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Edited Transcript of TPM.AX earnings conference call or presentation 4-Mar-20 10:30pm GMT

Half Year 2020 TPG Telecom Ltd Earnings Call

North Ryde Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of TPG Telecom Ltd earnings conference call or presentation Wednesday, March 4, 2020 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig Levy

TPG Telecom Limited - COO

* David Teoh

TPG Telecom Limited - Executive Chairman & CEO

* Nick Pachos

TPG Telecom Limited - Head of Product & Carrier Management

* Stephen Banfield

TPG Telecom Limited - CFO & Company Secretary

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Conference Call Participants

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* 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 Pan

JP Morgan Chase & Co, Research Division - 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

* Roger Samuel

Jefferies LLC, Research Division - Equity Analyst

* Sameer Chopra

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

* Thomas G. Beadle

UBS Investment Bank, Research Division - Associate Director and Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the TPG Telecom First Half '20 Results Presentation. (Operator Instructions) Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today, Mr. Stephen Banfield. Thank you, sir. Please go ahead.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [2]

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Thank you, Christian. Good morning, everyone. Welcome to the TPG Telecom H1 '20 Results Presentation. My name is Steve Banfield. And with me are David Teoh; Craig Levy; Nick Pachos; and Tony Moffatt.

We apologize for the slight delay at short notice in our call this morning, which was necessary due to the timing of the ACCC's announcement this morning. As you will have seen, the ACCC has announced that it will not appeal the Federal Court's decision in favor of the merger, which we're obviously very pleased to see. We'll come back to the merger again at the end of the presentation. But we have this morning posted our results on the ASX, together with our presentation slides, which are also available at our webcast link. Craig and I will run through the presentation slides, following which, we'll be pleased to take questions.

The first slide shows a summary of our reported and underlying results for 1H '20 compared to the first half of FY '19. Our reported profit results are obviously substantially higher than for the same period last year due to 1H '19 having been impacted by the $227 million Australian mobile impairment expense. Excluding the impairment, underlying NPAT and EPS are down as expected by approximately 30% because there is $54 million of Australian spectrum amortization affecting 1H '20, which wasn't in 1H '19 and a $20 million increase in net financing costs due to the cessation of interest capitalization associated with the Australian mobile network build. Underlying EBITDA for the period was $399.1 million. Although down by 6%, this result is ahead of what had been expected as I will go into in further detail shortly.

The next slide shows a reconciliation between the reported and underlying profit numbers. 1H '20 reported EBITDA included $6 million of professional fees incurred in the period relating to the merger transaction process, which we've added back to arrive at underlying EBITDA. Our Corporate Division EBITDA result includes a $3.3 million nonrecurring benefit, which we have also excluded so as not to overstate the underlying growth achieved by that division in the half.

In order to facilitate like-for-like comparison with the prior period results, we have also excluded the $10.2 million by which reported EBITDA has benefited in the half from the implementation of AASB 16. At the bottom of the table, we've also added back the EBITDA loss incurred in Singapore in the period as well as the operating expenses associated with our Australian mobile sites. The reason we've done this is to arrive at a BAU EBITDA figure, which is the basis on which we provided our FY '20 guidance.

On Slide 4, we've provided a bridge between the BAU EBITDA from 1H '19 of $425 million and the $404 million for 1H '20, presented in the same format in which we provided guidance for FY '20, so you can track how we are progressing against each element of our guidance.

Regarding NBN headwinds, you can see that the margin erosion experienced in 1H '20 from DSL services being replaced by NBN services amounted to $37 million. From home phone cancellations, $6 million; and reduction in profitability of existing NBN subscribers, $12 million. Forecast headwinds within our full year guidance for each of these elements were $75 million, $10 million and $25 million, respectively. So you'll observe that in the first half of the year, we have incurred roughly half of the projected headwinds for the year. However, the headwinds for the first half were in fact approximately $7 million less than we had forecast for the first half, mainly due to NBN finally, introducing some very necessary wholesale pricing relief for entry-level services in October 2019.

Regarding EBITDA growth from operations, we've had a stronger first half performance than forecast, with $34 million growth in the half, almost at the top end of the range that we had guided to for the whole year. The main contributors to the $34 million growth came from the Corporate Division, which recorded a $10.5 million increase in underlying EBITDA; a $5.4 million increase in EBITDA contribution from Tech2; further Consumer Division cost savings of approximately $11 million; plus organic consumer broadband subscriber growth from FTTB and NBN. The better-than-expected elements were the contribution from Tech2 and the earlier than anticipated Consumer Division overhead cost savings.

The next slide shows a breakdown of underlying EBITDA and revenue by segment. As can be seen, Consumer Segment EBITDA fell by $31.6 million due primarily to the NBN headwinds. On the positive side, underlying corporate segment EBITDA increased by $10.5 million at an EBITDA margin which continued to expand in the half and was 4 percentage points higher than the same period last year. The next couple of slides provide more detail on this for each segment.

Slide 6 shows the consumer segment results analyzed into our customary product categories. You can see that the $31.6 million EBITDA decline comprised a $39.8 million gross profit decrease, partially offset by a further $8.2 million reduction in overheads. $44 million of the GP decline came from broadband. This incorporates the $37 million margin erosion from DSL to NBN migration as well as the $12 million deterioration in profitability of existing NBN services, which are partly offset by GP growth and organic subscriber growth, including from FTTB. Fixed voice GP was down by $5.5 million due to subscriber erosion as customers migrate to NBN bundles.

There was a significant increase in other GP in the period, up by $9.1 million. This was driven by an improved trading performance from the Tech2 business, whose GP rose by $7.9 million.

With regard to overheads, the $8.2 million reduction was another pleasing performance. Tech2's overhead, predominantly employment costs, increased by $3 million in the period, supporting that improved gross profit. So excluding Tech2, the TPG Consumer Division overhead, in fact, decreased by $11.1 million compared to 1H '19.

Turning to the Corporate Segment on the next slide, you can see that the EBITDA growth has again been driven by continued improvement in gross profit and EBITDA margin, the $10.5 million EBITDA growth arising despite a $10.2 million decline in revenue. The composition of the revenue movement in the table at the top shows continuing declines as expected in voice and legacy higher net revenues. The $1 million decline in data and Internet revenues reflects declines in wholesale and off-net business being almost fully offset by continued strong growth in higher-margin on-net fiber sales. And it's the ongoing change in mix of revenue within this data and Internet category which continues to drive GP growth.

Overall, GP was up by $6.6 million compared to 1H '19 at a gross profit margin that increased from 66% to 69% and this was complemented by efficiency overhead savings in the period of $3.9 million, resulting in an EBITDA margin increase from 48% to 52%. All of this excludes the $3.3 million one-off benefit that the Corporate Division benefited from in the half, which I reported earlier, and also excludes the favorable EBITDA impact of AASB 16.

Turning to our cash flow performance on Slide 8, 1H '20 operating cash flow of $399 million is slightly below EBITDA, but still represents a 97% conversion rate. Our 1H '20 tax payments were $17 million lower than 1H '19, reflecting the decline in our profit before tax. Our business as usual CapEx was $26 million higher than 1H '19, but in line with the run rate for the second half of last year. The increase relative to 1H '19 reflects the step-up in our fiber builds for corporate customers, especially Fibre1000, which is what supported that continued margin expansion you saw in our Corporate Segment results.

We have guided for BAU CapEx for the year of $200 million to $240 million, which we remain comfortable with as there was a bit of a first half skew in our CapEx. In January 2020, we paid the final installment of $352 million in relation to the Australian 700 megahertz spectrum acquired at auction in April '17. CapEx for our mobile network build in Singapore in the period was $69 million, taking the aggregate CapEx incurred up to $216 million, excluding spectrum, still well within the $200 million to $300 million range, which was provided at the outset of the project.

I've included AASB 16 lease payments on this sheet also because although they are now classed as financing cash flow for statutory purposes, they're really part of operating cash flows.

The spectrum payment meant that we had net cash outflow in 1H '20 of $221 million and that was funded, as you can see on the next slide, by net drawdown of our debt facilities of $297 million. Interest payments were $4 million than 1H -- sorry, $4 million lower than 1H '19, due to the increase in the average debt balance being more than offset by a decline in interest rates. Our cash balances was $25 million higher at 31st of January 2020, than it was at the start of the period.

After payments of the $352 million for the spectrum, our net debt balance was $1.74 billion at 31st of January. This excludes our outstanding spectrum commitment of $132 million for the 3.6 gigahertz spectrum, which is payable in March. Our leverage ratio at 31 Jan '20, including the spectrum commitments was approximately 2.4x.

I'll now hand over to Craig.

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Craig Levy, TPG Telecom Limited - COO [3]

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Good morning, everybody. Our Consumer Division finished the half with a positive subscriber result. We added 14,000 broadband subscribers. The group now has 1.94 million broadband customers. During the half, we added 184,000 NBN subscribers, bringing our consumer NBN subscriber base to 1.4 million customers. We also added 6,000 FTTB subscribers to our on-net product.

During the half, we ended on mobile with 367,000 mobile MVNO subscribers. Unfortunately, our decline in customer base was because we never had a competitive MVNO product. However, this week, we have released a new set of mobile plans, which are designed to deliver positive subscriber trading and excellent value to consumers. If you take a look at our mobile product range, what we have done is we've once again introduced 6 months, 50% off promotional pricing. Our plans across the range now have more data inclusions as well as a monthly cheaper price point. We've also introduced cheaper excess data blocks. We now sell 2 gigs for $10 as our excess data block.

TPG Group continues to sell the NBN100 across all fixed line technologies. TPG has more NBN100 services in operation than any other retail service provider, where we offer 85 megabits per second typical evening speed. We promise that after activation, FTTN, B and C customers can downgrade or cancel with a full refund if they're not satisfied. Switching from another NBN provider to TPG now only takes a few days, allowing consumers to experience the TPG difference.

During the half, we were able to improve iiNet's trading position. We moved away from 24-month contract terms to new rent-friendly 6 months and no lock-in contracts. We released an NBN $74.99 entertainment bundle on iiNet offering NBN50, Fetch Entertainment, phone line, all with our amazing 24/7 customer support. We are proud to announce that Internode was named by Roy Morgan as Australia's #1 Internet service provider of the year. During the half, we've also refreshed Internode's residential and small business NBN plans.

Moving over to our NPS scores. We're quite pleased with the way our NPS scores have been tracking. And if you look at TPG consumer, we ended at 44.4; iiNet at 53.9; and our Corporate Division was 65.5 (sic) [65.2]. Our NPS achievement was impressive given the even further reduction in overheads during the half. We managed to deliver better NPS scores for both TPG and iiNet consumer divisions compared with the first half of 2019.

An update with regards to our Singapore business. We've achieved strong outdoor coverage with 99.89% outdoor coverage and 100% indoor quality of service validation post January 2020. Our company submitted an application for a 5G spectrum license in February this year, and we now have over 400,000 users on our free trial service. A paid version of the Singapore mobile product will be launching soon. We're very pleased to announce that we will soon be launching a very aggressive 50 gig prepaid mobile product in Singapore. This new product will be only $10 for 30 days.

In comparison, other products in the marketplace are $20 and above, with much less data inclusions. This product will allow TPG to tap into a very lucrative market segment. We can now offer a prepaid product to a wider range of tourists and customers seeking ultimate flexibility with no on-plan commitments. Our plan also offers 1 gig of roaming inclusions, which will be very favorable for foreign migrant workers, who this product will appeal to. We also include 300 local SMS as well as 3 -- as well as calls. So we're very excited about prepaid and that's going to allow us to go into a new segment.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [4]

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Thanks, Craig. Last few slides, ladies and gentlemen, the Board has declared an interim FY '20 dividend of $0.03 per share, fully franked. And turning to guidance, in September, we provided guidance for BAU EBITDA for FY '20 to be in the range of $735 million to $750 million. In light of our first half results and the updated outlook for the remainder of the year, we're now expecting BAU EBITDA for the full year to be in the range of $775 million to $785 million. Our BAU CapEx is still expected to be within the original guidance range of $200 million to $240 million.

The next slide shows an updated breakdown of the main components within that revised guidance.

The final slide is about the merger is, in fact, slightly out of date already given this morning's announcement by the ACCC not to appeal the Federal Court's ruling that the merger would not substantially lessen competition. This creates one of the key conditions precedent to the completion of the merger. There do remain other regulatory conditions that must be met before the merger can proceed, including CFIUS and the Australian Foreign Investment Review Board. But we are currently targeting a completion of the merger in mid-2020.

Ladies and gentlemen, that's the end of the presentation. There are a couple of appendices to the slides providing some additional information regarding ARPU, fixed voice subscribers and acquired customer base intangible amortization. We'll now be pleased to take a few questions. So I'll hand back to the operator to coordinate the Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Sameer Chopra from Bank of America.

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Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [2]

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Great set of results, by the way. One initial question, just looking at the corporate revenues, can you just give us some puts and takes on what's going on in the market? Revenue -- EBITDA was good, but revenue came off a little bit. So maybe if you could walk us through what's going on in the corporate segment, that would be appreciated.

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Nick Pachos, TPG Telecom Limited - Head of Product & Carrier Management [3]

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Sure. It's Nick Pachos here. Look, the revenue in the data segment is relatively flat. As we mentioned in the call, we will continue to focus away from wholesale, third-party aggregation business and substitute that revenue with our on-net product. So what you're seeing there is actually a lot of substitution in the revenue base, which is showing through on our EBITDA results.

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Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [4]

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Great. And Craig, just one for you on the consumer segment. Subscriber growth was kind of good. What are you seeing in terms of competitive intensity in the market right now? And which of the plans do you think you're getting best traction with?

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Craig Levy, TPG Telecom Limited - COO [5]

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As we've said before, the market continues to be extremely competitive with the amount of retail service providers out there. The different brands that we have in our group allow us to zoom into different segments in the market. We see TPG continuing to do very well with the value side of the market as well as now the NBN100, as I said on the call. So TPG has this organic growth, and it continues. We've also seen in the half the premium iiNet brand as we've made adjustments to the product, and we've slightly adjusted product down to $74.99. It's doing well. We've also seen a revival with the Internode product, which has got very much a niche market, and it's now doing well as well.

So we've got different brands, very, very strong and we're pleased with those brands and are able to compete with the other guys in the market and stand up to them. And I think the amount of automation we've put into the business, backed up with the excellent support we're giving to our call centers, means that customers are coming to our group and experiencing the difference that we can provide.

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Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [6]

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And last one for you, Steve, just on Tech2, do you think the cost reductions are kind of done and dusted? So as in like the EBITDA turnaround on Tech2, do you think you're run rating at a stable base now? Or do you think there's more upside or downside to go on Tech2?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [7]

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Just to be clear, Sameer, the improved performance isn't a product of cost reductions within Tech2. They've traded better and increased revenue. Unlike the rest of our business, Tech2 isn't a recurring revenue business. So it's earnings are less predictable than the rest of our business, so it's -- you can't necessarily extrapolate the first half performance. But we're very pleased with the first half performance.

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Operator [8]

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Your next question comes from the line of Kane Hannan from Goldman Sachs.

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Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [9]

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Just 3 questions from me. Just focusing on the guidance firstly. Just that $20 million to $30 million of other growth in the second half, I mean, I take the point around Tech2Home and not extrapolating that. But should we be thinking the composition of that growth in the second half, Tech2Home aside, should be similar to what we've done in the first half?

Secondly, just the NBN margin headwinds and the change to the numbers there. Is there any change to that 13% ADSL subscribers, I think, you're forecasting at year-end at the -- in August? And then finally, just on Singapore, you'll see some very small losses in the first half. Just comment on how we should be thinking about the loss profile of that business in the second half in '20 -- well, second half. And then the level of churn as you move from the free to paying subscribers?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [10]

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Kane, yes, my answer to your first question is yes. We do expect to be -- the contributors to the second half growth to be similar to the first half. Yes, noting that the -- coming to that Tech2. The subscriber migration from DSL to NBN to date in the year-to-date has been very much in line with our expectations. So we are still expecting the number of DSL customers remaining at the end of the year to be around about a 13% mark, yes.

Kane, do you -- sorry could you just…

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Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [11]

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Just Singapore and the sort of the second half losses for that business. And then obviously 400,000 free subs, but how do you think about how they migrate on to being a paying subscriber in that $10 plan, assuming there has to be a reasonable level of churn coming through?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [12]

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Yes. Kane, you would have seen from our slides that we are planning to launch paid services, in fact, by the end of this month. So we will, as a result, cease capitalizing much of the OpEx within the business, which will mean that there will be a greater level of loss or I expect there will be a greater level of loss for TPG Singapore in the first half of this year, but that will, of course, be determined by the number of subscribers. We are still very comfortable with the guidance that we provided at the start of this project. So we believe that we will reach EBITDA breakeven with a market share of around about 400,000 subscribers. So it's difficult for us to predict exactly what the customer number outlook will be. But with our Tech2 offers, we do expect it to be successful. And just to be clear, that breakeven assumption that we made incorporated our ARPU of around about $10, which you've seen from this prepaid product.

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Operator [13]

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Your next question comes from the line of Eric Pan from JPMorgan.

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Eric Pan, JP Morgan Chase & Co, Research Division - Analyst [14]

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Congratulations on getting the merger through and a great result. A few questions from me, and maybe I'll just shoo them off one at a time. Firstly, your consumer margins were roughly flat half over half. Have you reached a trough in terms of margin pressure in the business, given the recent changes in wholesale pricing? Or should we continue to expect continued pressure on them until the migration is complete?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [15]

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The headwinds will certainly continue because we still have -- we should have hundreds of thousands of DSL subscribers to migrate to NBN. So the headwinds will continue. In terms of NBN margin, it's a little unpredictable. You know that there is a significant variable cost component to the NBN wholesale charges in the form of the CVC charge. And so costs continue to increase as customer data usage increases, and the majority of our plans are unlimited plans. So it is a little hard to predict.

But yes, there certainly has been a stabilization of overall margin in the first half of this year compared to the second half of last year. But of course, it is substantially lower than it was in the first half of FY '19 when the CVC both boost and Focus on 50 promotion is in place.

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Eric Pan, JP Morgan Chase & Co, Research Division - Analyst [16]

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Got it. And then secondly, on the merger, given it's been 1.5 years since the merger was announced, do you still expect the net debt for the merged group to be about $4 billion or running about 2.2x net leverage?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [17]

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The -- when we made the announcement back in August 2018, we announced the debt that the second parties will be bringing in have been agreed. I think it was $1.65 billion of TPG, $1.94 billion for VHA. And -- but in addition to that, any payments in respect of the 700 megahertz spectrum would also be brought in as debt for merged co. Now the delay in the completion of the transaction means that there have been actually 2 installments paid by TPG of $350 million each as well as approximately $200 million in aggregate by VHA, which means that both -- that means that under the scheme implementation, there'll actually be approximately $4.5 billion of debt -- of net debt on completion.

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Eric Pan, JP Morgan Chase & Co, Research Division - Analyst [18]

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Okay, that's helpful. And then just lastly, when do you expect to distribute the Singapore move venture to shareholders? And how much capital will you be allocating to it?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [19]

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The separation of TPG Singapore will occur at the same time as the completion of the merger. TPG will, prior to separation, be capitalizing TPG Singapore to meet all of its obligations. We need to -- we're not in a position yet to confirm exactly how much that amount will be. We'll be advising the market of that closer to the time.

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Operator [20]

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Your next question comes from the line of Roger Samuel from Jefferies.

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Roger Samuel, Jefferies LLC, Research Division - Equity Analyst [21]

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I've got a few questions. First one, just on the Corporate Division. I'm just wondering if you can comment on the competition in that sector. And when can we expect the [dealer networks] revenue to increase?

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Nick Pachos, TPG Telecom Limited - Head of Product & Carrier Management [22]

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We play across a number of markets in the Corporate Division. I guess the competition varies depending on which market segment we're going after. We have seen some increased activity in the corporate segment at the top end of the corporate and enterprise government market. And you would have seen some press from -- some of the announcements that have been made by other parties in relation to some of the big corporate and banks that are actually going to market at the moment. So there's been a very high level of activity at the top end of town. That activity also carries through into the local government segment.

In terms of when would we see the data and Internet revenue increase, that's hard to answer at this stage. We've still got a transition period to go through on the revenue mix for data and Internet.

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Roger Samuel, Jefferies LLC, Research Division - Equity Analyst [23]

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Okay. What about the competition in the mid-market and small, medium businesses as well?

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Nick Pachos, TPG Telecom Limited - Head of Product & Carrier Management [24]

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One of the things we are seeing is that we're starting to drive voice or SIP and ISDN revenue or actually products into the market, and we're seeing very good take-up on our BizPhone product and voice-related products that we bundle with our traditional on-net Fibre400, Fibre1000 products. So I think you'll see that a lot of the products -- a lot of the revenue substitution that we're seeing in the data and Internet space is in that mid-market segment.

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Roger Samuel, Jefferies LLC, Research Division - Equity Analyst [25]

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Got you. All right. And just lastly, on the consumer segment. Any plans for the MVNO customers? I mean presumably, they will be migrated to Vodafone once the merger is complete. Is that just -- is that the plan?

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Craig Levy, TPG Telecom Limited - COO [26]

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Well, we can't comment on that now. What we're focused on at the moment and for the time being, as I've said, is we've got some extremely competitive offers right now. And it's all about getting these offers out into the market, making sure that consumers are aware of them and growing MVNO customer base, which you saw declines. Our first and foremost priority right now is to get back into positive subscriber trading territory.

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Operator [27]

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Your next question comes from the line of Tom Beadle from UBS.

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Thomas G. Beadle, UBS Investment Bank, Research Division - Associate Director and Research Analyst [28]

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I just had three, if that was okay, please. Just on -- firstly, on the consumer overhead, it was another really strong number there. But just, I guess, wondering if you could size the opportunity for cost savings, just firstly, once the NBN rollout completes there. And, secondly, just any savings from the proposed merger as well.

And then secondly, just on the merger. Just with both your debt and Vodafone's debt, are there any approvals remaining from lenders or refinancing that needs to be done prior to the merger completing?

And then just on Singapore, just a follow-up from Kane's question. I realize it's difficult to forecast the second half as you stop capitalizing losses. But could you provide us maybe just with the framework as to how we should think about this?

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Craig Levy, TPG Telecom Limited - COO [29]

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So on the operating cost side, we've been able to reduce our overheads and we expect that focus to remain. So we have more programs of automation and trying to make our business decisions more efficient. There's also savings that we experienced through marketing. Marketing is quite closely aligned to the NBN rollout. And once we have gone through the majority of the rollout, it means that there could be less marketing costs associated in the future, given the fact that we wouldn't be promoting to our existing customer base. As Steve was mentioning, we still have a number of hundreds of thousands of DSL customers to market to. And once that's complete then that type of activity falls away.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [30]

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Tom, yes, one of the necessary steps between now and completion is that TPG, together with VHA, needs to arrange a debt facility with a syndicate of lenders to refinance the existing debt facilities of the stand-alone entities. So that's something which we will be doing in the coming weeks.

In relation to your question about Singapore, really the only framework I can give you to think about yet is what I said before, which is that you now know, roughly, the ARPU that our business plan is -- is based around, which is around a $10 ARPU. And we've said that with approximately 400,000 customers, we would expect to be able to break even at an EBITDA level. From that, you'd be able to back solve our operating costs. And then how many of -- how much that hits our bottom line will be determined by customer uptake.

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Operator [31]

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Your next question comes from the line of Entcho Raykovski from Crédit Suisse.

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Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [32]

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A couple of questions for me. First one around the guidance. And just looking at the items on the declining profitability of the existing NBN base. Now it looks like previously you had that as a headwind of $25 million, now you've got a $17 million headwind, so an $8 million improvement. But in the first half, you already mentioned that you saw a $7 million better performance. Just wondering, heading into 2H, shouldn't we expect a greater benefit given that the new NBN wholesale pricing didn't kick in until October last year? And just wondering what other moving parts perhaps are impacting that item?

And then secondly, on the corporate side, just interested in whether you see any positive impact from the NBN'S decision not to engage directly with corporates, which obviously, they announced over the past few weeks.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [33]

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Entcho, when we gave our guidance back in September, we said that in relation to the headwind, which you referred to, the $25 million headwind, that within that, we were making an assumption that in the second half of this financial year, we would finally get some pricing relief on the entry-level bundles. So what's actually happened is that, that came in a few months earlier than we expected in October -- than we had included in our forecast, in our guidance, that came in, in October 2019. That's what the main driver of the $7 million benefit in the first half. But in the second half, we had already factored that pricing relief into our guidance. So that's the answer to your question.

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Craig Levy, TPG Telecom Limited - COO [34]

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And Steve, just to comment that, if you look at the -- we said the full -- that the full year that we're expecting an entry-level bundle to be settled, which it did at $35 wholesale cost. The disappointing factor about that is that there's only 1 megabit per second of inclusions. And when you're selling an unlimited product, you have usage, which is variable, as Steve said. So we're hoping to see in the future better wholesale inclusions, but at this point in time, it's quite disappointing.

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Nick Pachos, TPG Telecom Limited - Head of Product & Carrier Management [35]

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Okay. And just in relation to NBN's engagement in the corporate space. I think there's 2 components there. One, NBN haven't said that they're not engaging in the corporate space. So they'll still be engaging with customers. What they've said is they won't be contracting the infrastructure builds with the end customers. From our perspective, we see that as a step in a positive direction. Yes, but there is still some way to go. We are actually providing feedback to the NBN on some of the mechanics of how this is going to work, but it is a step in the positive direction.

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

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Okay. And maybe if I can follow up on the first one. So the new NBN bundles, I noticed they've increased the CVC or increasing the CVC inclusion for the 50 bundle later this year. They've also implemented a national pooling of CVCs. Are you seeing that reducing your overage charges, perhaps over and above what you may have assumed previously?

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Operator [37]

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(technical difficulty)

Ladies and gentlemen, thank you for your patience. I'd now like to hand the conference back to your speaker. Thank you. Please continue.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [38]

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Thanks, Christian. Sorry, everybody, for the technical difficulty. Entcho, would you mind repeating your question?

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Operator [39]

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(Operator Instructions)

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Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [40]

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Great. Okay. I hope you can hear me okay. So my question was, given that NBN is increasing the CVC inclusions on the 50 product from later this year, and then they've implemented a national pooling of CVCs, do you see that as an incremental benefit? And are you finding that's reducing overage charges, perhaps over and above what you may have previously estimated?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [41]

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Actually, Entcho, our concern is that the CVC inclusion increases don't keep up with the escalation in customers' data usage, so no.

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Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [42]

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Are you able to talk about what the -- well, how the usage compares to inclusions so far, so what the average usage is?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [43]

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No, we don't want to go into that level of detail on this call, I'm afraid.

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Operator [44]

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Your next question comes from the line of Fraser Mcleish from MST Marquee.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [45]

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A couple for me. Steve, just on the special dividend, can you just confirm what the parameters are around that and given the -- with the delay to the merger? And second one, just being sort of mobile infrastructure, can you just -- what small cell infrastructure you've got built out now that you're going to be contributing to the merger? And also just on your MVNO base, are they all Vodafone now or is there still some of those on -- in -- on Optus? And I've got one more, I might just come back for after, if that's okay.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [46]

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Okay. Thanks, Fraser. Yes. So just to refresh your memory about how the special dividend parameters under the Scheme Implementation Deed. To the extent that the TPG Group's actual net debt is lower than our agreed target net debt, which is about $2.37 billion being the $1.67 billion that was announced the 30th of August 2018, plus the extra $700 million of payments that have been made in respect of the 700 megahertz spectrum. Yes, to the extent that there's a difference between our actual net debt and that $2.37 billion, we will be, under the terms of the SID, we will be committed to pay the difference out to our shareholders as a special dividend.

You saw from the presentation that our net debt at 31st of January 2020, including spectrum that we -- commitments is $1.87 billion. But remember, out of any difference, we will also need to pay our transaction fees and, out of that, we'll also need to capitalize Singapore. There was a question earlier about how much the capitalization of Singapore will be. We will be confirming that closer to the time.

Your question is -- I think your question relating to mobile infrastructure is you wanted to be reminded what our -- what our small cell infrastructure is that will be -- become a valuable part of that [merged co] network? Well as at the time that we had -- that we ceased our Australian mobile network build in January 2019, we have built approximately 900 small cell sites in major capital cities.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [47]

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And then the Optus.

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Craig Levy, TPG Telecom Limited - COO [48]

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Yes, the third one is about the split on our MVNO customer base. We don't break it out, but the majority of them are on the Vodafone network.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [49]

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Right. Great. And just so my last one, I don't know if David's on the call, but it would great if you could take the opportunity to give us an overview of what he sees is the key areas of upside and opportunity from the merger given that we -- and I know it's going to go ahead, that would be very helpful.

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David Teoh, TPG Telecom Limited - Executive Chairman & CEO [50]

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David here. With the merger -- with the merged co, I think they are complementary assets from our fiber infrastructure and also the small cell infrastructure that we built and also the combined spectrum holdings. So we can compete strongly with the 2, Telstra and Optus. So with the growing market, I think the mobile and it is a growing market and also with the fixed wireless, so there are tremendous opportunity for the merged co moving forward. So we're quite excited with the opportunities in the future, yes.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [51]

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Can I just ask, I mean, we've seen a big shift in mobile competitive environment with -- and Optus, particularly, raising its prices pretty substantially. I mean do you see that as an opportunity to grow ARPU because that would obviously be a big turnaround, given we've had 3 or 4 years of ARPU declines in mobiles which have hit revenues across the industry. Is that the opportunity you see? Or is it more of a market share opportunity?

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David Teoh, TPG Telecom Limited - Executive Chairman & CEO [52]

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I think with the -- I think we are glad that the -- there is no appeal from the ACCC because with the delay in the last 18 months, that gives Telstra and Optus, I think a good run on implementing their 5G network. So I believe that the merged co has to strengthen and speed up the 5G rollout to compete in the marketplace because there are enormous opportunity there. We need a good network and good product for the benefit of the consumer. So we do see tremendous opportunity moving forward.

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Operator [53]

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Your next question comes from the line of Brian Han from Morningstar.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [54]

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Gentlemen, once the merger is complete, how long do you think the integration will take? And will it involve a whole army of Vodafone plc people coming down here and having their inputs into the whole process?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [55]

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Brian, Steve Banfield here. The integration of a merger like this is obviously a multiyear process, but we -- we have a lot of experience in merger integrations and prioritizing the most important tasks. The business will be run by a local Board, chaired by David Teoh. And with Inaki as the CEO, the business will be managed locally.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [56]

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Okay. And just a side question. Can you tell us what percentage of your 1.9 million broadband subscribers are already Vodafone mobile customers, whether virtual or straight out network?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [57]

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Sorry, Brian, we actually don't have that figure.

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Operator [58]

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Your next question comes from the line of Ian Martin from New Street Research.

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Ian John Martin, New Street Research LLP - Senior Telecommunications Analyst [59]

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You guys are obviously managing quite a lot of moving parts in that half year and including the court case, it came out pretty well in the circumstances.

Look, probably my -- I mean you covered off a lot of areas, but probably the one thing I'd be interested in is with that change in NBN pricing, how the mix -- how the customer mix has changed. I know your focus is predominantly on -- or you've had a relatively greater focus on entry-level 12 and 25 megabits per second. But I wonder with that change in NBN pricing, whether you're starting to see potentially more at the 50 and even 100 level, where some of the other RSPs are focusing. That's probably my main question. And I'm interested in how you then manage that to focus your fixed wireless investment as you roll out 5G.

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Craig Levy, TPG Telecom Limited - COO [60]

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Ian, it's Craig. In relation to our sales, you see the ACCC profile. I think the last one was published in December and things really haven't changed much since then. But the majority of new sales that we make today are on the NBN50 product. But we do sell the other tiers, depending on the type of customers and their needs. So yes, I think that's all I can really say at this point.

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Ian John Martin, New Street Research LLP - Senior Telecommunications Analyst [61]

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And have you given much thought to where you focus the fixed wireless rollout, post-merger, with Vodafone?

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David Teoh, TPG Telecom Limited - Executive Chairman & CEO [62]

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It's too premature to say at this stage. I think the -- we have to look at the combined infrastructure and also where the customers are. And I think the Vodafone started looking at the 5G implementation at this stage. But the combined group would have a lot of strength because of all the combined infrastructure that we put together, yes.

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Ian John Martin, New Street Research LLP - Senior Telecommunications Analyst [63]

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Yes. So I see Vodafone's announced this morning they're launching 5G focused on urban areas of Sydney, Parramatta and so on, and they'd be areas where I think you were also kind of focused with your mobile rollout, areas where you potentially got quite a few entry-level customers that might easily migrate to a 5G network.

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David Teoh, TPG Telecom Limited - Executive Chairman & CEO [64]

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Yes, you're correct. Yes, not a lot of the customers are in that, I think from the CBD to the Parramatta, and also when you look at Melbourne, it's like 15-kilometer radius from the CBD. So there are key areas where there are a lot of opportunities we can focus on.

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Ian John Martin, New Street Research LLP - Senior Telecommunications Analyst [65]

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I'm really looking forward to what happens next to this in the segment, well done.

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Operator [66]

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Your next question comes from the line of Craig Wong-Pan from CLSA.

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Craig Wong-Pan, CLSA Limited, Research Division - Research Analyst [67]

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Just firstly, on that $3.3 million nonrecurring benefit that was in the Corporate Division, could you just talk about what that was?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [68]

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Craig, Steve Banfield here. It was a confidential commercial segment in our group's favor. So unfortunately, I can't give any more detail than that.

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Craig Wong-Pan, CLSA Limited, Research Division - Research Analyst [69]

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Okay, sure. And then the next one, on the consumer segment, a great performance in the mobile segment. So improved margin and gross profit. Could you talk about what drove that increase in profitability?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [70]

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Sorry, this is in MVNO?

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Craig Wong-Pan, CLSA Limited, Research Division - Research Analyst [71]

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Yes.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [72]

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In terms of MVNO? In terms of the performance in the half, we were obviously disappointed at the subscriber momentum, which is quite negative. But in a sense, we're very pleased to have been able to, this week, introduce the new plans, which should reenergize that segment. In terms of the margin, yes, the margin did improve slightly in the half with some of our promotional pricing rolled off.

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Craig Wong-Pan, CLSA Limited, Research Division - Research Analyst [73]

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Okay. And then thinking about Singapore, if you get the licenses for 5G, I was just wondering if you could talk about what the CapEx could be like for that business. I think you've got another sort 100-or-so-million-dollars of CapEx to go in FY '20. But then post that, if you get approved for 5G, what could the capital spend be for that business?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [74]

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Craig, we've submitted a -- made a confidential submission to the IMDA in February of our 5G license application. Under the terms of that submission, unfortunately, we're not able to share such detail publicly at this time, whilst the IMDA is assessing the various submissions.

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Craig Wong-Pan, CLSA Limited, Research Division - Research Analyst [75]

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Okay. And then the $3.3 million of costs for your -- in the Australian mobile business for the network. I just wanted to understand what those costs were. Because I thought that you had elected to stop the rollout at the start of last year. So I was surprised to see some costs coming through there and just wondering if there's any more cost to come through in future periods.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [76]

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Yes. Craig, we've got these 900 sites installed. And so we pay rent at those sites. So that will be an ongoing cost.

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Craig Wong-Pan, CLSA Limited, Research Division - Research Analyst [77]

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Okay. And then just my last one, could you quantify the potential impact from the regional broadband scheme?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [78]

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So the regional broadband scheme, if it goes ahead as it looks, unfortunately, that it will, will levy a tax of $7.10 approximately on our high-speed residential broadband services. You can see from our subscriber charts that there are around about 110,000 of those -- sorry, 123,000 of those. There is, under the legislation, I understand, an exemption for the first 25,000. So you've got approximately 100,000 of our subscribers that we will need to pay the $7.10 tax per month on. That's on the residential side. My understanding of the proposed legislation is the SID also now extends to business corporate enterprise side. To us, there's still not sufficient clarity of exactly how that will be applied for us to be able to reliably estimate the number of services that will be impacted by that tax in the corporate segment.

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Operator [79]

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There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [80]

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Okay. Well, that's all for us. Thank you very much, everybody, for joining us this morning, and have a good day. Thank you. Bye.

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Craig Levy, TPG Telecom Limited - COO [81]

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Thank you.

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Operator [82]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.