -- and it will follow a similar time line to the rest of the restructuring process. On our T22 transformation program, we have delivered or are on track to deliver more than 3/4 of our strategic objectives. Our 5G network is the best in the country and among the very best in the world. We expect to reach more than 50% of the Australian population by the end of December and 75% by June 2021. Telstra InfraCo is now fully operational as a stand-alone infrastructure business unit. Through our productivity work, we have delivered $1.8 billion of savings so far and remain on track to reach our target of reducing annual underlying fixed costs by $2.5 billion by FY '22, including a further $400 million this year. Our progress so far on productivity, along with the digital investments we have made sets us up for what's beyond T22. And importantly, we believe we can deliver strong productivity in FY '23 and beyond. Notwithstanding the significant progress, I know it's not sufficient that we do not deliver a strong financial performance for our shareholders, too. We're absolutely focused on getting our underlying EBITDA into the $7.5 billion to $8.5 billion range post the nbn. We are upgrading our return on invested capital target in FY '23 from greater than 7% to around 8%, given that is the ROIC consistent with EBITDA towards the lower end of the range I just described. Our mobile business continues to perform strongly relative to our competition. Our clear lead in 5G means we have the opportunity to capitalize on a new multiyear cycle of growth, and our transacting minimum monthly commitment has continued to grow in FY '21. We have a plan to improve our fixed EBITDA, and we are targeting a mid-teens nbn reseller margin in FY '23, managing the economic impact of legacy copper network and accelerating our use of fixed wireless in a home where it makes sense for our customers. We expect our total enterprise business to return to growth in FY '22 after combining our mobile, Data & IP, NAS and international, and adjacencies such as health to contribute to our turnaround. Turning to our priorities in the year ahead, which include: stay committed to simplification, getting our digitization program, realizing the value from our strategic shift in Telstra Enterprise, maturing our ways of working, extending our 5G leadership and realizing the value from our strategic investments in networks, including targeted fixed wireless and continuing to deliver our $2.5 billion productivity target. Now to FY '21 guidance, which we reaffirmed at our recent Investor Day. We expect FY '21 underlying EBITDA to be in the range of $6.5 billion to $7 billion. Within FY '21, we expect underlying EBITDA to be stronger in the second half. We anticipate the first half to remain challenged, including by the ongoing COVID-19 pandemic and nbn headwinds. Our second half performance will be supported by stronger cost out and expected improvement in product margin trajectory, especially in mobile. Underlying EBITDA guidance assumes an in-year nbn headwind of approximately $700 million. At the end of FY '20, we estimated we absorbed around -- in 75% of the total recurring financial headwind created by the nbn. Based on our guidance, at the end of FY '21, we estimate this will be over 90%. To achieve growth, excluding the in-year nbn headwind in FY '21, our underlying EBITDA will need to be around the midpoint of the guidance range. We estimate that in FY '21, the negative impact of the COVID-19 pandemic will be approximately $400 million on underlying EBITDA or about a $200 million greater than the estimate for FY '20. This impact is across the following factors: a decline in international roaming, where we've assumed no recovery in FY '21 with an estimated $200 million impact. Our decision to delay productivity, job reduction announcements under the T22 program to February 2021, which contributes $100 million. And a further $100 million of impact, made up of delays and descoping of some customer contracts for professional services in the first half and customer support packages. We have not factored in additional COVID-19-related bad debt provisions in FY '21. We will continue to assess and monitor the impacts. CapEx guidance is consistent with our capital management framework at a CapEx to sales ratio of approximately 40%, excluding spectrum. This CapEx guidance includes investments in 5G. We expect free cash flow after operating lease payments to be in the range of $2.8 billion to $3.3 billion. To summarize, the 2020 financial year was uniquely challenging, but also one that once again highlight the importance of connectivity in society. It was a year that saw a huge acceleration in the digital economy, now critical to a fast recovery and where Telstra has a key role to play. It was a year where we saw the value of our T22 investments to transform Telstra for the future as a simpler, more digital and more agile business built around its purpose and values and a commitment to responsible business. We make guidance and maintain dividend despite the challenging environment. And as I mentioned earlier, by the end of calendar year 2021, we intend to restructure our organization, which will unlock value, improve returns from our assets and create further optionality for the future. We still have a lot of unfinished business to truly transform Telstra, but we look at the year ahead with growing confidence in our ability to deliver our strategic ambitions. I encourage you to view our complete set of FY '20 results and Investor Day materials available on our investor website. I'd like to say thank you for taking the time to listen in. Should you have any questions on Telstra, please do not hesitate to contact me. Thank you very much. Goodbye.