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Edited Transcript of TLS.AX earnings conference call or presentation 14-Aug-19 11:15pm GMT

Full Year 2019 Telstra Corporation Ltd Earnings Call

Melbourne Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Telstra Corporation Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 11:15:00pm GMT

TEXT version of Transcript


Corporate Participants


* Andrew Richard Penn

Telstra Corporation Limited - CEO, MD & Director

* Ross Moffat

Telstra Corporation Limited - Head of IR

* Vicki Maree Brady

Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance


Conference Call Participants


* Andrew Levy

Macquarie Research - Analyst

* Brian Han

Morningstar Inc., Research Division - Senior Equity Analyst

* Entcho Raykovski

Crédit Suisse AG, Research Division - Research Analyst

* Eric Pan

JP Morgan Chase & Co, Research Division - Analyst

* Eric Choi

UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst

* Fraser Mcleish

MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst

* Ian John Martin

New Street Research LLP - Senior Telecommunications Analyst

* Kane Hannan

Goldman Sachs Group Inc., Research Division - Research Analyst

* Sameer Chopra

BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research




Ross Moffat, Telstra Corporation Limited - Head of IR [1]


Good morning. My name is Ross Moffat, Head of Investor Relations of Telstra. Welcome to our 2019 Full Year Results Presentation. Before we commence, on behalf of Telstra, I'd like to acknowledge and pay my respects to the Wurundjeri and Boonwurrung people of the Kulin nation, the traditional custodians of the land we're meeting on, and I pay my respects to elders past and present.

After presentations from our CEO, Andy Penn; and CFO, Vicki Brady, we'll take questions from investors and analysts on the phone. And with that, I'll hand over to you, Andy.


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [2]


Well, thank you very much, Ross, and good morning, and welcome to Telstra's results announcement for the financial year ended 30 June 2019.

2019 has been a pivotal year for Telstra. Notwithstanding the intense competition and the challenging structural dynamics in our industry, it is a year in which I believe we are starting to see the turning point in the fortunes of the company from the changes that we're embracing. 2019 was the year in which we completed the strategic investment program that we announced in 2016 to create networks for the future and to digitize our business. Whilst we will obviously continue to make investments, we are now doing so through our business-as-usual parameters, and we have reduced our CapEx-to-sales ratio to below 14% for 2019 -- sorry, for 2020.

2019 was the year in which as an industry we passed the halfway mark in the migration to the nbn. We estimate that we have now absorbed around 50% or $1.7 billion on an annualized basis since FY '16 of the economic headwind from the nbn, with more than 60% of homes in Australia now connected.

2019 was the year in which we commenced our T22 strategy to radically simplify our products and services, improve the digital experience for our customers, establish Telstra InfraCo as a separate business unit, simplify how we work, reduce our cost base and improve our portfolio management. We have made very significant progress in this program, and I will cover this shortly.

2019 was also the year in which we again demonstrated our clear network leadership by being the first operator in Australia and among the first in the world to launch 5G, the next generation of mobile telecommunications technology. 5G is clearly going to be an important platform for our growth in the future.

Today, we are already a very different, much simpler and more customer-focused organization than we were a year ago. And we are well positioned for the era into which we're about to head, the 2020s.

Let me then turn to the results highlights and a summary of our progress before handing over to Vicki, who will take you through more detail of the financials. We will then both be ready to take some questions from you.

Total income for the year decreased 3.6% to $27.8 billion on a reported basis. On a guidance basis, total income decreased 2.6%. EBITDA decreased 21.7% to $8 billion on a reported basis. Underlying EBITDA, which excludes one-off nbn income, restructuring costs and impairments, decreased 11.2% to $7.8 billion. The estimated nbn headwind that we absorbed in 2019 was approximately $600 million. Excluding this, EBITDA decreased approximately 4%. After accounting for significant restructuring costs of approximately $800 million and asset impairments of approximately $500 million, net profit after tax decreased 39.6% to $2.1 billion. The Board has resolved to pay a fully franked dividend of $0.08 per share. This takes the total dividend for the year to $0.16 per share, comprising a $0.10 ordinary dividend and a $0.06 special dividend.

As circumstances today are very different from that which they were before the nbn, we are no longer the national wholesale provider. That part of our business, the revenue and the value and the customers, is progressively being transferred back to the government via the nbn. Vicki will spend some time taking you through the current view of the impact of this on Telstra, but I want to make 2 points on comments that often come up in relation to the commercial agreements that we have with nbn.

Firstly, the notion that the payments we receive from nbn Co for access to our network somehow leave us better off or give us an advantage. This is clearly not the case, as you can see from our financial results today.

The second point is the claim that the payments to Telstra are the reason why nbn Co's wholesale prices are so high. In fact, it is completely the opposite. These payments to Telstra have actually helped keep the cost of the nbn down. Without access to our very extensive network, all of the exchanges, fiber, ducts, pits and pipes, nbn would have had to build out all of this infrastructure from scratch at a much higher cost and a much longer build.

But we are reaching an inflection. Whilst 2019 underlying EBITDA, excluding nbn headwind, declined by around 4%, we estimate that it will grow by up to $500 million in 2020, and Vicki will provide more detail on our 2020 guidance in her presentation.

This turnaround is a result of our focus on building value and growth through the many initiatives under our T22 program, as demonstrated in our operating highlights. Postpaid handheld mobile revenue was up 1.2%, while services revenue was down 1.6%. Our mobile business performed very well compared to industry, where overall we saw pressure on ARPUs and service revenues. In fixed, we are capturing more value with price increases, reducing the negative ARPU impact from customers recontracting onto the nbn.

Our Internet of business -- Internet of Things business exceeded industry growth rates with revenue up 19.4%. And during the year, we introduced new IoT products, including Telstra Locator in May, Telstra IoT SIM Manager and onesim in March and a commercial vehicle product, a digital water metering product, in June.

Our NAS business performed strongly in the second half with an EBITDA margin of 15.5% after a soft performance in the first half. This puts us back on track to deliver long-term NAS margins in the mid-teens as we have previously promised. We also achieved improvement in the performance of our international business with global connectivity EBITDA up 7.5% on a constant currency basis. Encouragingly, our health business also achieved strong growth with revenues up 36% and EBITDA improving by 49%. Our health business is performing extremely well, and it is expected to hit breakeven during 2020 and is strategically very well positioned in what is a growing market.

Turning then to customer experience. I am pleased to report that the investments that we have been making and the initiatives under our T22 strategy are having a positive impact for our customers. Episode NPS improved 6 points over the year, whilst Strategic NPS improved 3 points. We were also pleased to see that TIO Level 1 complaints reduced 20% compared to the prior year. This improved customer experience and our simplified product offerings contributed to growth in customer numbers. Through our multibrand strategy, we added 378,000 net retail postpaid mobile services during the year. This included 197,000 from our branded channel and 181,000 from Belong. We estimate that we took almost 60% market share in postpaid industry net adds in the last quarter alone. We also added 230,000 wholesale MVNO mobile prepaid and postpaid services in the year, bringing total wholesale services for the company to more than 1.2 million.

In fixed, we added 107,000 net new retail bundle and data services, including 56,000 from the main brand and 51,000 from Belong. Belong now has over 400,000 services, with almost 250,000 mobile services and over 175,000 fixed services. In the year, we added 659,000 new nbn connections with an estimated nbn market share, excluding satellite, of 49%. Total nbn connections from Telstra now exceed 2.6 million.

Turning to costs. We achieved our underlying fixed cost reduction target with underlying fixed cost down 6% or $456 million. This brings our annualized cost reductions achieved since the program began in 2016 to $1.17 billion, and we remain on track to achieve our long-term target by '22 by $2.5 billion.

Cost-out drivers have included simplification and digitization, and this has led to reductions in direct and indirect labor as well as nonlabor-related expenses.

In June of last year as the impacts of the nbn and competition became more profound, we recognize that we needed to do even more in response to the market dynamics. We needed to accelerate the rate of our change. We needed to lift the level of our aspiration, and we needed to be more aggressive in leaving our legacy behind.

That is why we launched T22. It's about simplifying the business and reducing our cost base for the future. It's about maximizing the value of our infrastructure assets. It's about positioning us for the 2020s and beyond and taking advantage of the significant opportunities coming around the corner from growing demand, technology change and the arrival of 5G.

The strategy is built around 4 key pillars and 2 critical enablers, building the networks for the future and digitization. We have made a very strong start, so let me cover some of the highlights starting with Pillar 1, to radically simplify our product offerings, eliminate customer pain points and create all digital experiences.

We have completely overhauled and simplified our product range. We have reduced more than 1,800 Consumer & Small Business plans to just 20, creating simpler, more flexible ways for customers to choose the best value connectivity, devices and services for them. During the year, Telstra became the first major telecommunications company in Australia to introduce no lock-in plans across both fixed and mobile. We also launched build-your-own mobile plans to give our customers freedom and flexibility.

Pain points such as excess data charges are now a thing of the past across all of our new mobile plans, and already more than 820,000 customers are enjoying the freedom and Peace of Mind that this brings.

In October of last year, we launched the next generation of our smart modem, a technology that includes a 4G chipset which now enables both voice as well as data backup. Already 1.3 million customers are using the smart modem.

One of the most pleasing measures of the real progress we've made during the year to improve the experience for our customers was a 22% reduction in the volume of calls to our call centers from Consumer & Small Business customers. In fact, since 2016, we have reduced the number of calls coming in to our call centers on an annual basis by more than 15 million to less than 30 million. We have significantly improved our online experience, including refreshing the Telstra 24/7 app, making it simpler for our customers to self-manage their services. Our digital experience now accounts for more than 53% of service transactions, including account management, prepaid product and billing-related inquiries. At the same time, we have also achieved an increase in the number of digital sales interactions for Consumer & Small Business customers, which more than doubled during the year to 16.8%. The message is clear. Our customers increasingly prefer to use digital channels to interact with us, and this creates great opportunities for us to deliver a better experience for our customers more efficiently for Telstra.

As well as flexibility, simplicity and choice, our customers also told us that they wanted to be recognized and rewarded for their loyalty. During the year, we introduced Telstra Plus, a program offering customers the opportunity to earn rewards, discounts on new technology as well as bonus entertainment and much more. Already, we have more than 770,000 customers enrolled in the loyalty program, Telstra Plus, since it launched in April 2019. Our support for small business customers also underwent a major revamp. As well as no lock-in and no excess data charges on our new mobile and tablet plans, we launched a host of more dedicated support services for small business customers. This includes account management for all small businesses through a 24/7 tech support service where we have trained thousands of more -- of dedicated small business specialists. It also includes new technology business centers for small business, a premium channel for businesses with more complex needs.

The drive to have fewer, better products and services also extends to our Enterprise customers with the number of active Enterprise plans cut by 21% as we continue to remove and unravel complexity. Connected Workplace was launched to selected Enterprise customers in December. It offers simple, streamlined way for our midmarket business customers to get all of the communications, data and connectivity solutions that they need at a fixed per-user price on a per-month basis. Call volumes from Enterprise customers also reduced during the year, down 8%, reflecting these improved digital experiences.

Turning now to Pillar 2, Telstra InfraCo. Telstra InfraCo is now fully operational as a stand-alone infrastructure business run by Brendon Riley. Master SLAs have been established, and we are reporting InfraCo separately in our annual accounts so that you can get greater visibility of the performance and the value of our infrastructure assets.

Telstra InfraCo has a book value of assets of around $11 billion and is responsible for key network assets, including data centers and exchanges, most of our fiber, the residual copper and HFC networks not transferred to the nbn, international subsea cables, poles, ducts and pipes.

The third pillar of our T22 strategy is focused on simplifying our structure and ways of working to empower our people to serve our customers. A critical part of delivering our T22 strategy is reengineering Telstra for the future. It's changing the way in which we work for our people to collaborate more easily so that they can deliver better and faster outcomes for our customers. This has meant an ongoing and unrelenting focus on removing hierarchies and silos and redesigning our organization from the ground up. We have already removed on average 3 layers of management across the organization. The changes have meant that around 6,000 or 75% of the 8,000 direct workforce role reductions have already been announced. Almost 5,000 have left the company. We've also reduced our indirect headcount by approximately 6,000 during the year.

While difficult, these changes are about adapting the business to a rapidly changing market and the transfer of a substantial part of our business to nbn, a company, of course, which did not exist previously.

To support those affected, therefore, we are investing up to $50 million in a transition program that provides a range of additional services to help people move into a new role.

As well as changing how we are structured, we are also changing how we work. We have adopted agile at scale, enabling us to deliver products and services faster, more easily to the changing needs of our customers. Under this program of work, we're also building the capabilities we will need for the future, creating 1,500 new roles in new areas such as cybersecurity and software engineering, data and analytics and AI.

The fourth and final pillar of our strategy is to deliver an industry-leading cost reduction program and portfolio management. We have accelerated the cost program in the second half of 2019 and into 2020, and we remain on track to reach our target of reducing annualized underlying fixed costs by $2.5 billion by 2022. We have already delivered $1.17 billion, and with an acceleration, we are targeting a further reduction in fixed costs of $660 million in 2020.

The other aspect of Pillar 4 is focused on actively managing our portfolio to monetize up to $2 billion of assets. In this regard, we have restructured Telstra Ventures, releasing $75 million. We have exited Ooyala. More recently, we sold the Edison Exchange in Brisbane for $57 million. And today, we announced the sale of 3 international data centers for $160 million, yielding a 9x EBITDA multiple and $110 million gain on sale.

T22 is built on a foundation provided by our strategic investment program that we announced in 2016. We have now completed this program, having invested $2.6 billion digitizing the business and building the networks for the future. This has delivered sustainable EBITDA benefits of more than $500 million per annum. We are now moving the ongoing initiatives and investments into business as usual within our promised midterm CapEx-to-sales ratio of 14%.

I can't reiterate enough that without these investments our T22 program would just not have been possible. Upgrading and digitizing our CRM, our provisioning, our billing, HR and many other systems and taking all of these to the cloud is a key enabler of the many customer experience initiatives that we are delivering.

The enhanced functionality of our new Salesforce CRM system is allowing us to remove complexity for our Consumer & Small Business frontline teams, and they can now respond to customer needs and process transactions from a single console.

Salesforce is also now the portal for Telstra Enterprise and our partners to manage their sales opportunities. This has helped us increase our sales pipeline by 27% over the past 12 months. Enterprise has also introduced Telstra Connect as a single digital channel for business-to-business customer interactions, which will bring together more than 50 active portals into just 1.

At the same time that we are building our new platforms, we're also retiring many of our legacy systems. As we announced during the year, this resulted in an approximately $500 million noncash impairment and write-down of the value of our IT legacy systems. The investments in our network have also been crucially important and a foundation for our T22 program. It's about building the networks for the future, continuing to reinforce our network superiority, developing the next generation of software-defined networks and, of course, creating a platform that's enabled us to launch 5G.

I'm going to talk a little bit more about 5G in a moment, but in addition to 5G, this year we've added more than 250 new mobile sites and upgraded a further 1,200. 500 new small cells were also installed, bringing the total number of small cells in regional and rural Australia in particular to more than 200.

Nationally, our mobile footprint has now been extended to more than 2.5 million square kilometers. That's at least 1 million square kilometers more than any other mobile network in the country. Our leading mobile network footprint is why we can offer more than 3.5 million square kilometers of Narrowband IoT coverage and around 3 million square kilometers of Cat M1 coverage.

Service reliability and resilience remains a critical factor for our mobile customers and a key network differentiator for Telstra. Since 2016, customer impact hours from outages have been reduced 76% as a result of our ongoing improvements.

Telstra also continues to lead the market in key speed benchmarks. Independent third-party recognition for the speed and quality of our networks this year included winning P3 and Systemics network surveys for Australia's best mobile operator and the Netflix Speed Index for the last 18 months in a row. However, perhaps the most significant network achievement this year was launching 5G and putting this technology into the hands of our customers for the first time.

Telstra is a global leader in the development of 5G and was the first to introduce it here in Australia. We have delivered the first 5G handsets available in the world through a number of exclusive arrangements with the major handset manufacturers. The rollout of 5G coverage is ongoing and is currently focused on CBD locations and selected regional centers where more than 4 million people live, work or visit every single day. We have already rolled out more than 320 5G-enabled mobile base stations across the country in 10 cities nationally. We expect to increase our 5G coverage fivefold over the next 12 months as a further 35,000 cities and major towns are connected. For the tens of thousands of our customers that are already using our 5G network, they are in 5G coverage almost 25% of their time, experiencing at least twice the speed of 4G with almost half of their data usage coming from the 5G network. And we are only at the beginning and on the first generation of handsets and chipsets. Ultimately, 5G will deliver ultrafast speeds, ultralow latency and greater bandwidth that will transform the way we live and work by enabling all sorts of future applications and technologies, including the Internet of Things, cloud computing, big data, machine learning and artificial intelligence, all areas where we continue to build expertise and capabilities. And of course, as with 4G, we believe that as 5G rolls out customers will be willing to pay more to access this new technology and the great benefits that it brings.

5G will also enable new revenue streams that do not exist today as well as delivering capital efficiency by reducing the cost per bit of data traveling over the network.

Before I close, I would like to take you through our T22 scorecard which we use to track our progress. Importantly, the scorecard represents a very strict view of our progress and is reviewed by our auditors. I want to comment on the performance against this scorecard and also highlight, in particular, 5 new measures.

Firstly, as you can see, 6 key T22 milestones are now complete. These include, amongst other things, the key measures to simplify to 20 Consumer & Small Business plans to be 5G ready and to ensure that Telstra InfraCo is fully operational. Of the remaining 23 measures, 13 are on track; and we have made good early progress on a further 3, which we show in gray as they are too early to measure. 7 measures in our T22 scorecard are rated either amber or red, and I want to explain why now.

Firstly, our new technology stacks. We are very well progressed. For Enterprise, the stack is live with our customers starting to experience the benefits. Mass market customers are also experiencing benefits. We are currently building our key mass market products on the new stack to enable us to migrate customers, albeit some functionality remains to be delivered.

Secondly, the 24/7 app. Ironically, one of the side effects of our successful Peace of Mind data plans is that customers are understandably using their Telstra 24/7 app less frequently to check their data consumption because they no longer need to worry about it. That's great news for customers, as I mentioned earlier, and we are working on other initiatives to increase Customer Engagement with the app, and I'm particularly excited by the impact of the Telstra loyalty program, Telstra Plus, and the interaction this will have with our customers.

Thirdly, while we have increased average services per customer in the year, we are below where we want to be. We, therefore, launched a series of campaigns late in the year to increase multiproduct holdings. For industry network surveys, we lead in all of them except the ACCC Fixed Broadband survey. This survey and its methodology does not allow for underperforming nbn lines, which acts as a disadvantage to Telstra compared to the rest of the industry. In contrast, of course, we continue to lead the Netflix index, which we have done for the last 18 months consecutively.

Employee engagement is critical to our ability to have both key leadership and technical talent required to deliver our T22 strategy. We set ourselves the ambitious target this year given the changes that we were implementing, and we missed it, unfortunately. Employee engagement reduced 7 points in the year. This was disappointing and perhaps not surprising given the level of disruption, and that certainly had an impact on results.

However, for the year ending June 2020, we are again setting an ambitious target to increase engagement by 9 points. And we are well underway in making improvements to the employee experience and processes in decision-making, getting rid of bureaucracy and [approvals]. Encouragingly, in a monthly pulse survey of employee engagement, we have seen a 4 point and consistent improvement since April of this year.

As I mentioned earlier, we're also much on track in relation to our cost productivity targets, although total costs, excluding restructuring costs, did increase in 2019. So we have identified this metric as amber. Although this was driven by handset prices and did not affect profitability, we expect total operating expenses, excluding restructuring costs, to decline in 2020 due to the momentum that we have achieved in our underlying cost reduction program.

Lastly, underlying ROIC. Whilst we expect growth in underlying ROIC from 2020 to 2022, we have identified this metric as amber. Firstly, we do not expect growth in underlying ROIC in 2020 given that it has become the peak year in the rollout of the nbn and the economic impact that, that has and also because of changes from an accounting perspective because of AASB 16, which Vicki will explain in a moment. But at a practical level, AASB 16 reduces our ROIC just from an accounting point of view by around 1 percentage point. Given this, we are now targeting hitting 9% in 2022, which is equivalent to the existing target of 10% on a pre-AASB basis. But we are indeed in addition to that committed to achieving 10% after the rollout of the nbn in 2023 and including this on an AASB 16 basis.

Which brings me to the additional 5 T22 measures in our scorecard, which we have chosen to give you to measure our continued success. These measures include targeting 24% of consumers and small business transactions for the digital channel, 4,000 active Enterprise customers on Telstra Connect and 2 million Telstra Plus loyalty members by the end of 2020. And of course, as we have done today, we will continue to use this scorecard in the future announcements to track our execution and to provide transparency to you on our progress.

So let me summarize before I hand over to Vicki. 2019 was indeed a year in which we met our guidance, we built strong momentum behind our T22 strategy, a year in which I believe we can start to see the turning point in the fortunes of the company coming from the changes that we have been embracing. Our progress was the combined efforts of many people, including our dedicated employees and management team who are focused on serving our customers and helping us return value to our shareholders. And I would like to thank them and recognize them today.

As expected and as previously flagged, our results also reflect the current market realities, including the intense competition we see in the market and the rollout of the nbn.

Whilst these factors will continue to influence the year ahead, we are approximately halfway through the negative headwind from the nbn, and we expect the hard work of our teams to translate into underlying momentum in our business.

Excluding the in-year nbn headwind, we expect underlying EBITDA to grow by up to $500 million in FY '20, as Vicki will explain when she takes you through guidance. At the same time, we're also sitting at an exciting inflection point in technology, in telecommunications and, importantly, for Telstra. We are only a few months away from the dawn of the 2020s. We're already at the dawn of 5G, and we have entered a period of rapid technology innovation which will provide significant opportunities for the company in the future.

T22 is about positioning us in this world as a simpler, more digitally enabled business with the best network, the right economic model, a strong balance sheet and the skills, capabilities, cultures and a way of working to succeed.

Thank you, and with that, I will hand over to Vicki before taking questions.


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [3]


Thanks, Andy. It's a privilege to be here as CFO presenting our full year results for the first time.

This morning, I will provide details on our financial performance and some insights into how our business is performing. I will take some time to walk through the impact the nbn is having on our business.

Prior to outlining our FY '20 guidance, I will talk through the impact of accounting standard AASB 16, which will be implemented in FY '20. I will also provide further transparency on the expected turnaround in our underlying business performance in FY '20.

Turning to our results for FY '19, which were in line with guidance and market expectations. On a guidance basis, income was down 2.6% to $27.8 billion. EBITDA was down 11.4% to $9.4 billion, which was at the upper end of our guidance. Guidance excludes approximately $1.4 billion of restructuring and impairment costs incurred in FY '19, largely related to the strong momentum we have built in executing against our T22 strategy. Underlying EBITDA declined $979 million to $7.8 billion. The largest reason for this decline was the nbn where we absorbed around $600 million of negative recurring headwind in the period. I will talk more about this in a moment.

The remaining decline of approximately $400 million excludes these nbn impacts and provides the clearest view of the trajectory of our business. The decline was largely in mobile and Data & IP. We also reduced fixed costs at an accelerated rate during the year and have now achieved close to 50% of our $2.5 billion FY '22 cost-out target. The $456 million reduction achieved in year was, however, not enough to change the underlying earnings trajectory.

As you can see, on a reported basis, EBITDA, EBIT and NPAT were down 22%, 35% and 40%, respectively. Depreciation and amortization reduced 4.2%, partly due to our ongoing review of asset lives. Finance costs were broadly flat, while tax declined on lower net profit. We have great confidence that our strategy can arrest earnings decline and create opportunities for growth. However, there are remaining financial headwinds we need to navigate, and a return to growth will take time.

Let me now talk to you about the impact the nbn is having on our business.

As we have previously advised, we estimated at least a $3 billion negative impact on recurring EBITDA by the end of the nbn rollout. Today, we are providing you a breakdown of the component parts, as shown on the slide. First, on the positive side, we received recurring EBITDA from the nbn via the ISDA agreement for access to our ducts, pits, exchanges and backhaul. This is contracted for over 30 years, increases with inflation and is expected to reach just under $1 billion per annum by the end of the nbn migration period.

Second, the exit of our legacy access network business will result in reductions in our fixed costs. This category is made up of direct costs related to field activation and assurance activity in the fixed network. However, the negative nbn headwinds across the next 3 areas far outweigh the positives. As a retail provider, we now incur significant new costs in the form of AVC, CVC payments to nbn Co. We also lose our legacy fixed wholesale business.

Finally, the nbn rollout results in retail revenue decline at an accelerated rate in our Fixed and Data & IP businesses. We have assessed the declines in these businesses. In the several years prior to the nbn rollout, these declines were between 3% and 5%. Post-nbn rollout, declines greater than these levels we have attributed to nbn.

Based on these 5 factors, we estimate the in-year net recurring negative headwind of the nbn was approximately $600 million in FY '19, and the cumulative headwind from FY '16 to FY '19 was approximately $1.7 billion per annum. We estimate that we are around 50% of the way through the recurring financial impact of the nbn.

FY '20 is expected to be the peak headwind year. We estimate that the impact in FY '20 will be between $800 million and $1 billion. These impacts are based on management's best estimates, with a key input being the 2019 nbn corporate plan.

The ultimate impact will be determined by how the identified areas evolve. The slide also shows that we expect to receive around a further $3 billion pretax, net one-off nbn receipts through to the end of the nbn migration period.

Looking now at income by product. Our reported income declined 3.6%. This is partly due to one-off gains in the prior year and lower one-off nbn DA and connection revenue during FY '19. Excluding these one-offs, underlying income for the period declined $572 million or 2.2% year-over-year. In terms of our major products, mobile revenue grew $165 million in FY '19. This was primarily associated with hardware, which increased $283 million. In postpaid handheld, we were pleased with our performance in market with service revenue growth of 1.2% as positive SIO momentum offset ARPU decline.

Postpaid handheld ARPU decline of 3.1% in FY '19 was caused by several factors. Firstly, $200 million lower out-of-bundle revenue; secondly, minimum monthly commitment, or MMC, which whilst flat in the first half declined in the second half; and finally, dilution from a higher mix of Belong customers. Reported ARPU decline also benefited by around 1 percentage point from one-offs.

Our new T22 mass-market plans have improved economics, and our leading ARPU indicator, transacting MMC, is up approximately $2 to $3 since the launch of the new plans in June, albeit it is early days. Transacting MMC represents the average MMC, excluding hardware, of new and existing customers that have taken up our new plans in the period. Despite this improvement in our leading ARPU indicator, we expect postpaid ARPU declines to continue in FY '20 due to a further decline of approximately $200 million in out-of-bundle revenue; the accounting treatment for our loyalty program and new plans; and MMC decline, due to a period of intense price competition in FY '19 washing through our base.

Turning to other mobile categories. In prepaid handheld, we largely arrested unique user decline in FY '19. However, increases in competitive intensity, including dramatic growth in data inclusions, have impacted ARPU. We remain pleased with positive momentum in IoT with revenue up 19%, and our wholesale MVNO business, a crucial part of our multibrand strategy, achieved revenue growth of 6.3%.

Now let me turn to our fixed line business where revenue declined in line with expectations. We performed strongly in retail broadband SIOs with net adds of 107,000, supported by, first, our multibrand strategy, with Belong contributing 51,000 net adds; second, lower churn through strong base management, including moving customers to in-market plans, bestowals of higher speeds and more data; and finally, differentiated experiences, including extending the number of consumer broadband customers using a Telstra Smart Modem to 44%.

Throughout FY '19, we have continued to lift recontracting fixed MMC. This is helping to reduce the rate of ARPU erosion.

Turning to Data & IP. Revenue was down 7.7%, with IPVPN SIO growth offset by competitive pricing pressures, technology shifts and legacy product declines, especially within ISDN. The ISDN revenue decline accelerated to negative 18% for the year, reflecting impact from the nbn, rationalization of legacy products and customer migrations to voice products within the NAS portfolio. Reported NAS revenue also declined due to the expected reduction in nbn commercial works. NAS revenue, excluding commercial works, grew 2% and shifted to a higher quality mix of annuity revenue. We expect these trends to continue in FY '20.

Turning to our operating expenses for FY '19. We are delivering well against our $2.5 billion net productivity target and managing our total costs. Total FY '19 operating costs rose 6.5%, largely due to increased restructuring associated with reshaping our workforce and asset impairments. Excluding guidance adjustments, total costs increased 2.4%. Importantly, our cost of growth slowed as demonstrated by a second half increase of 1.9% versus a first half increase of 3% on a pcp basis.

The key components of our FY '19 cost increases were nbn payments, up $410 million; and other sales costs, up $296 million, mostly related to mobile hardware.

The increase in nbn payments was more than offset by our productivity program, which reduced underlying fixed costs by $456 million in the period. In addition to reductions in labor costs, we have also reduced nonlabor costs in a range of other areas, including a 32,000 square meter or 8% reduction in commercial property footprint; also, a 1,400 or 14% reduction in fleet vehicles; and finally, a 900,000 or 19% reduction in truck rolls.

In FY '20, we expect our level of fixed cost reduction to accelerate. We are targeting a further $660 million reduction. This will take us to a cumulative total from FY '16 of over $1.8 billion by the end of FY '20.

In line with our T22 commitment, we also expect total operating expenses, excluding restructuring costs, to decline in FY '20, with reductions in underlying fixed costs offsetting increased nbn network payments and other variable costs.

Moving to EBITDA where our results were in line with expectations. The mobile EBITDA decline of $342 million can be explained by lower service revenue and hardware margin decline, including lease, partly offset by fixed cost reduction. We expect some of these trends to continue in FY '20. Fixed EBITDA declined by $636 million. We achieved significant productivity improvements. This was, however, more than offset by over $500 million of revenue declines in mostly high-margin legacy products and growing network payments to nbn. Including one-off nbn migration costs, our retail fixed EBITDA margin was 17.9%, and we expect further pressure on margins as the migration to the nbn continues.

Turning to Data & IP. Revenue pressure has flowed through to EBITDA despite some improvement in costs. Margin is expected to be increasingly impacted by competition and resale of nbn at lower margins. NAS performed strongly in the second half, achieving EBITDA margins of 15.5%. FY '19 margins declined modestly from 10.1% to 9.5% due to a change of revenue mix, including a decline in nbn commercial works and timing of large contracts. We expect NAS EBITDA growth in FY '20 and remain committed to mid-teens NAS EBITDA margins at maturity.

In global connectivity, EBITDA improved by $37 million, as we focus on more profitable products. We were also pleased with progress in new business, especially health.

Turning to free cash flow. Our FY '19 free cash flow was $3.2 billion and consistent with our guidance. The decline versus the pcp was principally due to lower EBITDA, including restructuring costs and increased working capital, largely due to timing of nbn receivables. This was partly offset by lower CapEx and tax paid. CapEx was consistent with FY '19 guidance. FY '19 was the final year of our strategic investment program, which has laid the foundations for our T22 strategy.

Moving to dividends. The Board has resolved to pay a final dividend for FY '19 of $0.08 per share, fully franked, including an ordinary dividend of $0.05 per share and a special dividend of $0.03 per share. Dividends for the second half of FY '19 are consistent with the first half. Total dividends for FY '19 are $0.16 per share, fully franked, including $0.10 ordinary and $0.06 of special dividends. The ordinary dividend represents a 59% payout ratio of underlying earnings. Underlying earnings in our capital management framework now explicitly exclude restructuring costs, impairments and other guidance adjustments as well as one-off nbn receipts. The ordinary payout is below the indicative 70% to 90% range, with the Board taking into account our overall capital management framework, which is included in the supporting material.

Turning to our capital position. Debt levels, average maturities and gross borrowing costs were all broadly flat year-on-year. We remain within our comfort ranges for all of our credit metrics. Our reported and underlying return on invested capital were 8.8% and 8.4%, respectively. We previously outlined a target for underlying ROIC to improve from FY '19 to FY '22. Although our aspiration remains for a post-nbn ROIC of greater than 10%, we do not expect to achieve underlying ROIC growth in FY '20. There are a number of factors that have caused this, including the impact of the AASB 16 accounting standard, which will reduce ROIC by approximately 1 percentage point and delay of the nbn.

I will provide more detail on accounting standards shortly.

There are 4 areas that I am focused on that are key to deliver improved performance and ultimately ROIC growth. Against each of these, we are beginning to see positives that give us confidence. First, executing our T22 strategy and the $2.5 billion cost-out target where we have made significant progress. Second, managing our cash flow and CapEx discipline. As I mentioned, FY '19 was the final year of our strategic investment program. Third, building value from our key product lines. In mobile, we are seeing transacting MMC uplift and are excited by 5G. And in NAS, our second half margin shows strong improvement, albeit there is some seasonality. And finally, focusing on other business growth opportunities, including 5G and IoT, global connectivity, health and infrastructure.

Before I finish with FY '20 guidance, it is important that I take you through the impacts of the implementation of accounting standard AASB 16 as it will impact the basis on which we provide guidance and report in FY '20 and beyond.

AASB 16 will result in operational lease costs moving onto the balance sheet and below EBITDA in the P&L. Although not an economic change with no impact on cash flow or our credit quality, we expect AASB 16 to increase our reported net debt by around $3.7 billion and increase statutory FY '19 pro forma EBITDA by $1 billion. Reported net profit before tax will decline approximately $60 million, mainly due to the implied interest in the capitalized lease liability.

Under AASB 16, mobile lease costs, like rent, move out of EBITDA into D&A. We stopped selling mobile lease plans in June 2019. However, given the runoff of lease amortization associated with these plans, it will result in a significant noneconomic lift in reported EBITDA in FY '20 and FY '21.

On a management and guidance basis then, rent will be moved below EBITDA, consistent with the accounting standard. However, mobile lease amortization will be included in underlying EBITDA, which on a pro forma basis is $8.2 billion in FY '19. This will only be necessary for FY '20 and FY '21 due to the runoff of lease amortization.

Turning now to guidance. Our FY '20 guidance ranges, along with the assumptions and conditions upon which we have provided them, are shown on the slide. I would like to highlight 2 significant aspects of this guidance.

First, on underlying EBITDA, I believe the clearest view of the future financial performance of our business is one that excludes the nbn headwind. We expect FY '20 to be a pivotal year for us financially as momentum in our underlying business is expected to deliver up to $500 million of growth, excluding the nbn headwinds. This is a significant improvement on the decline of around $400 million in FY '19.

Second, FY '20 free cash flow guidance includes a significant working capital increase of approximately $1 billion, driven predominantly from our exit of our mobile lease plans, payment of restructuring costs announced in May and an increase in nbn receivables. We also have an outflow of $386 million in FY '20 for 5G spectrum purchased in FY '19, which is excluded from guidance.

Clearly, we have headwinds, but we are well progressed on our transformation with a focus on building value.

Finally, on a personal note, I would like to take this opportunity to recognize and thank our dedicated teams right across Telstra. Despite going through a period of huge change, they have delivered improved customer outcomes, better network performance, innovative new products and services and led Australia in 5G whilst also improving productivity. I also look forward to meeting many of our investors over the coming weeks.

I will now hand back to Ross to moderate Q&A.


Questions and Answers


Ross Moffat, Telstra Corporation Limited - Head of IR [1]


Thank you, Vicki and Andy. We'll now open to questions, and do we have any questions on the phone line, please?


Operator [2]


The first question we have is from Kane Hannan from Goldman Sachs.


Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [3]


Just 3 for me please, mostly on the '20 guidance. Firstly, just trying to get a clean like-for-like number on that guidance prior to the accounting changes. Is it reasonable to just strip out that $450 million rent and lease impacts on your '20 underlying guidance to get that comparison? And secondly, just in terms of that $500 million underlying growth in FY '20, could you give a bit more color around and I supposed the composition of that growth? I know you said you're expecting NAS EBITDA growth. But should we be expecting mobile to do most of the heavy lifting from here?

And then finally, just on the nbn headwind. It's on Slide 13 I think you're saying you absorbed $1.7 billion of that recurring headwind. Is that an exit run rate this year? Or you're saying that you're estimating to absorb 50% of the headwind? So should we now be thinking about that as a $3.4 billion headwind?


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [4]


Look, thanks very much. Thanks for the questions. I'd like to take the second 2 and then ask Vicki to comment on the first in relation to guidance and the impact of AASB accounting changes.

On the $500 million underlying improvement, as you can see, what we've tried to do is to be a little bit more -- provide a little bit more detail in terms of how the nbn headwind is actually comprised so that you can do your own modeling on that, and I'll come back to that when I answer the third part of your question in a second.

But essentially, what it means at a practical level is that the initiatives we're taking in terms of improving the core mobiles business, fixed business, Data & IP, et cetera, are starting to bear fruit and our productivity improvements are also helping as well. But to be clear, what it means is that the productivity is doing most of the heavy lifting there because, as you can see, we're delivering $660 million next year, and that leads to a net of $500 million improvement. But that's an improvement of up to $900 million on the previous year, which also means, to your point, mobile makes a big difference in the context of that. And the reason we're providing that guidance is whilst obviously the mobile market has been under intense pressure and intense competition over the last couple of years, we've had very, very strong performance in size. So we're very pleased about that.

And also, we've taken a number of initiatives, particularly with the launch of the new plans, to improve value capture in the market. And as Vicki said, we're seeing $2 or $3 improvement in net recontracting MMC. So that's really -- that sort of addresses that point. It's a combination of mobile, the underlying product profitability as well as the underlying cost-out programs. So that's the second question.

On the first -- sorry, on the third point in terms of is that an exit rate, one of the -- in the past, we've sort of said we expect the impact headwind of the nbn approximately $3 billion or at least $3 billion. And we're moving to a sort of situation where what we'd like to do is to provide you with as much information on the composition of that as possible so you can actually now forecast that yourselves because, ultimately, that's going to be a function of things such as where the wholesale price goes, where retail prices go and some of those sorts of things. But to your point, yes, it is -- it's the exit sort of runway. And so, therefore, on that basis, if you use those assumptions, it would be reasonable to assume it will be sort of double what $1.7 billion is.

And then on the first point, I might just hand back to Vicki just to comment on the like-for-like and the impact of AASB.


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [5]


Yes, absolutely. So if you look at the slides I spoke to and particularly the one that outlines the impact of AASB 16, you will see that our actual underlying EBITDA in FY '19 was $7.8 billion. It does get a benefit of $450 million by moving rent below the line, and you'll see that gives us a pro forma number of $8.2 billion for FY '19.

If you then go to our guidance page, we are guiding on a like-for-like basis. So we use that $8.2 billion, our pro forma number, as the comparison to our FY '20 guidance. So hopefully, that gives you clarity on...


Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [6]


So would it be reasonable to assume that rents and that full impact would be $450 million in FY '20 as well?


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [7]


I mean our rents are a fairly stable number, so yes.


Ross Moffat, Telstra Corporation Limited - Head of IR [8]


Our next caller is Eric Choi from UBS.


Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [9]


Hey, guys. Thanks for the questions. I just had 3 as well. Just firstly, on the mobile ARPUs and the out-of-bundle impacts. A bit of a silly question. Just wondering how we sort of had $120 million of out-of-bundle impacts in first half, and then they sort of declined sequentially to $80 million in the second half. Just wondering mechanically how that happened?

And then just second question on Vicki's comments around the postpaid ARPU outlook. I think you said the tendency is to decline. Just wanted to confirm you mean year-on-year. And I guess just referring to your competitors' comments that they expect ARPUs to sort of improve sequentially from next half, just wondering if we can expect the same from you ex the out-of-bundle impacts obviously?

And then just the last question. I think there's been some speculation in the press you might be prepared to sell 51% in certain assets, and obviously, you'd never want to give up operational control of your mobile assets. I was just wondering if you'd ever consider a sort of a minority sale in those assets.


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [10]


Thanks very much, Eric. Look, on the final point, as you say, there are network assets strategically very important to us, so that's a good assumption. If I had anything else, I know there's been a bit of speculation on what we may or may not be doing vis-à-vis certain assets. As I announced this morning, we have sold 3 international data centers where we continue to service customers out of those data centers. We don't need to own those properties, and so that was actually a really successful transaction, which we did at a 9x EBITDA multiple and gained $110 million, and that's part of our overall $2 billion of portfolio management. But I don't have anything else to report in relation to infrastructure assets today.

On the second point on postpaid ARPU and just the trend, I'll get Vicki to comment on that and then also on the out-of-bundle revenues as well. I mean I think the point is that obviously there's a lag effect with ARPU, which sort of measures an in-force average as opposed to recontracting ARPUs or recontracting MMCs. And I think the main point is that we are capturing more value in our recontracting MMCs now, and we expect to continue to do that, but there is a lag effect of that actually flowing through. And so that's why I think Vicki alluded to the fact that we see ARPUs sort of starting to increase and reach an inflection point towards the second half of the year, but already we're seeing positive movement in recontracting MMCs.

And I think that's similar to which others are saying in the industry, but I would observe I think that our ARPUs actually and our share performed very, very well compared to the industry for FY '19. So we feel we're in a strong position.

But Vicki, you might want to add a couple comments there.


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [11]


Yes, if I can just add some comments in terms of the MMC decline. And yes, I did reference MMC decline year-over-year. I would just call out, we've had obviously a very long run of MMC increases in the market in postpaid handheld. And we flagged at the first half that we were seeing MMC flat. In the second half, we have seen declines. And we do anticipate that to continue into FY '20. And as Andy said, that is largely a lag impact of those competitive forces that we faced in '19 flowing through our customer base. And that transacting MMC metric is absolutely our lead indicator. And as I said, albeit early days, it is up $2 to $3 since the launch of our new plans, and that will be our key focus. But that will take time to wash through our base and land in our ARPU.

Just on your first question, which was related to the out-of-bundle revenue decline, it was lower in the second half. And as you can imagine, there are actually quite a lot of factors that impact that number. It is a function of which customers move to new plans, what their out-of-bundle usage was. There are also some other out-of-bundle charges beyond data. So we did see it slower in the second half. However, we still expect another $300 million of out-of-bundle revenue to be removed from our business, and we're anticipating $200 million of that in FY '20


Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [12]


That's very helpful. Can I just ask a quick follow-up to MMC? I guess we used to talk about mobile and those 4 different cohorts: consumer, premier, enterprise, et cetera. That transacting MMC up 2 to 3, is that an average across all cohorts?


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [13]


It's a good question. It is an average across our Consumer & Small Business segments. So our -- the bulk of our mobile business.


Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [14]


And then do we assume then that there's still a gap? Or has it been that effect for the premier and enterprise segment? Just wondering if you can elaborate how big that gap is?


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [15]


Look, the trends in our Enterprise business there's also some pressure on mobile pricing in the enterprise market. But as you know, I mean Consumer & Small Business are the biggest driver of our overall ARPU.


Ross Moffat, Telstra Corporation Limited - Head of IR [16]


Thank you, Eric. Next question's from Andy Levy at Macquarie.


Andrew Levy, Macquarie Research - Analyst [17]


Vicki, if I could just get a bit of clarity on the guidance in your comments. There's a benefit from the runoff of lease amortization. So do I think about that as there's a significant year-on-year benefit FY '20 versus FY '19 in the guidance as you stated it as in against the $8.2 billion, is the first question? If so, how much?

Second question is just on the new plans, and the MMC is obviously going very well in recontracting of customers. Just wondered if you could comment on whether subscriber momentum has been broadly unchanged since you put those plans in the market and how well they're being received would be great?

And then also if you could just comment on the new plan implementation around the impacts on EBITDA now that you don't have the, as I understand, the upfront subsidy expense going through on the customers? Or is that an overlap with my first question? I'm not sure how EBITDA is sort of impacted by the new plan structures as opposed to just MMC.


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [18]


Thanks very much, Andrew. It's Andy. Look, just -- I might just comment on how the new plans are being received in the market. And then Vicki, I'll get your comment in terms of what the flow-through impact on the structure of the plans is to EBITDA and how that differs with the previous plan construct and also your point about the like-for-like nature of the guidance outlook for FY '20.

But look, I think -- the short answer would be we're sort of pretty pleased with how the new plans have landed. The feedback that we're getting from customers is that they like the simplicity and the clarity and the flexibility of the plans. They also like the fact that we're eliminating a lot of the previous pain points. We've now got, as I said, 820,000 customers that are enjoying sort of Peace of Mind, and that's only going to accelerate now with the new plans as well.

So generally, that feedback. But also the feedback from our teams is good as well. Because they're simpler and easy to -- less complex for our customers, that makes it easier for our frontline teams to be able to service their customers as well. So net-net, that's all playing out as we expected. And obviously, there's a few things we're learning as we going through the process, which we'll adjust to, et cetera. But no, it's good.

In terms of momentum, we launch the plans -- I think it was on the 24th or something. It was on the last week of June. We took 60% of market net adds in postpaid handheld in the fourth quarter of last year's, which we were pretty pleased with. The fourth quarter is typically a slower quarter across the industry. So the industry numbers were smaller in the fourth quarter, but we certainly outperformed the industry. But that was before we put the plans out. Since then, we're not seeing any material change in our volumes in Q -- whatever, with Q1 we're in now relative to sort of the Q1 last year. There's obviously seasonality with size, but net-net, we're pretty comfortable with what we're seeing in terms of overall momentum in that part of the business, which is good.

The other thing I was going to say as well, take the opportunity -- you didn't ask, but I'm going to take the opportunity to just to really reinforce how pleased we are with our loyalty program. That has landed very, very positively. We've got very strong NPS from our customers that are using loyalty, very strong relative to the average of customers overall. We've got 770,000 customers already signed up. We only launched this in April.

We've also got quite a few redemptions already and getting some really, really good feedback. And I think that's going to be important strategically. And the reason I say that and I mentioned it here is because it's a part of the overall package of our new plans because we're moving to the no-lock-in contracts. We want to give customers the flexibility and the freedom to move, but we also want to reward them for their loyalty, and having those 2 things in parallel with each other is really important. So we're exceptionally pleased with how well that's gone. But with that said, I'll hand over to Vicki to comment on those other points.


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [19]


Yes, let me -- Andrew, let me start with the FY '20 guidance question. So again, just to be really clear, I know there's a little bit to take in, in the numbers. The basis on which we are guiding, and the FY '19 pro forma is also shown on our guidance page, is that rents have moved below the EBITDA line, but we are keeping the mobile lease amortization cost above the EBITDA line in terms of our guidance and how we will report to market.

Just to give you an indication, the supporting material does provide some breakdown on that lease amortization. So you can see in FY '19, it is a $600 million cost. In FY '20, it is $460 million. And in FY '21, it's under $100 million, and then it is gone as it runs off out of our business. So hopefully, that gives some clarity.

Andy's answered the second one. And I think the final question was just around the impact of the new plans in terms of subsidy on our EBITDA. So just come back to that transacting MMC measure where we saying we're $2 to $3 up. That is an economic benefit for us.


Andrew Levy, Macquarie Research - Analyst [20]


But accounting-wise -- if I'm still on, yes, so accounting-wise though you used to take some of the subsidy upfront, understood. And so just pushing that out in new plans that don't appear to have subsidy? Or you're going to take I guess different amounts of service revenue and handset revenue? There's no benefit that flows from that that's sort of like-for-like?


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [21]


There are quite a few changes with the accounting for the new plans, and I am planning -- in some of our one-on-one follow-ups, I can talk more to that and certainly at our Investor Day later this year. I think it'll be a great point to deep dive into those accounting impacts. Because, yes, the new plans just broadly do move a little bit of revenue out of service revenue into hardware in the way we account for them.


Ross Moffat, Telstra Corporation Limited - Head of IR [22]


Next, we have Sameer Chopra from Bank of America Merrill Lynch. Sameer?


Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [23]


I just have 2 questions. Firstly, Andy, great job on the CapEx reduction for next year. Could you walk us through what's driving that sort of 12% CapEx to sales? And second one, Vicki, just to clarify. So the EBITDA guide for next year is $7.2 billion to $7.8 billion. My mechanics takes this down to an EBIT of $3 billion to $4 billion. Is that correct kind of thing? So on a reported basis, we're expecting a reported EBIT of $3 billion to $4 billion? I just want to make sure that we're all on the same page.


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [24]


Okay. Look, thanks, Sameer. So you're talking about EBIT. So before interest and tax but after D&A, yes?


Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [25]


That's right. After all the lease accounting is taken into account.


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [26]


Got it. Okay. I'll ask Vicki to comment on that in a second. In terms of our CapEx to sales, the main point is, as I sort of touched on in my remarks, basically we have competed our strategic investment program. We announced in 2016 that we'd invest up to $3 billion to really double down on the investment in networks platform for the future and also in digitization. We ended up spending $2.6 billion for delivering the $500 million worth of EBITDA benefit, and we -- as committed, we're now moving to effectively what our mid-term business-as-usual CapEx-to-sales ratio is. I think it's a little more than 12%, which I think is more like 13% or a bit over.


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [27]


At the midpoint.


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [28]


At the midpoint, it's about 13%. But I think the point is, is that it's predominantly the fact that we've completed that program. And importantly, one of the things that, that program did, which I don't know it was fully appreciated at the time, is it created the foundation for us to be able to launch 5G. Because when people think about know about new mobile telecommunications technology, there's a lot of focus and energy goes into, of course, the thing that you can see, which is rolling out 5G antennas and radio access equipment across our access network, across towers, across the country. But what's perhaps not fully appreciated is the amount of investment and the upgrading of the capability that needs to go into the core and into the backhaul in creating the capacity.

And so we've put a lot of investments into our fiber transmission networks and back into the core to really give us that foundation and, of course, also into all of the software-defined network aspects of our network as well.

So as I mentioned, we're aiming to get basically 5x the coverage of our 5G that we already have. And we're already, as I say, got a lot of customers enjoying the benefits of 5G, and that's all within that CapEx-to-sales ratio.

So I think the summary of all of that, Sameer, is that it's a benefit of having really sort of identified in 2016 that it was important that we invested ahead of the curve to put us in a strong position and set us up for the 2020s and 5G, and we're now getting the benefits of that. Our guidance on CapEx sort of remains about 14% in the mid-term but trending down closer to 12% once we get into a post-nbn world and we can release some of the CapEx that goes into supporting the 92% of the access network that transfers to the nbn. Obviously, we'll continue to retain responsibility for the 8%, but that will also help us make improvements on CapEx.

So I might hand over to Vicki on the EBIT point.


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [29]


Sameer, thanks for that question. So just as you're thinking about EBIT, the one callout I would make, as you look at D&A, the impact of AASB 16 and the way we've treated it for guidance is $450 million of rent that moves out of EBITDA down into D&A. So like we've just flagged, that's an important part to factor in as you're taking it below EBITDA down to EBIT.


Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [30]


Vicki, just on that. Your D&A this year was $5.5 billion, right, on a AASB 16 basis? Am I right?


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [31]


So it is on a statutory basis, but you can see if you go to the slide where I've talked through AASB 16 in my presentation, you'll see for management and guidance purposes D&A is $4.7 billion.


Ross Moffat, Telstra Corporation Limited - Head of IR [32]


Our next inquiry is from Entcho Raykovski from Crédit Suisse.


Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [33]


Three from me. The first one, just around the $660 million fixed cost reduction in FY '20. Are you able to give us any more color on which division you expect that to come from? Is there a large chunk from mobile, for example? And then secondly, around the increase in transaction MMC that you're seeing, do you think it's the competitive environment that's allowing you to see that? Or is there -- or is it your plan specifically? And just finally, I don't want to belabor this point. But the ARPU decline obviously that you guided to in postpaid handheld, do you then expect to see an increase? So you alluded to the second half being better, but do you expect to see an ARPU increase in the second half sequentially?


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [34]


Look, thanks for that question. A couple of things, and I'll ask Vicki to add as well. I think, look, on the first point, on the $660 million worth of cost reduction, it comes from a number of areas. But I mean, most importantly, it comes from the initiatives that we're sort of taking under our T22 program to fundamentally simplify the business, flatten the structure, eliminate a lot of activity in the business.

And so we've done a lot of heavy lifting and a lot of the restructuring, particularly around reducing layers of management. But by moving to the new plans and also then shifting those plans to the new technology, what we expect to do is to be able to take volume out of the system. And I already mentioned that we reduced calls into the call center by 35% since 2016. Our actual aim is -- they're under 30 million this year. Our aim is, what we've probably quoted, is to get that down to 12 million I think by the end of the program. So it's that type of dynamic.

Now it's hard to attribute it at a high level to individual products because, as you can imagine, a lot of our costs are sort of shared costs. So if you think about our Telstra stores, if you think about our call centers, our operators and our frontline people receive customers who may have queries on media. They may have queries on fixed. They may have queries on mobile. So a lot of the costs are allocated. But I would say that it's -- I would sort of spread it fairly consistently or proportionately across our overall portfolio. There's not really one I think product set that's sort of achieving more than another, if I can put it that way. I mean we're obviously going very hard in relation to the resale of nbn broadband services just given how slim the margins are there. But as I say, the vast majority of their costs tend to be shared across the portfolio. And then even in the network side of things, of course, the access layers are different. But again, in the core, it's a lot of shared infrastructure.

But look, it's a big -- it's an ambitious target. We're committed to it. It's a step up from what we've previously done, but also, it benefits from a lot of the work that's been done this year obviously, and so a lot flows into next year because we've taken a lot of steps. One of the reasons, by the way, that we made the announcement, I think it was either in May or early June when we said that we were bringing forward some announcements in relation to restructuring so that we could really sort of, firstly, for our people give them more confidence and certainty that more of our people changes were behind us but, secondly, to put us on a good path into FY '20.

But why don't I hand over to Vicki to talk to you about essentially just the evolution of ARPU. I mean in the end, what ARPU does will be a bit of a function of obviously how the competitive dynamics play out in the market. I mean our focus is though to absolutely capture value and make sure we return value to shareholders because we've invested a lot on behalf of our customers in the network, in providing more data, in fact in providing Peace of Mind data and lots of services. And I think we're sort of at a stage in the cycle where we will see that value uplift as well as not just on our current plans but also increasing in our plans moving into 5G as well. But Vicki?


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [35]


Yes, okay. So in terms of ARPU, I would call out obviously 10 MC is a key lead indicator. But when we look at ARPU, we clearly have the out-of-bundle revenue pressure as well. So in terms of the second half, we currently expect in terms of second half ARPU declines. Those declines will slow on a pcp basis is our current expectation. First half will decline faster. In terms of the sequential question, half-on-half, look, it's probably too early to tell, particularly given the out-of-bundle revenue. And as we've just seen in our FY '19 results, that out-of-bundle revenue can shift around a little bit timing-wise, so I think it's too early to make the call on the second half sequential question.


Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [36]


Got it. And maybe just a very quick follow-up around the transaction MMC increase. Presumably, you were seeing that before the pricing changes and not just last week?


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [37]


Yes, I guess just a comment at a high level. From our point of view, obviously we're at the mature level end of 4G right now and obviously entering 5G with it having launched. And I guess you see in those changes of generations in the mobile market. Obviously, we've all got to face and look at return. We want to be able to invest the right amount of money to deliver an amazing network experience, innovative products and great customer experience for our customers as well. So certainly as we looked at our plans and where -- what was the right economic level to set them at for 2 to 3 TMMC increase, it was in that context. And I would expect a lot of the players in the industry are probably looking at things in a similar way right now.


Ross Moffat, Telstra Corporation Limited - Head of IR [38]


Our next question will come from Eric at JPMorgan.


Eric Pan, JP Morgan Chase & Co, Research Division - Analyst [39]


Just on the mobile front, another strong half in postpaid net adds with strong contributions from Belong. But with you and Optus both reporting strong adds, what are you taking share from? And on the flip side, prepay and mobile broadband were much weaker than expected? What can we attribute that to? How much of that postpaid gain came from internal prepaid migration?

And then the second question. On the CapEx, a comment you had before. You mentioned trimming it down to 12% in the medium term. Does that include any planned 5G spend on base station expansion?

And then lastly, some of your smaller fixed competitors are looking to be more aggressive in the Enterprise and wholesale space. Are you seeing the degree of competition there increase? Or is it business as usual?


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [40]


Thanks, Eric. Again, I'll make a few comments, and I'll ask Vicki to add hers as well.

Maybe just going in reverse order. Look, on fixed, and -- sorry, and in Enterprise in particular, yes, no doubt there is increased competition in Enterprise. I think as there has been some of the challenges associated with reselling nbn has sort of manifested itself with increased competition at the Enterprise sector. We're seeing that from our other competitors. And of course, also nbn has been quite active in the Enterprise sector itself as well. So I do expect that to intensify, particularly as we go through a period where more businesses are now migrating or needing to sort of go through the process of migrating their services that are impacted by the transition to the nbn.

So that's the first point. On a CapEx point, to be clear, what I said is that our medium-term CapEx-to-sales ratio guidance is 14% and that we would expect it to trend down towards 12% post the rollout of the nbn. The nbn rollout finishes in FY '22/'23, whichever -- however you sort of look at it, but around about that time. And that does include basically all of the things that I've communicated so far in relation to 5G. I've said that we're already at 3 -- more than 320 stations across -- mobile base stations in 10 cities nationally. We're looking to increase that fivefold over the next 12 months. And so that's incorporated in what I've said in terms of my CapEx guidance.

Were we to be even more aggressive than that or were we to develop other aspects of our 5G strategy, we'll then -- we would obviously brief the market what the CapEx implications of that was. But we think we've got the balance there just about right.

And then on sort of the prepaid mobile broadband point. There's no doubt that the market dynamic over the last couple of years has been a bit of a switch from prepaid to postpaid, particularly with the sort of increasing proportion of BYO plans. I still think the performance overall has been pretty strong. But with those comments made, Vicki, is there anything else you wanted to add?


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [41]


Yes, I would just call out in terms of the postpaid handheld market, we are pleased, as Andy said, with our performance in the second half in that market. Just as I step back and look at the market, I think it's fair to say the June quarter was a slower quarter overall in the market in terms of postpaid handheld net adds. And as Andy said, prepaid to postpaid migration has been a dynamic in our market for some time. We are seeing that slow down a little bit now. And I think that's playing a part in those. As you look at the second half, particularly the fourth quarter, overall I would say we're pleased to come through a period of high competition in mobile and to be able to hold our SIO share in our postpaid handheld retail business plus do well with our multibrand strategy with our MVNO business. And I think it's also important, beyond SIOs another key thing I look at is service revenue in postpaid handheld market. And looking at our share of that, we have -- we expect held share over FY '19 on service revenue.


Ross Moffat, Telstra Corporation Limited - Head of IR [42]


Thank you, Eric. Now we move on to Fraser Mcleish at MST.


Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [43]


Sorry, just to belabor the point slightly more on the AASB thing. When you previously talked about a $900 million impact, I'm assuming that includes the mobile swap costs, which you're now taking kind of above the line in operating costs you're seeing? And then it looks like you've got quite some big savings on that coming through in '21 and '22. So we'll see operating costs come down in mobile by that amount in '21/'22? So I'm just wondering -- that's my first question.

Second question, just on the guidance on the nbn impact. Andy, can you -- does that include the nbn moving into corporate and Enterprise as well? And just a bit on your general thoughts on that. And finally, could you just give an update on spectrum and timing of spectrum auctions and new spectrum coming available?


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [44]


Thanks, Fraser. I'll get Vicki to comment on the AASB point.

On the nbn impact, does it include the impact of corporate? Yes, it does. Obviously, we're making assumptions in relation to what that impact is going to be. But yes, it does. And certainly, we're now expecting that impact to be higher just given nbn has -- themselves have suggested that that's an area of focus for them. That wasn't something that we were expecting, candidly, given that the actual principal rollout hasn't actually completed yet. So that's -- we won't expect them to divert capital to the Enterprise. But nonetheless, the point is, is yes, it does -- our outlook does include that.

On spectrum. We've obviously got our 3.5 gigahertz spectrum. That's allowing us to roll out as we currently are. At this stage, I don't have any further update, millimeter band, wide spectrum. I that's -- the latest information I have is that's intended to be the second half of calendar 2020 -- yes, 2020, next -- sorry, second half of next calendar year.

And then also, on the low band -- and we will be looking to utilize around 50 spectrum, which we can free up through basically the volume of data that's shifting off of 3G onto 4G and ultimately on to 5G. So we're pretty comfortable with how the spectrum landscape is playing out.

We commended ACMA and the role that they played in making sure that Australia is at the lead in terms of having spectrum bands available for 5G. That's one of the reasons that -- why Telstra can continue to be a world leader in rolling out 5G.

The other thing I'd comment on as well is, of course, that where the global handset manufacturers and the chipset manufacturers are beavering away on second-generation chipsets, we expect those to be coming through in the second half of this calendar year, with second-generation handsets coming out early next year. And also stand-alone 5G will be coming out technologically next year. And we'll be at the forefront of that too. So it's a lot of exciting stuff happening on 5G. But with that, I'll maybe hand over to Vicki on the AASB point.


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [45]


AASB 16. So again, just, Fraser, I'll talk to it, and then you can tell me if I've answered your question.

So firstly, our underlying EBITDA that we are guiding on for FY '20 includes mobile lease amortization in it. We have not moved it below the line in the same way that obviously our statutory reporting will do. And as I spoke to earlier, that's because it would provide an uneconomic lift in EBITDA, and we've only got 2 more years of runoff of lease amortization. So the lease amortization is in EBITDA in terms of our guidance for FY '20. The rent expense goes below the line. So the rent on buildings, et cetera, does go below the line, but mobile lease is above the line for EBITDA purposes for FY '20 guidance. So not sure if that helps clarify your question


Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [46]


Yes -- no -- that is helpful. And then just on -- but then it'll come down. You're saying the lease expense comes down to $100 million in '21 and 0 in '22. So within your guidance, you've got quite a -- when I look into '21, you kind of got $350 million of mobile costs rolling off, is that right?


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [47]


Yes, but we don't obviously guide to FY '21. But if you look in FY '20, yes. So in '19, you can see our mobile lease amortization was $600 million. In FY '20, we have shown in the detailed information that we've released to the market the equivalent number is $460 million for FY '20.


Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [48]


So it -- that's effectively a real cost saving in your mobile operating expenses that isn't offset by anything else, any other kind of accounting teams. Is that right?


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [49]


Yes, that's my expectation given our new plans in market are economically better for us.


Ross Moffat, Telstra Corporation Limited - Head of IR [50]


And now we have Brian Han from Morningstar.


Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [51]


Andy, do you think Telstra's mobile and coverage still warrant a -- the kind of 15%, 20% price into competition? Or are you prepared to flex that to maybe compete even harder for customers if need be?

And also, my second question is, what is the state of play with the whole nbn pricing consultation process? And from where you sit, what do you think is the likely outcome? I mean I know what outcome you want. But what do you think will be the likely outcome?


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [52]


Thanks, Brian. Just the 2 questions? So firstly, in relation to our mobile, it's more than just our mobile coverage. But doesn't a network leadership deserve a price premium? Absolutely, it does. And one of the things I know and I hear from our customers and all the research we do and all the feedback we give is absolutely what customers want is they want great coverage. They want good speeds. They want reliability. They want the best technology in 5G, and that's absolutely at the forefront of our focus.

I was in the U.K. actually last week visiting some family, and it just struck me how poor the mobile coverage was. Just -- I wasn't far out of London, actually in a very heavily populated, quite affluent area. And candidly, I couldn't even get 3G, let alone 4G. I could hardly get coverage whatsoever.

And that's a manifestation of some of the dynamics in the U.K. market has been very difficult for the operators to invest in providing that level of and quality of coverage. And so I -- what I've learned, what I believe passionately is what customers want is they want connectivity. They want coverage. They want reliability and resiliency. And they want the best technology. And that's our strategy, and that's what we invest in.

And multibrand strategy also though enables us to provide customers who perhaps want a different value proposition, a different offering as well. And Vicki commented on it earlier, but I think it's interesting, if you look at our postpaid handheld SIOs, which were 378,000, that was sort of roughly -- I think it was 195,000 or so from Telstra brand and about 180,000 or a bit more -- maybe less for Belong and then 220,000 on our MVNOs as well, which I think really shows the power of that multibrand strategy. But now look, we're very committed to continuing to provide the best network, best coverage, best resiliency and best technology.

On the nbn consultation process, I think -- it's not for me to comment on. We've made our submissions. I think people are pretty clear on what our perspective is, and that's clear in the submission as well. And I think -- respectfully to nbn, I completely understand the dynamics that they need to manage, and we look forward to hearing how these deliberations play out. So I don't really have anything else to say on that.


Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [53]


Do you know when that actually plays out in the next couple months, couple weeks?


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [54]


Actually, I don't off the top of my head. In fact, I don't even know if they have specified a target which they will conclude that review. I'll be surprised if it's a couple weeks. In fairness to nbn, I think it's quite a lot of work to go through. So that's probably a question best directed at nbn.


Ross Moffat, Telstra Corporation Limited - Head of IR [55]


And our next caller is Ian Martin from New Street.


Ian John Martin, New Street Research LLP - Senior Telecommunications Analyst [56]


Just 3 questions, if I could very quickly. On the dividends, the payout below policy, both for the ordinary and the special with special policy quotes [spinning up and in] over time, but the low ordinary, you say, is due to issues around capital management. But when I look at the capital management slide, you're within comfort zones in all the metrics that matter. Debt servicing I guess is at the high end, but that comes down slightly I think next year. So I just wondered what it is it about capital management that's causing that concern enough to keep the dividend so far below policy?

Second question, just going back to that question about prepaid migration to postpaid. Is it a situation there that we're getting customers that might have been on a prepaid account with an entry-level fixed broadband plan that are saying, “Well, why move to a nbn creditable plan that might cost $60 retail when I can get 30 or 40 gigabytes a month on a mobile plan?” Is that's what's going on in that prepaid to postpaid migration? Because if so, that seems to me to still have some time to run.

And third question, very quickly, is you said -- you pointed to some good growth in the health care vertical. Is that something that's particular to health care? Or are we starting to see some of those factors you talked about in terms of new technologies working across a number of different verticals there?


Andrew Richard Penn, Telstra Corporation Limited - CEO, MD & Director [57]


Look, thanks very much, Ian, for the questions. I might have Vicki to comment on the dividend capital management considerations in a second. On the prepaid question, I think the short answer is I don't have any evidence to suggest that's a material factor. Your point there that is it customers choosing not to go onto the nbn and choosing a prepaid service instead given the data allowances have increased on prepaid. So that's not -- if that is a factor, it's not sort of at a level that's material enough that it's sort of come across my radar in that sense. I think the biggest dynamic, candidly, has been that the trend has been for people to hold devices for longer given where the price of devices have gone, and that's sort of created more of a BYO market in Australia over the last 2 to 3 years, which is where basic customers are bringing their own device and then taking out a plan. And I think that's taken some of the top end of prepaid customers and pushed them over into being postpaid customers. That's the more material dynamic we see, and we've seen that quite a bit over the last couple of years. I think we may be starting to see a bit of a slowdown in that, but that's not a forecast for the future. It's just what we're seeing at the moment. So that's the point on prepaid.

Look, on health care, I think it's a combination of a couple of things. I think we've been quietly working in the background consolidating the investments and acquisitions that were made a few years ago to really focus on a few core segments. One of the things I was chatting with the team about yesterday is I think what we'll do is in an upcoming Investor Day we'll maybe do a little bit of a showcase on the health care business, possibly not this year, got a lot of other things to get through and share with you, but certainly next year.

But it's pretty encouraging. And I think what's happening is, is that technology is definitely playing a role in improving the efficiency of the health care industry. And so just some of the verticals that we're in, as an example, is possible electronic records. So that's digitizing the records of patients when they're in a hospital. That's quite an important area of growth. Another area we're in is electronic prescriptioning. So you can imagine that's an area of growth. Another area we're in is basically national registries, where you're aware that in conjunction with the government we've rolled out a national cancer registry screening for [survival] cancer. And that's going really, really well, providing some great benefits for government and improved health care and security for women. And we're now in the process of rolling out another registry for bowel cancer. And the platform for that has got so much applicability.

So there's some pretty exciting things in it. I think the important point is we're looking to hit breakeven during the course of 2020. It's not hugely material in the scheme of Telstra's economics for now, but maybe in 12 months, we'll find a bit of time and provide a little bit of a deep dive on that for the market.

But why don't I hand over to Vicki on the dividend and capital management point?


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [58]


Yes, thanks for that, Andy. So on the dividend, obviously, as the Board is making the decision on the dividend, the capital management framework is key input into that, and those principles are very clearly laid out. But the broad objectives of that capital management framework are also important, particularly maintaining financial strength and retaining financial flexibility.

I would point out, when you look at our dividend, although the ordinary dividend payout ratio is just below the range, if you look at our total dividend payout on our earnings per share, we're at 88%. So there are a range of factors that the Board take into account in determining the dividend, and that has happened again this year.

Just in terms of our balance sheet, as you rightly call out, we have a very strong balance sheet and remain absolutely committed to our A band credit rating. And of course, that remains a factor as well in our Capital Management Framework.


Ross Moffat, Telstra Corporation Limited - Head of IR [59]


And I think with constraints on time, that is our last question in this section of the investor Q&A.

I'll now hand over to my colleague, Nicole McKechnie, who after a short break, will continue to moderate for media questions. Thank you.


Vicki Maree Brady, Telstra Corporation Limited - CFO and Group Executive of Strategy & Finance [60]


Well done.