TPG Telecom Limited (YST1.F) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for our presentation of our capital management plans and the pro forma financial information we released this morning. I'm Paul Hutton from TPG Investor Relations, and I'm joined by our CEO and Managing Director, Iñaki Berroeta; our CFO, John Boniciolli. To begin, I would like to acknowledge the traditional custodians of the 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. I will now hand over to Iñaki.

Thanks, Paul, and good morning to everybody listening. I want to begin by acknowledging that today's announcements are the culmination of an enormous effort to deliver a transformational outcome for TPG. We have created a strong, sustainable financial position to support TPG's growth strategy, which reflects the confidence we have in our outlook. It marks the culmination of a series of strategic moves, including brand refreshes, IT modernization and network expansion that are enabling TPG to compete more effectively than ever. We announced on Thursday that the Vocus transaction had completed, netting us cash proceeds of $4.7 billion. Today, we have announced what we intend to do with those proceeds. We plan to return up to $3 billion in cash to our shareholders through a pro rata capital reduction. We then plan to offer minority shareholders the ability to reinvest their capital reduction distribution if they choose to, in new TPG shares. This reinvestment plan is designed specifically to support TPG's free [ ownership ] of the company. In addition, we will repay up to $2.4 billion of bank borrowings. These plans will deliver an investment-grade financial position. We are also updating our dividend policy today. We will keep annual dividends at $0.18 per share this year, the same as 2024 and seek to grow them over time as profit and cash flow grow. Finally, today, we have released pro forma historical financial information for 2023 and 2024 and guidance for this financial year. These financials demonstrate the strength of the retained TPG business. The Vocus transaction delivers a simpler, more focused and more capital-efficient TPG with a radically improved financial position. Our fiber network infrastructure and enterprise government and wholesale fixed business were great assets, but they were subscale. The deal has also strengthened the economics of TPG's network access. We have established a long-term partnership with Vocus through which we can grow customer numbers and data volumes across our business. We emerged from this with a streamlined structure and cost base as Australia's most cost and capital-efficient mobile-led telco. And we are using the proceeds from the transaction to reward our shareholders and transform our financial position. I will now explain our capital management plans in more detail. We have designed these plans to reward all shareholders and rebalance the share register to increase minority shareholder ownership. The capital reduction of up to $3 billion is equal for all shareholders and translates to a cash distribution of $1.61 per share. It is subject to a shareholder vote requiring a simple majority, and we will hold an EGM for that in October. We have begun engagement with the ATO to seek a class ruling on the tax treatment for shareholders. The reinvestment plan is our way of giving minority shareholders the ability to buy more shares in the company and increase free float. Our strategic shareholders, they all recognize the importance of increasing minority ownership to drive trading liquidity. Hence, they are supporting this reinvestment plan and not participating in it, even though this will dilute their ownership in TPG. We will undertake their investment plan after the EGM, giving minority shareholders the option to receive their cash distribution, new shares or a combination of both. Minority shareholders will also be able to subscribe for more shares, if they choose. The targeted debt repayment of $2.4 billion combines the $1.7 billion of Vocus transaction proceeds not being returned to shareholders and proceeds from the reinvestment plan of $688 million. This will result in pro forma financial leverage of 1.3x, excluding leases and a solid investment-grade credit position. I want to reiterate our confidence in our plans and our growth trajectory, especially the very healthy outlook for our cash flow. This means we do not need to reduce dividends despite selling part of our business. So we are targeting a 2025 dividend of $0.18 per share, the same as 2024 and intend to grow dividends over time. We will consider the timing and extent to which we resume franking dividends in future, once we begin generating franking credits again. This next slide sets out the details of how the capital reduction and reinvestment plan will work, and how proceeds will be allocated between strategic and minority shareholders. The example shown is strictly illustrative only as, of course, the price in terms of the reinvestment plan, including any discount will not be set until the time of execution in October. Now turning to debt repayment. Our plans will deliver a reduction in bank borrowings from $4.1 billion at the end of June to about $1.7 billion at the end of the year. The chart shows our debt maturity profile before this repayment following the very successful refinancing of our 2026 maturities in June. We extended $2.1 billion of borrowings to mature in 2027 and 2028 at much tighter margins than previously. We are grateful to our lenders who were extremely collaborative in this process and understanding of the dynamics of the refinancing with the Vocus transaction settlement in [indiscernible]. We will now work with our banking group to assess which facilities to repay and the best way to extend further the tenure and diversity of our borrowings. The reduction in our financial leverage since the merger in 2020 has been dramatic. We exited the merger with external financing of $6.9 billion, including bank borrowing, leases and a legacy handset receivable financing arrangement and a leverage of 3x EBITDA. At the end of 2025, following the debt repayment, we expect to have drawn bank borrowings of approximately $1.7 billion, about 1.3x pro forma EBITDA. We have also eliminated the legacy handset receivables financing facility, and we continue to work with our banks on a superior solution, any proceeds from which will be used to repay more bank debt. The final element of the capital management plan is our dividend policy. This reflects the confidence we have in the operational outlook and strategic focus of our business. Simply, we intend to grow dividends over time as both cash flow and profits grow. We will start with a target of $0.18 per share for 2025, the same as 2024 with a target of progressive growth from there. We have a very strong cash flow outlook from underlying earnings momentum, cost control, reducing CapEx, lower borrowing costs and a pause in spectrum payments for the next few years. As I noted, we will consider the timing and extent to which we resume franking, once we begin generating franking credits again. Before I hand to John, I will cover the timetable for our plans. We will soon start to engage with our lenders to commence repayments of debt so we can maximize financing cost savings over the year. Our next major touch point with the market is our half year results on the 28th of August. After that, we will send out a notice of meeting, 28 days ahead of the EGM, to approve the capital reductions, which we expect to hold in early October. We will then open the reinvestment plan offer period, allowing minority shareholders to subscribe to new shares if they wish. We expect to make cash distribution related to the capital reduction and issue any new shares under the reinvestment plan in late October. John will now discuss our pro forma financials, financial year '25 guidance and our first half trading.

Thanks, Iñaki, and good morning to everyone on the call. Firstly, a quick overview of the operational perimeter of the Vocus transaction and how this feeds into our definition of pro forma financials. We have divested our EGW fixed commercial operations, our fixed network infrastructure and the Vision Network wholesale residential access business. Our business is now focused on our mobile radio access network infrastructure and access rights, our consumer and EGW mobile and consumer fixed business. Using 2024 as the example, the transaction means a reduction of about $616 million of revenue a year. There would then be a $21 million net reduction in the cost of telecommunication services once you factor in the new commercial agreements with Vocus, being the transmission and wholesale fiber access agreement or TAWFA for short, and the Vision wholesale broadband agreement. We retain the retail business operating on Vision, but not the network itself. Hence, we now have wholesale charges for Vision, whereas before, these were eliminated at the group level. Operating expenditures would be about $224 million lower, which includes the transition of approximately 535 employees. EBITDA on a guidance basis, excluding material one-offs, would be $388 million lower. Cash CapEx would be $122 million lower. However, lease cash outflows would increase by about $45 million, reflecting payments under the TAWFA. Today, we have released pro forma financial information for the 2023 and 2024 financial years and the first half of 2024. This slide summarizes the annual trend with detailed information for all 3 periods included in the appendices. EBITDA on a guidance basis would be $1.508 billion in 2023, $413 million lower than the $1.923 billion we reported on a status quo basis. You may note that this is $14 million less impact than we flagged in our preliminary work when we announced the Vocus deal last October, partially because of a slightly larger allocation to lease treatment of the TAWFA. We had originally expected $65 million being half of the TAWFA payment to be in EBITDA. However, it is now $58 million. For modeling purposes, the proportional split of the TAWFA between lease and non-lease is expected to be fairly consistent year-on-year. The impact on assets and liabilities of the new TAWFA leases is shown in the table on the right, resulting in a net increase in lease liabilities of approximately $600 million compared with the December 2024 accounts. EBITDA on a guidance basis would be $1.6 billion for 2024, up 6.1% on 2023. This will be down $388 million on the status quo business in 2024 versus the reduction of $415 million in FY '23. The EBITDA impact of $27 million less year-on-year in 2024 demonstrates that the business we are retaining has higher growth than the one we are selling. Operating free cash flow has increased $490 million between the 2 years. This very positive trend includes the benefit to working capital of reduced unwind of legacy handset receivables financing arrangements and lower CapEx following the peak of our network and IT investment in 2023. These figures help to demonstrate the underlying business is very healthy and continuing to improve. Now turning to our updated guidance. You recall our previous guidance for FY '25 was for the status quo business, assuming no transaction took place. Following settlement, we are now issuing guidance on a pro forma basis for both EBITDA and CapEx. We expect pro forma EBITDA to be between $1.605 billion and $1.655 billion for the full year FY '25. The midpoint of this range is approximately 2% higher than the comparable figure for 2024, whereas our prior status quo guidance showed no growth at the midpoint. An important point to note, the pro forma basis is not the same basis as the AASB5 basis on which we will report statutory financials this year. While both approaches admit discontinued operations, the statutory basis only recognizes the cost of new commercial agreements from when they begin, which is 1 August. The pro forma basis assumes those arrangements are in place all year. I note that on a statutory basis, FY '25 EBITDA is expected to be approximately $35 million higher than the pro forma basis as we will only have the new commercial arrangements with Vocus from this month. I also note that any transaction and separation costs this year-to-date will be in discontinued operations. Guidance is otherwise exclusive of any other material one-off impacts and as always, is subject to no material change in operating conditions. For CapEx, we are guiding to $790 million on a pro forma basis. This is the previous guidance of $900 million, less expenditure related to the sold assets plus some additional projects. There is approximately $20 million of investment to develop ground station infrastructure to support a low earth orbit satellite project, supporting our efforts to further improve our coverage for Australians in remote areas. We have also had to invest a little more in IT systems for the EGW mobile business post the separation related to the Vocus transaction. This slide is a reminder of the additional targets we have put out for CapEx and OpEx. Post transaction, we are a simpler and leaner business with the ability to remove costs. We will implement target initiatives commencing next year once we have recalibrated the base expenditure, aiming to remove $100 million over the next 4 years. This is a nominal target, meaning is gross efficiency before the impact of inflation. So with our post-transaction pro forma OpEx base of approximately $1 billion and assuming inflation at the midpoint of the RBS 2% to 3% target range, that means we are targeting to have operating costs of approximately $1 billion in 2029. We expect CapEx to continue to reduce as we have passed the peak of the 5G upgrade and as we finalize our IT modernization. We are targeting CapEx of $550 million to $650 million from 2027. The outlook for cash flow is very strong this year and beyond. In 2025, this will be driven by lower CapEx, the completion of the unwind of the legacy handset receivables financing facility, a pause in major spectrum payments and lower borrowing costs from reducing borrowings and lower interest rates. Turning now to our first half performance. I would like to stress that these figures for the first half of 2025 are an early view based only on management accounts. As such, they are subject to our usual review and sign-off processes for the end of the period and subject to change. We are discussing them today to make it easier for you to prepare for our half year results later in the month. In February, we gave you a view of our market share in the context of the new regional network infrastructure sharing deal with Optus. I'm pleased to show you some initial success since the launch of that arrangement at the end of January. As we said then, Sydney is our largest market with about 30% market share. In other major cities, we have seen market share growth of around 0.5%. Our strongest area of share growth has been in the smaller towns and fringe urban areas, places like the Central Coast in New South Wales, Geelong, Hobart and Cairns. In these areas, we've increased our share on aggregate by about 1%. This is an encouraging result in such a short period. Port-ins from Telstra and Optus are up 48%, and we are starting to see evidence of favorable churn trends. Meanwhile, in regional areas over the last 6 months, we have seen an 82% increase in data volumes across the network and voice traffic or phone calls are up 20%, showing that customers really do want what we are now providing. They have been calling for real choice, and we're giving it to them. Looking at key trading metrics for the first half. Mobile subscribers increased by about 100,000 to 5.615 million. We had positive net adds in our core brands and products; Vodafone postpaid and across prepaid, including TPG and Felix. Mobile ARPU was up $0.33 to $34.97. Fixed subscribers were 2.021 million. We continue to see pressure in the NBN space, but the recent promotions around the TPG brand refresh have delivered a better trend in recent months, and fixed wireless continues to grow. We saw an increase in fixed AMPU of $0.84 to $26.11, driven by a modest increase in NBN AMPU, combined with growth in the FWA base. Please note, AMPU is now shown after Vision wholesale costs, which were part of our margin prior to the sale of that business. My final slide compares our expectations for the first half of 2025 with the same period in 2024 on a pro forma basis. Again, these figures are an early view of the result based on unaudited management accounts. They are subject to our normal review and sign-off processes for the period and therefore, may change. We expect total revenue to be up 2%, reflecting the robust trading I just discussed. OpEx is looking broadly flat despite increased marketing costs across the Vodafone Double the network campaign and the TPG brand relaunch. We expect first half EBITDA to be up just under 1%, which is a good result considering the MOCN also results in increased network input costs of $25 million to $30 million in the half. Finally, cash flow. There was a circa $40 million increase on the first half of last year. This reflected lower CapEx and a lower working capital impact from the legacy handset receivables facility unwind, offset by lower net additions to handset receivables and a timing impact from higher lease payments compared with the first half of 2024. We will see further strong improvement in cash flow in the second half, as I have discussed. With that, I'll hand back to Iñaki.

Thank you, John. Our strategic focus is unchanged following the Vocus transaction, which was a key plank of running our networks smarter and becoming faster, simpler and stronger. Our other 2 areas of focus remain to invigorate our brands and services and make it easy for our customers. In 5 years since the merger of VHA and TPG, we have transformed into a more competitive low-cost telco challenger committed to simplicity, value and a better customer experience. In closing, I want to talk about the long-term value proposition TPG now presents. Firstly, in an uncertain and volatile macroeconomic environment, we are exclusively domestic focused and operating in a low-risk essential services industry. This competitive market increasingly favors the lean, customer-centric players who can be nimble in responding to customer needs. We are Australia's genuine mobile challenger, the largest player in fixed wireless and the second largest in home Internet. We have a strong stable of refreshed brands competing on modernized systems and an opportunity to expand into a larger-than-ever addressable market. Added to that, today is our transformed capital structure and balance sheet, a scalable cost position, very strong cash flow outlook and consistent returns from our simplified dividend policy. TPG is entering an exciting dynamic era, and we have great confidence in our ability to realize our potential. Thank you for your time, and I would like to open the call for questions.

[Operator Instructions] Our first question comes from Eric Choi at Barrenjoey.

Can I ask 3, please? And would you prefer them all at once or one?

All at once would be great.

Okay. So first one will be on just the growth profile of the ramp. Second one, just a question to help me and investors value that ramp. And then thirdly, just on the remaining strategic shareholder overhang. So on the first one, if we look at the ramp EBITDA, it's going to grow from around $1,600 million to, say, $1,630 million in FY '25. But in '25, you've got a $50 million to $60 million MOCN hit in there, and you've got extra marketing costs as well. So should we be looking at the underlying FY '25 growth rate of, say, $50 million to $100 million? Is that the best comp that we have for the ramp going forward? Second question on valuation. I think in the near term, market is probably going to look at that $0.18 on $4 post capital return and sort of go, that's a 4.5% dividend yield. So that will probably drive the share price short term. Longer term, though, I think people are going to look through to FY '27 and want to do the work on what free cash flow per share and dividend by '27 looks like. So I just wonder, so by '27, you're going to get EBITDA growth, you're going to get $200 million of CapEx reduction, but then I think you're going to exhaust your tax losses, so you're going to have some new tax. So I'm just wondering, does free cash flow -- you put that all together, free cash flow lift to, say, $600 million to $700 million plus maybe by even FY '27 and maybe you get like $0.30 per share plus of free cash flow per share? And is that around about ballpark right? And should we be putting that sort of number on a yield going into the long term? And then just thirdly, on strategic shareholder overhangs, obviously, you didn't do a selective buyback. So we can probably, in further strategics, think TPG is worth more than $550 million. Just in terms of how much more though, can we look at that like the breakeven price? And what I mean by that is what share price would be needed to clear all of Vodafone and Hutch's JV debt if they ever sold their full 50% and maybe $5.30 is that number, which would be the bare minimum. But then obviously, Vodafone and Hutch earn more than 50%, so they need a control premium probably quite a bit above that $5.30. Is that the right way to think about it?

Thank you, Eric. Look, I think on the first 2 questions, the answer is yes and yes. So you've done calculations more or less in line with our view. The third one, that's a very highly [indiscernible] question. So we cannot really get into that one. And ultimately, shareholders' intentions, it's up to them.

It's James, Eric. If I can just add depending on how you're defining free cash flow, as you know, we generally talk most about operating free cash flow. In addition, the free cash flow that's actually available for shareholders includes the fact that we've got a few years break from paying any spectrum payments. So that's $128 million year-on-year from '24 into '25, which is noted on Slide 18 of the presentation. Plus everything we're doing today means we'll have much lower borrowing costs. So you need to factor those 2 things into your free cash flow yield calculations for this year and indeed future years.

Our next question comes from Entcho Raykovski at Evans & Partners.

So I've got 3 as well, and I'll give them to you all at once. Firstly, can you give us an indication of the pro forma EBIT performance in the first half of '25? I mean I know we'll probably get it later in the month. But if you can't give us an exact number, I'm just curious in whether you saw growth in pro forma EBIT versus the $158 million that you've got as the pro forma number in 1H '24. And then the second question is just around leverage. I'm just curious if the reinvestment plan is not taken up, I mean, at that point, leverage could be as high as 3.2x, once you include leases. I suppose would you be comfortable with that level of gearing because it sort of puts you on the same sort of levels you have been on through the journey since 2020. And then it seems like some of that gearing reduction is contingent on a take-up -- full take-up of the reinvestment plan. Yes, just your level of comfort around take-up of the reinvestment plan as well and whether you feel like you need to do things to encourage take-up, including potentially increasing the discount available. And then my final question is, around postpaid subs trajectory, can you give us an indication of what the postpaid gross adds have done during the period? Did they accelerate meaningfully to give you the growth in 15,000 subs? I'll be honest, like that 15,000 number was a bit lower than my estimates. So did you see any uptick in churn during the period? I guess I'm trying to reconcile specifically that 15,000 postpaid net adds number with the very strong growth in ports, which you've referenced today. And yes, I'm struggling a little bit with making that reconciliation.

Thank you, Entcho. Look, maybe what I do is I'm going to -- so I'm going to start with the last question that you have, and then I'll pass on to John to answer the first one. In terms of the subscriber performance, we are actually quite happy about the way that the year has gone. You need to realize that we introduced the MOCN to customers in February. So that also takes into account the month of January that probably was a bit softer than usual, also because we were preparing ourselves for what was coming. But the other thing that we also need to appreciate in this market is that the boundaries between what is a prepaid and postpaid are getting a bit more blurred now. And in fact, our fastest-growing brand, which is Felix, we classify that as a prepaid. It is a 100% subscription model. And that type of customer in some occasions by other players is classified as a postpaid. So all those things we need to take into account. Like I said before, the performance that we have seen in the last 6 months, consistent with the numbers that we have given on profitability is actually a good performance by our standard, and it remains with a good trajectory. In terms of the leverage, look, I think that we are quite optimistic around the prospects of the reinvestment plan. We're still going to be an investment grade in any case, but we are quite positive on how we're going to end up with all this. John?

Yes. And on the first question, and look, I know we gave half 1 '25 preliminary numbers as we're yet to complete our year-end process. But I think you should -- and I think it's fair to say that the EBIT year-on-year will be flattish.

And then on -- on the leverage, again, the purpose of the reinvestment plan is to increase the free float and increase minority shareholder ownership. We will use the proceeds to reduce debt. But whether we do that or not, as Iñaki said, and presumably, you've all seen the ASX announcement that references the S&P rating, that is an investment-grade outcome in any case. The other thing I would say is that lease debt is much lower risk than bank debt. And if you look at the information we put out, the reduction that we've got is in effect. We've gone from more than $4 billion -- $4.7 billion of bank debt a few years ago to $1.7 billion at the end of this year. Even if you don't include the reinvestment plan, that's $2.4 billion, but it's still a very, very large reduction. And I refer you to that S&P report. The target ratio within that is 2.75x, but where we've started the rating journey, so to speak, reflects the very strong cash flow outlook of the business and the comfort that everyone has with that strong cash flow outlook, meaning you could be a little bit at the top end of that in the immediate term.

Our next question is from Liam Robertson at Jarden.

Three questions from me. Just firstly on the DRP, then one on the trading update and then just got a long-term strategic question I might ask as well. So firstly, on the DRP from minorities. I mean, have you got an early indication on what uptake might look like? How confident are you to getting closer to that 100%? I mean what are the incentives for minorities to take up the DRP? Is it just the increase of that free float? Or should we be expecting some form of discount? Second question, just on the trading update. I might elaborate and put some numbers around the question that Entcho asked. So I mean, from my perspective, June -- Feb to June, sorry, port-ins up 48% on the same period last year. To your comments, if we assume Jan was lower, that implies circa high 30s percent year-on-year step-up in port-ins for the first half '25. So I get about 240,000 gross adds. Therefore, to generate an outcome, 15,000 net adds. To me, that implies churn potentially stepped up about 1%. So I'm just interested in your comments. John, I think you said previously that you're seeing improving churn. Can you maybe elaborate on that or maybe help me out with what I'm missing? And then last question, just around the business post this EG&W sale. I mean, with TPG now predominantly operating under a long-term infrastructure access model, how do you see your competitive advantage in network quality evolving over the next 5 to 10 years, especially against, say, Telstra and Optus, who own more of the infrastructure? Are you effectively now all in on the expectation that network will ultimately become more commoditized?

Thank you very much. Look, I think that maybe I ask John to answer on the first one. Then on the second one, I'm going to ask James Gully to get a little bit into the numbers and also the effects of prepaid and seasonality there as well. And then I'll take the last one at the end. So John?

Yes. So look, we remain confident on the principles of the reinvestment plan. We're basically putting a decision in front of minority shareholders to make a call on what they like the free float percentage to be. And I think we all understand that, that's in the best interest of the company to increase the free float percentage and liquidity and then the funds to pay down debt. The final terms of that reinvestment have not been determined yet, and that includes any discount that might be applied. So hopefully that makes sense.

James?

Yes. Look, I think we have seen some improvement in our churn has not gone up in the first half of the year. We've certainly seen some improvement, particularly in the regions where our network has improved more materially than in the metro areas. I think I have to reconcile the numbers that you've given there, but the port-in number that we've given is only a portion of our inflow. So a significant portion of our inflow comes from non-porting customers, things like internationals and even domestic customers that are not porting. So I think that might be the explanation for the numbers there, but churn has definitely gone down in the half versus gone up.

And then, look, regarding your third question, at the end of the day, I think that what is important for us is to -- like I've said a few times, to maintain ownership economics on the usage of our infrastructure. We do that on our wireless network because we own it. And now through our agreement with Vocus after the transaction by utilizing those assets plus some of the assets that Vocus already has under a structure, that is, we have called the [ TAWFA ]. It is a constant payment per annum independent of our customer growth and also independent of the growth of the consumption of these customers. And then the thing that is also important is, in this infrastructure moving ahead and going ahead, who is behind the investments that are going to keep this infrastructure relevant. We are quite comfortable around the bet that Macquarie has put behind this fixed infrastructure, and we will definitely continue to invest on our wireless infrastructure to maintain this relevant and competitive in the market. So from that perspective, I think that it is some occasions, we do think that is better to own it. On other occasions, we don't think that ownership of the infrastructure is what is going to give you an edge in the market.

Our next question is from Roger Samuel at Jefferies.

I've got 2 questions. Just firstly, in postpaid mobile, just wondering how the subs momentum has been tracking in July and August, especially after you ended the promotional period for new customers. And also, yes, you raised the prices for the back book as well in April this year. I suppose the second part of the question is, are you expecting to increase the marketing spend in the second half of the year as well? And my second question is just to confirm your dividend policy going forward, is that based on free cash flow? Or is it based on adjusted earnings? Because if I look at your free cash flow, it looks like you only have just enough free cash flow in FY '25 to pay the $0.18 in dividend, which doesn't leave you much free cash flow for degearing. So yes, I'm just wondering what's your policy going forward?

Thank you, Roger. Look, I'm going to pass the first one to James Gully, so he gives you a little bit of an update of how are we trending in the last couple of months. And August will be only 1 week. But yes, I'm going to ask him to go through that. James?