Telstra Group Limited (TLS) Earnings Call Transcript & Summary

Good morning. Welcome, and thank you for joining our call on today's ASX announcement. I'm joining today from the lands of the Gadigal people on behalf of Telstra, I acknowledge and pay my respects to the traditional custodians of country throughout Australia and recognize the continued connection Australia's First Nation people have to land, waters and culture. We pay our respects to elders, past and present. This morning, I will make some brief comments on today's announcement and then open to questions from analysts and investors. Michael Ackland, our CFO; and Nathan Burley, Head of Investor Relations, are also on the call. Turning to today's announcement. Today, we announced measures to begin the reset of our enterprise business, simplify our operations and improve productivity. As part of today's announcement, we reaffirmed FY '24 guidance, provided early FY '25 underlying EBITDA guidance and said that we would be updating customer terms for our postpaid mobile plans to remove the CPI-linked annual price review. The measures announced today are difficult, but they are necessary. We need to be a more efficient and sustainable business, to ensure we can continue to make the investments needed to support the ever-increasing growth in data volumes on our network and deliver improved connectivity for customers across the country. Ongoing investment in infrastructure, technology, innovation and service for our customers drives growth and underpins Australia's digital economy, contributing to the prosperity of the nation. This is incurring within a dynamic environment with an evolving competitive landscape, rapid advances in technology, changing customer needs and the ongoing inflationary pressures all businesses are facing. Let me now step through the 4 components of today's announcement. Starting with our reset of Telstra Enterprise and the product simplification. At our half year results in February, we announced a detailed review of Telstra Enterprise, covering all elements of its domestic business. A number of actions have been identified to begin the reset of Telstra Enterprise. These will sharpen its focus on areas where it has the strongest differentiation, further improved delivery for customers and improve the cost base of the business. These include a streamlined product portfolio, reducing the number of NAS products in market by close to 2/3, a simplified customer sales and service model to better support customers and a reduction in the cost base of the Telstra Purple Tech Services business, particularly NAS products aligned with revenue and changing market dynamics. Our review of Telstra Enterprise is ongoing and the challenging market conditions we are facing remain the same. A further update on next steps, including progress on the actions above will be provided at our full year results in August. Let me now turn to how we are simplifying operations and action on costs. At our half year results in February, we noted that more significant action was required on cost. Today's proposed measures, which requires consultation with employees and unions would result in up to 2,800 job reductions from Telstra's direct workforce, with the majority of this to occur by the end of this calendar year. I appreciate the uncertainty proposed changes like this can create for our people, and we will support them through this change with care and transparency. Consultation on 377 rolls will begin immediately, mainly from areas supporting the products and services to be exited in Telstra Enterprise. In addition to starting the reset of Telstra Enterprise, we will reshape some of our internal operations by moving our Global Business Services function into other parts of the business. This will help simplify processes and empower leaders closest to customers to make more decisions. We will also continue to focus on a range of actions to reduce nonlabor and indirect labor costs. With these actions, we expect to achieve $350 million of our cost reduction ambitions by the end of FY '25. We expect one-off restructuring costs of $200 million to $250 million across FY '24 and FY '25. These costs will be excluded from guidance and are in addition to BAU annual restructuring costs. Let me now turn to our update to customer terms for our postpaid mobile plans. Today, we announced that we will be updating the customer terms for our postpaid mobile plans to remove the CPI-linked annual price review. This change simplifies our pricing strategy by bringing the approach to prepaid mobile plans into line with other products. This approach reflects there are a range of factors that go into any pricing decision, and will provide greater flexibility to adjust prices at different times and across different plans based on their value proposition and customer needs. As a result of this change, we will not be making a CPI-based annual price change to our postpaid mobile prices in July 2024. We will continue to review our pricing and any changes will be communicated to customers in a timely and transparent way. Our mobile business continues to perform strongly with growth in subscriber numbers for the first 4 months of this half, consistent with the first half of FY '24. This success has underpinned our EBITDA growth in FY '24 to date and reflects the high demand for our products and the value customers place on our differentiated network, its reliability and our flexible plans. Finally, turning to guidance. Today, we reiterated FY '24 guidance and provided FY '25 underlying EBITDA guidance of $8.4 billion to $8.7 billion. We are committed to delivering our T25 CAGR ambition for underlying EBITDA, EPS and ROIC growth. Our continued confidence in our capacity to grow mobile's revenue along with clear actions on cost and to reset our enterprise business has allowed us to bring forward our underlying EBITDA guidance for FY '25. We are just over 12 months from completing our T25 strategy and good progress has been made in a range of areas, including improving customer experience. Our strategy beyond T25 will build on the momentum created over recent years and help set the organization up for success through to 2030. Let me close my comments there, and we will now open to questions. A reminder that Michael Ackland, our CFO; and Nathan Burley, Head of Investor Relations, are also on the call. Can I ask Rachel, our call moderator, so please introduce the first question. Thank you.

[Operator Instructions] Your first question comes from Eric Choi with Barrenjoey.

One question, got it. Just on mobile, I guess, mobile and group EBITDA guidance, just thinking about those 2 things together. You're guiding for FY '25 EBITDA to grow $150 million to $450 million year-on-year. And it just seems to me to hit the top end of that guidance, Telstra would need to see a lift in postpaid ARPUs. And furthermore, given your postpaid price increases are delayed this year, though any price increases would also need to be higher than what you previously fought to achieve a similar outcome, i.e., possibly higher than CPI. So can you just confirm kind of logically thinking about mobile and EBITDA guidance the right way?

Thanks, Eric, for the question. And I'll make a couple of comments, and then I'm sure Michael will probably want to jump in as well. So first thing I would say is we've obviously issued our FY '25 underlying EBITDA guidance a little earlier than we ordinarily would and that really comes from, as I mentioned, that confidence in the growth we're seeing in the mobile business. And I would just reinforce that mobile business strength is across really multiple areas. It is the postpaid business performing well. It is our prepaid business performing well. It is a long boost and also our Wholesale business performing well. So -- and as we mentioned in the ASX release, we've continued to see mobile subscriber growth in the 4 months of this half running at a similar level to the first half of FY '25. So absolutely, we've got real confidence in our mobile business. In terms of the change we announced today to our customer terms, it removes the CPI-linked annual price review. It does provide us further flexibility. We said -- as we've said, we will not be increasing postpaid prices in July '24. And obviously, it's not appropriate to comment on any future pricing increases. We said pricing remains under review. And if and when we make those decisions, we'll obviously communicate those transparently to customers. But I just want to reinforce, we are very confident in the performance of the mobile business. We're confident in the actions we've announced on cost today, and we are beginning the reset of Telstra Enterprise. I do want to be clear on Enterprise, we're at the start of that detailed review that is still ongoing, and it will take some time to progress all of those actions to set it up for success. So all of those factors have come into play as we've thought about the underlying EBITDA guidance range for FY '25. But Michael, are there any areas you'd call out?

No, I think you've covered them, Vicki. And just in terms of, Eric, as you do that walk from -- on the EBITDA growth. Obviously, as Vicki mentioned, there's cost. At the half year, we talked about being about $105 million through a large majority of $500 million. And so as we committed today to the $350 million, that provides part of that walk from '24 to '25. And then we also -- at the half, we had mobile customer growth of around 4%, and we've seen that consistent growth continue into the second half, which means that we start '25 with a larger subscriber base than we started '24, which underpins that mobile growth as well. Now obviously, when you look at [indiscernible] when you look at the range, where business, there's a lot of businesses that will perform differently. And depending on where they land as we go through the year, that will depend on the range. And obviously, one of the areas of risk and concern is our fixed enterprise business and particularly NAS as we've talked about. So we are at the start of that reset. And in the EBITDA guidance we've given today we've accounted for, we think the range of sensitivities there. But on mobile, when we look at that customer growth that we've seen through '24, the range of products that we had from postpaid to prepaid, the range of brands in Wholesale in Boost, in Belong, we remain confident that we have a fantastic value proposition that customers continue to value and continue to value more.

Can I ask you a specific quick follow-up, just housekeeping, Michael? Just on those restructuring charges. Can we just confirm they will reduce tax paid and therefore, franking? And then rough math on that is maybe those restructuring charges could be an additional 0.5% negative impact on franked EPS and DPS.

Yes. So what we've said is that our -- the restructuring charge, we expect to be $200 million to $250 million over and above the BAU restructuring that we've had annually. And so that in our underlying guidance for next year and what it was in FY '22 was around that $70 million to $75 million mark. So on top of that, the $200 million to $250 million would absolutely be tax deductible, it would reduce tax paid. And you can calculate through what that [ lists ]. Our franking balance has been tight, but we believe it is sustainable, and we've factored that in as we thought about these restructuring charges.

Your next question comes from Tom Beadle with Jarden.

Just wanted to run some logic on cost savings and T25. So just with that 2,800 redundancies, I've calculated that probably drives about $360 million in annualized savings, assuming the average salary. So if were to assume you received 75% of the benefits of that in FY '25 and then were to exclude that from the $350 million of T25 cost savings, that probably infers that you might have only achieved $50 million to $100 million of the cost savings under T25. So I just want to check if that math is correct. And just if there's anything that might have changed in the past few months that's driven that outcome?

Yes. Why don't I jump on that one, Tom. So I think there's a couple of other factors that are worth taking into account. Obviously, there's costs that go up and down within our business. Particularly in that math, we need to account for the fact that some -- we will have, as always, annual salary rises across the entire base. This -- the 2,800 represents a bit under 10% of our employee base. So the other 90%, their costs increase as we go into the year. So when you look at it on a net basis, it's a smaller number. Your calculation is on a gross basis, I think are probably pretty reasonable. But yes, you need to account for the fact that there's other costs that will be going up. And the big one is the rest of that 90% of the employee base, their salaries will increase -- an increase through '24 and they'll increase in '25. So -- and just to repeat, at the half, we said out of the $350 million, we've achieved about -- a bit over $100 million of that in the first half. We expect it on a PCP basis. The second half, we wouldn't see a whole lot more. So that's what we're expecting in '25 is the remainder. On a net basis, a net nominal basis net of all of those inflationary costs in salary rises.

Next question comes from Lucy Huang with UBS.

Vicki and Michael, in relation to your comments around mobile subscriber growth currently tracking in line with the first half. It sounds like momentum is still pretty strong there. Just wondering if you've seen any noticeable shift the mix between postpaid, prepaid and wholesale like anything to point out there over the last 4 months.

Yes. Thanks, Lucy, for your question. And I mean, broadly, we've seen the overall mix continue to trend pretty consistently with what we saw in the first half.

Great. So no kind of trading down in this kind of environment with still like a -- macro uncertainties?

No. I mean, as we talked about in February first half results, we continue to see absolutely that connectivity services, whether it's mobile, broadband, I think for a lot of consumers, even though [ that are doing it tough ], it remained pretty high in their priority [ share ] of services that they want to maintain, obviously, being connected is important to access a range of services, particularly if you're someone experiencing financial challenges. So we continue to see consumers wanting to remain connected and keeping their services with us. Obviously, we don't have lock-in contracts. We have a range of brands that people can access different propositions, and we do support customers who are -- who do find themselves in financial hardship. So at this stage, all of the trends and mix that we're seeing continued pretty consistent with what we saw in the first half.

Your next question comes from Darren Leung with Macquarie.

I just wanted to ask about postpaid churn, please. And I'm just looking at the first half number at 11.4%. Can you give us a feel as to what it's done in the first 4 months of this calendar year, please? And I guess I'm asking in the context of trying to underpin what's driven the decision to defer the postpaid price increases.

Michael, do you want to comment?

Yes. Darren, we haven't seen -- and I think it goes a little bit back to Lucy's question around downshifting and mix. We haven't seen any significant shift in that, we tend to get it a little bit different first half, second half churn, and it was 11.4% in the first half, as you rightly point out. We're expecting a pretty similar number for the second half. I haven't seen any trends that would suggest that's significantly different [ data ].

Your next question comes from Kane Hannan with Goldman Sachs.

Maybe just looking retrospectively, I mean if you didn't have the CPI linkage structure in your plans last year, how would you view change postpaid pricing? I'm just trying to understand, you've seen all the time and effort conditioning the base to expect an annual price rise and giving the market and customers' visibility about what it should be. I mean, why would you walk away from that? This is the question.

So Kane, why don't I jump in? And I can understand why there are a lot of questions about the change today, just to reinforce. So firstly, it brings postpaid mobile plans back in line with the rest of our product portfolio. So that does help simplify a little bit in terms of our approach to pricing and making those choices and decisions. The second thing I'd say is it does give us flexibility, gives us flexibility, obviously, over the longer run as well because we know there are many factors that need to be taken into account when we make pricing decisions. We also know we have very different customer needs and value propositions in the market, even when I look at the Telstra Branded postpaid offering. Obviously, the customers that choose the various plans have quite different needs and demands. So the change we've announced today does provide us that additional flexibility over the long run.

Okay. Maybe just quickly a follow on. If I think about your 2030 outlook then, I mean, you've taken it out of the contract. But do you think CPI-esque mobile ARPU accretion is still something that's possible or you've started to tap out in terms of ARPU growth going forward?

Kane, the thing we're focused on is we obviously invest at a different level in our network, in our services, in the technology and experience we provide. And we continue to see customers value that. And we're seeing that through these 4 months again in terms of that subscriber growth in the business. And so that's what we're focused on. We've got to make the choices and decisions overall for our business. We know there is ever increasing demand for data, for ever increasing and better connectivity across the country. And so as we invest and as we deliver a differentiated experience, we will make prices -- we'll make choices and decisions around that in all aspects of our business. So our focus is really on making sure what we're investing in, what we're delivering delivers that differentiated experience for our customers. And ultimately, customers will be the judge of that. And as I said, 3 to 4 months, we -- to date as we talk, we continue to see customers make that choice.

Your next question comes from Entcho Raykovski with E&P.

My question is also on the change in approach to [ asset ] pricing. And I'll just say clearly, we'll focused on this, but -- did anything change in the market, in the mobile market over the past few months, which has driven this change in approach to postpaid pricing? And then looking forward, you've obviously said you're not putting it through till July [ an increase ]. What are the key factors going forward which will drive the likely decision whether to increase prices in the future?

Thanks, Entcho for that and for the question. First thing I'd say is, obviously, it's a competitive market and it continues to be a competitive market. But our focus is always on -- as I said, it's about how do we differentiate, where we invest, how what we deliver meets the needs of customers and does provide, frankly, a better experience. And we know our mobile network, its coverage, its performance, its reliability, the security that we provide through lots of technology and services over our network. It is a differentiated proposition. And so yes, it's a competitive environment, but we remain confident in our ability to invest and differentiate. As you point out, today, we've announced we won't make price changes in July for our postpaid mobile customers. Part of the change for the customer [ paying ] does give us more flexibility because there are obviously, a range of factors that need to be taken into account, not just CPI when we're making pricing decisions. And we continue to review pricing. As I said, if and when we make those decisions, we will obviously communicate that very transparently with our customers first.

The next question comes from Roger Samuel with Jefferies.

So with the 2,800 job reductions, you're required to consult with employees and unions. So how should we think about the enterprise agreement that is going to expire in September this year? Do you think you need to make some compromise to get through this reduction program? Or perhaps given the fact that you removed the annual CPI increases for mobile, that may imply that you're more confident with the outcome of the enterprise agreement?

Yes. Thanks, Roger for that. And look, as you point out, you're spot on. Our current enterprise agreements expire in the September of this year. We commenced bargaining with our employee representatives and with the unions a little while ago. We were keen to enter those good faith negotiations because we know for our teams, having some certainty in getting new enterprise agreements voted on will be important. So those negotiations are underway and ongoing. As you would expect, this morning as we made these announcements, we've also spoken with the unions. As part of those negotiations, look, we have very constructive relationships with our unions. We also have our employees engaged and part of those discussions. So they are ongoing. We do now need to consult, so we will begin consultation today on the 377 jobs proposed to be impacted. I would expect as that consultation process happens, we are likely to be in a position where we would make changes on both proposed jobs by the end of July. I anticipate by mid-July, we will be in a position to then provide more detail to our teams internally on the further job reductions and impacts. And again, with those we will enter consultation with our teams and with the unions. So look, as I said, negotiations -- in our [ EA ] negotiations are underway and I expect we'll have ongoing constructive conversations with our employees and with unions on the back of today's announcement.

Next question comes from Brian Han with Morningstar.

On the restructure, does it encompass the fixed wholesale business in any way? And if not, I guess, why not?

I'm not sure [indiscernible].

To restructure any of the cost out of fixed wholesale. It's cost out, Brian, across all parts of the business and including fixed wholesale and our InfraCo business, there would be there is cost out as well.

Right, I only ask -- I only ask, Mike, because when you guys turn the -- coined the term reset you specifically confined it to fixed enterprise. So just wondering whether that resetting process encompasses the wholesale business?