TPG Telecom Limited (TPG) Earnings Call Transcript & Summary

Good morning. This is Paul Hutton from TPG Investor Relations. Thank you for joining us for our 2024 full year results presentation. At TPG Telecom, we acknowledge the traditional custodians of country throughout Australia and the lands on which we and our communities live, work and connect. We pay our respects to their elders, past and present. This morning, our CEO and Managing Director, Inaki Berroeta, will present the results, highlights and the strategy update. Our CFO, John Boniciolli, will then discuss our financial performance in more detail before Inaki closes with a discussion of our outlook and we turn to Q&A.

Thanks, Paul, and good morning to everybody listening. In fiscal year '24, we delivered a strong financial result and address key strategic priorities as we build a simpler, stronger and more competitive business. The highlights of the results were market-leading service revenue growth in mobile, increased EBITDA margins, reflecting improved product mix and cost discipline, strong cash flow recovery and higher return on capital. There were also 3 key strategic highlights. Firstly, our regional network sharing implementation. We are now a month into operating our agreement with Optus after we signed this deal last April. This is a fundamental change for our business, more than doubling our mobile network coverage and materially increasing our addressable market. In the first 4 weeks, we have experienced a strong growth in net adds and ports across mobile and significant increase in data traffic among our customers. This step change in our mobile proposition sets up to compete much more effectively and grow our market share over coming years. Secondly, our business transformation is delivering material simplification. We now have 2,500 fewer plants in the market, increased digital sales capabilities and substantially modernized IT systems. There is more work to do, but solid progress means customers are benefiting from simpler products and plans, and we are creating cost efficiencies to TPG. Thirdly, we complete the strategic review of our fiber assets and in October announced the transaction with Vocus. The value of this deal goes well beyond the proceeds we will receive, the strengthening of our financial position and the significant streamlining of our business. It removes future CapEx needs and locks in cost for our fiber network access with our volume base increases as we add customers or as those customers use more data. Now turning to our financial metrics. We said in 2022 that growing mobile service revenue was our objective, and that is what we have done by rationalizing plans, rephrasing pricing and steadily adding subscribers. Mobile service revenue is up more than 15% over the past 2 years, including 5.4% growth in fiscal year '24. This was the main driver of our 1.5% increase in group service revenue to just over $4.7 billion. We also said in 2022 that our objectives for our fixed business was to improve profitability. We have delivered on that, notwithstanding the slight decline in fixed revenue. Our group gross margin was up 3.5% in fiscal year '24 to just over $3.2 billion, a rate of growth 2 percentage points better than service revenue. That was supported by the strength in our fixed wireless business and direct cost discipline across all mobile and fixed products. At the half year result, we announced actions to address operating costs with OpEx increasing just 1% in the second half, reflecting the continuous cost discipline of our organization. This enabled us to increase EBITDA by 3.4% to $1.988 billion at the midpoint of our guidance range. That excludes material one-offs such as the impairment associated with the new regional network sharing implementation. On the same basis, excluding one-offs, our NPAT was up 4.8% to $87 million, reflecting EBITDA growth, flattening depreciation and amortization expense and much slower growth in financing costs. Capital expenditure was reduced by $112 million to just over $1 billion, reflecting the gradual normalization of our CapEx levels while working capital movement was $331 million better. Combined, this enabled us to deliver $474 million improvement in operating free cash flow. We have declared a final dividend of $0.09 per share, taking full year dividends declared to $0.18 per share, the same as fiscal year '23. This dividend is unfranked. As we communicated previously, our remaining historical franking credits were utilized against the interim dividend. Pleasingly, return on investment capital improved 40 basis points, reflecting our profit growth and a slowing rate of investment. The improvements in cost and capital efficiency made this the strongest financial results we have delivered since the merger of VHA and TPG 5 years ago. We still have a lot of work to do, but we have entered 2025 with great confidence for the future as we focus on accelerating market share growth from a leaner cost and capital base. Having delivered on key milestones in fiscal year '24, we are now entering a new phase. We have made significant changes to our business to become nimbler, simpler and more efficient. We have refreshed our strategy based on 4 principles: running network smarter, invigorating brands and services, making it easy for customers and becoming faster, simpler and stronger. These principles inform how we set objectives and monitor our progress. Running network smarter means using our capital in the most strategic, disciplined and efficient way, investing where we can create value through scale and partnering where we cannot while enhancing our customers' network experience. Both the regional sharing agreement with Optus and the way we will access fiber under the Vocus deal are consistent with this principle, enabling us to grow in the most cost-efficient way with certainty that higher revenue will lead to higher margins. Integrating brands and services is about differentiating our offerings to be more competitive and build share by bringing to market our best ever products and services. Complex legacy systems has held back our product innovation, but at times, it has been more difficult than it should for customers to engage with us. Making it easier for customers is all about bringing the benefits of a simpler business to our customers, a smaller portfolio of great value plans and products, increased digital capability and the benefits of a single lean IT architecture where legacy no longer slows us down. Becoming faster, simpler and stronger is about simplifying our structure and reducing the capital and cost required to run the business. The proposed sale of the fiber and EEW fixed assets makes us leaner and simpler while enabling us to optimize our capital structure. This enable us to deliver a better cost profile with significant efficiencies to come. In fiscal year '25, we are focused on accelerating the benefits of our strategy for both customers and shareholders. And the KPIs and metrics on this slide show how we will measure it. In networks, the regional sharing agreement is just the beginning of what we can achieve through greater infrastructure sharing. We continue to work with Optus to drive greater efficiencies from what we call the EJV, a pre-existing arrangement that covers sharing of towers and rooftop sites in metro areas. We are also looking forward to the separation of our fiber network and EGW fixed business with Vocus and embedding the benefits of the deal. Meanwhile, we expect our focus on fixed wireless services will continue to increase the margin we generate from our own network. We will have completed more than 80% of our 5G rollout by the end of this year, and we will finish fiscal year '25 with far higher 5G penetration across our business ever mobile network. We have an enormous opportunity to grow our mobile base in key locations of the back of our expanded network as well as to refine and enhance our brand propositions. Over time, we expect more customers to consider switching to our brands more often and to sell both mobile and fixed services to more households. The strength of our brands and employee engagement are a virtuous circle, and we are encouraged by our people's positivity about our improved network proposition. The sale of EGW fixed also means revitalizing our EGW mobile business, both in our Vodafone mobile offering and through MVNO capability. More digitalization, service plan simplification and rationalization of IT applications will continue as will our focus on cost and capital efficiency. We expect operating cost growth to be flat in real terms in fiscal year '25, while CapEx will be lower at $900 million and OpEx will start to fall as a percentage of service revenues. The point of these KPIs and metrics is to highlight the confidence we have in our capacity to deliver value after a period of significant investment and transformation. We are bringing a vastly improved network to customers, driving subscriber and revenue growth, accelerating the benefits of IT modernization and business simplification, and we will continue to refine and enhance our brand propositions. The strategic actions we have taken over the past 2 years have transformed our business and made us fit to fight and win. We plan to go into more detail and also talk longer term at an Investor Day we intend to hold later in the year once we have more certainty on the completion timing of the Vocus deal. Let me now give you an update on our regional network expansion. We have more than doubled our network coverage, creating a step change in our addressable market. We believe the scale of network growth and transformation, including the acceleration in 5G coverage in recent years, is unprecedented in any other market. As the map illustrates, our increased coverage across Australia positions our brands strongly to grow share in underpenetrated regions. Today, we have roughly 30% mobile market share in Sydney, about 20% in the next 6 cities, 5% to 15% in smaller towns and less than 5% in rural areas. Clearly, if we can increase our share nationally towards Sydney levels, the size of the price for TPG is very large. And today, there is no reason why this could not happen. Customers are excited about having better access to the great value service our brands can offer. In the month since the regional network sharing launch, we have had our highest postpaid connections in 6 years, our highest postpaid net adds in more than 2 years and a 50% year-on-year increase in port-ins from our competitors. TPG and Felix Mobile are recording very strong sales figures, too. While across regional areas, we have seen a 35% increase in data traffic. Many of you will have seen our new marketing campaign on television or on trans and bus shelters. This increase in marketing spend is delivering great results for us so far. Now turning to the proposed sale of our fiber and EEW fixed business. The deal is subject to regulatory approval and the ACCC has indicated it will provide the findings of its review on the 27th of March. Meanwhile, separation planning is progressing well, and we are on track to close the transaction with Vocus in the second half of 2025. To recap, the rationale of the sale has 4 key components. Firstly, consistent with our commitment to run our networks smarter, this is about exiting assets and operations where we are subscale and replacing them with a partnership that gives us access to a larger network without the requirement for TPG to allocate capital. The fiber we are selling is primarily a metro fiber access network substantially overbuilt by the much bigger NBN and Telstra. While the assets are high margin, they are low growth and the opportunities in fiber are in long-distance transmission, an area where we have never played at the scale and where the size of investment required to compete is beyond our scope. Secondly, the sale of this business will enable us to accelerate and increase the streamlining of the TPG operating structure and cost base. Being leaner and nimbler than the others must be a key competitive differentiator for TPG. Thirdly, the net proceeds, which will be about $4.7 billion in cash, create enormous optionality as we look to put in place the optimal capital structure to reward existing shareholders and to attract new ones. But finally, and perhaps more importantly, the deal strengthens our network economics. Let me explain. The transaction removes a combined $360 million a year in operating cost and CapEx from TPG's business and replace it with a $130 million a year commitment to Vocus under what we call the TOFA, the transmission and wholesale fiber access agreement. Under the TOFA, TPG is provided the fiber services required to run our network on ongoing basis maintaining ownership economics, that is without any increased cost as we grow customer numbers or traffic. That creates operating leverage for TPG as we add customers or move them on to higher value, higher data plans. Importantly, the TOFA also includes all our intercapital traffic needs. That means we avoid material costs we will otherwise incur to renew existing intercapital arrangements. And if we require new or additional services from Vocus, we can also acquire those. We believe this transaction should create substantial value for TPG shareholders, and we are excited to move forward subject to the approvals. My next slide covers our business simplification program, which has the 3 objectives: simplifying plans and products, increasing digitalization of customer experience and modernizing IT platforms. We are around halfway through and making great progress. Having started out with more than 3,700 plans across mobile and fixed, we now have roughly 1,000 left, and we are on track to remove 750 more this year. Our longer-term target remains to have about 100 plants in market. This makes our business more efficient to operate, but also makes us much more responsive to customers when we need to make product changes. In the past, our legacy systems prevented us from increasing the use of digital channels. Now we are simplifying and upgrading our capability, and we are getting ready to launch new digital tools and experience this year. We will soon release the new Vodafone mobile app with revamped digital journeys. Right now, digital mix in postpaid is tracking at more than twice the levels of the same period in fiscal year '24. And across the business, digital sales are tracking higher. IT platform rationalization is also progressing as planned. We have reduced total applications by 15% with many of the larger, more complex applications the first to be consolidated. We anticipate removing close to 100 additional applications this year, including those that will be decommissioned or transferred as part of the Vocus transaction. Our longer-term target remains fewer than 250 applications to support our business. The efficiencies we deliver in CapEx and OpEx from these initiatives are reflected in our targets to reduce CapEx to a range of $550 million to $650 million and reduce operating costs by an incremental $100 million in real terms post the completion of the Vocus transaction. We are also confident that making life easier for customers will help us reduce churn and increase market share. The combination of these strategic initiatives positions TPG to win and grow in the coming years and to create value for shareholders over the long term. We will provide a lot more detail at this Investor Day planned for later in the year, the timing of which is subject to progress with the Vocus transaction. At that time, we will also provide full pro forma information for the new TPG for fiscal years '23 and '24, of which to base our aspirations. For now, I can say my team is focused on the commercial and operational priorities to drive revenue growth, lower costs, and create capital efficiency. We are committed to growing our mobile market share, a low OpEx-to-service revenue ratio, and a growing EBITDA margin. This will enable annual growth in EPS, operating free cash flow, and ROIC as well as attractive dividends. The Board is looking at all aspects to optimize value for shareholders and deliver a sustainable profile for TPG. Before I hand to John, I want to emphasize how proud we are of our people and the way they have represented our company and our customers during a period of unprecedented change. TPG is truly a value-led organization, and this gives me and my colleagues on the executive leadership team great confidence in our ability to deliver in the years to come.

Thank you, Inaki, and hello to everyone listening. Today, I'll be talking you through some of the drivers of our strong FY '24 operating results and providing some context for our financial outlook for FY '25 and beyond. As covered off by Inaki, 2024 was a year of milestones in the delivery of our strategy to simplify and streamline our business. Our results today and our outlook reflect this work, which has laid the foundations for the future of our company. Now turning to Slide 15, covering mobile performance. Mobile service revenue growth of 5.4% across the group was another great result. We have delivered 15.3% growth in mobile service revenue since FY '22, well ahead of both our main competitors and reflecting our focus on ARPU growth. Postpaid ARPU is up 13.9% over 2 years, including a 4.9% increase in FY '24 to $48.46. Prepaid ARPU in FY '24 was up 6.1% to $20.07. This is a direct result of our rationalization of back book plans and the introduction of new pricing for most of our in-market plans over the past 2 years. Data consumption is up 30% year-on-year. Changes to our plans are a modest way for us to monetize this increased consumption following our ongoing investment in 5G and other network and security capabilities. The growth in mobile service revenue has come with a continued focus on costs, which contributed to a strong 7.1% increase in gross margin in FY '24. Strong ARPU growth has offset lower momentum in subscriber numbers. Subscribers were up a modest 99,000 in FY '24 with the benefit of the Leica MVNO contract and a strong increase in prepaid, offsetting the reduction in postpaid. The decline in postpaid subscriber numbers includes the impact of a 25% decrease in both international migration and student intake. Against this headwind, we have seen competitors respond through aggressive handset discounting, and we've been very selective about participating in that, so not as to destroy value. The shutdown of our 3G network has also impacted mobile subscriber numbers in the first half. Importantly, our improved regional coverage means we can focus on winning a greater share of domestic customers. Since the MOCN launch, that's exactly what we are seeing with both net adds and ports up materially, as Inaki has explained. The very strong initial customer response to our improved regional coverage gives us confidence that in 2025, we can expect much better subscriber growth. Turning now to Slide 16, fixed broadband. Strong fixed wireless customer and ARPU growth remain the highlight of our fixed broadband performance. This drives higher AMPU and resilient gross margin despite ongoing challenges in the NBN market. We maintained our position as Australia's largest fixed wireless provider during the year with growth in subscriber numbers of 41,000 or 18%. Fixed wireless now makes up 13% of all fixed broadband subscribers, and we expect this to keep growing towards 20% over time. Many of the 41,000 new fixed wireless customers transitioned from TPG Telecom NBN services, a positive outcome for TPG Telecom given the higher ARPU. However, owing to intense competition in NBN, which is increasingly being sold by non-telco players and smaller entrants at very low margins, our total fixed broadband subscribers reduced by 84,000 users during the year. We remain Australia's second-largest distributor of NBN services, and we expect to maintain this. Pleasingly, as the NBN market moves towards higher speeds and fiber to the premises services, the quality of the TPG Telecom offering is being recognized. We were the leading provider of new NBN Fiber Connect services every month but in FY '24. I'm pleased to report our retail subscribers on Vision Network grew slightly in the second half. We are pleased with the 4.7% increase in AMPU for all fixed technologies, driven by subscriber and ARPU growth by on-net customers using fixed wireless and ARPU growth on Vision Network services. AMPU for NBN customers was unchanged from the prior year. Gross margin declined less than 1%, a resilient outcome relative to the 2.6% reduction in service revenue. I'll now turn to Slide 17 to discuss operating expenses. Excluding material one-offs, total operating expense for FY '24 was $1.225 billion, an increase of 3.6%. Importantly, efficiency initiatives limited second-half growth to only 1%, and we expect flat growth in real terms in FY '25. As we discussed at the half-year results, the outsourcing of the Manila contact center resulted in the transfer of $40 million of employee costs to other OpEx in the year. Excluding this change, employee costs were up $39 million, almost all of which occurred in the first half. This reflects the capability uplift undertaken in FY '23, offset by streamlining of roles across the organization in August 2024, which results in lower employee costs in half 2 than the first half. We said the run rate would moderate in the second half, which it did to growth of 4%, and we expect a much flatter employee cost growth in FY '25. Pleasingly, technology expenses reduced by $5 million. This reflected good cost control, including decommissioning of third-party network infrastructure and some nonrecurring third-party spend savings, partly offset by increased electricity costs. Excluding the reclassification for Manila, other OpEx increased $9 million, largely reflecting the front-ended nature of costs for the new Manila arrangement, which will deliver efficiencies over time. To reiterate, at worst, we expect OpEx to be flat in real terms for the FY '25 full year, that is no greater than the rate of inflation. However, we do anticipate some cost growth in the first half due to marketing investment to support our regional mobile network launch and higher electricity costs. Turning to Slide 18 now on EBITDA. Our EBITDA result reflects robust gross margin performance and slowing OpEx growth. The statutory result was $1.712 billion, reflecting the previously announced $250 million noncash impairment related to the decommissioning of assets as a result of the regional network sharing arrangement with Optus. Excluding the impairment and other material one-offs, EBITDA was up 3.4% to $1.988 billion at the midpoint of our guidance range. The Consumer segment delivered a very strong gross margin performance with growth in both mobile and fixed of more than 7% or a combined $162 million, driven by ARPU in mobile and on-net AMPU in fixed, as I have discussed. In January 2024, we reduced Vision wholesale pricing to provide stronger differentiation from the NBN. This negatively impacted fixed wholesale margin in EGW and benefited fixed margin in consumer. Consumer fixed gross margin was broadly flat, excluding this impact. Excluding this Vision change, EGW gross margin was down $9 million due to challenging market conditions and cessation of legacy technology services. This masked a strong result in both enterprise and wholesale mobile and in mobile-related services such as IoT and MPN, all of which remain with TPG post the proposed Vocus transaction. Hardware margin improved materially in FY '24 by $15 million, reflecting higher fixed device margins and improved credit performance on handset debtors. Other gross margin was down $22 million, reflecting the cessation of revenue we received in FY '23 to sublease spectrum as part of the proposed MC with Telstra, which did not go ahead. The final bar on the chart is operating costs, which we have already covered in detail. I reiterate this grew much more slowly in the second half. Before we move on, I will comment on half-on-half trends for EBITDA as a whole. In the first half of 2024, on a guidance basis, we reported a 2.2% increase or $21 million increase on the prior comparative period. In the second half, this improvement more than doubled to $44 million, a 4.6% increase on the prior comparative period. We are exiting the second half in a good place with operating momentum, continued revenue growth, particularly in mobile and strong cost control. However, we expect there will be a half-on-half skew in FY '25 with potentially a slight decline in the first half before stronger growth in the second half. This reflects the recognition of costs of the regional sharing arrangement with Optus ahead of any new revenue as well as the expected higher first half OpEx, as I noted earlier. Turning now to Slide 19. Trends in capital expenditure and depreciation and amortization has stabilized significantly now that we have passed the peak of our network and IT investments. We are looking forward to year-on-year reductions in CapEx. Cash CapEx, excluding spectrum, decreased $112 million or 9.9% to $1.014 billion in FY '24 and is expected to reduce to $900 million in FY '25 and between $550 million to $650 million per annum from FY '27 onwards post completion of the Vocus transaction. Reflecting this moderation in spend, we expect growth in D&A expense to increase only about 1% in FY '25 as it did in FY '24. We expect cash CapEx in FY '25 will be skewed to the first half, largely due to the way we manage payment timings. Turning to cash flow on Slide 20 now. Cash flow is the real highlight of this result and of our outlook over the coming years. The waterfall in this slide shows our operating free cash flow growth, excluding material one-offs, up $474 million to $672 million in FY '24. This was driven by the following factors in order of size. The impact of the unwind of legacy handset receivable financing arrangements peaked in FY '23. So the impact to working capital in FY '24 was $229 million lower. Cash CapEx was $112 million lower, as I have discussed. Other working capital movements were $101 million better, primarily reflecting lower new debtors arising from sales of handset on monthly payment plans. EBITDA was up $65 million and lease costs were up $33 million, primarily reflecting increase in leases taken on in FY '23. Many of these items will continue to further cash flow growth in FY '25 and beyond. The handset unwind impact in working capital will be less a further $125 million in FY '25 than Ss. The working capital impact of growth in handset debtors is likely to be negative in FY '25 as we do not expect to see such a reduction in our share of this market. However, we are actively exploring a new handset receivables financing arrangement, which would be very positive to cash flow. CapEx will be a further $114 million lower in FY '25 than a further $250 million to $350 million lower from FY '27, reflecting completion of the 5G rollout, completion of our IT modernization and removal of CapEx currently spent on fiber post the Vocus transaction. Offsetting this, of course, will be the EBITDA reduction arising from the Vocus transaction, albeit this will be partially mitigated by our expectation that other operating costs will reduce by an incremental $100 million post the transaction. Lease costs are expected to be relatively flat by the estimated $52 million increase we have forecast post the Vocus transaction. Looking beyond operating free cash flow, spectrum payments will be $128 million lower in FY '25, while the outlook for bank borrowing costs is improving. All in all, the outlook for TPG Telecom's cash flow is very positive. Moving to Slide 21 on debt funding. Our funding situation is quite stable due to our strong cash flow as we wait to determine the optimal capital management settings post completion of the Vocus transaction. In FY '24, bank financing costs of $251 million were up on the prior year as expected, reflecting higher market interest rates and slightly higher drawn borrowings. Gladly, we are expecting lower bank financing costs in FY '25 following the RBA's recent cut to the cash rate. Lease interest costs of $127 million were also higher than in FY '23, but these have now stabilized. Looking quickly at our debt stack, we are well positioned with a net debt-to-EBITDA ratio of 2.32x on a pre-AASB 16 basis, comfortably below our 3.75x lending covenant. We have $2.3 billion of debt maturing in 2026. We are in a good position to make decisions about this refinancing as we progress through 2025. The proposed sale of the fiber and EGW fixed assets creates significant capital management optionality and the treatment of this debt will be part of our decision-making. With that, I'll hand back to Inaki.

Thanks, John. I want to reflect quickly on where TPG has come from and where we are today. We are in a radically improved position to 5 years ago when we completed the VHA TPG merger. We have an integrated business, rationalized products, a simplified segmental focus and increasingly distinctive brands. This makes it easier for customers to choose our products and interact with us. That lowers our cost to serve, reduces churn and improves our capacity to cross-sell. We have access to greater network scale and have replaced future CapEx need in areas where we are subscale with a predictable cost profile, enabling operating leverage, higher margins and increased capital efficiency as we grow. We have a scale and coverage in mobile like never before with a modern 5G network and regional coverage that has created a much larger addressable market. And we are expecting cash proceeds of $4.7 billion from the Vocus transaction, enabling us to access capital management opportunities and establish a stronger growth and lower risk investment proposition. Our guidance for fiscal year '25 reflects the continued underlying growth in the business with lowering capital intensity and the impact of the regional network sharing arrangement in the first year as we accrue costs prior to revenue growth. We are expecting EBITDA, excluding material one-offs to be between $1.95 billion and $2.025 billion. This is the same as the fiscal year '24 guidance range with a midpoint in line with the fiscal year '25 result. The $80 million to $120 million of separation costs we have previously communicated to achieve the fiber and EW fixed sale will be within material one-offs. The initial EBITDA impact of the regional sharing deal is in the range of $55 million to $65 million, as we said last April. There are also some additional impacts to revenue recognition in fiscal year '25 related to a key global Internet of things contract in our enterprise business. We do expect EBITDA growth to be skewed to the second half, reflecting the regional sharing cost and higher first half OpEx for marketing and electricity costs. But OpEx overall will be flat year-on-year in real terms. Our CapEx guidance for fiscal year '25 is approximately $900 million, consistent with our update of November 2024 and the efficiencies we are generating. We also expect a first half skew with CapEx higher in the first half. This reduction in CapEx, along with a further improvement in working capital and lower spectrum payments will all contribute to another strong free cash flow result in fiscal year '25. Thank you. We will now take questions.

[Operator Instructions].Our first question is from Aryan Norozi at Barrenjoey.

Could I do one on postpaid subs on the free cash flow one on EBITDA guidance. And I might just give all at once, Paul. And if you want me to do one, stop me. But just on the subs, I know you're only saying February is the best net add month since December '22, but we only get the net adds by halves. So if you look at the December '22 half, it was plus 60,000. The next best half was plus 20,000. Is it reasonable for us to assume you're pacing somewhere between those 2 halves, maybe towards the bottom end if we're being conservative? Second question, just on free cash flow. So I think your FY '24 free cash flow to equity was $240 million. And then if I look at Slide 10, it feels like you're trying to drop red crumbs on how strong future free cash flow could be, say, in FY '27 if finishes. So if I just take the $240 million today and take all your public information, you add $400 million for a CapEx reduction, you add $150 million for spectrum falling out, you add $250 million for a potential net interest reduction and then you lose $400 million from ET&WEBITDA, that still gets you to $600 million to $700 million of equity free cash flow in '27 before any EBITDA growth. So just, John, like do you broadly agree it could be a much bigger number because if so, that has implications for your dividends by then as well. And then just lastly, on '25 EBITDA guidance for John again, you're guiding to flat year-on-year despite a $60 million drag from MOCN. And I know there might be a cost growth, but you said that's a worst case outcome. So if we assume you execute on cost, then you're solving for a minus $60 million. So, but if I just annualize the higher postpaid ARPUs and prepaid ARPUs you had in the second half, you're at a $40 million benefit in '25 already. So you really only need a little bit from sub growth, FWA LA to get to the midpoint of guidance. You don't really need anything extra beyond those.

I'm going to pass the first question to Kieren on subscribers, and then I will ask John to answer your questions on free cash flow and guidance. Okay. Kieren?

Kieren here. Just quick answer, yes, it would be within that range. And just to clarify, that's total mobile net growth for the group.

And Eric, on free cash flow, I understand your math. So your point on CapEx sort of moving to around that $600 million mark. is correct, and it's after IT modernization, business simplification and 5G rollout and also is assuming you're doing post the Vocus transaction there as well to get to that number. And we've previously noted an expected range of the $550 million to $600 million. So I think you've taken $600 million being the midpoint. Your point on spectrum is correct. We incurred about $156 million of spectrum in '24. So that's removed. Your interest costs, of course, that depends on the math assume on the debt levels at that time, but logically correct. So you do get to around that $400 million. And therefore, as a result of that, you $600 million to $700 million pre any other drivers of growth. And then finally, on your EBITDA question, I also understand your math on the assuming an ARPU trajectory on post and pre. And therefore, you are correct that growth disproportionately in the year comes from mobile services revenue growth, which does the heavy lifting across both ARPU and subs.

Our next question is from Thomas Beadle at Jarden.

I've got 3 as well. Just firstly, just with the outperformance of prepaid in the half year, your mix obviously moved unfavorably, but that blended ARPU still moved by about 3% sequentially in the second half. So can you just talk to the factors that drove that, please? I mean I realize you get the full run rate of price increases that you put through in the first half. But how much did you push back book pricing? And did you benefit from rationalizing the number of plans in the back book? Did that drive any favorable mix? And just should we be starting to think about this as a blended ARPU rather than just looking at the sort of prepaid and postpaid sort of in their respective silos? The second question is just actually on the postpaid subscribers. Just can you talk to the factors that drove that reduction for example, did you see any churn just from the rationalizations in plans? Is there any competition? Have you been sort of strategically pushing the prepaid channel harder, for example? And just finally, can you just help me bridge OpEx from FY '24 to '25, please? Obviously, you've got the MOCN costs coming in. Can you just talk to the efficiencies that are coming through? And just to what extent inflation is an offset and just any other moving parts that are worth calling out?

Thank you, Tom. I'm going to ask Kieren to take your question on subscribers and ARPU, and then I will ask John to take the one on OpEx bridge.

Thanks, Inaki. And thank you, Tom. Yes, so the question on prepaid. So first of all, that is where we've seen not just within our business but across the market where there's been a lot of the growth in population. So the Tier 2 subscribers have grown, I think about 3.5x that of the Tier 1 postpaid market. So that's been happening for the last few years. And we've been very careful about the way we compete in that market. We've used our family of brands, both TPG, but also Felix and also -- sorry, Vodafone and also TPG and also Felix. So using all of our brands in there. And yes, we have grown well in that space. So acknowledging that our growth over the last 2 years has been above our nearest competitors that. And your point around ARPU is a good one that we've been very careful in the way that we've grown there. So we have been obviously strong growth in the prepaid market as well. Your question around how much of it is back book versus front book, it's a combination is that back book affects more the postpaid market by the nature of the way the plans work. The question in terms of would we look at a blended ARPU, we don't intend to currently. We don't think there's use there because there are 2 very different distinct customer groups that have very different needs and different spending patterns. And then I think your earlier question was around what we're seeing in the postpaid market and what were the drivers behind some of the population moves. John touched on some of this in the introduction. But what we saw and what we saw in government information is that the center of population showed that international arrivals slowed by about 25% year-on-year last year. As we know, we are a global brand in Vodafone, and that does tend to affect us. We also saw a lot of very rigorous competition in that market and handsets and promotions, that tends to have an effect of diluting ARPU. And you'd recognize that as a result, we were quite disciplined in where we promoted and how we promoted. And as a result, we saw our ARPU continue to perform outside of our competitors and then overall continue to see our margin growth very strongly across the year in multiyears.

And Tom, thanks for your question on OpEx. Just please note that the MOCN costs aren't within OpEx. They're within direct costs and therefore, within gross margin. So therefore, the bridge becomes a little bit simpler. And as you would have seen in our second half, our OpEx grew substantially less across all dimensions of OpEx. And as a result of that and the actions we've taken and our management of costs, we see that OpEx being no greater than inflation in '25. Noting, of course, what I said on the half 1 versus half 2 split.

Our next question is from Ray -- sorry, Entcho Raykovski at Evans & Partners.

My first question is maybe just a follow-up on the postpaid decline in the second half. Just a follow-up to Tom's question. It just looks like on an underlying basis, that postpaid decline was greater in the second half than the first half, given that there was no impact of the 3G shutdown in 2H. And back in August, I think you talked about some improving subscriber trends. So my question is, was there perhaps anything more specific in the market later in the half, which drove the decline? I mean you've mentioned the competition and migration trends, but it just feels like those were there in the first half as well. And if anything, it should have been a slightly better outcome in the second half. I've got a couple of others. I might just hold off and wait for the answer to the first one.

Thanks. The postpaid actually, it was about even between the 2 halves. So -- and the factors we're talking about affected throughout the year.

I'll just make one other point. With the pending launch of MOCN that we've spoken about today, it didn't make a lot of sense for us to maybe go harder in our go-to-market upon launch of MOCN rather than prior.

Okay. That's probably a useful lead in to my second question. You've given us some very useful color around subs at the start of calendar year '25. And I know it's probably quite difficult to split out. But how much do you think has been driven by the promo offers that you've got in market? And does -- I mean, does the reaction of the consumer, does it change your thinking around the use of promo offers going forward?

You want to take that one, Kieren?

Thanks, Entcho. First of all, I agree that it is hard to split these out, especially over a short time period. But what we would note is that we do promos on a regular basis as our competitors do, but we don't see the uplift that we have seen in the first few weeks of the level. So I suggest it is, as always, a course of many factors, but I think the big new news to the Australian telco market was the doubling of our network. And I think that's really what we're seeing consumers respond to.

Okay. Great. And just a final one. Are you able to provide a little bit more color on the change in the IoT contract in EGW that you noted as part of the guidance. It's obviously going to be a headwind in '25. In particular, I don't know if you're able to give us the dollar quantum of the headwind?

It's Jonathan here. Thanks for the question. We wouldn't go into the specific details of the contracts. Look, it's probably immaterial in the overall guidance, but it is an important reason to be there, and we called it out for that purpose. We wouldn't go into specifics of individual contracts, I'm sure you'd appreciate.

Okay. No, got it. Maybe given you can't answer that one, I'll throw a final one in. You've spoken about the capital management opportunity post the Vocus deal. Do you have a target gearing in mind for the new TPG, assuming the deal goes ahead? What sort of debt load do you think the entity can hold?

Yes. Thanks for the question, Entcho. But first, we need to wait until this transaction gets approved. As all of you know, the ACCC will give the preliminary decision on the 27th of March. And then, of course, the Board will assess the different options that we have for those proceeds.

The next question is from Kane Hannan from Goldman Sachs.

Just a discussion around TPG's mobile market share in Sydney versus the other regions. I mean, firstly, why do you think the share is so much stronger in Sydney than, say, in the other 6 cities? Is that mobile coverage, retail footprint, sort of Vodafone being a stronger brand in Sydney? And how do you look to address those challenges in the other 6 markets given the coverage was there, I suppose, without the MOCN?

Thanks, Kane. Maybe I'll take that one. Look, I think that the history of the way that the network has been deployed has always given a bit of preference, I think, on Sydney and not just Sydney Metro, but also the areas where Sydney people go. And that is just historical. I think that is something that we have seen over the years. And it is something that changes dramatically in the implementation of the MOCN agreement. That's why even though we have doubled the network nationwide, there are many states where the size of the network is triple. And that is why we see that for a lot of people that not just the ones that live in the region, but also the ones that living in the cities are for work or for holidays, accessing those areas, the benefit that we're going to get probably outside of the Sydney region are going to be greater. And that is also why we say the brand awareness is a nationwide brand awareness. Our distribution is strong nationally. So this network improvement is really what is going to drive that ability to grow in other places to the level where we are in Sydney.

Yes. That's helpful, Inaki. I mean maybe I suppose the mobile trading year-to-date, are you seeing a noticeable difference in Sydney versus the other regions, sort of any early signs of success coming through?

Kieren, do you want to take that?

Thank you, Kane. Overall, we're seeing growth right across the country, but it might pick up on some of the points that Inaki mentioned. This isn't just about the places where we roll out our new network or our extended network is where we're getting the coverage. It's often in the cities where the people from those cities go to. And so where we're often seeing a lot of our growth is in the other metropolitan areas. And the good news is what we're seeing is a lot of the growth is coming not from second service or from anything like that, but it's from customers choosing to leave the other Telcos and join Vodafone. So we're seeing our ports grow a lot as well.

Thank you Kieren and just lastly, just the guidance, obviously, very helpful commentary on the phasing of costs. So given those mobile subs and then that trading, is it reasonable to think about service revenue picking up a bit into the second half or the ARPU impacts, the LICA contract impact that maybe offset some of the sub trends?

Yes. That's correct.

Next question is from Roger Samuel at Jefferies.

Good morning, guys. Two questions from me. First one, just on the strong net adds in February after the launch of MOCN. I suppose some of that is due to the marketing campaign. Is there any risk that you may have to ramp up the marketing cost in the second half of '25 if the momentum of the net adds is slowing down? Second question is on the NBN AMPU, which went down a little bit in the second half. And that's despite the higher ARPU in that period. Is it just a reflection of the roll-off of the NBN focus on incentives?

Thanks, Roger. I'm going to ask Kieren to take those 2 questions.

Thanks, Inaki. Thank you, Roger. So on the first question on the marketing spend over the year, look, we won't project the whole view of where we're spending, but we have laid out our marketing, the shape for the year with the growth in mind. And we do recognize that there is a period of announcing it. We only get to launch doubling the network once. So we're making sure that will be heard loud and clear. And then from that point on, we look at marketing like any other investment, seeing if we think it can get incremental growth. On the second point in terms of NBN AMPU over the years, as you probably appreciate is that AMPU is a better measure to understand the NBN market than ARPU is the relationship between the 2 are not linear. So in a lot of markets, what you'd see is ARPU grows with for example, speeds. So as you go up higher speed, you get a higher ARPU, but that's not the case with AMPU. So with NBN is actually what you see is that as you go up some of the higher speeds, the 100, for example, to the 250, actually the ARPU goes down. One of the reasons that we've seen a reduction in AMPU has much to do with the changes in NBN pricing that we see throughout the year. So you'll remember that NBN has locked in prices every year, so it's an unavoidable and uncompressible and increasing cost to our NBN business every year.

Thanks. Our next question is from Nick Basile at CLSA.

Morning Inaki and Tim. I've got 3 questions. The first one is on the MOCN. Can you just help us understand your perspective on the impact thus far? Obviously, you would have expected it to be positive. But just in terms of how it's tracking relative to your expectations prior to launch? And in terms of momentum, I know it's only been weeks rather than longer than that. But are we -- are you seeing continued growth in port-ins -- or sort of what's the profile of that growth so far? And then second question is on the EBITDA guidance. I hear the comments about first half, second half skew in terms of costs. But overall, it sort of still feels like maybe it's a bit conservative in general given the benefit you're going to see from IT transformation? And attached to that question is just on the TAWFA, I guess, agreement, which I think you've noted there's an ACCC decision on a month's time, that would represent upside given the OpEx saving you would get from that agreement to the guidance, i.e., it's not included? And then the third question, I think you put in one of the slides in the mobile -- consumer mobile section, just a target around digital sales. Now it's quite a big step-up that you're targeting relative to what you've achieved in the past. So I just want to sort of explore, I guess, a bit more detail on the drivers there.

Thanks, Nick. Look, on the first question, the results that we are getting are very positive, but are also what we expected. It is a massive upgrade to our mobile proposition. So we were expecting a good reaction from customers. And I would say that we are under our expectations. In terms of the EBITDA guidance, whether we are conservative or not, look, it is the guidance. We have quite a few things this year going on for us, including the implementation of the separation work and obviously waiting for the approval of ACCC. So I think that you need to take it for what it is. It is guidance. And then in terms of the digital sales target, I'm going to leave Kieren to give you a bit more detail. But in principle, we have digital brands that are performing at a very strong level. And we then also have brands that are more traditional where we are putting a lot of emphasis with all the transformation work that we are doing to improve the performance in digital and to be able to get not just the customer experience, but also the efficiency in terms of our cost to serve. So yes, from that perspective, yes, I think that we are quite confident. I don't know, Kieren, if you want to add anything on that?

I can't build much more on what you're saying other than to repeat the fact that when we talk about transformation, we talk about simplifying our business, it's not just about the systems, it's about the experience that customers have. One of the reasons that it is tough than we would like it to be for our customers to deal with this is there's this complexity. And that complexity often shows up as barriers in the digital experience. So one of the things we have been committed to and investing in over the last few years and this year delivering on is a mass simplification of that experience. And one of the ways that consumers are going to be able to benefit from that is to have a lot better control and a lot better of a digital experience. And we expect to see that in terms of digital sales and digital service.

Thanks. Just a quick follow-up, if I can. Sorry, the TAWFA agreement transmission, assuming that you do get approval from the ACCC, that would represent upside to your guidance, i.e., it's not included in the guidance, correct?

All our guidance is done on a status quo basis. So we previously disclosed in the announcement of the transactions, I think to regulatory approval, the impacts right across the business of EBITDA, cash flows and EBIT. So you need to probably need to look at that in its entirety rather than just focus on the [indiscernible] component. And Inaki said earlier, we'll provide more color on that later this year.

One thing, Nick, before I finish because my team here is telling me that maybe I didn't pronounce very well. And it might sound like under tested that we were on expectations on MOCN, just to clarify to all of you.

Our next question comes from Andrew McLeod from Morgan Stanley.

There's been a bit of discussion around the MOCN results, which sound very strong. Can you maybe provide some color on any conversations you're having with your partner there, how they're receiving the initial period of the deal and if they're incremental commentary you can give? And then just additionally, if I may, just one more on the OpEx side. Obviously, it sounds like you're seeing growth in customers largely from metro areas, the travel to rural areas. I appreciate the promotional spend will likely be directed by the growth opportunity. But how do you think about ongoing cost to support this customer? Is there something you may need to do in terms of the store footprint? And how should I think about that?

Thank you, Andrew. And look, I want to take the first one, then I'm going to ask Kieren to give you a bit of color on your other question. We don't have conversations around commercial performance with any partner or competitor. So this is an infrastructure arrangement between 2 players. We have other infrastructure arrangement with other players in the market, but that doesn't mean that discussions around commercial performance are among them. Kieren.

Thanks, Inaki. On the question in terms of where the growth and if there's any incremental investment required in MOCN and regional areas. I might tie actually in a way back to the comments on the previous questions from Nick around digital. What we know is for a lot of our growth, customers want to served, they want to buy and they want to research via digital. And as we improve that experience, we expect a lot of our growth will be through digital. Also, what I'd say is we do have infrastructure in terms of stores, partner stores, mass market retailers right throughout Australia. And again, just like we're talking about with marketing, we take a very investment view and a critical view in terms of any investment that we need in any other area.

Perfect. And then just one more follow-up, if I may. Obviously, with the changes to the gaining coverage. How do you think about the opportunity for growth and directing that incremental reinvestment dollar? Do you prioritize revenues, subs? How should I think about kind of the returns you're expecting? And is the return on the marketing dollar getting better in your view?

All of the above. I mean, at the end of the day, we will be considering. We've been quite consistent in the way that we've been driving the business in the last years. And it's always a balance, making sure that we have a sustainable, healthy business. At the same time, we are creating the enhancements on our proposition to make it more attractive to customers. And probably '25, if you consider what MOCN means as an enhancement to our mobile proposition, this is the single biggest enhancement to a mobile proposition in this market for many, many, many years. That's what we are working on, and that's what is going to give us the market share growth that we envision.

The next question comes from Brian Han at Morningstar.

I just have one. John, you said somewhere that you expect TPG to maintain its NBN subs at current levels. How would that happen? Will that be through competitive pricing or bundling or some other ways?

I think I said we want to maintain our market position is #2. That does mean maintain the base and improve stabilization of the base. And you will have seen that this year versus last year, whilst we declined sorry, '24 versus '23, while we declined, we declined less. So that's what I meant by that comment, stabilize the base and continue to hold our second position on NBN in the Australian market.

Understood. But maintaining your current subscriber base, how would that happen?

I do accept your broader hypothesis maybe behind that point that the competitive intensity in this market with the non-telco players and the smaller players driving low margin, if that's sort of the preface of your question. I accept that the NBN competitive intensity and market conditions are challenging. But I'm not going to go into how we're going to compete in market.

And it's also important to know that for us, it's also the households that we serve, and that's why also we play fixed wireless and that plays a big role in the way that we are addressing this second position in terms of broadband.

Right. And I take it that in regional areas, your NBN shares very, very low, just like your mobile?

Probably not. I would say that, that's not a right assessment. So in fixed, we have a more homogeneous market share across the country.

Our final questions are from Fraser McLeish at MST Marquee.

Just obviously a highlight this result in your last few results has been your ARPU growth. I just got a sense from your comments upfront that the focus is maybe shifting more to subscriber growth, but this is the mobile I'm talking about. Just if that's the case? And second, just, I guess, linked is, are you intending to monetize MOCN more through subscribers rather than ARPU because you're obviously giving your existing customers a lot of additional value. So I would have thought there's an ARPU opportunity there.

Thank you, Frank. Look, I think that for us, of course, ARPU and subscribers are important. I think that it's clear that we've been concentrated on profitability recovery and bringing the value that we provide to the customer in a sustainable way. It's also true that this ARPU has grown on the back of significant enhancements to the proposition. So 5G, much more data. And now we add on top of that double the coverage, which means that we can have an ambition to continue doing both. And I think that, that's really the way that we monetize the MOCN. The MOCN is an enhancement on the product that our customers are buying, and that gives an opportunity basically to enjoy much more of the product that they were before, and we continue to improve our 5G coverage. I think by the end of this year, 80% of our metro 5G will be completed. So I think that that's why we are quite confident that we can do both things.

We have no more questions, so we'll now close the call. Thank you very much for joining us.