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Edited Transcript of TPG.AX earnings conference call or presentation 24-Feb-21 11:00pm GMT

·50 min read

Full Year 2020 TPG Telecom Ltd Earnings Call Feb 25, 2021 (Thomson StreetEvents) -- Edited Transcript of TPG Telecom Ltd earnings conference call or presentation Wednesday, February 24, 2021 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Iñaki Berroeta TPG Telecom Limited - CEO & Director * Stephen Banfield TPG Telecom Limited - CFO * Trent Ashley Clinton Czinner TPG Telecom Limited - General Counsel and Group Executive of Legal & External Affairs ================================================================================ Conference Call Participants ================================================================================ * Brian Han Morningstar Inc., Research Division - Senior Equity Analyst * Craig Wong-Pan CLSA Limited, Research Division - Research Analyst * Entcho Raykovski Crédit Suisse AG, Research Division - Research Analyst * Eric Choi UBS Investment Bank, Research Division - Director and Australian Telco & 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 * Nick Harris Morgans Financial Limited, Research Division - Senior Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by. Welcome to TPG Telecom FY '20 Results Presentation Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Trent Czinner. Thank you. Please go ahead. -------------------------------------------------------------------------------- Trent Ashley Clinton Czinner, TPG Telecom Limited - General Counsel and Group Executive of Legal & External Affairs [2] -------------------------------------------------------------------------------- Good morning, everyone. Welcome to the TPG Telecom results briefing for the year ended 31 December 2020. I'm Trent Czinner, Group Executive, Legal and External Affairs. For this briefing, we have a presentation by our CEO and Managing Director, Iñaki Berroeta, outlining our performance and financial headlines for 2020 and our strategic priorities for this year. Our CFO, Stephen Banfield, will then present details of the financials. And Iñaki will return to present the 2021 outlook. There will then be an opportunity for analysts to ask questions. I will now hand over to Iñaki. -------------------------------------------------------------------------------- Iñaki Berroeta, TPG Telecom Limited - CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Trent. And good morning, everyone. 2020 was clearly a year that challenged all of us, individuals, businesses and communities. Our priorities last year were, first, completing the merger; deploying our 5G network; continue to provide great service to our customers; and at the same time creating a strong company for the future. We are privileged to be in the telecommunications industry, which has been so critical to the lives of all Australians throughout 2020, but the challenges were still significant. The mobile market contracted for the first time ever due to global travel restrictions, and we were impacted by the ongoing migration of services to the NBN. We navigated this while completing the merger, integrating the 2 businesses and recovering from the merger approval delay and 5G vendor restriction. I have to thank our people for their tireless work during the year to deliver for our customers and shareholders across a range of different settings. Our financial results demonstrate we are better and stronger together as a merged group. Before I come to financial performance, I would like to highlight some of the achievements throughout 2020, so I'll move to Slide #4. We have begun to hit our stride as a merged company and are already delivering to our customers and shareholders. After completing one of Australia's largest mergers of the past decade in the middle of the pandemic, we moved quickly to start integrating the 2 legacy businesses. The executive team has been finalized, with whole team now working under a unified structure. I'm also pleased to say that our synergies program is on track. In supporting our customers during COVID, we helped more than 220,000 customers in financial hardship through initiatives such as the Vodafone $10 stay-connected plan and other relief measures. Throughout this challenging year, we kept delivering for our customers with new products and offers and better inclusions. However, our mobile base, particularly prepaid, was disproportionately impacted by restricted immigration and travel and regulatory challenges. Our postpaid mobile base closed the year with 3.3 million customers, and prepaid mobile with 2 million. In March last year, we commenced our 5G rollout, which is on track to reach 85% population coverage in the top 6 cities by the end of this year. At the same time, we demonstrated the commercial strength of our combined company. Our fixed broadband base grew 6% with 117,000 net subscribers additions, and we generated $342 million in net cash flow and lowered net debt to $4.2 billion. The Board has determined to pay a dividend of $0.075 per share. Taking a look at some of our 2020 highlights on Slide 5 now. 5G services are now live in more than 350 suburbs across major cities. This comes as more than 425,000 of our customers have now a 5G-enabled smartphone. We are currently testing 5G fixed wireless services and are on track to begin offering services to customers in the first half of this year. Across our major brands, we have strong brand health with improved NPS, lower complaints and recognition through a number of major consumer and industry awards. We have also lifted digital engagement, with Vodafone's online sales mix increasing by 60% compared to 2019. TPG Telecom is now the highest seller of NBN Enterprise Ethernet. And we have won major tenders, including the provision of fixed and mobile services to the National Australia Bank. Solid progress has been made on our synergy program with mobile customers experiencing improved performance through the combination of our spectrum and small cell and fiber assets and capabilities. And around 60% of iiNet customers have migrated now to our mobile network. This brings significant cost savings to our business, while customers benefit from better-value offers. We continue to innovate in 2020 with some market firsts. We introduced Infinite Data mobile plans that allows unlimited usage at speeds from 2 to 25 megabits per second. We built Australia's first city-wide 10-gigabit network in Adelaide; and launched felix, which is 100% powered by renewable electricity. Turning now briefly to financial performance on Slide 6. As the merger was effective from the 26th of June of 2020, reported figures for 2020 include 12 months of the company formerly named Vodafone Hutchison Australia, combined with 6 months and 4 days of TPG Corporation. The group's reported revenue increased 24% to $4.35 billion, and EBITDA increased 18% to $1.39 billion. The increase, as I said, is primarily due to there being no contribution from TPG Corporation in 2019. Reported net profit after tax was $734 million, which includes a one-off $820 million accounting credit to income tax expenses. Steve will explain in more detail during his presentation. Pro forma results, which simulate what the group results would have been if the merger had been effective throughout 2019 and 2020, have also been prepared. Pro forma revenue decreased 6% to $5.52 billion, and EBITDA decreased 10% to $1.79 billion. We are satisfied with the result in light of ongoing competition in the broader market, continuing COVID and NBN impacts and disadvantages from the merger delay and 5G restrictions. In a challenging year, we were encouraged by improved momentum in mobile in the final quarter. This was supported by a strong iPhone launch, our Infinite Data plans, accelerated 5G rollout and the "summer of cricket" sponsorship. Overall, I'm confident in our company's fundamentals and our future growth potential. In 2021, we will continue to capitalize on our strengths and opportunities as a merged company. I'll now outline these on Slide 7. We have 3 growth priorities. Number one, the first is to grow our share of converged households. Having brought our mobile and fixed broadband capabilities together, we are able to provide a richer portfolio of products. The second is to make the most of our extensive network infrastructure by providing compelling on-net broadband services to more customers. The third area of focus is to drive competition and growth in enterprise, government and wholesale with whole-of-business telecommunication solutions. To enable growth, we will continue rolling out 5G to reach scale and transform IT and digital to improve customer experience and journeys. And underpinning this is our synergy program and organizational integration, which will make our company even stronger. I will now go through each layer in turn. On Slide 8. Our first growth priority aims to bring more of our products into more Australian households. We are consistently seeing that households with both fixed and mobile services will have lower churn than those accounts with a single service. In 2021, we will be launching new ways to encourage our customers to take up more services and new inclusions to enhance their at-home experience. This will include 4G backup or more NBN products, increased cross-selling initiatives and improvements to customer journeys. The second is to bring more customers onto our own infrastructure to improve margins whilst delivering competitive and high-quality services. We are especially excited to start offering 5G fixed wireless services to customers in the first half of 2021. We're currently testing services to ensure we deliver an exceptional product to customers. Our 4G fixed wireless services which are already offered on Vodafone will be expanded to TPG and iiNet. And we will continue to invest in and maximize the value from our on-net fiber to the basement, HFC and VDSL networks. Our third growth priority is to provide more choice to business and government agencies of all sizes with whole-of-business solutions. This year, we will deepen our focus on the complete customer experience we provide. We will continue to drive on-net data in our existing fiber footprint; connect new businesses to NBN Enterprise Ethernet; and provide mobile services, including mobile backup to support fixed fiber networks. Our efforts will be supported by investment in building brand awareness and expanding our existing proposition, including IoT. Last year, we brought our legacy wholesale and carrier teams into an independent business unit to maximize the potential of wholesale function. The combination of the legacy Vodafone MVNO and AAPT wholesale units has brought a third wholesale infrastructure challenger to the market for the first time. Wholesale will play a key role to increase the utilization of our extensive network assets and drive synergies and long-term value in our partner agreements. Turning to the next layer on Slide 9. We will enable growth in these 3 areas by investing in our 5G mobile network and in the transformation of our IT and digital infrastructure. 5G provides higher speeds, lower latency and more connections, which will enhance online experiences and create new wireless capabilities. Using our 3.6-gigahertz and 700-megahertz spectrum together with a new stand-alone core, we are targeting more than 85% 5G network population coverage in the top 6 cities by the end of this year. Millimeter-wave spectrum will accelerate the potential of 5G, especially for mobile services in high-foot-traffic areas and for fixed wireless services. It will provide significant increased capacity and enable faster data speeds. As our 5G network scales up, we will offer new products and experiences so customers can make the most of the benefits that 5G brings. While we are accelerating our 5G rollout, Australians will still be relying on 4G for some years to come. To continue meeting customer demand, we will enhance the 4G experience by expanding voice-over-LTE capability and virtualizing our network to make it more agile and scalable and to support new use cases. In 2021, we will continue to support the shift towards online activity across our brands to give customers more choice around how they engage with us. Integrating and simplifying our technology stacks will enable us to continue to serve and interact with our customers the way they want while bringing together our mobile and fixed offerings across our family of brands and customer segments. These will enable us to improve our time to market, simplify back-end processes, empower our employees and ultimately allowing us to better understand and serve our customers. And now to the final layer on Slide 10. At TPG Telecom, we are building a strong foundation for the future underpinned by our integration and synergy program and our work to unify our culture and organization. Together, we expect to deliver approximately $70 million in cost synergies in 2021 from mobile network backhaul savings; the continued migration of iiNet mobile customers; and other operating efficiencies across technology, infrastructure, property and marketing. Further, we expect additional cost savings from the launch of fixed wireless services as well as revenue synergies from increased cross-selling to our fixed and mobile base across consumer and enterprise. I will return to say more about our synergies outlook toward the end of the presentation. Together, we are also working on building a vibrant and inclusive environment for our people, one which acknowledges that we grow stronger with diversity, flexibility and respect in the workplace. At TPG Telecom, we are progressively creating a common culture and way of working which capitalizes on our organizational strengths and promotes cross-functional collaboration. In 2021, we will increase our focus on growing future leaders and attracting new talent as well as harmonizing the end-to-end employee experience. We are pleased with our progress so far and excited about the year ahead as we continue the integration journey. I will now hand over to Steve to share details of our financial results. -------------------------------------------------------------------------------- Stephen Banfield, TPG Telecom Limited - CFO [4] -------------------------------------------------------------------------------- Thanks, Iñaki. Good morning, everyone. I'll start with the summary results on Slide 13. I remind everybody that the merger became effective for accounting purposes from 26th of June, with the legacy VHA business being the acquirer and TPG Corporation the acquiree. As a consequence, the reported results for the group for 2020 comprised 12 months of results from the legacy VHA business and 6 months and 4 days from TPG Corporation. This means that the reported results for 2020, as you can see, show a significant increase compared to 2019 because 2019 reported results only included the VHA business. So in order to facilitate a more meaningful analysis of the group's performance compared to the prior year, we've also provided pro forma results for 2020 and 2019, which are designed to simulate what the group's results would have been if the merger had been effective throughout both years. On this pro forma basis, you can see that the group's revenue was down by $377 million or 6%; and that this revenue decline, compounded by NBN margin headwinds, resulted in a $195 million or 10% decline in EBITDA. I'll talk more about the drivers of EBITDA movement in a few slides time. Pro forma net profit after tax was down by $38 million or 12%, with EPS down by the same. Pro forma free cash flow excluding spectrum payments was $320 million lower than 2019. However, this was materially impacted by the timing of approximately $200 million of handset supply payments made by VHA last year which were deferred from second half of 2019 into the first half of 2020, causing effectively a $400 million adverse swing between 2020 and 2019 cash flows. Free cash flow for the second half of FY '20, i.e., the first 6 months post merger completion, has been strong, with $342 million net cash flow generated in that period. And this has enabled the Board to declare a maiden dividend of $0.075 per share. Before I leave this page, I should also make one further observation regarding the reported results. As well as being boosted by the first-time inclusion of TPG Corporation's results, the 2020 reported NPAT figure also includes an $820 million one-off accounting credit to income tax expense. This is because in the 31st of December 2020 balance sheet the group has recognized deferred tax assets in respect of carry-forward tax losses and temporary timing differences between book and tax accounting, where previously, before the merger, the company didn't meet the accounting criteria necessary for recognition of deferred tax assets. So the initial recognition of these deferred tax assets has resulted in this one-off accounting credit to income tax expense. Slide 14 provides a simple reconciliation from the reported to the pro forma results for 2020. It starts with the reported results in the first column, which are straight from the statutory account, and we then aggregated in the second column all of the adjustments which were set out in a lot of detail in the half year results presentation. The additional pro forma adjustments which we've made to the second half results are to, firstly, add back $11 million of merger transaction costs included in the second half; subtract the accounting credit to income tax expense arising in the second half; and to add back acquired customer base intangible amortization, which is a noncash accounting expense which arises from the acquisition accounting exercise that was completed during the second half. So then on Slide 15 we show 2 comparable pro forma P&Ls. As shown on the summary page, pro forma EBITDA for 2020 was $1.789 billion, $195 million lower than the pro forma EBITDA for the prior year. You can see the decline was revenue-driven. The steep decline in revenue from handset sales, as you can see, is roughly offset by the decline in cost of handsets sold, but service revenue was also down by about $140 million. Even with the service revenue declining, you can see that the cost of provision of telco services actually increased by $87 million. So to explain: This is due to the fact that the revenue decline has come mainly from mobile revenue, which has little associated costs of delivery, whilst netted off within this overall revenue decrease is a substantial growth in NBN revenue, which of course comes with high wholesale costs of delivery charged by the NBN. You can see that employment and overhead expenses decreased by $21 million in aggregate in 2020. And we'll discuss EBITDA movements on the following slides, but before we go there, we should note other P&L movements. Depreciation and amortization declined by $57 million in 2020 due to reduced level of capital expenditure and commissions. Net financing costs were lower by $21 million due to debt repayments and interest rate declines. And regarding income tax, that $138 million income tax expense in 2019 was TPG Corporation's income tax expense for that year. In 2020, the $60 million income tax expense reflects TPG Corporation's income tax expense up until the date it joined the new tax-consolidated group following merger implementation. The next slide shows a simple bridge between the 2019 and 2020 pro forma EBITDA results. You can see that the group incurred NBN margin headwinds of $83 million in 2020. Over the past 6 years, the rollout of the NBN and the accompanying shutdown of legacy copper services have forced the group to migrate its fixed broadband customer base of almost 2 million subscribers off DSL and onto the NBN. The high wholesale costs charged by the NBN make these services much less profitable for the group to deliver than the DSL services they are replacing. In 2020, although the group increased its overall number of fixed broadband customers, within this, the average number of DSL subscribers declined by 356,000; and this caused a $73 million decline in gross profit. The other $10 million of NBN headwinds in 2020 was from the group's fixed voice customers migrating to NBN services. As at 31st of December 2020, the group only had 115,000 DSL subscribers remaining. And 2021 is therefore expected to be the final year of material headwinds from DSL-to-NBN migration. Regarding the impacts of COVID, we calculate that the pandemic has had adverse impacts on the group's EBITDA in 2020 of approximately $90 million. The largest component of this is the loss of international roaming margin and visitor revenue, but in addition there is the cost of the special offers and credits which Vodafone supported its customers with during the first wave of the pandemic from April through to July; and finally, the impacts on our customer base. International visitors and temporary visa holders in Australia have historically been a very important customer segment for the group. It's quite hard to accurately calculate how much of the subscriber loss in the period is attributable to COVID, but we conservatively estimate that we had 54,000 fewer postpaid customers at December '20 due to the pandemic. And our monthly prepaid connections stepped down by between 20,000 and 30,000 as soon as international travel restrictions were implemented. Excluding the estimated impacts of COVID, the declines in mobile subscribers and ARPU in the year accounted for approximately $75 million gross profit decline. This is reflective of the current competitive intensity of the industry, which has seen industry postpaid ARPU decrease. Our group's postpaid ARPU would have in fact been roughly flat year-on-year without the negative impact of the loss of roaming and visitor revenue, but that relative ARPU discipline has covered the costs of losing some customers in 2020. Partially offsetting these headwinds is growth of $53 million. As you [saw them earlier], employment costs and OpEx decreased by $21 million in 2020 on a pro forma basis, but the other main contributor is growth in fixed broadband subscribers, which grew by 117,000 in the year. The next slide sets out the pro forma results by segment. Prior to the merger, VHA reported segments for a single operating segment, whereas TPG Corporation reported 2 operating segments, being its Consumer and Corporate Segments, so following the merger, the merged group is now also reporting a Consumer and a Corporate Segment. Slide 18 sets out the composition of the revenue decline within the Consumer Segment. You'll see that almost 3/4 of the revenue decrease came from the decline in the volume of handset sales. Postpaid and prepaid mobile revenue declines came from subscriber and ARPU decline, whilst fixed broadband revenue increased by $125 million, driven by subscriber growth and the change in mix from more affordable ADSL plans to more expensive NBN plans. Regarding other service revenue. This has historically included the Tech2 business. As a reminder: Tech2 is in the business of primarily providing installation services in the telco and other technology space. The group has owned a 60% interest in Tech2 since 2015, when Tech2 became part of the group via the iiNet acquisition. Tech2's EBITDA contribution to the group in 2020 declined and was actually slightly negative in the second half of FY '20. And being a noncore part of the business, the group earlier this month completed the transaction to dispose of its interest in Tech2, so it will not form part of the group's results in 2021 and onwards. The remainder of the decline in other service revenue primarily represents fixed voice. Slide 19 shows the composition of the revenue movements within the Corporate Segments. Although post merger the group is ramping up the cross-selling of mobile services to its enterprise base, pre merger, it had experienced some decline in mobile revenue from business and enterprise customers and mainly attributable to COVID. Revenue from data and Internet services has also decreased slightly despite positive sales momentum. Revenues are impacted by price erosion, loss of low-margin NBN wholesale business as well as some COVID-related cancellations. Although EBITDA was down, Corporate Segment EBITDA margin continued to improve, up from 48% to 50%. Slide 20 shows the movements in mobile subscribers, with prepaid and postpaid down by 545,000 and 158,000, respectively. TPG and iiNet mobile subscribers are now included within these numbers, including in all the prior period columns and regardless of whether they were on the Vodafone network or not at the time. In the June 2020 column, there are approximately 100,000 iiNet and 10,000 TPG mobile subscribers that were under an MVNO arrangement with Optus. That number has reduced to 45,000 by 31st of December, as we successfully migrated close to 60% of them onto our network. This contributed a benefit of approximately $2.5 million to group EBITDA in the second half of FY '20 and is expected to provide an annualized EBITDA benefit of around $14 million in 2021. Slide 21 shows the growth in fixed broadband subscribers, which were up by 117,000 in 2020 with growth across Vodafone, TPG and iiNet brands. The composition of the subscribers continued to change with a 415,000 net growth in NBN and 306,000 decline in ADSL. And as I've already said, as of the year-end, only 5% of the base remained on DSL, and that is expected to get close to 0 by the end of 2021. Across our on-net infrastructure, we grew our subscriber base by a net 10,000 subscribers. Slide -- on Slide 22. Regarding ARPU, you can see that the step reduction in postpaid ARPU in the first half of 2020 as a result of COVID continued and declined further in the second half of 2020 due to the full 6-month impact of COVID. A step down of roughly $2.30 relative to 2019 is almost fully COVID related. i.e., postpaid ARPU would have been roughly flat without this impact. Although prepaid subscribers decreased significantly, you can see that prepaid ARPU has actually increased. The first thing to say about this is that the first half 2020 prepaid ARPU of $17.20 was actually suppressed by about $0.80 by the free calls and data that Vodafone gave customers during the first wave of the COVID pandemic. Without that, the first half 2020 ARPU would have been approximately $18. So you can see that there has actually been an underlying steady increase in prepaid ARPU over the past few periods, reflecting the fact that the subscriber losses are heavily weighted towards less-active, lower-value customers. Fixed broadband subscriber ARPUs have been relatively flat at the technology level, although as already noted, the change in mix of subscribers away from the cheap ADSL plans has caused an overall ARPU increase for fixed broadband. Turning to cash flow. Just like in the P&L, the reported numbers for 2020 include 6 months of TPG Corporation and include -- sorry, yes, include 6 months of TPG corporation and include only VHA in 2019, whilst the pro forma numbers include the full 12 months of both entities in both years. The net negative cash flow in 2020 is due to spectrum payments made in the year, being the final 700 megahertz installments and the onetime payment for the 3.6-gigahertz spectrum. The spectrum payments were all made in the first half. And in the second half of the year, the group has generated strong positive net cash flow of $342 million. Pro forma CapEx for 2020 of $706 million was $82 million lower than 2019. Approximately half of the net financing cost payments relate to interests on leases, and the other half on bank debt. The reason financing costs increased slightly is that 2020 includes one-off fees incurred in establishing merged co's new debt facilities. For completeness, Slide 24 shows a simple reconciliation between the reported and the pro forma cash flow numbers, which I don't propose to go through. So then on Slide 25. This shows the group's net debt position, which decreased by $344 million in the second half of 2020 due to the cash generated in the first 6 months post merger such that we ended the year with approximately $4.2 billion of net debt. I'll remind you that the new debt facilities arranged for merged co were $5.25 billion, so we had as at the year-end over $1 billion of headroom in the facilities and a leverage ratio of approximately 2.6x EBITDA. My final slide is just confirmation of the dividend declared by the Board of $0.075 per share payable on the 14th of April to shareholders on the register on the 17th of March. The slide also shows the calculation of the dividend in accordance with the company's dividend policy of 50% of adjusted net profit after tax. I'll now hand back to Iñaki. -------------------------------------------------------------------------------- Iñaki Berroeta, TPG Telecom Limited - CEO & Director [5] -------------------------------------------------------------------------------- Thank you, Steve. I will now take you through a final few slides about our year ahead and our synergy program. So before I share our 2021 outlook, I would like to recap on our priorities for this year on Slide 28. We remain focused on providing a great customer experience across our networks and service channels. Integration activities across the company continue, targeting $70 million in cost synergies this year. Our 5G mobile rollout will continue to gather pace, working towards our target of 85% population coverage in the top 6 cities by the end of this year. Bringing more customers onto our infrastructure will be a key focal point as we launch 5G fixed wireless services; and maximize value from our FTTB, HFC and VDSL networks through investment and expansion across more brands. Recognizing the potential of growing our converged market share, we will be targeting exciting and new -- sorry, and new customers to get more of our products in household and businesses. Later this year, we will also launch our sustainability strategy. On Slide 29. 2021 will present itself as another challenging year for everyone. As outlined on this slide, 2 major challenges we faced last year are expected to persist. As Steve explained, this will be the last year of material NBN headwinds, with forecast $45 million negative EBITDA impact. With the loss of the remaining fixed voice subscribers and NBN rebates, total NBN headwinds will total around $60 million. Whilst the continuing uncertainty around COVID makes it impossible to accurately forecast its impact, we expect the decline in international roaming and international digital revenues to persist through 2021. Given that COVID only started to impact the business from around April 2020, we forecast an additional 3 months of COVID headwinds of around $20 million. From the 1st of January this year, our on-net high-speed broadband services started incurring the new RBS levy. This is the government new tax on companies investing in broadband infrastructure and is forecast to cost TPG Telecom approximately $11 million in 2021. Turning to the outlook on Slide 30. We expect our fixed broadband mitigations will gain ground. As a merged company, we are in a stronger position to respond to ongoing competition, and we are confident on building on improved mobile momentum as our 5G rollout continues. We plan to lead enterprise and government share, and we will be focusing on delivering significant merger synergies. On Slide 31 now. In 2021, through the work we have done so far, along with our plans which are well underway, we expect to generate around $70 million of cost savings. This excludes the contribution of fixed wireless and the cross-sell synergies. By 2023, we expect to deliver between $125 million to $150 million of annual cost savings, again excluding fixed wireless and revenue synergies. It's important to note, however, that the synergy program will not end there. The bucket for 2021 are $14 million in savings from the completion of the iiNet customer migration, $6 million in savings from the fiber rollout for mobile network backhaul and $50 million on other OpEx initiatives. We see a significant opportunity from fixed wireless. We are not disclosing a target at this stage, but to give you an idea of the potential savings: Every 100,000 NBN customers successfully migrated would generate incremental savings of around $50 million, based on current NBN wholesale pricing. In summary. I'm confident in our company's fundamentals. We have a strong portfolio of infrastructure assets, awesome brands and talented people who are dedicated to serving our customers. We have built a solid foundation for the future, and I believe in our strategic plan to deliver on our growth potential. Steve and I are now happy to take questions, and Trent is available for any relevant questions as well. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of Eric Choi from UBS. -------------------------------------------------------------------------------- Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco & Media Lead Analyst [2] -------------------------------------------------------------------------------- I understand it's sort of hard to forecast or provide a target for fixed wireless, but I'm just -- if I just think about that 1.9 million NBN sub base, around 700,000 are on the 12 and 25 plans, so I'm just wondering if you think that's a reasonable estimate of where you can take that fixed wireless sub base over time. And then just a second question, I guess, just on how fast you'll market that new product. Will you do it quite aggressively off the bat? Or do you do it sort of more progressively as your 5G coverage ramps up and contracts roll off? And I presume we'll need to send customers on new CPE as well. And then just thirdly. Iñaki, you've said for a long time that we pay more for a cup of coffee than our mobile services. Just interested in why you think we haven't seen more market repair at this stage. Do you think it's because 5G hasn't quite ramped up yet and because of these sort of short-term COVID disruptions on subscribers? Just interested in your thoughts. -------------------------------------------------------------------------------- Iñaki Berroeta, TPG Telecom Limited - CEO & Director [3] -------------------------------------------------------------------------------- Yes, thank you, Eric. Look, in terms of the fixed wireless, that's I'm not going to be talking about the speed of rollout. What I would say is we are looking at the fixed wireless mainly as opportunity on those plans that are, of course, in the 12 meg which you identify. And that is something that is at this stage quite independent of the technology, whether it's 4G or 5G. We do have the benefit of a lot of spectrum, and also we have the benefit of having to roll out a brand-new network. So we are actually -- as we deploy 5G, we're just not installing an overlay of 5G on top of our old equipment. We have been, in a way, forced to bring brand-new equipment, which allows us to use equipment that will improve the total capacity of our respectful holdings. So we will go with twin-beam antennas and other technologies on existing spectrum that later can be used in 5G, which basically tells you that the capacity that we have is ample. And that is why we believe that fixed wireless is a big opportunity for us. So far, we have a few thousand customers on this product. Like I said, in Vodafone brand we are doing a number of user-friendly trials on other brands. And soon, you will see a bit more on our 5G product as we launch it before the end of this [half of the year]. In terms of the market repair. Look, that's a question that comes often. And I think that you will see that we have been, as usual, quite consistent on our ARPU trends. And probably we are following a different trend than the market, so obviously that's a question for others. In our case, we are -- like I said, we are providing a very good service to our customers. We price things at a good value proposition. And I think that we are doing a good job in keeping our ARPUs, so I'm confident that, as we deliver more services to our customers, there are opportunities to monetize that. And that's why I'm quite optimistic around the opportunities of 5G related to the overall revenues that we're going to get from our customers. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- Your next question comes from the line of Craig Wong-Pan from CLSA. -------------------------------------------------------------------------------- Craig Wong-Pan, CLSA Limited, Research Division - Research Analyst [5] -------------------------------------------------------------------------------- Three questions from me. Firstly, on the stay-connected plans or those kind of special credits that were provided during COVID, could you quantify what the financial impact was in FY '20? Second question is, if you could provide any split between the mobile customers between Consumer and Corporate, that would be helpful. And then thirdly, a priority mentioned was cross-selling, like, mobile and fixed services. I was wondering if you could give an indication of how much progress you've kind of made on your customer bases in that cross-selling. Or is there still a large opportunity for that in 2021 and beyond? -------------------------------------------------------------------------------- Stephen Banfield, TPG Telecom Limited - CFO [6] -------------------------------------------------------------------------------- Craig, I'll take the first couple of questions, Steve Banfield here. The -- within the COVID headwinds, we've called out kind of 3 components. The smallest component of that is the credits and the support provided to our customers. The lion's share of those COVID headwinds come from the impacts of the -- of roaming and visitor revenue and then the subscriber numbers. So that's not -- so the smallest part is the part which is nonrecurring. We actually haven't called out the Consumer-versus-Corporate mobile subscriber split, but you can see the revenues there. And I think, just by reference to the relative revenues, you can derive the approximate split in the subscriber numbers. -------------------------------------------------------------------------------- Iñaki Berroeta, TPG Telecom Limited - CEO & Director [7] -------------------------------------------------------------------------------- Yes. In terms of the how much progress are we doing on cross-selling. So what we have been doing in the first 6 months of the merger is really quite basic in that sense. So we did start with the migration of iiNet customers to our own infrastructure, which was obviously part of the synergy. And we took that opportunity also to start offering on iiNet a richer value proposition on mobile, and that has had good feedback from iiNet customers. On TPG, if you look at what we've done, we have really revamped all the mobile offering. And we have started to introduce as well bundled offers in these plans, which is something that has been new, so that's another area where we have -- that we have introduced. And similarly, I think on Vodafone we'll continue to offer the bundles, [let's say]. So we're still having a multi-brand approach to growing services in these brands in a simple way by just giving the customer the benefit of getting all the services from us. And I think that we will continue to enrich in these offers in the future, but so far, we are quite satisfied with the way that the customers are responding to these offers. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Your next question comes from the line of Entcho Raykovski from Crédit Suisse. -------------------------------------------------------------------------------- Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [9] -------------------------------------------------------------------------------- Iñaki, Steve and Trent, a couple of questions from me. The first one is, I guess, a follow-up on the mobile market repair question. You've given us your best estimates of the impact of mobile subs and ARPU decline in 2020, but just wondering what's your expected trajectory for that item. So for the combined postpaid subs and ARPU impact in the next sort of 6 to 12 months and particularly if you exclude the roaming and COVID impacts that you've given us. So can you stabilize some of the decline that you've seen? And secondly, CapEx has remained relatively low at around $700 million. Is this a good indication of what we should be looking for, for FY '21 as -- and particularly as the 5G rollout continues? And are you factoring in any CapEx synergies? -------------------------------------------------------------------------------- Iñaki Berroeta, TPG Telecom Limited - CEO & Director [10] -------------------------------------------------------------------------------- Look, first, in terms of the trajectory of ARPU and subs, I think that, first, clearly I believe that we -- of the impact that we have on COVID has been a bit disproportional on us. And the reason why I say that is because on the mobile business we have an international brand very attractive for newcomers to the market, students. And at the same time, it's clear that we have the best roaming proposition in the market, so we were attracting a lot of the travelers, which during this period have not had the opportunity to use our services. So that, I think, has created a disproportional negative impact. We have been, like Steve mentioned, conservative in the way that we evaluate that. We think that, as COVID releases, we will also have a good reversal of that impact. In terms of the trajectory of ARPU. I mentioned already, I think, that -- if you take the roaming revenues out, I think that we've been quite disciplined in the way we manage our ARPU. It's not a secret that, during the time in the past 18 months or 24 months that we were under the uncertainty of, on one side, the merger but also having to replace our main vendor on our network, we did use a strategy to manage capacity and value in a smart way, making sure that the customers that we had were experiencing a very good service. So I think that, that is something that, now with our new 5G rollout and also with all the spectrum that we have available, you have seen that our offers have become a lot richer, but they have become a lot richer in terms of the value we provide to customers. But we have been quite consistent in managing the ARPU because, like I said, I think that the value that we get is -- as consumers is good. And I think that is more important, to provide good service, rich data connections, rather than trying to get into other parameters of the proposition. So from that perspective, like I said before, I'm optimistic in terms of the opportunities that 5G brings in terms of revenue per customer. -------------------------------------------------------------------------------- Stephen Banfield, TPG Telecom Limited - CFO [11] -------------------------------------------------------------------------------- Entcho, regarding CapEx, as we said at the half year, notwithstanding the 5G rollout and the Huawei replacement, we don't expect the merged group's annual CapEx profile to be much different, in coming years, to the combined spend of the premerger entities which was in the mid-$700 million. And that -- you asked about CapEx synergies. That, there really is the -- one of the major synergies of bringing these 2 entities together. We have delivered CapEx -- significant savings already on CapEx and on spectrum, reflected in the fact that what we plan to achieve with this rollout can be done without a significant uplift in the CapEx profile. In relation to CapEx in the second half of FY '20, you see we spent a little less than average in the second half of 2020. And so that kind of timing might have a flow-on effect of slightly increase in 2021 CapEx maybe a little bit above average, but the -- but we're still comfortable with the -- what we said at the half year about the ongoing CapEx profile being reasonably consistent with what it was pre merger for combined entities. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Your next question comes from the line of Fraser Mcleish from MST Marquee. -------------------------------------------------------------------------------- Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [13] -------------------------------------------------------------------------------- Just 2 from me, please. Just Iñaki, firstly, on the fixed wireless and just, I guess, capacity limitations of the mobile network, there's always been the question around how many home customers you can put onto fixed wireless. Can you just talk about what those -- or how you see those limitations now? I mean, does that limit how many customers should be able to transition across? And secondly, just on the kind of mobile competitive environment: You're talking about pricing competition, but I mean Telstra has increased its prices. Optus ditched that $35 price point 18 months ago, so you've seen your branded competitors actually come up. Who are you concerned about on pricing when you're talking about that? -------------------------------------------------------------------------------- Iñaki Berroeta, TPG Telecom Limited - CEO & Director [14] -------------------------------------------------------------------------------- Yes. I think, on pricing, I'd rather not -- I think that is what I think is the dynamic of ARPU, not a dynamic of statements on pricing. I think the statements on pricing are not healthy. I think the only thing that matters is ARPU. So how do we manage ARPU? That's really the parameter, [I mean], we need to all look at. In terms of the capacity, like I said before, we are in a quite good situation there. And the reason is, if you consider that for the -- most of our 4G spectrum we will be deploying twin-beam antennas, that have an efficiency that almost double the capacity of the spectrum. At the same time, the group now has 15 megahertz of 700 that we were not using before. And on top of that, we have 60 megahertz of C band spectrum for 3.5. So there is plenty of capacity, especially if you consider the type of products that fixed wireless is going to be replacing. You're talking about products that -- NBN's 12 megabits per second upstream, and 1 downstream, with limited contention ratio. So at the end of the day, we're not talking about really high-speed products here, so the pressure that they put on the spectrum is limited. The other thing is, when we look at fixed wireless, we are actually creating a wireless product that is fixed. So it's a geolocated product, which is -- allows us to very well manage the distribution of this product. And then we use a smart -- we use the technology in a smart way, so where there is high mobile traffic, we have alternatives. Where there is no high mobile traffic, we can use wireless spectrum to provide a service. So in essence, the -- in summary, the answer to your question is that we have plenty of capacity. -------------------------------------------------------------------------------- Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [15] -------------------------------------------------------------------------------- Great. That's very helpful. So just a very quick follow-up: Are you expecting a big small cell rollout to facilitate this? Or do you think you can do the majority of it with the existing macro network? -------------------------------------------------------------------------------- Iñaki Berroeta, TPG Telecom Limited - CEO & Director [16] -------------------------------------------------------------------------------- Yes. Look, there are many alternatives there. I think that we are in a pretty privileged position because, on one side, we have a very dense and, now with the Nokia rollout, a quite modern infrastructure on our macro cells. We have already enhanced that infrastructure with close to 400 small cells, but you all know that we have the ability to deploy up to almost 3,000 small cells in a pretty low-cost structure. So we are quite opportunistic in the type of infrastructure that we will use to deliver our services both for mobile and fixed wireless. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Your next question comes from the line of Nick Harris from Morgans Financial. -------------------------------------------------------------------------------- Nick Harris, Morgans Financial Limited, Research Division - Senior Analyst [18] -------------------------------------------------------------------------------- Just a couple from me, just the dividend. Obviously, that's great to see. It was a little bit of a surprise to me just in the context of your net debt targets. So pretty sure, pre the merger, the Board had a target 1.5x to 2x net debt. And your number is a little bit above that and looks like it'll probably stay above that for the next 12 months, so could you maybe just talk about the logic and how you're balancing both of those on the dividend policy? And I'm assuming you will continue to pay going forward given, I guess, the signaling there. And then the second question was just obviously there's a fair degree of complexity in the merger. Just trying to get my head around depreciation, amortization and interest. Is it sensible to use the rates in the pro forma slide? The $1.2 billion on Slide 15, is that a sensible number going forward? Just a little bit of direction on that would be very helpful, please. -------------------------------------------------------------------------------- Stephen Banfield, TPG Telecom Limited - CFO [19] -------------------------------------------------------------------------------- Nick, Steve here. The -- we've got -- the dividend. We have a stated dividend policy and the dividend has been calculated accordingly. So with that, we expect to generate strong cash flows going forward, which should enable us to continue to invest strongly, pay dividend and also at the same time achieve a deleveraging profile. So we're aiming to achieve all of those 3 things. In relation to depreciation, clearly it's more appropriate for you to look at the pro forma numbers than the stat numbers. Just bear in mind that those pro forma numbers exclude that customer base intangible amortization. And you can see that number for the half year was $82 million. That amortization is going to be on a straight-line basis, so you can just double that and add that on top of the pro forma D&A. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Your next question comes from the line of Brian Han from Morningstar. -------------------------------------------------------------------------------- Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [21] -------------------------------------------------------------------------------- Iñaki, can you please talk about your longer-term aspirations for the felix brand and what it may mean for the pricing dynamics of the main Vodafone brand longer term? -------------------------------------------------------------------------------- Iñaki Berroeta, TPG Telecom Limited - CEO & Director [22] -------------------------------------------------------------------------------- Okay, I think that you are asking me about the long-term aspirations of felix brand. -------------------------------------------------------------------------------- Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [23] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Iñaki Berroeta, TPG Telecom Limited - CEO & Director [24] -------------------------------------------------------------------------------- So yes. felix brand is it fulfills 2 things at the same time. One of them is we wanted to bring a brand in the market that was a bit different, that was also recognizing the need for companies to be more responsible around the way that we interact with the environment. And I think that, that is something that we wanted to do at the same time that we do -- we look at the way that TPG Telecom overall -- we look at our contribution in that sense. We also wanted to create a model that is simple; a model that allows us to serve customers, in extremely direct way, fully digital experience fully automated, a very simple price plan. And we're very interested in doing that also with extremely simple IT infrastructure. So that is more of a platform, a platform that supports this product, and in a way, the project was trying to fulfill both things. And I'm very happy with the result. If you look at felix: The feedback that we are getting from customers, the feedback that -- I mean you can go to the Apple store and look at how many stars that app has, which is the interface with the customer. And for a mobile business to be over 4 stars is actually unusual. So yes, I think that, that is really something that I'm -- we're going to continue to invest on. The traction in the market is good even though we haven't really done much above the line, so quite comfortable on that. And the opportunity to look at the way that other brands will benefit from that platform, I think, is actually a clear opportunity for this business. And of course, we're looking into that as well. -------------------------------------------------------------------------------- Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [25] -------------------------------------------------------------------------------- While I have you. I noticed that, at least for your iiNet broadband customers, you're offering some free upgrades to the -- I think, the 200-megabits ultra-fast plan from the 100 plan. Just wondering what thinking is behind there. -------------------------------------------------------------------------------- Iñaki Berroeta, TPG Telecom Limited - CEO & Director [26] -------------------------------------------------------------------------------- Yes. Well, the thinking is simple. So we live in an environment where NBN is looking at some promotional opportunities. And we want to make sure that we take opportunity of those, but also we transfer those to the customers. And I think that for a lot of areas in this market there have not been the opportunity to use fast broadband. Now they have it, so we decided to leverage on that and give the customers an opportunity to be using these products at the same time that we get their feedback. And hopefully, a lot of them will upgrade to those services. And we are looking always at opportunities to improve our offering to customers. And I think that -- these initiatives that NBN put forward, I think that give a good opportunity to us. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Your next question comes from the line of Ian Martin from New Street Research. -------------------------------------------------------------------------------- Ian John Martin, New Street Research LLP - Senior Telecommunications Analyst [28] -------------------------------------------------------------------------------- Just a couple of questions on the Corporate Segment or on the Corporate business. First, just looking at the NBN headwinds on Slide 29, $60 million. Is that all Consumer? Or is part of that going to be in Corporate given the impacts you've talked about in Corporate? [They're likely to be ongoing, I'll say], through this -- certainly through this year and possibly for longer. And secondly, Iñaki, you made quite a big point, I think, about the merged company's [aspirations for the Corporate segment, particularly] being able to bundle wireless products, mobile products and fixed products. Looking at the Corporate Segment revenue, it's pretty much all traditional telecoms revenue, mobile, data, Internet and so on; [and nothing] obviously in applications and services, cloud services, cybersecurity, edge compute and so on. I just wonder whether you're well established enough to be able to compete with that -- in that growth part of the corporate market. -------------------------------------------------------------------------------- Stephen Banfield, TPG Telecom Limited - CFO [29] -------------------------------------------------------------------------------- Yes, the -- Ian, the NBN headwinds in the EBITDA bridge are entirely consumer related. Of course, NBN is a significant factor in the corporate space now, but it's not just a negative. It's a positive as well. And as you -- I'm going to say we are the largest provider of NBN Enterprise Ethernet services, so we are -- we see NBN as an opportunity in the corporate space. -------------------------------------------------------------------------------- Iñaki Berroeta, TPG Telecom Limited - CEO & Director [30] -------------------------------------------------------------------------------- And in terms of the bundling, if I understood the question correctly. We have been traditionally serving telco products and quite linked to our infrastructure, which I think is a great foundation that we have, but at the same time, we are going into a bit more elaborated products. So we have now customers that are coming to TPG Telecom because of SD-WANs; but also looking at the way that we enhance the services on top, including security and many other things. We do some hosting. And I think that we will -- as we grow our enterprise, I think that -- rather than looking at offering products ourselves and trying to do what others do, I think that our aim is to really create a strong partners network to make sure that, when we deliver to our customer we're -- at the same time that we enhance our services, we are also able to bring with us [suppliers] of services that are more specific of the segment. So it is part of our growth on enterprise. As I said, we are now probably going to, during this year, develop much more around this convergency. We have a customer base served by TPG traditionally with connectivity products, where we have a huge opportunity to offer also mobile but, like you said, many other added-value services on top. And the same applies for former Vodafone customers that now are getting more of the fixed-data products. I talk about NAB, and I'm very certain that there are many others like those to come because we have a very good value proposition in the Corporate. And I think that -- with our current infrastructure and the plan that we have to grow these services, I think that this will be a key area of growth for our business. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Your next question comes from the line of Kane Hannan from Goldman Sachs. -------------------------------------------------------------------------------- Kane Hannan, Goldman Sachs Group, Inc., Research Division - Research Analyst [32] -------------------------------------------------------------------------------- Just 2 quick ones. Just the synergy numbers you're talking to. Is there a sense of what the benefit was in the second half from the merger and whether that is included in the medium-term target? And then just secondly, around the CY '21 EBITDA bridge, you've obviously given us a lot pieces there, but just interested if you think the business is going to be able to exceed that $53 million of underlying growth you did this year given some of the legacy savings coming through [TEBA]. -------------------------------------------------------------------------------- Stephen Banfield, TPG Telecom Limited - CFO [33] -------------------------------------------------------------------------------- Kane, the synergies in the second half of 2020. I referred in my presentation to what have been achieved on the migration of iiNet mobile subscribers, about $2.5 million contribution. That was the main synergy achieved in the second half. We've been obviously working very hard on the synergy program. A lot of planning work has been done, which gives us the confidence about the synergies which we expect to be able to achieve in the -- in 2021. I'm a little confused about your question about how the -- what we achieved in 2020, how -- whether that's included in the medium-term synergies. Just to be clear: That medium-term synergy number is an annualized number. It's not an aggregate [exclusive] number. So I hope that's clear. With regard to 2021, we haven't provided guidance for the results for the -- as a whole for the year given the ongoing impacts of COVID, particularly on the important market segments for us. We don't think there was sufficient certainty for us to be able to do so. What we have done is provided guidance about the things which we are -- which we can see and which we're confident about, being those headwinds and the synergies that we're confident of delivering in 2021. So I can't really answer your question in relation to other growth in 2021, I'm afraid. -------------------------------------------------------------------------------- Kane Hannan, Goldman Sachs Group, Inc., Research Division - Research Analyst [34] -------------------------------------------------------------------------------- Steve, I just meant the $2.5 million iiNet. It sounds like it's in that $100 million to $150 million. So you've chipped away a little bit of it, but is the [TEBA] savings we've previously spoken about in that NBN headwind? Or is that going to be a separate contributor when that eventually comes through? -------------------------------------------------------------------------------- Stephen Banfield, TPG Telecom Limited - CFO [35] -------------------------------------------------------------------------------- So just to be clear. So the $2.5 million in 2020 becomes $14 million in 2021, as you can see. And yes, the $14 million is within the $125 million to $150 million. So I hope that's clear. In relation to [TEBA], no, that's not part of the synergies. That's a business -- what I'd call like a business-as-usual OpEx saving which we will be realizing over the next couple of years as the -- as we decommission our remaining [leasement]. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- There are no further questions at this time. I would like to hand the conference back to the presenters. Please continue. -------------------------------------------------------------------------------- Trent Ashley Clinton Czinner, TPG Telecom Limited - General Counsel and Group Executive of Legal & External Affairs [37] -------------------------------------------------------------------------------- Well, thank you, everybody, for joining the full year results presentation. And have a -- we'll end it there. And have a great day. Thank you very much. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.