Telstra Group Limited (TLS) Earnings Call Transcript & Summary

Hello, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference. I am pleased to announce that our next presentation will be from Telstra, headquartered in Australia. Before I introduce our speaker, a few points to note. Please remember that after the presentation, you'll be directed to the Telstra booth where you can submit questions via e-mail. On a final note, all today's presentations will be recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome back Nathan Burley, 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 TLS YY. Over to you, Nathan.

All right. Thank you for having me and thanks to Deutsche Bank, and thanks for joining this presentation. Today, I'll provide you with an overview of Telstra's business and take you through why 2021 is a significant year for our company. So in terms of Telstra, we are really Australia's leading telecommunications and technology company. Our purpose is to build a connected future so everyone can thrive. We're widely owned and known in Australia with 1.2 million shareholders. We've got a market cap of around AUD 40 billion. We enjoy an A- credit rating from S&P and A2 from Moody's. And we've got considerable scale, 19 million retail mobile services and 3.7 million Consumer & Small Business broadband services. Likewise, we were certified as carbon neutral in July last year, and our climate change targets include to enable renewable energy generation equivalent to 100% of our consumption by 2025 and to reduce absolute emissions by at least 50% by 2030. Look, as mentioned, 2021 represents a turning point for the company. For the last 4 years, really every year, we've had to face the challenge of financial headwinds, which have arisen as a result of the transfer of a large part of our business across to the nbn. And what that's done is it's meant that we've started each year with our EBITDA going backwards to the tune of up to $800 million. And this has been occurring in a market where competition has led to material reductions in both fixed and mobile ARPUs as well as technology disruption and significant structural change. In many ways, it's these dynamics which brought about our T22 strategy that we announced almost 3 years ago. And it's also these dynamics, in conjunction with a conviction around technology change, that led us to really announcing that radical transformation that was our T22 program. And we're now substantially through that program, and it's delivering significant benefits and outcomes, and also leading to the financial turnaround that I talked about before. So T22 has seen us invest in technology, digitization, networks, improved customer experience and also discipline around our capital management. And these strategies are paying off, as I said. We're performing well in the market and you can clearly see the path to underlying growth. So that's really why FY '21 is a significant year for Telstra. We also continue to progress our proposed legal corporate restructure, we announced -- which we announced back in March. And we expect -- and we are on track with the monetization of our tower assets, which again, I'll speak to further shortly. But let me just come back to the financial turnaround that I spoke to. The left-hand side of the slide on screen shows the evolution of our underlying EBITDA over the last several halves. The first half of FY '21, we reported underlying EBITDA of $3.3 billion, and we gave guidance for the second half of $3.3 billion to $3.6 billion. The turning point is also illustrated by our ambition for FY '22 and '23. The chart on the right shows the evolution of our full year underlying EBITDA from '21 and the ambition for mid- to high single-digit growth in '22, and to be in the range of $7.5 billion to $8.5 billion in '23. These figures for FY '22 and '23 are not guidance, they're aspirations or ambitions. So there are greater risks and uncertainties associated with them compared to our guidance statements. But nevertheless, the charts clearly demonstrate our confidence and the turning point which we are at. This $7.5 billion to $8.5 billion range is also important to support a $0.16 dividend inside our dividend policy and deliver a ROIC of around 8%. And we estimate that towards the bottom end of the range equates to a ROIC of around 8% in FY '23. I want to comment further on what sits behind some of the financial ambitions and draw out some of the operating metrics that we've been focused on as a business. The first is postpaid handheld Transacting Minimum Monthly Commitment, or TMMC, which is the leading indicator of mobile ARPU. Now pleasingly, TMMC has continued to have positive momentum since FY '19. It was up more than $3 in the first half of '21 versus PCP, and we expect a similar increase in the second half. The $5 increase across these years as well as the pricing changes that we're making to the base, is absolutely now flowing through to ARPU, which is very positive. And what we've seen is, in previous periods, our ARPU had a negative drag from pricing trends, but that's now turned positive. And in first half '21, we saw that positive improvement come through and we're confident that's going to flow through even more strongly into the second half. And then that will lead to mobile ARPU reaching a turning point and deliver growth. Really, our mobile business is clearly demonstrating positive momentum. We've got a really strong 5G leadership position and differentiation around that. We have a higher proportion of our customers choosing $65 or higher plans. Our digital engagement is increasing. We've got 2/3 of our mass market postpaid customers on in-market plans. And our loyalty program continues to scale. And likewise, we're seeing value accretion occur across our brands. So we've really got a lot of confidence that mobile EBITDA will grow again sequentially in the second half, and we expect further growth in FY '22 and FY '23 to support the ambitions that I discussed before. Secondly, in terms of Consumer & Small Business fixed broadband ARPUs, they stabilized in the first half of this financial year, thanks to customer migrations to in-market plans no longer being dilutive. And in this business, we're really focused on building value and achieving mid-teens nbn margins from about -- which were about 5% in the first half of this financial year. And that improvement, we expect to come through a combination of initiatives targeting gross margin improvements through speed and tier mix, add-on services, along with cost-to-serve reductions as we continue to deliver on our productivity program. Thirdly, we've continued to make strong progress against our productivity targets, reducing underlying fixed costs by around $200 million during the first half of FY '21, with approximately $250 million expected in the second half and a further $450 million in FY '22. As at the first half, we had achieved around $2 billion of net reduction in our fixed costs since 2016. And based on our strong progress to date, we lifted our target back in February from $2.5 billion to $2.7 billion by the end of FY '22. And we expect some of these further reductions to come from delivery of IT and network infrastructure cost reductions, realization from the benefits of what we're doing in digitization, including around product simplification, customer self-service tools as well as ongoing efficiencies within labor. Now at the same time as we're getting these improvements in underlying operating metrics, the major headwinds around nbn that I discussed earlier are starting to come to the end. The in-year NBN headwinds' negative impact on our business peaked in the second half of FY '20, reduced again in the first half of this financial year and will be substantially less again in FY '22. We also expect that COVID impacts will reverse over time. We had an estimated $200 million impact in FY '20, and we expect around a $400 million impact in FY '21. And that estimate is based off lower international roaming fees as a result of travel reductions, delayed cost-out, customer support initiatives and some deferred professional services contracts. So this is really why we are quite optimistic around the future, and that we are at a financial turning point. Now let me turn back to this year and comment on our progress around our T22 strategy and some of the initiatives there. Our first half results, we're on track to deliver more than 80% of our T22 scorecard metrics. Today, I'll speak to a few of those areas, but obviously, further detail is available in our public announcements. The first on simplification and digitization. As at our first half, digital service interactions accounted for more than 70% of all service interactions. Under T22, our aspiration has been to reduce the number of calls to our call centers by 2/3 by FY '22. And with the reduction -- or with the acceleration to digital that we're seeing, we're already actually at that run rate more than a year before the end of the strategy. So that means, over time, we're going to need less call centers for these customers, and we also expect more of our staff to work at home. So we're on track to have all inbound calls from our Consumer & Small Business customers answered in Australia within the next 18 months. Secondly, on our leading cost reduction program. With the progress we've made on simplification and digitization, our workforce continues to change. Since June 2018, we've produced 22,000 roles, including 6,000 in our direct workforce and 16,000 from our indirect workforce. At the same time, we've recruited more than 1,500 new roles with skills in areas such as software engineering, data analytics and cybersecurity. And third, on monetization of assets. We've exceeded our target of monetizing $2 billion of assets to further strengthen our balance sheet. And fourth, on network leadership. On 5G, we're not just leading in Australia, but we're among the leaders globally. Telstra's 5G network technology covers almost 2/3 of the Australian population and is on track to reach 75% by June 2021. We've also been successful in acquiring 1,000 megahertz of millimeter wave spectrum at the recently completed 26 gigahertz spectrum auction. And this spectrum will no doubt help continue to build our network leadership into the future. So lastly, on Telstra InfraCo. We've made continued progress in the establishment of this business. InfraCo is a fully operational business function with separate accountabilities and reporting. And we announced back in March, the progress to enable a legal restructure, which would see, first, the establishment of a new holding company for the Telstra Group; second, the creation of separate subsidiaries, including InfraCo Fixed, InfraCo Towers, ServeCo and Telstra International, and transferring the relevant assets into InfraCo Towers and ServeCo; and it's proposed that the establishment of the new holding company and the transfer of the relevant assets be undertaken by ways of schemes of arrangement, and Telstra intends to seek shareholder approval for these schemes. It remains our intention to complete this restructure around the end of this year, which will further increase our optionality and, we think, growth in these underlying businesses. On towers, once established InfraCo Towers will own and operate the largest mobile tower network in Australia. And we've been conducting due diligence and preparing documentation to support the monetization process of these towers, with potential investors in the third quarter of 2021, and we expect binding offers to be submitted in the fourth quarter of this calendar year. So to conclude, 2021 is an inflection point for the financial performance of our business. Our first half '21 underlying results remain challenged, including from nbn headwinds, legacy declines and financial impacts of the COVID-19 pandemic. However, our continued focus on T22 is delivering simpler, better outcomes for our customer and greater productivity, enabling us to increase our cost-out targets. Product margin improvement is also imminent and absolutely already occurring in mobile. We see clear positive indicators of an improved financial trajectory, which we expect will return us to underlying EBITDA growth in FY '22 and put us on the path to achieving our FY '23 financial ambitions. As I said earlier, 2021 is a significant year for Telstra. We have more to do, no doubt, but we have reached an important turning point, and we look forward with great confidence in our ability to deliver our growth and our strategic ambitions. I encourage you to view our complete set of first half results and investor materials available on our investor website. So once again, thank you for taking the time to listen. And should you have any questions at all on Telstra, please do not hesitate to reach out and contact us. Thank you.