TPG Telecom Limited (TPG) Earnings Call Transcript & Summary

This is Bruce Song, speaking from the TPG Telecom Investor Relations team. Welcome to our presentation for our results for the Full-Year Ended 31 December 2023. TPG Telecom acknowledges the traditional custodians of country throughout Australia and the land on which we and our communities live, work and connect. We pay our respects to their elders, past and present. Our CEO, Inaki Berroeta, will begin today's presentation with the results highlight and business update. Our CFO, John Boniciolli, will then present our financial performance in more detail, before Inaki closes the presentation with a summary of our strategy and outlook. Other members of the Executive Leadership team are also here for Q&A. I will now hand it over to Inaki.

Thank you, Bruce, and good morning to everyone. 2023 was a really strong growth year for TPG Telecom. We are simplifying our business, reducing complexity and elevating the service we offer to our customers, while at the same time delivering above market growth rates. The highlight of the year was the performance of our mobile business, where service revenue increased 9.3%, driven by the subscriber growth we had coming into the year, and successful plan refreshes across our premium postpaid products. In fixed broadband, the expansion of our fixed wireless offering help us grow margins, and we are now shifting focus to stabilize our overall subscriber base amid intense competition. Our enterprise, government and wholesale business continues to grow its core connectivity products, and we are focused on maintaining and building sales momentum amid challenging market conditions in 2024. We're executing our key strategic priorities. Customer transformation is well underway. In 2023, we're reducing market front book plans by 40%. In 2024, we will focus on significant rationalization of our back book or legacy plans. We made significant progress on the upgrade of our national mobile network, with 5G now installed across more than half of that network. We continue to explore infrastructure sharing options to help us deliver on our commitment to bring a stronger competition and value to regional Australia. The strategic review of our fiber infrastructure assets is progressing, as we assess value optimizing options following our decision to seize discussions with Vocus last November. Off the back of a strong result, we have a positive outlook improving over the medium term. Our 2023 EBITDA result was $1.93 billion on a guidance basis, excluding transformation costs and impairment on the Internode brand, which we have stopped selling and plan to transition to our major brands. This reflects growth of 7.6% on 2022, and was in the top quartile of our original 2023 guidance range provided in February '23. Today, we are providing guidance for 2024 of $1.950 billion to $2.25 billion, but inclusive of transformation costs. Recognizing these costs are likely to continue up to and including fiscal year '26, so should not be excluded from guidance. Beyond '24, we expect growing momentum in our cash earnings outlook. This will occur as recent working capital movements normalize, we complete the 5G rollout, transformation costs lessen and debt reduction and potentially lower market interest rates reduce funding cost headwinds. I will now provide a summary of our '23 financial results. Service revenue was up 4.3% to $4.632 billion, driven by strong growth in ARPU and subscriber numbers compared to the previous year. Statutory EBITDA was down 12.2% to $1.875 billion, reflecting the $402 million one-off gain we recorded on the sale of our passive tower and rooftop assets in the year '22. We gave our updated guidance last August, with transaction costs included and transformation costs and material one-offs excluded. On this basis, EBITDA of $1.93 billion was up 7.6%. Excluding the transaction costs, EBITDA would have been $1.961 billion, up 9.4%. Statutory NPAT of $49 million was also impacted by the one-off tower sale gain from fiscal year '22. We use adjusted NPAT as a reference for our dividend payout, removing one-offs, as well as non-cash tax and amortization from spectrum and customer base intangibles. Adjusted NPAT for fiscal year '23 was $584 million, down 6.9%, primarily reflecting higher expenses for interest, depreciation and amortization. Earnings per share, adjusting for customer base, amortization and one-offs was $0.119 per share and was down for the same reason. Cash capital expenditure of $1.126 billion was up 20.1% on 2022 and broadly consistent with our updated guidance from last August, reflecting investment in the 5G rollout and IT transformation. Notwithstanding higher CapEx, operating free cash flow was up 81.5% to $167 million on higher EBITDA and an improvement in working capital movements. The Board has declared a final dividend of $0.09 per share for a total of $0.18 per share for the year. This holds dividends constant on fiscal year '22, despite the reduction in the '23 net profit and reflects our confidence in TPG's cash earnings. Return on invested capital, adjusting out goodwill and other intangibles, increased to 6.1% in fiscal year '23, up 40 basis points, reflecting underlying earnings growth. I will now talk about our brand positioning, which is changing in line with our transformation program. Vodafone is strongly positioned as a value leader among Tier 1 telco brands. Our plans and products offer superior data inclusions compared to our competitors, as well as a host of exclusive benefits such as our global roaming offering and our partnership with Live Nation, allowing early access to live music tickets. We are proud to be a value leader as we evolve the brand portfolio. In December, we announced we were stopping the sale of some of our secondary brands, Internode and Westnet. This focus our value brand position to TPG and iiNet. These brands remain the home of great value, high-speed Internet in Australia, focused on simple, not fast offerings and with increasingly popular mobile plans. Across our brands, customer experience simplification is progressing and will accelerate over the next couple of years. In addition to brand rationalization, we have been exiting complex legacy products such as e-mail. And in year 2023, reduced the number of front book plans in market by 40% to about 110 plans. This transformation to make things simpler for the customer is supported by IT system consolidation and modernization. In 2023, we moved 37 applications to the cloud, and we decommissioned a further 43 applications. This year, we are targeting a 50% reduction in our back book consumer plans, as well as a large reduction in plans for our small to medium business customers. We will undertake additional decommissioning of legacy systems and move another 40 applications to the cloud. The targeted state of all this is a cleaner customer focus, with no more than about 100 mass market plans and products, a significant improvement in the quality and reach of our digital interface and enhanced cross-selling capabilities across products and services. This will be enabled by having a single application stack for each of consumer and enterprise, government and wholesale, and a cloud-first approach to our entire IT architecture, reducing the total cost of ownership. This focus on simplicity and modernization is supporting the strong performance of our mobile business. The combination of subscriber growth momentum and the plan refreshes we implement in postpaid at the start of the year have driven this result. Customers are paying slightly more for plans in postpaid, but they are consuming more data, so the unit cost of the consumption continues to fall. Mobile service revenue was up 9.3% in total, 9.9% to $1.673 billion in postpaid and up 7.3% to $482 million in prepaid. This reflected ARPU growth of 8.5% to $45.80 in postpaid and a slight reduction in ARPU to $18.90 in prepaid. Subscriber numbers were up 17,000 in postpaid, following growth of 86,000 the year before and 167,000 in prepaid with growth across all our brands. Our key focus on '24 is to rationalize plans and products, with total service revenue growth expected to continue, albeit at a lower rate as subscriber growth momentum slows. We have recently commenced notifying customers of our plan updates on some of our Vodafone postpaid and prepaid plans, as well as Lebara. Access fees have risen, but we are increasing the monthly data allowance for most affected plans, and we are confident our new plans offer great value in the market. Price adjustments support our ongoing investment in technology, security and network capabilities to provide a greater customer experience. In our fixed broadband business, our focus in the last couple of years has been on driving profitability against a backdrop of higher NBN wholesale costs. We have delivered on that objective, with very strong growth in our on-net fixed wireless offering and targeted NBN pricing updates, delivering average margin per users of 13.6% to $25.90 in 2023. However, total subscriber numbers have fallen. We grew in fixed wireless by 56,000 subscribers to 227,000 at the end of last year, making us the largest provider of fixed wireless services in Australia. But our net subscriber numbers were still down 91,000, primarily reflecting the impact in the NBN market and on-net products of aggressive competition from smaller and non-telco entrants. In 2024, we are focused on stabilizing our overall fixed broadband base. We have had a strong uptake on our NBN fiber connect offering since introducing that product last year, and we expect our fixed wireless customer base to continue to grow. Plan refreshes remain very targeted. We have recently commenced notifying customers of plan updates on some of our TPG and iiNet NBN plans. Those changes reflect a range of factors, including the update Special Access Undertaking, but generally, some lower and mid-speed plans will see a price increase while prices for some higher-speed plants are coming down. Our fixed wireless and on-net fixed products remain great value alternatives to NBN. In enterprise, government and wholesale, we have continued to grow revenue and gross margin despite challenging market conditions. Service revenue in enterprise and government was up 2.8% to $732 million. This reflected ongoing strength in sales of our on-net fast fiber and NBN Enterprise Ethernet products, as well as bespoke managed services such as software-defined wide area network products. Gross margin was up 6.1% to $537 million, following a concerted effort to deliver direct cost efficiencies on top of revenue growth. Our focus is on our range of connectivity and network products, on growing sales in the small to medium business segment and on maximizing value through increased utilization of our fixed infrastructure base. In wholesale, the decline of non-core products using older voice or fixed access technologies remains a drag on revenue growth. Wholesale revenue, excluding Vision Network, was down 3.5% to $276 million, with gross margin down 6.4% to $204 million. There remains a significant opportunity to grow our wholesale mobile business, noting the intense competitive landscape. Vision Network was reported as part of the wholesale segment for the first time in 2023, following the completion of functional separation from the retail operations and the relaunch of the business and brand. Sales revenue was up on a pro forma basis to $108 million, reflecting the introduction of new wholesale rate cards early in the year. In 2024, Vision is targeting subscriber growth through competitive pricing plans and credits for new retail service providers. The ongoing investment in our mobile network remains a key feature of our strategy and an increasingly powerful aspect of our value proposition to customers. We have now upgraded more than 3,000 sites to 5G. That's over half of our network sites, and we intend to complete the metro 5G upgrade in fiscal year '26. Huawei transmission equipment has been decommissioned and upgrade in all metro areas. We were the first Australian telco to shut down our 3G network nationally and the first to implement a dual-core network enabling 5G. We continue to explore infrastructure-sharing options to increase our mobile network reach in regional Australia, which would enable a step change in value and competition for people in these areas. Our people are thriving as we nurture a strong company culture around our vision to be Australia's best telco. This slide shows just 2 examples of initiatives that are making a strong contribution. Our leading with the Spirit program has now been attended by 831 leaders over 3 years, supporting a strong increase in leadership scores across our employees surveys. I'm also really proud of the AccelerateHER program launched in 2023, targeting female employees in technology and engineering roles. We have seen a 7% increase in engagement in that cohort, and we'll continue to invest in the development of this important group in the coming years. We are also progressing with our sustainability goals. Information security is a major component of our social contract. In addition to investing heavily in our internal cyber capabilities, we are increasingly participating in cross-industry collaboration initiatives to protect customer information. In 2023, this included intelligent-sharing partnership with Commonwealth Bank of Australia and the Australian Financial Crimes Exchange. We are working towards our target to power 100% of our operations with renewable energy by 2025. An important step in our emission reduction program in 2023 was having our emission reduction targets validated by the science-based target initiative, the first Australian telco to achieve this validation. We launched our supplier engagement program to address key issues, including energy use, greenhouse emissions, human rights, modern slavery, nature and biodiversity and waste reduction across our supply chain. We received conditional endorsement from Reconciliation Australia for our reconciliation action plan under the Innovative RAP framework. In the area of gender diversity, female representation in our Australian workforce increased to 34.9%, just below our 2024 target of 35%. We were also awarded HRD's 5-Star Employer of Choice Award for the second year in a row. I'm delighted that we are making a strong progress on these goals for our people and community at the same time as we deliver improving financial performance and accelerate our business simplification. I will now hand over to John to talk in depth about the financial results.

Thank you, Inaki, and good morning, everyone. It is a pleasure to be here to present my first results as TPG Telecom CFO. I want to say thank you to Grant Dempsey and the whole TPG finance team for their support in the transition. I'm looking forward to spending more time with investors and analysts over the next couple of weeks. I will start with the EBITDA result for the year. The FY '23 statutory result of $1.875 billion was, of course, lower than FY '22 due to the gain on the tower asset sale of $402 million that occurred in FY '22. We achieved FY '23 EBITDA of $1.93 billion on a guidance basis despite incurring higher transaction costs. The strong year-on-year result was primarily driven by operating performance in mobile, as Inaki has already noted, where service revenue grew 9.3%. Our original FY '23 guidance provided in February 2023, was for EBITDA of $1.85 billion to $1.95 billion, after removing an estimated $50 million of transformation costs. We upgraded this guidance at the half year results to $1.925 billion to $1.950 billion despite absorbing $20 million to $25 million of estimated transaction costs. At that time, we also provided an updated outlook for transformation costs at $35 million to $40 million. Transaction costs grew beyond our estimate to $31 million, owing to the attempted Vocus deal, adding to costs already incurred on the Vision Network strategic review and the attempted MOCN with Telstra. Adding back the FY '23 transaction costs incurred translates to an EBITDA of $1.961 billion, above the original guidance range, that is, if transaction costs were not absorbed into guidance. This represents 9.4% year-on-year growth in EBITDA. Capital expenditure of $1.13 billion in cash terms and $1.08 billion in accrual terms came in broadly in line with the updated guidance we gave at the half year. I'll return to EBITDA when I discuss our FY '24 guidance. I'll first get into more detail on the FY '23 result, starting with revenue. This slide shows total revenue, which grew 2.2% in FY '23 to $5.533 billion. Total service revenue growth was $193 million or 4.3% to $4.632 billion. This compares with FY '22 service revenue growth of 1.5%. The FY '23 result was driven by strong performance in consumer mobile. This was a result of subscriber base growth in prepaid in FY '23, as well as the cumulative effect in FY '23 of the subscriber base growth in both prepaid and postpaid that took place in FY '22, combined with plan refreshes in postpaid, which supported ARPU growth. Total mobile service revenue growth was 9.3%. Consumer fixed service revenue was flat year-on-year. The decline in our NBN subscriber base in the year was offset by the benefit of the increase in our fixed wireless base as well as ARPU growth. Our focus in FY '24 is on stabilizing and optimizing the fixed broadband customer base. Enterprise, government and wholesale service revenue, excluding the Vision Network business in wholesale, grew 1.7% in FY '23 despite challenging market conditions. Good growth in mobile, on-net Fast Fiber and NBN Enterprise Ethernet was offset by declines in older technology, voice and connectivity products. Revenue from these older technology products was $149 million in FY '23, down from $187 million in FY '22. The $15 million growth in other service revenue was driven by Internet of Things and growth in roaming revenue from inbound visitors. In FY '23, inbound and outbound roaming revenues returned to and now exceed pre-COVID levels. Hardware revenue was down $79 million or 7.7% to $901 million. This was primarily volume related, with lower sales as the customer upgrade cycle for personal devices continues to lengthen. Margins on hardware are, of course, small, so there is minimal gross margin impact from this reduced volume as shown on the next slide. Our total gross margin growth was $264 million or 9.3% to $3.105 billion, a significant step-up on the FY '22 growth rate of 1.9%, excluding the tower sale gain. This demonstrates operating leverage as both gross margin and EBITDA growth were stronger than both total revenue and service revenue growth. The FY '23 result reflected the strong mobile service revenue growth in both consumer and EGW as per my previous slide, combined with a $56 million reduction in direct telco costs. This reduction in cost was due to reduction in NBN subscribers from migration of TPG's existing NBN base to on-net fixed wireless, increasing fixed wireless as a percentage of our total broadband mix, as well as lower subscriber numbers because of continued intense competition in the NBN market. This was offset slightly by a $14 million reduction in wholesale gross margin, excluding Vision as we continue to cycle out of older, high-margin voice and connectivity products. Vision revenue of $108 million reflects Vision being recognized in wholesale for the first time following the FY '22 functional separation from consumer. Vision's retail customer revenue was flat year-on-year as ARPU improvements offset subscriber declines. In hardware, gross margin improved $15 million, despite the reduction in handset volumes. This was because of the change in the way we finance consumer handset debt. As we have explained in the past, TPG has suspended selling handset receivables to third parties and is instead funding them on our balance sheet with our own bank debt. The cost of third-party handset debt sales was previously absorbed in handset margin. In FY '22, we incurred approximately $30 million of such costs. Hence, in FY '23, the avoidance of these costs was a benefit to gross margin of $30 million. While the benefit to gross margin will persist as we continue with our current approach, the year-on-year uplift we saw in FY '23 will not repeat. Other gross margin declined $7 million in FY '23, including a $3 million reduction due to the cessation of spectrum lease arrangement with Telstra in the fourth quarter. Total revenue from this arrangement was $13 million in FY '23. Operating costs are an area of particular focus for me as an incoming CFO. I have been impressed by TPG's deep commitment to position itself for medium-term growth by creating a dramatically simpler business that enable us to maintain a low-cost structure. However, given the scale of investment and transformation across the business, employee and IT support costs have had to go up over the last 2 years, and that is reflected in our FY '23 result. Please note, for simplicity, the numbers I'm discussing on this slide, map to our statutory accounts with no adjustment for transaction costs or transformation costs. The overall operating expense increase of $105 million, or 9.5% includes the $31 million of transaction costs incurred in FY '23 on the attempted MOCN arrangement with Telstra, Vision Network sale process and Vocus transaction process. The growth in OpEx was 6.7%, excluding these transaction costs. Working from the left of the chart, you can see that total employee expense was up $51 million or 13.5% in FY '23. This reflected the importance of pay rises at this time of cost-of-living pressures for our people. Investments have also been made to build capability and capacity to support business simplification and IT modernization and in specific critical areas to support long-term performance. For example, in FY '23, we added 40 FTEs to uplift IT and network security for our customers. This employee cost investment was offset only partially by the non-recurrence of the redundancy costs we incurred in FY '22. The other main area of operating cost growth has been in technology costs, which were up $42 million or 11.6% in FY '23. Approximately half this growth was transaction costs associated with the MOCN and transformation costs associated with the retirement of the e-mail platforms we were offering customers. We are certainly experiencing a higher cost of doing business in technology generally, particularly in software and security as well as third-party contract rates. These increases were partly offset in FY '23 by gross productivity savings across our network and IT spend base. Other operating expenses grew due to transaction costs as previously noted. We expect operating cost growth to continue in the mid- to high single-digit growth range in FY '24 due to the full-year impact of investments made in FY '23, combined with the ongoing higher cost of doing business. This is inclusive of our expectation that transformation costs are going to continue around FY '23 levels of about $40 million a year up to and including FY '26. We will, of course, be continuing to seek to deliver OpEx efficiency across the business where it is prudent. There has been immense effort across all areas of the business to offset cost pressures through efficiencies. We will continue to deeply consider discretionary spend, while making the investment required aligned to ensure we drive sustainable, high-quality medium-term cash earnings growth. You may have seen announcement last week from Tech Mahindra that we have partnered with them to run our Manila contact center and shared services operations. This partnership will result in some OpEx currently recognized in employee expenses, transferring to outsourced services. Now turning to capital expenditure as well as depreciation, amortization expense. Both our FY '23 results and our outlook to FY '26 reflect a stage in the investment cycle when expenditure is high on both network infrastructure for 5G upgrades and on business simplification and IT modernization. Cash CapEx was $1.126 billion in FY '23, while accrual CapEx was slightly lower at $1.082 billion. The different directions of cash and accruals CapEx versus FY '22 reflects timing differences, with some capital expenditure incurred in FY '22 having been paid for in FY '23. Another change from FY '22 to FY '23, which will continue in FY '24 is CapEx mix, and the resulting impact on our depreciation and amortization profile. CapEx mix in FY '24 will comprise lower levels of network modernization and an increase in IT modernization, as well as data and analytics and security investment. As we continue to ramp up the IT modernization, software-related CapEx will be a greater share of total CapEx. Given the lower useful life of software relative to network infrastructure, this capital investment is amortized at a faster rate. This mix shift as well as the broader cumulative impact of higher CapEx over the past 2 years and the recognition of new leases resulted in a 6% increase in FY '23 depreciation, amortization expense. We recognized new leases in FY '23 after we executed new tower arrangements. We also had a full 12-month lease accounting impact from the July 2022 tower asset sale. We expect depreciation and amortization expense to grow at mid-single-digit rates again in FY '24. We are guiding for total cash CapEx of $1.05 billion in FY '24. We continue to expect annual accounting CapEx of about $1 billion, up to and including FY '26, when the 5G rollout and the business simplification and IT modernization will be completed. It remains our expectation that beyond that year, CapEx should trend back towards 13% to 15% of service revenue or between $700 million and $800 million a year. In FY '24, we'll also be funding the $128 million of expenditure on the new 3.7 gigahertz spectrum licenses as we announced in November last year. Our FY '24 CapEx guidance and outlook commentary to FY '26 excludes spectrum expenditure. You will note that we have split out amortization of spectrum and customer base intangibles from other depreciation in the chart. This is to align the comparison with CapEx, which is excluding spectrum and because customer base amortization is a non-cash item on which we don't incur any CapEx. My next slide covers interest costs. The team completed a $2.5 billion refinancing in FY '23, which has set us up with a flexible borrowing platform, very competitive borrowing rates and no refinancing until FY '26. Nonetheless, our total interest costs grew substantially in FY '23 to $341 million from $187 million in FY '22. The biggest driver was the doubling of the effective interest rate on our bank debt over the course of the year due to higher market interest rates. The addition of new leases, as I mentioned on the previous slide, led to an increase in lease interest costs. The year-on-year impact of higher market interest rates will again be filled in FY '24, with our prevailing cost of bank debt currently about 6% and the need to fund spectrum and other investments preventing us from deleveraging until next year. In addition, as I've discussed, we have also made a deliberate decision in FY '23 to increase bank debt by bringing handset receivables back on balance sheet, delivering lower cash funding costs overall for this activity. This meant gross bank debt was $386 million higher at the end of FY '23 than at the end of FY '22. We continue to work actively to seek an optimal solution to handset debt. From FY '25, as working capital movements normalize and operating cash flow continues to grow, we expect to start deleveraging, a process that should accelerate as the benefits of IT modernization and business simplification accelerate over the medium term and CapEx investment begins to reduce post FY '26. Our operating free cash flow result for FY '23 was pleasing with strong EBITDA and improved working capital trends, enabling growth of $75 million or 81.5% to $167 million. This was despite FY '23 being the peak year for the negative working capital impact of bringing the handset receivables financing back on balance sheet. That impact increased $111 million to $376 million in FY '23. That leaves a remaining balance of approximately $165 million still to unwind, about $150 million of which will be in FY '24, translating to a reduction in impact year-on-year of $226 million. The $223 million year-on-year improvement in other working capital movements was due to lower trade receivables as a result of lower handset sales, reduction in inventory levels from stabilization of our supply chain post COVID and other working capital movements. The movements in cash, CapEx and lease payments are consistent with trends I've already discussed. We expect continued improvement in operating free cash flow in FY '24 with continued EBITDA growth, a flat CapEx profile and the reduction in the impact of handset receivables financing movement, as I just mentioned. Our final dividend of $0.09 per share is a reflection of our confidence in the medium-term cash earnings outlook for the business. It makes total FY '23 dividends of $0.18 per share and a payout of 57% compared with our policy to pay at least 50% of adjusted NPAT. The team mentioned at the last result that our outlook for franking was challenged in the context of TPG's continued utilization of revenue tax losses, meaning we aren't generating new franking credits. The chart on the right highlights the franking and tax loss balances disclosed in our financial statements. The franking balance as at 31 December 2023 was $133 million, which after payment of the final FY '23 dividend will reduce to $61 million. That is a reduction of $72 million. For illustration only, if FY '24 dividends were to continue at a similar level to FY '23, the current franking balance would be insufficient to fully frank this year's dividends. A period of unfranked dividends would then be likely until we have utilized all tax losses currently recognized on the balance sheet. I mentioned already that we expect trends from working capital, CapEx, transformation, OpEx and interest costs to improve over the medium term. All these factors support our outlook for cash earnings for our dividend outlook and for our ability to start to reduce debt from FY '25 onwards. This slide sets out some of the trends we have seen in recent years and the direction in which they are heading. Starting with working capital, where we will see a more than $200 million improvement in FY '24, now that we have passed the peak of the impact of the suspension of handset receivable sales to third parties. Next is CapEx, which has risen above $1 billion, but is expected to step down post FY '26 to recurring levels in the $700 million to $800 million range as we complete the 5G rollout, IT modernization and business simplification. OpEx is also elevated in the medium term as a result of business simplification and IT modernization, but is expected to normalize from FY '27 once the transformation is complete. Along with growing EBITDA, the improvement in these cash drivers will enable us to begin to reduce bank debt with recent growth in lease interest also expected to stabilize, and that is before any benefit we might get from lower interest rates in coming years. This all points to a reduction in borrowings, a strongly improving trend in the free cash flow available to equity holders and the achievement of our objective of having net debt including leases within the range of 2x to 3x EBITDA. In FY '24 specifically, free cash flow to equity as defined here is expected to improve from FY '23 due to growth in operating earnings and the improvement in working capital trends discussed. We expect this to more than offset slightly higher CapEx, including spectrum, plus expected higher lease payments and bank interest costs. I will close with our guidance for FY '24. FY '24 guidance is on a slightly different basis to FY '23, with transformation costs now included in the guidance range, with our expectation that these costs will continue at around FY '23 levels up to and including FY '26. EBITDA guidance is subject to no material change in operating conditions as always. It excludes any impact of material one-offs such as transaction costs, restructuring, mergers and acquisitions, disposals, impairments and any such other items as determined by the Board and management. Our guidance range for FY '24 is $1.95 billion to $2.025 billion, the midpoint of which implies a lower growth rate than we delivered in FY '23. EBITDA in FY '23 was $1.923 billion on a comparable basis. That is with the $38 million of transformation costs included, with $31 million of transaction costs and $17 million Internet brand impairment excluded. I'll now provide some color to this FY '24 EBITDA guidance. We are cycling lower mobile subscriber growth than we were this time last year, and we do not expect the kind of growth in inbound and outbound roaming revenue we had in FY '23, which was $35 million to reoccur as roaming has now fully recovered beyond pre-COVID levels. We expect to see lower service revenue growth in consumer fixed broadband this year, given the lower fixed NBN customer base. Offsetting this, is our focus on stabilizing the fixed subscriber base, and we expect to continue to grow fixed AMPU, including through continued growth in fixed wireless. In addition, market conditions are a little uncertain in the enterprise, government and wholesale segment and the high cost of doing business continues across the whole industry. I noted earlier, the reduction in FY '23 hardware margin cost of about $30 million after we suspended the sale of customer handset debt to third parties and financed this activity with our own bank debt. Whilst this gross margin cost avoidance persist in FY '24, the FY '23 year-on-year benefit to EBITDA will not repeat in FY '24. Finally, late in FY '23, we ceased to receive revenue under a short-term arrangement we had to sublease some 3.6 gigahertz spectrum to Telstra. This amounts to about $13 million accounted for in other income, which will not be realized in FY '24. Our focus remains on delivering EBITDA growth in FY '24, as we continue on our journey to position TPG for medium-term growth by creating a dramatically simpler business. I'll now hand back to Inaki.

Thank you, John. To summarize, we are positioning TPG for long-term growth and creating a simpler, smarter company. In 2024, we expect growth in mobile subscribers and service revenue, a stabilization of our subscriber base in fixed broadband and continued growth in our enterprise business. We will focus on progressing the 5G network upgrade and on our exploration of mobile network sharing options in regional Australia. Our strategic review of our fiber infrastructure assets is continuing and may present several value-enhancing alternatives. As we look beyond 2024, the underlying trends of a growing population and increasing data consumption support underlying growth for our business. We are delivering ever simpler and smarter offerings and experiences for our customers, and we maintain an ongoing emphasis on infrastructure sharing to drive capital efficiency. Importantly, we expect improving cash earnings over time as trends for working capital, CapEx, transformation, OpEx and interest rates begin to normalize. We will now take questions.

Thank you, Inaki. [Operator Instructions] Our first question comes from Eric Choi from Barrenjoey.

Good to have you on board, John. I'll fire 3. First one, John, you're going to feel like you're talking to a brick wall, given you just gave us a million drivers for guidance. But using my very, very simple logic, I sort of see you guys guiding to $5 million EBITDA decrease at the midpoint. And then if I just [Technical Difficulty] prepaid and postpaid did last week, I mean, maybe they're worth 100 by themselves. I guess you hide your budget [Technical Difficulty] ahead of everything else. But maybe could you be conservative back about that? That's the first one. Second question, just on postpaid churn. I think you've disclosed it for the first time, which is helpful and it's elevated at 15%. So I'm just wondering how much of this is by price increases versus other things, which is I think you've previously called out like [ travelers leaving ] [Technical Difficulty]. But if it is the pricing increases, does that have any implication for any future price increases that you do? And then thirdly, just on strategic review, I understand your limit what you say, but we want to do our own math on this. So hypothetically, if you were to do a simple transaction and if it excludes that EGW, how much would that reduce the [Technical Difficulty] EBITDA that you previously discussed? Thank you.

Thank you, Eric. Look, I'm going to ask you to repeat the first question, if you don't mind, because there was part of it that we couldn't hear. On the third one, before you do that, look, we continue to do the review. And I think that this is not the time for us to talk about these things. It is an active process and when we have some of those answers, we'll head back to all of you. But for now, it remains a review. So we are not going to talk about any of the hypotheticals of the review.

Got it. The first question, Inaki, sorry, is your FY '24 guidance EBITDA guidance conservative? Just because it's a $65 million EBITDA increase midpoint. But if I look at the mobile price increase last week on prepaid and postpaid, they're worth $100 million. [Technical Difficulty]

Yes. Clear. So look, I think it's cautious, but I'm going to -- rather than conservative, I'm going to ask John to get into the details of that and then I will ask Kieren to talk a little bit about churn.

Eric, thanks for your question on EBITDA. You're right that the implied midpoint of the FY '24 guidance delivers a lower growth rate than what we delivered in FY '23. And certainly in my commentary, I try to give color to 7 factors that were driving that, including lower mobile subscribers sort of cycling this time this year versus this time last year. The roaming has fully recovered and now exceeded pre-COVID, the lowest service revenue in consumer fixed broadband. And on this point, just to give you a bit more color on that, in FY 23, excluding the Vision wholesale charge, consumer fixed gross margin grew about $56 million. Whilst we expect to continue to grow AMPU, in nominal total dollar terms, we don't expect that similar year-on-year increase in absolute fixed gross margin, largely due to the intensity market competitiveness. Added to that is uncertainty in the market conditions in the enterprise, government and wholesale. And then, of course, I referenced mid-to-high single digit OpEx cost growth. And then, of course the $30 million or thereabouts benefit we got in '23 on handset margin, taking the receivables back on balance sheet. That will persist, but we won't get that same year-on-year growth. So I'm sort of restating the points I raised, perhaps giving you a bit more color on consumer fixed gross margin outlook.

Thanks, Eric. Kieren here. To the second question on post paid churn, it's difficult to give a simple answer as at any time there are numerous and there are always overlapping factors behind why a customer would choose to join, stay or leave. One of the factors that bears repeating is what Inaki covered and then John also repeated is just the intensity and the increasing intensity of competition in the market. And just as evidence for that, I look at just the current handset [ offers ] market, or in fact, there are Tier-1 telcos that are currently offering 100 gigs for $39. So it's although difficult to say what is the isolation impact of churn as a result of the plan refreshes, clearly what we did do is we carefully monitored changes in our customer base over that period and period afterwards and it's probably fair to say that churn was within what we're expecting.

Thank you, Eric. Our next question comes from Entcho Raykovski from Evans & Partners.

So I've got a question on fixed and then a couple of hopefully more straightforward ones on numbers. Just firstly on fixed, I'm interested in what you've seen in the fixed market since late last year when a number of the other RSPs increased prices, obviously, following the NBN SAU changes. Have you seen any benefit to subs in that period? You've obviously given us the full-year numbers which are down, but just interested in whether there was a benefit to you at the end? And then your decision to put prices up from 20 March for the lowest lead tiers, is that just a reflection of the impact on margin from NBN SAU? Are you factoring in high churn when that comes in and sort of the rationale for you waiting for a number of months since the 1 December? So I know there's a few in there, but I think it's interesting the dynamics in the fixed market. And then secondly, just your level of comfort that the $40 million of annual transformation costs will drop down post FY '26. It's obviously a few years away. So what level of comfort do you have they'll reduce? And finally lease interest into FY '24. Should we just take the second half run rate of $71 million as indicative of what the FY '24 number is going to be?

Thank you, Entcho. So. what I'm going to do is, first, I'm going to ask Kieren to talk to you a little bit about the way we see the fixed market and some of the things that we are doing. Kieren?

Thank you, Entcho. So just maybe one point to clarify. At the end of last year, there were price changes across the market. We described them as price increases, but some plans generally went down and some went up and what you saw was higher speed plans were often coming down and lower speed plans are often going up across the market. That was in conjunction with, you will have seen changes that NBN has rolled out around fiber connect. And so what we saw was really a movement towards higher speed plans over that period. We too rolled out fiber connect at the end of last year. And since that period, what we've seen is an increase, a marked increase in proportion of sales that are going to the higher speed plans. And with the price changes that you mentioned that have been announced recently from us, which also saw some of those higher speed plans come down in price, expect to see that volume increase as well.

Thank you, Kieren. Entcho, number two, so related to transformation, our level of comfort around [ fast ] '26 is good in the sense that it is a strong program. It is a program that is company wide. So it's looking into everything that starts from customer journeys, customer proposition, products, going all the way to the consolidation of our IT stack. And it does have a very strong governance around it. So we're really looking at it very closely to make sure that this investment, which is multi-year investments of this caliber are risky. So from our perspective -- and we're putting a lot of emphasis on making sure that we do it at a reasonable cost. But we are seeing already some of the benefits and we do see a lot of the decommission of platforms reduction. So there is significant things that we are seeing as we go and we are able to manage before the completion of the program. So for that reason, the level of comfort in the organization on concluding this by '26 and also getting the benefits of it is quite high. And maybe John can go into question related to lease costs.

Yes. Thanks, Entcho. And the beauties of IFRS 16 accounting, the way I would describe it is, lease costs in FY '24 on an annual basis should be flat to FY '23 in absolute basis. So therefore, down on annualizing '23. What I would say though is to give you a bit more color is given the nature of the amortization schedule, whilst lease interest will be flat year-on-year or flattish year-on-year, actual lease payments, i.e., principal and interest will be slightly up.

Thank you, Entcho. Our next question comes from Darren Leung from Macquarie.

I might just ask 3 as well and I might just fire them up upfront in the interest of time. So the operating cost base, can I just confirm when you provide FY '24 guidance, are you including the $15 million to $20 million of customer value reinvestment as well that you guided to 6 months ago? And does this drop off by the end of 2025? Or will that continue until 2026? That's the first question. The second one just in relation to the dividend. And so you're calling out higher transformation costs, obviously handset refinancing payments and there's some higher interest costs in there. But is it fair to conclude that the dividends probably unlikely to change from the current $0.18 per annum until 2026 at earliest? And then the third one, just on postpaid pricing, should be a pretty simple one. But can you please confirm that you intend to change the back book pricing as well and just the timeframe you expect to achieve this, please?

Thank you, Darren. Look, I'm going to ask John to give you a bit of clarification around our fiscal year '24 cost. In terms of the second one related to dividend, we do not give guidance on dividends, so we just cannot get into that answer. And the same applies for number 3. So we do not give forward-looking pricing decisions that we are making. So we never have done it and we will not do it. And it's a bit of a matter of principle that we are very happy to talk about what's going on in the market today, but nothing moving forward. John?

Yes. And the -- yes, the $15 million to $20 million is included in our FY '24 sort of commentary on cost. And yes, we do expect this to drop off. And we've previously made comment on the benefits we expect on a cash basis, and they still hold.

Thank you, Darren. Next question comes from Lucy Huang of UBS.

I've got 3 as well. Sorry. Just following on mobile, are you able to remind us what proportion of the customer base is sitting on these in market plans that would be impacted by the recent changes to the access charges? And then just secondly as well, on mobile, did you see any down-trading from your postpaid products down to prepaid, given prepaid performance was a bit stronger than expected. And then just thirdly, any color you can give us on your EBA agreement? When does it come up for renewal, given we've seen quite a bit of pressure on wages more recently?

Yes. Thank you, Lucy. So let me ask Kieren to get into the first 2 questions and then talk to you about EBA.

Thanks, Lucy. So it's about 80% to 85% of the base to the first question. And to the second question, not really, there was no marked increase down into prepay. The main drivers of prepay up were adoption travel, return to school, et cetera, and an increased activity around that period. We didn't see a marked increase at post to pre. Yes, in terms of our EBA, the EBA was done this year, so it's already completed.

Thank you, Lucy. Our next question comes from Tom Beadle from Jarden.

I might break the trend and only ask 2 questions. Just on postpaid mobile ARPU, I guess 6 months ago, you'd spoke into an expectation of having a fairly immaterial sequential move in that underlying ARPU in the second half. And obviously, that increased by about 4%, which is a great outcome. So can you just talk about the dynamics that drove that sequential growth? I guess what was different to your expectations 6 months ago? And I guess then how all this sort of rolls through into first-half '24, given, I guess, the changes that you've communicated to your base? And just the second question is you mentioned that you're seeking an optimal solution to your handset debt. So I mean, are you actively looking to potentially securitize that?

Thank you, Tom. I'm going to ask Kieren to talk to you a little bit about the postpaid ARPU, and then John will tell you what we are doing around handset debt [indiscernible].

Thanks, Tom. So postpaid ARPU, the key dynamics behind the growth are a few things. So what we saw is a big part of plan refreshes, where we increase the allowances that were included within the plans and we saw that increased usage being used. So we started to see people more start to trade up into plans. The second thing is we saw lower than expected rate plan changes down over that period. So we're able to retain a lot of the value of the price increase. And we were trading quite clearly on the higher end within our Vodafone postpaid space. So we were trying to plan up, trade more new customers coming into the higher end and really limiting our lower value. And the overall element of why we always look to make sure that this isn't just about price, but it's about the value a customer gets is that we see that there's an ever increasing demand for quality data and in a volume of data, which is really behind these changes as well.

And then on your second question on handset, look, it's just good practice to look at all elements of our balance sheet, including handset receivables. I guess securitization is one option that we'll continue to look at, and there are other options as well, but nothing concrete to update you on at this point in time.

Thank you, Tom. Our next question comes from Kane Hannan, Goldman Sachs.

3 for me as well, please. Just that mid-to-high single digit cost growth this year, are there any step changes coming through the base that we should think about that might not repeat into '25? Or is that just continual growth across all the different cost aspects that potentially continues beyond this year? Secondly, just a commentary around uncertainty in government and wholesale impacting the guidance. I mean, is there any more details you can give us around that? What you're seeing? Is that customer deferring spend or canceling contracts? And then thirdly, just the gearing comments on Slide 25. So the comment improving towards the target of 2x to 3x. I mean, do I read that, that you'll be above the 3x target range in 2026? Also, if you just help me understand the pathway to being back within that range.

Thank you, Kane. So I'm going to ask John to talk to you about cost growth and also gearing, and then I will ask Jonathan to talk a little bit about how we see the price, government and wholesale.

Yes, on costs, it's more to do with the annualization at the impacts in '23 rather than any non-recurring items. And remember, most of the commentary I've given on that mid-to-high single digit ejects the FY '23 transaction costs. So in that sense, I suppose that's non-recurring or assumed to be non-recurring. That's point one. On gearing, we would expect over time for the gearing level to drop, and this includes leases. So that is our outlook. And you would have seen a slide in the commentary on how we think about the go-forward improvement and how leverage and operating leverage and cash flow improves. Jon?

Kane, thanks for the question. We've seen 2 things at the moment. The first one is a lot of focus on rationalization by companies, and that's across all segments. So a lot of focus around number of services and which services are provided to which employees or which branches. So we're working through that. And then, secondly, we are seeing, I guess, a slower impact from sales volume in Q3 and Q4. So we've got a much more intentional focus around, I guess, segments of growth opportunity we usually see. Inaki signaled small and medium business being a really good opportunity to go after. We think that's an area of the market, where our proposition being low cost and very focused on value really resonates.

Thank you, Kane. Our next question comes from Nick Basile from CLSA.

Just 2 questions from me. Maybe first, just a follow up on the gearing. Just wanted to confirm whether we should expect it to increase in FY '24? And then with that, sort of how you plan to manage increasing competitiveness or competition with the need to balance or manage the balance sheet and gearing? And then the second one on mobile. Can you talk about the postpaid subscriber momentum through the second half? Was there any acceleration in the final quarter relative to, say, September quarter?

So maybe, John, can you clarify a bit the gearing and then Kieren will tell you around the momentum on postpaid.

Yes. So cash flow to equity before borrowing and dividends was negative in '23, and we expect that to actually go positive in '24. So there's a year-on-year improvement. That would be point one. Point 2, I would say, like prior years, though, including '23, given the cash CapEx profile in half one versus half 2 and the additional spectrum cost -- regarding the outcome of November's spectrum option that we notified the investor base off, we'd expect cash flow to equity in H1 to be negative and then improve in H2 and then give us the overall improvement in cash flow for the full year. So that's kind of the answer to that question.

Kieren?

Thanks, Nick. So the question on, was it changed across the second 2 quarters for postpaid momentum? Generally speaking, the fourth quarter has greater momentum in it. Naturally, throughout the year, it has some key events, a number of really important handset launches, which tend to drive a lot of activity into the postpaid market and also you see the lead up to Christmas with Black Friday, et cetera, which becomes a big sales period. Christmas itself, not so much postpaid. It does drive, but it's more of a prepaid activity, but really the lead up to it. So we did see an increase and that would be normal to what we'd expect in the other year. Sorry, Nick, I missed the second part of your first question, which was, how does gearing impact by competitiveness? Well, we always manage for the medium term, the drivers of high-quality future cash earnings growth. So I guess that's starting point one. And then how we trade that, given market conditions is something we consider every day, every week, every month. But we assess that by always understanding the drivers of future medium-term high quality cash earnings growth.

Okay. Just to clarify, it sounds like first half, as you sort of said, going to be impacted by the spectrum and auction spend and then it's going to improve through the year as far as free cash flow is concerned.

Correct. And that's very similar. If you look at the '23 profile, very similar in terms of the front ending of the cash CapEx.

Yes. I mean, just with that, though, at the same time, in the short term, you're going to have higher interest costs. So as far as the actual gearing is concerned, you're expecting it to rise slightly before hitting a sort of peak point in the first half or?

Correct. Remember, we've got that positive working capital improvement that I mentioned and is on the -- on sort of the working capital, that's partly offset by spectrum, higher lease principal and interest and higher bank interest. But the net of all those combined with improved EBITDA and cash CapEx is a positive to cash flow, to equity for the full year.

Thank you, Nick. Our next question comes from Brian Han from Morningstar.

Just a couple of questions, please. On fixed wireless, are you seeing a slowdown in sub growth relative to your prior expectations? And if so, can you talk about the dynamics that you're seeing between your ARPU and sub growth in that fixed wireless space? And, John, can I please ask whether TPG's debt leverage covenant is still 3.5x and that, that covenant relates only to the corporate debt and not the total debt as you calculated with the lease liabilities?

Thank you, Brian. Look, on fixed wireless, I'm going to answer that one myself really quickly. And I think we did talk last year about it. So we continue to really take advantage of this product. It's a product that is very competitive in terms of the proposition and the pricing, but it is a product that we never intended to be a full substitute of what we do on NBN and other technologies. So from that perspective, we started with probably 60,000 ads on the first year, and we continue at that level. I think last year we did 50 some thousand. So it is a product that performs well. A lot of the ARPU trends that we see have to do more with the wind-off of the sign-up discounts. And as the base of customers on this product increases, it does have a mechanical ARPU, but that's really what we see. And the other thing as well is that initially, a lot of the mix of this product was very much 4G over 5G. And I think that as we deploy more the 5G network, we are also able to monetize these incremental speed products. John?

Yes. And on the leverage for bank covenants, it's actually 3.75x. It excludes leases. And in short, there's loads of headroom.

Thanks, Brian. Our last question comes from Fraser Mcleish, MST Marquee.

Yes. Great. Could I just try again on -- I think the question Darren asked around your mobile price increases, I think you confirmed, Inaki, that you are notifying existing customers. It would be helpful to get some idea of how that's going to flow through to ARPU in terms of those increases for the back book. And then just also on fixed broadband, you're talking about stabilizing that base. Can you just give us some idea of the things you're doing that you think will stabilize that base?

Thank you. Fraser. Look, on the mobile plan refreshes, you can expect something similar to last year in terms of the amount of customers. So last year, I think we did 80%. I think this year probably going to be about 85% of our customer base. How that flows into ARPU is not just a matter of where those plans go. There is a lot of movements during the year. The market versus last year, I would say that is more competitive, especially around device subsidy and some of the discounting that we see. So it's something that we also need to take into consideration. And I would say that that's primarily the difference to the numbers that you saw from '23. In terms of the fixed, I will let Kieren talk a little bit. But last year, we did have a delay on the introduction of fiber connect at a time where the market was quite competitive. And there is a bit -- the price of having too many billing systems. And that's why we are investing heavily on simplification to react quicker in the market. The performance we see with fiber connect in our base is good, but we do see significant competition in this area, in the market. Kieren, I don't know if you want to add something there.

Thanks, Inaki. Thanks, Fraser. The only thing I'd add to build on top of the point around fiber connect is that we've launched 2 of our engines in TPG and iiNet, and we're just launching Vodafone. So one will start to see that growth. The second point of picking up on the comments before around the plan refreshes that were happening in TPG is we're having an NBN across many of the [ closing things ] or the RSPs. So what that will do is that will make our, as you will have seen, our high-speed plans considerably more competitive. So now, we'll have a fantastic high-speed plan, a fantastic product across all 3 of our engines.

Thank you, Fraser. We have no more questions on the line. This concludes our call. You may now disconnect.