Telstra Group Limited (TLS) Earnings Call Transcript & Summary

Hello, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference. I'm pleased to announce that our next presentation will be from Telstra, headquartered in Australia. Before I introduce our speaker, a few points to note. Once the presentation is ended, don't log out. You will automatically be transferred into the Telstra booth where you can submit questions via e-mail. On a note, all of 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 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 TLSYY. Welcome, Nathan.

Great. Thank you, [ Vola ], and thanks, everyone, for listening in. Look, today, I look forward to being able to provide you with an overview of Telstra's business and also take you through some of the significant momentum that we are seeing. So a bit of information around Telstra at a glance where Australia's leading telco company. Our purpose is to provide and build a connected future so everyone can thrive. So we've got around 1.2 million shareholders, which makes us the most widely held stock in Australia. The market capitalization is around AUD 45 billion. We've got a A- credit rating from Standard & Poor's and A2 from Moody's. We've got around 19 million retail mobile services, 3.6 million consumer and small business broadband services. We've also got quite an extensive international business operating in and around -- or in over 20 countries outside Australia, and we've also recently expanded through the announced acquisition of Digicel Pacific. We were certified carbon-neutral in our operations in July last year, and we have further climate targets, including to enable renewable energy, equivalent to 100% of our consumption by 2025 and to reduce absolute emissions by at least 50% by 2030. Now as I mentioned, we have -- do have some significant events in our business and 2021 has really been quite a significant year for us as a company. And it represented quite a big turning point in the financial -- in our financial trajectory. Really, for the last 5 or 6 years, every year, we've had to face the confrontational or confronting challenge of financial headwinds arising from the transfer of a big part of our business to the Australian government-owned NBN. And this has meant that every year -- we started the year with our EBITDA going backwards by around $800 million. And this has also occurred in a market where there's been competition, which has led to material reductions in ARPUs, both fixed and mobile as well as technology disruption and significant change across the industry. However, as I'll address shortly, we are seeing these market dynamics now changing very much in our favor. So look, in FY '21, we reached that significant turning point. We saw second half underlying EBITDA growth in the first half. We also can give guidance for FY '22 underlying EBITDA in the range of $7 billion to $7.3 billion. So representing sort of mid- to high single-digit growth on '21. NPAT and EPS were also up, respectively, in FY '21. So look, this is a big milestone of our T22 strategy, which I'll talk to more shortly, and we've announced that around 3 years ago and it's really been quite fundamental in us transforming and radically simplifying Telstra. So the T22 strategy that I mentioned, it's seen us invest in technology, digitization, our networks to deliver quite improved customer experiences and without really active in strong conviction, given how the technology innovation cycle was continuing to accelerate and it set us up really well to perform through the COVID disruption that we've had over the last year or so. Really these strategies under T22 have been paying off, and we've really been performing well in the market to deliver that underlying growth. We've also had recently closed some sales. So we sold 49% of value for hotel business, receiving net cash proceeds of $2.8 billion. So a really positive transaction, which valued our tower assets of $5.9 billion or 28x pro forma FY '21 EBITDA after leases. So a really strong multiple for that business showing the value of our infrastructure assets. We've also continued to progress our proposed legal corporate restructure, which we announced back in March, and we expect this to drive further value as well. Likewise, in '21, we've made strategic acquisitions in line with our strategy and investment criteria. We're excited by Digital Pacific, which will sit under Telstra International. We also acquired businesses called Medical Director of Power Health, which were part of our Telstra Health business. In that health business, we've got an ambition to grow that to around $500 million of revenue by FY '25. Digicel, which I mentioned is the leading telco operator in the South Pacific. It came in partnership -- we purchased that in partnership with the Australian government with substantial financial and strategic risk protections provided by the government. And we've had a positive reaction from the market to that transaction. And finally, I suppose, this year, we also announced what comes next in terms of our strategy, what comes after T22, and that's T25. This is really a strategy to accelerate growth from our core to scale new businesses as well as the strategy to really respond to some of the permanent ships that we're seeing in how people work and live. And finally, it's a strategy to capitalize on InfraCo, which I talked about briefly as well as the corporate restructure that we're doing. And I'll talk more about T25 shortly. I'll go to some of the financial headlines around our recent results from FY '21, you'll see income down around 11.6% to the $23.1 billion, although that was associated with weakness in mobile hardware. Underlying EBITDA, which, for us, excludes one-off NBN income and guidance adjustment, that decreased 9.7% to $6.7 billion. However, this did include the in-year NBN headwind of $650 million, which I talked to before, as well as an estimated $380 million financial impact from COVID from things like loss of international roaming. And even with these headwinds, what we did see though is that underlying EBITDA increased from $3.3 billion in the first half to $3.4 billion in the second half. So that momentum that we -- I talked about earlier, we are starting to see. Likewise, encouragingly, EPS was up $0.02 per share, $0.156 and free cash flow up 11.6% to $3.8 billion. And finally, we paid a final dividend $0.08 per share, bringing the total for the year to $0.16. And we've also recently commenced an on-market buyback. We announced that at our results and -- of $1.35 billion, and we're using some of the proceeds for Towers deal to execute that. In terms of some of the operating highlights, we continue to see strong customer growth in mobile. Although, we have seen the market slow due to COVID. There's been a bit of a reversal in Australia of net migration and population growth as well as some hardware supply shortages. So we added 101,000 net retail postpaid mobile services, including 67 branded and 34,000 from our alternative Belong brand, which is an important brand new market for us. And really, that performance, especially on main brand is illustrating our leadership in 5G. Importantly, mobiles, we also saw our lead indicator, which we call transacting minimum monthly commitment, or TMMC, that increased by $3. So it's showing the positive impact from -- and including some of the recent price rises that we've put through the market. And that focus on building value in mobile as a result of the mobile EBITDA growth of $170 million in FY '22, which we expect to continue into -- sorry, $170 million in FY '21, which we expect to continue into FY '22. In terms of the loan, we lost 69,000 bundled subs in the year. And finally, we did make really good progress in our productivity program. Total operating expenses down $1.8 billion, so more than 10% and underlying fixed costs down $490 million, which is obviously contributing to our growth. I want to spend a bit more time expanding on some of the financial turning point and momentum that we've got in the business. What you'll see on the slide on the screen is that the left-hand side shows the growth we achieved from the first half to the second half in FY '21. And the chart on the right shows the evolution of our full year underlying EBITDA, including guidance for FY '22 of $7 billion to $7.3 billion and our aspiration to be in the range of $7.5 billion to $8 billion in FY '23. We also communicated recently in our Investor Day that we expect further growth into FY '25 and for that growth in EBITDA to flow through to EPS. I'll talk to now our progress we made around T22 and the success that we've had with this strategy. We're on track to complete and deliver around 80% of the metrics that we outlined over 3 years ago. We've got 8.8 million services on 20 new simplified consumer small business plans. We don't have any more plans than 20 in market, which drives significant simplicity across the business. We've got over 3.5 million signed up to our rewards program, Telstra Plus, which is really seeing strong engagement from customers, and there's a lot of opportunities that are coming from that. And under our T22 strategy, we had the aspiration to reduce the number of calls into our contact centers by at least 2/3. And with some of the acceleration in terms of digital engagement, we've achieved that target 1 year early. We're also on track with the transition of full ownership of Telstra branded stores under Telstra ownership. We previously outsourced a lot of this, and we've now got agreements with most all the licensees to bring that in-house. We will hopefully further improve our customer engagement. We've met our T22 targets to reduce our workforce by 8,000 net. We've also got a very proud history of having world-leading mobile networks, and we're absolutely -- we've absolutely continued that under T22. We've got a very strong focus around 5G and what we achieved under T25, which I'll talk to shortly. So our 5G network is about twice the size of any of our competitors here in Australia. We also cover around 75% of the Australian population with 5G. And at June, we had over $1.6 million and obviously, growing very fast 5G devices connected. In terms of infrastructure around our scorecard and metrics, InfraCo in FY '21 has a full year of operation as a fully operating business unit in Telstra. We had passive income of 1% to $2.2 billion and towers income of $340 million. And as I mentioned earlier that the sale of -- or part sale of our towers business really reinforce the value of those infrastructure assets valuing that business, as I mentioned, around 28x EBITDA after leases. We also made really good progress to increment the corporate restructure, and we do expect that to complete in FY '22. That corporate restructure sees us -- put a holdco on top of the business and then a number of subsidiaries under net, including InfraCo Fixed, Amplitel, which is our towers business I spoke to and then Telstra Limited, which is serve call the retail business, along with our international business is also a separate subsidiary. And this is really designed to further increase our optionality and create more value for shareholders going forward. We'll turn to our T25 strategy, which is really a strategy for growth. Like T22, it's built around some key pillars, and there are 4 of these pillars. The first one is to provide an exceptional customer experience. Look as we've navigated the migration to the NBN and responded to the consequences of COVID, it's really become clear that exceptional customer service must be our #1 objective and nothing is going to change in terms of our strategy on that. The second pillar is to provide leading network and technology solutions, very much our heritage and never have such network and tech solutions and leadership being more important, especially, as you know, with 5G and soon 6G, satellite cloud, edge compute and these sort of things. The third pillar is to create sustainable growth and value for our shareholders. And as we move forward from a period of the transition to the NBN and convoy out from that economic headwind, the significant interventions we've had in turning our business around and taking costs out are now starting to flow through to the bottom line. And this really does position us for the value creation through this strategy. And I'll elaborate a bit further on our financial strategy shortly. The fourth and final pillar is the place you want to work. In the post-COVID world, we need to complete for the best talent, excel at flexible hybrid ways of working and be a leader in doing business responsibly. And that's really what we're committed to. Let me go into a bit more detail around our T25 financial strategy which I mentioned. This strategy has around 5 building blocks to deliver growth and value, again, building on the foundations of T22. But first, we will build financial momentum across our portfolio to deliver growth. We're entering a new phase under T25 that we haven't been in for a while, and that's -- we expect top line growth to also be a driver of EBITDA growth in addition to strong cost out, which we do expect to continue. And indeed, that's the second pillar of our financial strategy to deliver $500 million of net cost reductions from '23 through to FY '25, despite continuing to invest for growth. And these costs out of $500 million is in addition to the $2.7 billion that we've targeted under T22 and very well on the way to achieving. Thirdly, we'll continue to focus on cash conversion and generation, converting EBITDA into cash, including through CapEx discipline, working capital improvements and reducing lease and finance costs. And here, we do expect that cash flow will remain ahead of accounting earnings, given there's quite a large structurally lower D&A than our CapEx outlook. Yes. So we expect business as usual CapEx for the business around $3 billion, and that to be around $600 million lower than adjusted D&A due to what we've seen in terms of higher -- historically higher CapEx and also the mix of asset lives for our CapEx now versus where it started. So this structurally higher cash flow ahead of accounting earnings provides obviously significant flexibility for further investment in capital management as well, which I'll talk to shortly. And fourthly, we will be an active portfolio manager to unlock value and manage our balance sheet. We've got a really strong track record on portfolio management, illustrated through our successful monetization of $2 billion of assets through T22 and also the recent Towers transaction that I spoke to. And finally, in terms of the financial strategy, we'll create value through our capital management payment. We'll continue to apply fiscal discipline and use this framework to manage capital and deliver shareholder value. In terms of the financial ambitions from our strategy, which you see on the bottom of the slide, our ambition is to achieve $7.5 billion to $8 billion of underlying EBITDA by FY '23 and then mid-single-digit CAGR from '21 to '25. And look, as illustrated, we've -- today, we have strong confidence that the momentum we've built, and we will continue and enable us to deliver on these financial commitments. For ROIC, our ambition is to deliver around 8% by FY '23 and to grow this beyond FY '25. And for EPS, our ambition is a high-teen CAGR from '21 to '25. So we do expect the growth that we're achieving in EBITDA to fall through to EPS. Look, our capital management also includes a dividend policy that we will maximize our fully franked dividend and grow it over time. And this dividend principle -- it reflects our intention to return as much cash flow to shareholders via fully franked dividends, which are very important to our shareholders and to return as much, which can be sustainably supported by earnings and franking while also balancing the objectives and principles of the broader capital management framework, including an A band credit rating. Look, we're confidently maintaining a minimum $0.16 per share fully franked dividend, subject to no unexpected material events and the requirements that I mentioned earlier. Look, finally, for excess cash flow, our intention is to use the flexibility provided by our cash flow being greater than earnings to invest for growth and deliver additional returns to shareholders. Look, to conclude, I think I've -- hopefully, you've seen that 2021 has been really an inflection point for the financial performance of our business. We are now a simpler, leaner and more digital company than where we were when we started T22 a number of years ago. And we have clear positive indicators of the improved trajectory in our business, including to deliver underlying EBITDA growth in '22. And we see that putting us on a path to achieving the '23 and '25 ambitions that I've outlined. We also expect to deliver growth more broadly because of our T25 strategy and stay disciplined and focused around that. Now I would encourage you to view our complete set of materials on our investor website. There's links on the screen. But also, should you want to contact us or have any questions, please do not hesitate at all to reach out to me, [email protected], that's [email protected]. But thanks again for listening, and look forward to further engagement.