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Edited Transcript of TPM.AX earnings conference call or presentation 18-Mar-19 10:00pm GMT

Half Year 2019 TPG Telecom Ltd Earnings Call

North Ryde Jul 1, 2019 (Thomson StreetEvents) -- Edited Transcript of TPG Telecom Ltd earnings conference call or presentation Monday, March 18, 2019 at 10:00:00pm 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

* Stephen Banfield

TPG Telecom Limited - CFO & Company Secretary

* Tony Moffatt

TPG Telecom Limited - General Counsel

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Conference Call Participants

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* Brian Han

Morningstar Inc., Research Division - Senior Equity Analyst

* Entcho Raykovski

Crédit Suisse AG, Research Division - Research Analyst

* Eric Pan

JP Morgan Chase & Co, Research Division - Analyst

* 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

CLSA Limited, Research Division - Research Analyst

* 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 1H '19 Results Presentation. (Operator Instructions) I must advise you that this conference is being recorded today, March 19, 2019.

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

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

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Thank you. Good morning, everyone, and welcome to the TPG Telecom H1 '19 Results Presentation. My name is Steve Banfield, and with me are David Teoh, Craig Levy and Tony Moffatt.

We, 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 '19 compared to the first half of FY '18. It shows quite respectable underlying results for the half given the extremely tough circumstances the industry is facing currently due to the NBN. Underlying EBITDA is up by $11.4 million or 2.8% to $424.4 million with underlying NPAT and EPS also up by 3.5% and 3.3%, respectively.

Regarding our reported results, most people will be aware that we advised the market on the 26th of February that we will be recognizing a $227 million impairment expense in these half-year accounts arising from the decision to cease our Australian mobile network rollout. This plus $4.4 million of transaction costs incurred in relation to the planned merger with VHA have adversely impacted our reported results.

Now a couple of other points to note in relation to this slide, firstly, regarding underlying NPAT and EPS. It should be noted that, throughout this period, as our Australian mobile network build continued through to the end of the reporting period, our spectrum licenses were still not being amortized and interest relating to debt drawn to fund our Australian mobile project were still being capitalized. Having ceased the network build, the spectrum licenses will start being amortized in the start of the second half of FY '19, and there will be no further capitalization of interest relating to Australian mobile and, consequently, these 2 changes will lead to a significant step-down in NPAT and EPS starting from the second half of FY '19.

One other matter to note is that the first time adoption of the new AASB15 revenue accounting standard has led to some minor restatement of the prior period comparatives, details of which were set out within the accounts.

The next slide provides a reconciliation between the reported and underlying profit numbers, showing the merger transaction costs, the Australian mobile impairment expense and the regular adjustment to NPAT to exclude the acquired customer base intangible amortization, which is a noncash expense.

On Slide 4, we've provided a bridge between the underlying EBITDA for 1H '18 and 1H '19, presented in the same format in which we provided guidance for FY '19, so you can track how we're progressing against each element of our guidance. As you can see, the group was again successful in offsetting the NBN headwinds it faced in the period.

The margin headwinds we experienced in 1H '19 from DSL services being replaced by NBN services amounted to $20 million. This compares to $50 million that we guided to for the full year.

The fact that we have incurred to-date less than half of the forecast full year headwinds primarily reflects the fact that the NBN's focus on 50 and CVC boost promotion benefited margins for the majority of the first half. NBN margins have deteriorated significantly since NBN's new wholesale pricing structure was implemented in December.

Also with NBN's reactivation of HFC, we are expecting an accelerated pace of migration of customers from DSL to NBN in the second half of the year. So we do still expect DSL to NBN erosion to be close to the $50 million for the full year that we originally guided to.

iiNet home phone GP declined by $8 million in 1H '19. That compares with the $15 million decline that we guided to for the full year so reasonably in line with expectations in the year-to-date. To remind you, this is stand-alone, fixed landline voice services being terminated as customers migrate to NBN bundles.

With regard to EBITDA growth from operations, we forecast a range of $34 million to $54 million for the full year. The $39 million actually achieved in 1H '19 is well above half of the upper end of that range, but this will be quite adversely impacted in the second half from a significant decline in profitability of a 1 million-odd NBN subscribers that we already have due to the NBN wholesale pricing structure changes I mentioned earlier.

The main contributors to the $39 million growth in the first half came from the Corporate Division, including a step-up in the contribution from the VHA fiber contract and from the continued realization of operating expense efficiencies across the group.

One other small explanatory note regarding this slide. In our guidance, we did also forecast a step-down in EBITDA in FY '19 arising from the reclassification of certain subscriber acquisition costs under AASB 15. But as the prior period comparative EBITDA has now been restated on a comparable AASB15 basis, there -- this is no longer affected as a reconciling item in this EBITDA bridge.

The next slide shows a breakdown of revenue and EBITDA by segment. As with last reporting period, we've continued to leave Singapore within Other, due to the relative immateriality of its operating expenses at this time. As can be seen, Consumer segment EBITDA fell by $12.2 million under the pressure of the NBN margin erosion, but this was more than offset by $23.9 million EBITDA growth from the Corporate segment, which was achieved at an expanded EBITDA margin of 48%. The next couple of slides provide more detail on this for each segment.

Slide 6 shows the Consumer segment result analyzed into our customary product categories. You can see that the $12.2 million EBITDA decline comprised a $24.8 million GP decrease, partially offset by a further $12.6 million reduction in overheads. $6.5 million of the GP decline came from broadband. This incorporates the $20 million NBN margin erosion seen on the EBITDA bridge a couple of slides back and arose despite a $12.3 million increase in broadband revenue. As you can see, GP margin is down another 2 percentage points, reflecting the growing impact of NBN migrations with a strong margin that we do realize from on-net FTTB services not enough to offset the headwinds in the period.

Fixed voice GP was down by $7 million due to subscriber erosion as customers migrate to NBN bundles, all of the revenue from which is recognized within broadband. GP from our MVNO mobile operations decreased by $2.9 million, reflecting lower margins associated with our more aggressive offerings. And our other GP decreased by $8.7 million, driven by a lower contribution from the Tech2 business.

With regard to overheads, further excellent work is being done by Craig and his teams to further reduce operating costs. As you can see, there's been a $12.6 million reduction compared to the first half last year, and this comprised of $8.6 million further reduction in employment costs and $4 million reduction in Other overheads. The fact that these further savings have been able to be achieved is particularly impressive in light of the substantial increase in operational complexity that NBN is imposing on ourselves and all other ISPs.

Turning to the Corporate segment on the next slide. You can see that data and Internet revenues again showed good growth, driven particularly by the increased contribution from the VHA fiber contract. The decline in voice revenues reflects a continuing industry trend and the decreasing legacy iiNet revenues reflects the fact that new corporate sales are predominantly made under our TPG and AAPT brands rather than under iiNet.

Data and Internet revenue is up by $24.1 million, around $22 million of which came from the VHA fiber contract. The fact that Other growth looks relatively low reflects the fact that, within Data and Internet, there are wholesale revenues that have declined, including NBN wholesale revenue, which we are deliberately reducing due to the unsatisfactory margins that can be made in this space. You can see that the continued favorable change in the product mix towards our unmet products reflected in EBITDA growth, which is up by $23.8 million on revenue growth of $9.2 million.

Turning to our cash flow performance on Slide 8. 1H '19 operating cash flow performance at $410.7 million was slightly below EBITDA but still represented a 97% conversion rate. And this slight deficit in the half should be considered in the context of our almost $30 million overachievement in the second half of last financial year.

Our 1H '19 tax payment was substantially lower than 1H '18 because of the one-off tax paid in 1H '18 on the substantial capital gain realized in FY '17. Our BAU CapEx, which excludes any expenditure related to mobile, was lower than last year by $64.7 million due to the substantial completion of the build for the VHA fiber contract.

In January '19, we paid the second installment of $352 million in relation to the 700 megahertz spectrum acquired in 2017. The final remaining installment of $352 million is payable in January 2020.

CapEx incurred on our small-cell rollout in Australia in 1H '19 amount to $66.1 million and took the total incurred to just over $100 million. Due to the government's ban on use of Huawei equipment in 5G networks, the proportion of this expenditure that related to the purchase and installation of Huawei equipment has had to be written off within the $227 million impairment expense.

CapEx for our mobile network build in Singapore in the period was $39.8 million, taking the aggregate CapEx incurred up to $107 million. And an update on Singapore mobile follows in a couple of slides' time.

The substantial drop in the IRU/finance lease payments shown reflects the fact that the final repayment of the liability for old international capacity we inherited through iiNet occurred at the end of FY '18.

A large spectrum payment meant that we had net cash outflow in 1H '19 of $226 million, and that was funded, as you can see, on the next slide, by a net drawdown on our debt facilities of $237.8 million. Interest payments increased substantially due to the increase in debt compared to the same period last year to fund our spectrum and mobile investments.

The merger transaction costs paid were a little less than the $4.4 million recognized in the P&L, as some of the fees were already invoiced not paid as at 31 January. The increase in dividend payments reflects only that the DRP was not made available for the final FY '18 dividend paid during this period. The dividend declared was actually the same for both periods. And our cash balance was $38.2 million lower at 31 Jan than it was at the start of the period.

Our net debt balance was $1.57 billion at 31 January. This excludes our outstanding spectrum liabilities, the $352 million of the 700 megahertz, and $132 million for our share of the 3.6 gigahertz, both payable in early 2020. Our total debt facilities is $2.38 billion, rather easily sufficient to cover these commitments.

Our leverage ratio at 31 Jan '19, excluding the spectrum commitments, is 1.85x; approximately 2.5x including the spectrum commitments.

I'll now hand over to Craig.

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Craig Levy, TPG Telecom Limited - COO [3]

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Good morning. On the Corporate side, we're excited to release our new on-net fiber bundle. At the core of this product, based on our Fibre1000 symmetrical Internet product, which is the best-in-class enterprise-grade Internet service, now with expanded footprint coverage. We've added BizPhone into the bundle, all for $799. The bundle comes with 5 BizPhone services. The BizPhone product gives unlimited calls to mobile and fixed lines in Australia and comes with cloud PABX features, including call forwarding to mobile, Auto Attendant and voice mail to e-mail.

I'd like to thank our staff and management for their hard work and dedication over the period, and we finished the half with 1.92 million fixed broadband subscribers. During the half, we added 127,000 NBN customers. And today, in our Consumer business, we're proud to say that we have more than 1 million NBN connected customers.

NBN continues to be a very challenging environment. Costs on the NBN12 have seen the CVC increase substantially from roughly $12.75 to $17.50 per megabits per second is the price that it will end up in May. Should NBN continue its approach without any regulatory intervention, we will be probably having to stop selling our $60 product, and this is due to the fact that the costs have simply increased to a point which makes it difficult to continue to sell. So we do hope that there will be some intervention when it comes to this entry-level unlimited product.

As far as HFC is concerned, as the rollout size has increased, we have faced reschedules, impacting thousands of our customers due to shortfalls in technician capacity. Working with the NBN and the minister's office, we have started to see an improvement in relation to the NBN reschedules. We must pay close attention to NBN's performance in the second half. As Steve said, we expect the rollout to increase substantially, and this will have a massive impact if the reschedules are not brought under control. But as I say, we do see an improvement at this point with the reschedules.

Over the last few months, as the NBN rollout has moved more towards the East Coast and into metro areas, we've seen our Consumer division achieve more than a 20% market share, which shows strong signs in both the new and existing customer performance. Our TPG brand, which has been famous for incredible value, has now cemented its position in the NBN space as the leader when it comes to NBN average download speed. In February, we won the ACCC monitoring broadband report for average download speed, and this now makes it 3 out of 4 quarters where TPG has finished #1 on the ACCC program.

iiNet, our premium brand, continues to justify its position. The brand has won but 2 independent customer advocacy groups, both CHOICE and Roy Morgan. They've won the winner of the Best NBN Provider and Internet Service Provider of the Year with the most satisfied customers.

On our mobile side, in relation to our MVNO mobile base, we ended with 430,000 subscribers. In the half, we saw TPG grow. TPG was awarded Money Magazine Best Value, High Usage Plan.

On the NPS side, we're happy to see an improvement across all key divisions: TPG ended with 44.2, iiNet with 52.3, and our Corporate Division was 71.5. So good results on the NPS side across all divisions.

In relation to Singapore, our progress has been extremely positive. Our Singapore teams have done a sterling job. We have achieved a 99% outdoor coverage certified by the IMDA. To recap, we needed to achieve a 95% outdoor coverage milestone by the end of 2018 and more than 99% coverage by the end of 2019. So we actually achieved 99% outdoor coverage almost a year in advance.

As Steve said, so far, we have spent $107 million of CapEx, and we are inside our original CapEx guidance of $200 million to $300 million. And this is a range that our group is very much still comfortable with.

In relation to our trial uses, we opened up our trial user program in December 2018. Our trial was extremely conservative. We placed -- we had in place daily caps to ensure that we could monitor the network and the systems. We have now achieved a close to 100,000 trial customers who have connected to our network. And we have expanded our trials to 200,000 users by removing our daily cap. So although we have almost 100,000 users, we have now opened it up to 200,000 users.

We focus at the moment on our indoor coverage, MRT coverage and tunnel coverage, but the feedback on the ground has been excellent both in terms of the coverage the consumers are getting as well as the speed performance.

I'll hand back to Steve.

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

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Thanks, Craig. Last couple of slides. The board has declared an interim FY '19 dividend of $0.02 a share fully franked, in line with prior periods.

Now turning to guidance. In September, we provided guidance of BAU EBITDA for FY '19 to be in the range of $800 million to $820 million and for BAU CapEx to be in the range of $180 million to $220 million. Based on our first half results and the current outlook for the remainder of the year, we are pleased to reaffirm that guidance.

Our final slide is a very brief update on the planned merger with VHA. Following the release by the ACCC of the Statement of Issues in December, both TPG and VHA have continued to work closely with the ACCC as they carry out their detailed investigation.

We're currently expecting the ACCC will make its final decision in May. Other regulatory processes -- FIRB, FCC, CFIUS and IMDA -- have all been progressing in parallel.

So ladies and gentlemen, that is the end of the presentation. There are a couple of appendices to the slides, providing some additional information regarding ARPUs and fixed voice subscribers and acquired customer base intangible amortization profile.

But we'll now be pleased to take a few questions. So I'll hand back to the operator to go and make 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 is from Eric Pan from JPMorgan.

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Eric Pan, JP Morgan Chase & Co, Research Division - Analyst [2]

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Thanks for taking my questions. Three for me, one on the Australian mobile venture. You've announced a cessation of the mobile network rollout there, but what is your strategy going forward on a stand-alone basis for the company in general if the ACCC decision does not go through? And if the merger does go through, should we expect you to continue to spend the original $600 million CapEx under the merged entity? And then secondly, on Singapore. What's the time line for commercial launch there? And when should we start building in the associated OpEx in our model? And how much capital will you need to see the Singapore venture if the merger does go through? And then lastly, can you just give us an update on the FTTB rollout in terms of the premises passed and how has the penetration of the FTTB improved over time?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [3]

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Thanks, Eric. Steve Banfield here. In relation to your first question, the cessation of the mobile network. We have ceased the network. The board is reviewing all options. There are obviously multiple factors for them to consider not just technical but also financial. So there is no update to provide at this time. In terms of the commercial launch in Singapore, the trial is a 12-month free trial. The first trial users came onboard in late December 2018. So the first time we would be charging any customers would be the end of 2019. So in terms of the P&L and recognizing OpEx, our commercial launch that we would expect to be at the end of calendar year 2019. In relation to the funding of the Singapore entity on separation if the merger proceeds and if we separate Singapore, it will be funded to meet its obligations, to complete its network rollout and to fund its operating notice effectively through to profitability under our business plan. Craig, FTTB?

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Craig Levy, TPG Telecom Limited - COO [4]

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On the FTTB side, the rollout, we did see a slowdown in relation to the amount of multidwelling buildings excavated or made ready. This was mainly because our fiber teams were focused on our Australian mobile project as well as our corporate fiber installations. We have now reallocated those resources back onto the Fiber-to-the-Building projects that we should see an acceleration again in the rollout of premises. In relation to how we're going, we are quite satisfied with the share that we achieved in these buildings. We used both the TPG brand as well as the iiNet brand to sell into these locations. There is a large percentage of the locations that also have NBN coverage, so we are competing against the various retail service providers to sell NBN in those locations, but our product does offer superior speed to the NBN as well as a superior cross-point. So we are confident that FTTB will continue to give consumers an excellent experience for great value for money.

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Eric Pan, JP Morgan Chase & Co, Research Division - Analyst [5]

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And in terms of the total premises passed so far?

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Craig Levy, TPG Telecom Limited - COO [6]

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We haven't -- it hasn't really changed substantially since the last time that we've broken out that.

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Operator [7]

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Your next question is from Roger Samuel from CLSA.

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Roger Samuel, CLSA Limited, Research Division - Research Analyst [8]

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I've got 3 quick questions. Firstly, just on Consumer. The margin was -- it was really impressive, 29%. I'm just wondering how much more cost savings can you achieve in the Consumer business? And secondly, in Corporate. Looks like NBN is going after the enterprise customers as well. And you mentioned in this result that there is a mix shift towards on-net buildings. So are you concerned that NBN may be encroaching into your territories as well and potentially you have to use NBN tails? And certainly, just a housekeeping question. Just wondering how much of the cost of the spectrum that you capitalized in the first half '19 and how much interest that you capitalized as well and how much should we be expensing going forward.

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Craig Levy, TPG Telecom Limited - COO [9]

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Just going to the Consumer side, on the cost savings, we are always looking to refine our model and make it as efficient as possible. We do believe that there is room for improvement. We are currently undertaking a automation project inside of our Consumer business where we are automating as much as possible the supply and provision of NBN services, in particular, due to the low margin that we now yield from the product. So we do expect that the automation projects will assist, particularly on the iiNet side of the business.

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David Teoh, TPG Telecom Limited - Executive Chairman & CEO [10]

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On the Corporate side, now NBN does -- starting to come into the corporate market, but there is -- it does affect some of our customers, but also, it creates a lot of opportunities because the customer -- a lot of customers are starting to look around, so it creates a lot of opportunity for us. Our fiber network is very expensive, so the NBN product does complement the -- our fiber infrastructure. So in effect, we can provide good solutions for the customer using majority of TPG fiber products.

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Roger Samuel, CLSA Limited, Research Division - Research Analyst [11]

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Yes. So David, just to follow on that. So you don't see any change or a mix shift away from on-net to off-net as a result of the NBN rollout?

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David Teoh, TPG Telecom Limited - Executive Chairman & CEO [12]

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No. I think we expect to move more to the on-net than the off-net. I think the off-net to certain areas where we do not want to build because of high cost, then we look at the other providers.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [13]

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Roger, your third question. So the spectrum amortization will be at $108 million per annum. That's the increase. And with regard to interest, the amount of interest capitalized in the period is actually set out in Note 6 to the accounts. There are 2 components to it. There's the interest on the deferred 700 megahertz installment, the $16 million that will be expensed between Feb '19 and Jan '20 when we pay that final installment. So that's interest on that deferred repayment plan. And then, there's, obviously, facility interest as well. So I hope that makes sense. There's a bit more detail in Note 6 -- sorry, Note 8 to the account.

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Operator [14]

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Your next question is from Tom Beadle from UBS.

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Thomas G. Beadle, UBS Investment Bank, Research Division - Associate Director and Research Analyst [15]

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So I just had 3, if that's okay. Just, firstly, on Corporate, a follow-on from Roger's question. Could you just talk about the extent to which the Vodafone contract drove growth and maybe what the underlying data and Internet growth was? And also, I'm just seeing the Head of your Corporate business left recently, just wondering how his departure has impacted the business. The second question is just on the consumer broadband subscriber numbers. I understand the comments about the $60 price point, but does the decline in total subscribers suggest that you're not going after low-margin NBN subscribers as hard as you maybe could. And then just finally, just around the Huawei ban and the decision to stop rolling out your mobile network. I guess, there's estimates out there that the Huawei ban might add 30%, maybe 50% to the cost of your equipment, and I'd estimate, just given the board decided to cease the rollout, this means that the cost to roll out the network might have increased by about $1.4 billion ex spectrum, so that's obviously a lot more than 50%. So just wondering if you could talk about the moving parts there.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [16]

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Tom, Steve Banfield here. I did actually gave those figures as I went through the presentation on the Corporate segment. You see the data and Internet revenues up by $24.1 million, and as I said, $22 million of that came from the VHA fiber contracts. The fact that the other growth looks relatively low reflects the fact that we've been deliberately reducing some NBN wholesale revenue. In relation to Mark Rafferty's -- Mark Rafferty resigned and left in January. There's no impact to our Corporate business from that. We have very strong heads of sales heading up our enterprise, wholesale and corporate teams. So it's just business as usual on that front.

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Craig Levy, TPG Telecom Limited - COO [17]

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On the Consumer side, we're still advertising and selling the $60 product from a TPG consumer perspective at this point of view. As you'd see in our advertising, we are more focused towards our position around speed. The market is extremely tough and very competitive on the NBN side. We've had to maintain pricing discipline. We take into consideration our cost to managing, our cost to serve. And there's some providers out there which we think are not really making any money on their products, and so we can't chase business by keep on lowering pricing. So we have to be very disciplined at this particular time. We've seen some of the legacy brands become a little bit tough, but we do have strategy to improve on that moving forward.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [18]

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Tom, in relation to your question about Huawei, as I've mentioned in response to an earlier question, the board is evaluating all of these sorts of matters, but certainly, the Huawei ban is -- was very disappointing for us. And they do offer, in our opinion, the best technology and the best pricing. So the -- I said there are financial factors which affected that decision to cease as well, and the increased cost of alternative options is -- was one of those.

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Thomas G. Beadle, UBS Investment Bank, Research Division - Associate Director and Research Analyst [19]

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I guess, sort of the crux of that question was also just, I guess, what could the impact be on Vodafone's 5G rollout cost as well? So yes, just sort of maybe talk to that because, obviously, you would have done that work yourself.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [20]

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Tom, I can't make any comments in relation to Vodafone's business rollouts.

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Operator [21]

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Your next question is from Kane Hannan from Goldman Sachs.

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Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [22]

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Just 3 from me as well, please. Just firstly on the merger with Vodafone and the ACCC review, just interested if there's any comments you guys can make around what's been holding this process up and given you're expecting the outcome in May, whether TPM has now completed its submissions there. And then, 2 more for the housekeeping ones. Just in terms of the Corporate business, and I take your point around moving away from that NBN wholesale business, just be interested in how much of that is actually left in the base so how we should be thinking about where the margins are tracking in the second half and into '20? And then, finally, just in the MVNO mobile base. Can you just update us on the split across the Optus and Vodafone networks and where that stands today, please?

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Tony Moffatt, TPG Telecom Limited - General Counsel [23]

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Kane, it's Tony Moffatt here, General Counsel. The ACCC, obviously, is taking the review of this merger very seriously. It's a significant merger in our industry. It should be of no surprise that they want to spend quite a lot of time investigating all of the various moving parts, and as you'll appreciate, there are quite a lot of them. That's involved the production of a very substantial number of documents and the interviewing of witnesses and such like. We -- from our perspective and what we understand, we're pretty much through all of that now. And so it's now just down to the ACCC to finalize its review of those documents and the statements that have been given before coming to a conclusion on an informal basis as to what the (inaudible) clearance.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [24]

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Kane, your second question about corporates, all I can confirm is that, yes, we do still have some wholesale NBN business left within those numbers. I can't quantify exactly how much, I'm afraid. But there is still some more to come off in forthcoming periods.

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Craig Levy, TPG Telecom Limited - COO [25]

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And on the MVNO side, we have seen an increase on the TPG subscriber base, now more than 300,000 mobile subscribers inside of the MVNO base. And the pattern that we continue to see is that the Optus subscribers soften and the VHA subscribers grow.

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Operator [26]

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Your next question is from Entcho Raykovski from Credit Suisse.

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Entcho Raykovski, Crédit Suisse AG, Research Division - Research Analyst [27]

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A couple of questions from me. Firstly, you've touched on this but just wanted to see if you could provide a confirmation whether reselling the entry-level NBN12 product is now loss-making after the cessation of focus on 50 or if you can still make a level of margin on that product, particularly when you take into account overheads. And then secondly, linked to that, given the competitive environment that you've talked about in broadband, do you think you can realistically lift pricing and abandon the $60 product? And finally, looking at the decision to cease the Australian mobile network rollout, does that impact any potential synergies from the transaction with Voda?

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Craig Levy, TPG Telecom Limited - COO [28]

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Just going back to the reselling of the NBN12 product, so prior to the focus on 50, as I said earlier, our cost price per megabit per second is roughly $12.75. And then, as the focus on 50 program was removed, we found ourselves in a world now where there's a dual CVC construct, the bundled CVC supporting the 50- and the 100-MB products, and we have the legacy basic CVC handling the NBN12 product. We continue to see the cost per MB increase on this. And when it comes to May, it will be best at roughly $17.50, which is an enormous cost increase when you think about it on a per megabit per second basis, especially when the intention of the NBN was to provide consumers with an equivalent ADSL product at an entry-level perspective. If there isn't any intervention, when we take our cost of process and manage into account, it makes it very difficult for TPG to compete and offer this product, and the main reason for it is because the margin is reducing all the time. So it would be more beneficial for us to then focus on the NBN50 and other products. We would hate to see this happen, and that's mainly because we believe the poorer demographic out there deserves to have an affordable broadband product, especially the amount of money that taxpayers have put into the NBN, we should have a reasonable entry-level product out there, and it would be a great shame if we have to see the price of broadband increase. So we're still selling the product, but we hope something is done about the cost. In relation to competition, it's still crazy out there. We see people doing some things that just don't make economical sense. And as I was saying earlier, we maintain discipline when it comes to our cost structure. We feel that we've got strong products out there in the market, both with the iiNet brand, which includes the entertainment bundle, and we've positioned our NBN50 products on the TPG side in a competitor space. So We're confident in our ability to position our products. We'll be focusing on the small business side moving forward. We see this as a market of great opportunity. We expect a lot of small business competition to take place on the NBN side, and so we'll be using our various brands in the small office, home office and small business sector to compete. And what we're going to be doing is we're going to be coming up with some exciting bundles that will include NBN as well as our other products that we'll add on top of it, and we'll provide more details in the incoming time about it.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [29]

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And to your final question about the mobile network that we've built, the spectrum that we have and the mobile assets that we have and have built, we expect to be very complementary to the VHA network should the merger proceed. We have a large number of small cells installed in densely populated areas, which would be complementary to other parts of the VHA network.

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Operator [30]

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Your next question is from Fraser Mcleish from MST Marquee.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [31]

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Great. Just if the vertical merger doesn't proceed, do you still see an opportunity to use your mobile spectrum for home access? And do you have enough small cells out there already to sort of have a sort of meaningful home access network? And then also, just -- will there be anything stopping you selling your spectrum under the sort of license rules for that spectrum? Or can you transfer it? And then finally, Steve, can you just talk -- your D&A was -- in the half, was actually down slightly, I think. Saw your depreciation. And despite the fact you turned on the Vodafone fiber network, just what's driving that and what work should we expect D&A sort of in the second half and going forward?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [32]

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Fraser, Steve here. We've ceased our mobile network rollout. The board is considering all options. What does all options mean? I mean, there's really 3 scenarios. Exploring is there a use case for these assets which is technically and financially feasible. The second scenario is merger. The third scenario is realizing the value of these assets through other means, such as selling them. All those options are being considered by the board.

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Tony Moffatt, TPG Telecom Limited - General Counsel [33]

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Kane -- sorry, Fraser, it's Tony again. In terms of the licenses for the spectrum, the spectrum itself, there's a variety of ways in which it could be used, including disposing of the spectrum asset. There may be some process it has to go through to complete that, but it's something we believe can be done.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [34]

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Fraser, your questions about D&A, yes, you'll see that our PP&E CapEx for 1H '19, if you strip out the intangible element of that, which is the Southern Cross capacity, was about $68 million, and our PP&E depreciation was about $67 million. So they're virtually in line now. How is it that depreciation hasn't really stepped up over the last few reporting periods despite the surge in CapEx over that couple of year period is explained by the fact that, if you go back several years, we were spending -- we were investing a lot in these lands, which were being written off over a short period and had a high depreciation expense. Those have all been, for obvious reasons, pretty much written down close to 0 now. And so you have that -- that has been offsetting the growth in depreciation, which had been coming through from our fiber CapEx, noting that our fiber is depreciated over much longer periods than the assets that have become fully depreciated. That makes sense? So those are the kind of the competing forces which have served to keep the D&A -- sort of depreciation from increasing. In relation to the outlook for D&A, the things which you need to think about are, firstly, you can see in our capital commitments note, we still do have some remaining Southern Cross commitments, about USD 36 million payable over the next 3 years, and that will be -- certainly the amortization of that will come in, and that's amortized through to, I think, the end of the last -- the asset, is around about 2030. You'll obviously have the Singapore CapEx depreciation coming in, which will probably start, as I mentioned earlier ramped on the commercial launch at the end of this calendar year. We've provided guidance of $200 million to $300 million of CapEx all up for that project, excluding spectrum, and that will be depreciated roughly over 10 years. So you have $20 million to $30 million per annum of depreciation on that when that comes in. And then the Singapore spectrum, which is about $130 million, that's amortized over about -- I think the license is about 14 years, the license period. So it will be about another $9 million per annum amortization for that. So that and the Australian spectrum, which I mentioned earlier.

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Operator [35]

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Your next question is from Brian Han from Morningstar.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [36]

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I know the current situation is a little fluid, but do you currently have any input into -- the phone is guiding about upgrading to 5G and whether your fiber and/or cell infrastructure is somehow being incorporated into Vodafone's thinking process.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [37]

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Brian, Steve here. Today, the 2 companies are still competitors. There is no operation possible between the entities. Obviously, that can be -- we can do commercial business together but no cooperation until such time as the ACCC approves us to merge.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [38]

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Okay. And also, Stephen, now that your mobile network ambitions have been (inaudible), would you be giving us an idea as to your future dividend payout or capital management plans after the (inaudible) decision in May?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [39]

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After the ACCC decision in May, if the merger proceeds, then mergeco is already provided the market with guidance in relation to dividends. If the merger is blocked, we'll have to -- well, that would be something for the board to consider and -- consider at that time. So I don't have anything I'm able to share at this time.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [40]

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Right. But that consideration will be dependent on the 3 options that you laid out before that had to do with the spectrum?

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

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I'm sure those would be important factors. Yes.

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Operator [42]

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Next question is from Ian Martin from New Street Research.

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Ian John Martin, New Street Research LLP - Senior Telecommunications Analyst [43]

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Pretty tough environment. I think you guys seem to be managing it better than most, but, gee, it's tough out there. Just wondering in relation to your comments on the savings [heat] challenge. It is a very inefficient price structure, and I wonder whether you've perhaps canvassed options for changing that with the NBN or with the government. And in particular, you've got an enormous amount of fiber yourself, so surely, there is an opportunity there to potentially look at using more of your own fiber for traffic aggregation rather than the NBN fiber. I just wonder whether any of that's been canvassed with either the NBN or the government? And secondly, I'm interested just to explore the opportunities that David mentioned in reselling NBN in the corporate market. I just wonder how substantial at this point the copper access is in the corporate market. How much of that is locked or being migrated to NBN? And over time, I would like to see a bigger mix of off-net in the corporate market as you look for those resell opportunities in the complementary opportunities in that corporate market and, in particular, how that might change if you're able to use more of your own fiber backhaul?

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Craig Levy, TPG Telecom Limited - COO [44]

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Yes. In relation to the NBN and the CVC, I think we'll start with your second point first around aggregation. We have not had discussions with the NBN in terms of, for example, replacing things like CVC with our own top fiber or group fiber assets. It hasn't been in discussion. We do note that if you take one of the ADSL2+ customers that TPG provides the product to today, it's roughly an uncongested backhaul into the core of our network, whereas, those customers who moved to an NBN12 are challenged with the CVC construct, which is -- works on SIM to cell ratios. So it is definitely a bottleneck or a problem on the NBN side when you have a cost per megabit to price in construct. What we have said to the NBN is that we would like to see a fixed cost around the entry-level bundle that allows us to sell an unlimited plan. The actual speed is also an interesting point. There's some people out there in the market that have said the starting place for an entry-level NBN product should be the NBN25 speed. I think that's a good idea because at least you're giving the citizens out there the use of a national broadband network that performs better than ADSL2+ as opposed to worse than ADSL2+. So I -- we are extremely focused on the cost side, and we'd like to see a fixed cost and more on the recommendation side, that it would be great to have maybe NBN25 as the starting point. But if I were to keep NBN12 as the starting point, we could live with that so long as the cost price is fixed and we don't have the $17.50 cost per MB, especially when we've seen the carriage of video on the network and services like YouTube high definition or even Netflix high definition. We're seeing consumers use more and more bandwidth all the time. And having a usage-based model around the NBN on an entry-level plan, it's just not a sustainable model.

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Ian John Martin, New Street Research LLP - Senior Telecommunications Analyst [45]

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And on the Corporate side, what part of the business at this point is off-net?

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David Teoh, TPG Telecom Limited - Executive Chairman & CEO [46]

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Ian, this is David here. On the Corporate side, all our focus is to sell on-net product because of our extensive fiber infrastructure in our Fibre 1000 and our Fibre400. So all the focus is trying to convert all our customer to our fiber product. So that is what we are focusing now. And we are adding value, like the BizPhone PABX product, giving 5 BizPhone to the Fibre 1000 and also the Fibre400. So we are adding value to our fiber product, and that is an excellent value and is an excellent product. So we're trying to convert to all the -- our own infrastructure. And there are areas and also price point where it's too expensive for the lower end, then we're trying to resell the NBN. But the main focus is to sell the on-net product. That's our focusing -- that's our focus at the moment.

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Operator [47]

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We don't have any other questions as of the moment. Presenters, please continue.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [48]

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Okay. Operator, if that's the last question, thank you, everybody, for joining us today. That's all from us. Thank you. Bye.

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Operator [49]

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Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.