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Edited Transcript of TPM.AX earnings conference call or presentation 4-Sep-19 11:00pm GMT

Full Year 2019 TPG Telecom Ltd Earnings Call

North Ryde Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of TPG Telecom Ltd earnings conference call or presentation Wednesday, September 4, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig Levy

TPG Telecom Limited - COO

* Nick Pachos

* 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

* Eric Pan

JP Morgan Chase & Co, Research Division - Analyst

* Fraser Mcleish

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

* Kane Hannan

Goldman Sachs Group Inc., Research Division - Research Analyst

* Nick Harris

Morgans Financial Limited, Research Division - Senior 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 FY '19 Results Presentation. (Operator Instructions) I'd now like to hand the conference over to your first speaker today, Mr. Stephen Banfield, Chief Financial Officer. 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, everybody. Welcome to the TPG Telecom FY '19 Results Presentation. My name is Steve Banfield, and with me are David Teoh, Craig Levy, Tony Moffatt and our new head of Corporate Division, Nick Pachos. 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 FY '19 compared to the prior year. It shows business as usual, or BAU EBITDA, the basis on which we provided guidance, of $823.8 million, exceeding the top end of our guidance range of $800 million to $820 million. Given the extremely tough conditions the fixed line industry is facing currently due to the NBN and the profit headwinds that that's brought TPG in the year, we believe that a decline of less than 1% in BAU EBITDA in FY '19 is a respectable achievement.

Regarding our reported results, most people would be aware that following our decision in January of this year to cease our Australian mobile network rollout, we had to recognize a large impairment expense relating to our spectrum and mobile assets which has adversely impacted our reported NPAT and EPS results.

Regarding underlying NPAT and EPS, as we preempted at the half year, as a result of having ceased our Australian mobile network build from the start of the second half of FY '19, we have had to start amortizing our Australian spectrum licenses and cease capitalizing interest expense related to the Australian mobile project. These 2 changes have led to a significant step down in underlying NPAT and EPS starting from the second half of FY '19, resulting in a 13% decline in both for the year.

One other minor matter to note is that the first-time adoption of the new AASB 15 revenue accounting standard has led to some minor restatement of the prior period comparatives. Details of which are set out within the accounts.

The next slide provides a reconciliation between the reported and underlying profit numbers. The 2 reconciling items between reported and underlying EBITDA are: transaction costs relating to the planned merger with VHA, which amounted to $9 million after the end of July; and the Australian mobile impairment expense of $236.8 million. This is $9.4 million higher than the amount included in the half year accounts because, as we advised back in January when we ceased our rollouts, we were already committed to some further network rollout CapEx, a portion of which ultimately needed to be impaired once it was incurred in the second half of FY '19.

The reconciliation also shows the adjustment to reach BAU EBITDA, subtracting the noncapitalized OpEx in Singapore for the year and the Australian mobile OpEx incurred in the second half after the cessation of the mobile network build. This expense represents the recurring rental costs for the small cell sites that we had installed.

Slide 4 shows the comparison of our actual BAU results compared to guidance. BAU EBITDA was above the top end of our guidance range, and this is achieved with a BAU CapEx figure in the middle of the range that we guided to. So both positive outcomes compared to guidance.

On Slide 5 we provided a bridge between the BAU EBITDA for FY '18 and FY '19 presented in the same format in which we provided guidance for FY '19, so you can see how we performed against each element of our original guidance. As you can see, the group experienced gross profit headwinds in the year of $47 million attributable to DSL services that migrated to NBN in the year, and $14 million from home phone services being canceled as customers migrate to NBN bundles. And you can see that both of these headwinds were reasonably consistent with the expectations we had when we set our guidance.

You can also see that our other EBITDA growth in the year of $57 million was at the top end of our guidance range. This other growth was driven by the performance of the Corporate Division, particularly through the contributions from the VHA fiber contract, growth in our on-net consumer services and by continued OpEx efficiency savings across the group.

We have also noted here that netted off within this other growth of $57 million was a substantial decline of approximately $15 million in the profitability of our existing NBN subscriber base, which we preempted at the half year, caused by the fact that the economics of NBN deteriorated further in the second half following the changes to NBN wholesale pricing that took effect from around December 2018.

The next slide shows a breakdown of revenue and EBITDA by segment. As can be seen, Consumer segment's EBITDA fell by $41.8 million due primarily to the NBN headwinds. But on the positive side, Corporate Division EBITDA increased by $37.4 million in FY '19. That's an EBITDA margin which grew a further 4 percentage points to 48%. The next couple of slides provide more detail on this for each segment.

Slide 7 shows the Consumer segment results analyzed into our customary product categories. You can see that the $41.8 million EBITDA decline comprised a $62.6 million GP decrease, partially offset by a further $20.8 million reduction in overheads. $43 million of the GP decline came from broadband. This incorporates the $47 million margin erosion from DSL to NBN migration as well as the $15 million deterioration in profitability of existing NBN services. But both of which are partly offset by GP growth from FTTB and other on-net services and other cost savings.

You'll be able to calculate by reference to our half year presentation that the first half/second half split of this $43 million broadband GP decline was $7 million in the first half and $36 million in the second half, reflecting the accelerated DSL to NBN migration in the second half of FY '19, coupled with the increased NBN wholesale cost per subscriber when NBN's new wholesale pricing took effect in December.

Fixed voice GP was down by $13 million due to subscriber erosion as customers migrate to NBN bundles, and GP from MVNO mobile operations decreased by $3 million. The other GP decrease of $3.6 million principally reflects a lower contribution to the Tech2 business in FY '19, albeit with a slight improvement in the second half of the year.

With regard to overheads, you can see the continued efforts to drive operating cost efficiencies resulted in a $20.8 million further reduction in overheads compared to last year. This comprised an $11.6 million further reduction in employment costs and $9.2 million further reduction in other overheads.

Turning to the Corporate segment on the next slide, you'll see a continuation of the theme for this division of strong profit growth being driven by margin expansion, as the Corporate segment continues to derive benefits from the group's investments in fiber infrastructure.

Corporate Division EBITDA growth was $37.4 million despite revenue growth being a modest $4.6 million. The modest revenue growth is due to ongoing declines in wholesale voice and legacy iiNet corporate revenues. And also because within data and Internet, strong sales of our very competitively priced on-net services, such as Fibre1000, continued to replace declines in revenue from more expensive, low-margin off-net services.

Revenue from the VHA fiber contract is included within data and Internet and accounts for most of its growth. And so excluding its contribution, data and Internet revenue growth itself would appear underwhelming. However, it's important to understand a couple of things about this.

First, within data and Internet revenues, there continues to be deliberate decline in very low-margin wholesale NBN revenue. And secondly, something we're very pleased about is the gross profit growth from data and Internet revenues which far exceeds the revenue growth. In fact, data and Internet revenues, excluding the VHA contract, generated approximately $16 million out of the overall GP growth for the division of $31 million. And this reflects the continued favorable change in product mix towards our on-net products. And pleasingly, on-net fiber sales momentum has actually accelerated in the second half of FY '19.

Turning to our cash flow performance on Slide 9. You can see that FY '19 operating cash flow performance was again strong, again exceeding EBITDA this year. Our FY '19 tax payments was substantially lower than FY '18 because of the one-off tax paid in FY '18 on the substantial capital gain the group realized in FY '17. Our BAU CapEx, which excludes any expenditure related to mobile, was lower than last year by approximately $60 million due to the substantial completion of the build for the VHA fiber contract last year.

In January 2019, we paid the second installment of $352 million in relation to the 700 megahertz spectrum acquired at the auction in 2017. The final remaining installment of $352 million is payable in January 2020. CapEx incurred on our Australian mobile network in Australia in FY '19 amounted to $86.1 million and took the total incurred on that rollout to approximately $125 million.

As we advised at the half year, we were already committed to certain further expenditure when we ceased our rollout, which is why the CapEx increased by about $20 million in the second half of the year. Due to the 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 $237 million impairment expense.

CapEx for our mobile network build in Singapore in the period was $80.1 million, taking the aggregate CapEx incurred up to $147 million excluding spectrum. An update on Singapore mobile follows in a few slides' time.

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

Turning to nonoperating cash flows. The merger transaction costs paid were a little less than the $9 million recognized in the P&L as some fees were only invoiced and not paid as at 31st of July. Interest payments increased due to the fact that our debt increased to fund our spectrum and mobile investments. And the increase in dividend payments reflects only that the Dividend Reinvestment Plan was not made available for the dividends paid during FY '19. The dividends declared were the same in both periods.

Turning to our net debt. At 31st of July, our debt position was $1.45 billion. In addition, we have $484 million of spectrum liabilities, a $352 million final installment for the 700 megahertz spectrum and a $132 million payable for our share of the 3.6 gigahertz spectrum acquired by our JV with VHA. These are both payable in early 2020 and our existing debt facilities are sufficient to cover these commitments. Inclusive of our spectrum liabilities, our net debt at 31st of July was $1.94 billion, approximately 2.4x our FY '19 EBITDA.

I'll now hand over to Craig to talk a little bit more about the Consumer Division.

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Craig Levy, TPG Telecom Limited - COO [3]

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Thanks, Steve. And good morning, everybody. Our Consumer Division finished the year with 1.926 million fixed broadband subscribers. During the year, we added 358,000 NBN customers. If we analyze the performance of the NBN in the first half, we've got 127,000 subscribers, and in the second half we experienced an increase to 231,000 new subscribers on the NBN.

This was brought about mainly because of an increase in the ready-for-service footprint, the rerelease of HFC and the rollout moving towards metro-based areas. In addition, we added 10,000 fiber to the building customers, which brings our on-net fixed broadband customers to 117,000 customers. Just to go over it, these customers are made up of our VDSL broadband customers in Canberra, our HFC customers in regional Victoria and our fiber to the building customers in metro areas.

We are proud to be the winner of the ACCC Measuring Broadband Report for the category of NBN average download speeds. We have now been rated #1 five times out of the ACCC's 6 quarterly reports published.

A new category added to the ACCC report during the period is daily outages lasting over 30 seconds. This new category shows that TPG customers measured on average at the least amount of daily outages, making our NBN reliability very favorable and impressive within the industry. TPG now offers incredible pricing, excellent performance when it comes to speed and great Internet reliability for our customers.

What is proving very popular amongst small business customers is our BizPhone product. Our BizPhone product is an excellent solution for small businesses when they have to make decisions about the NBN and moving the existing telephone services. We ask our customers to bring their phone numbers to our cloud and we provide them, with the handsets included, unlimited calls to all Australian mobile numbers and fixed line numbers as well as full PABX functionality for $29.95 per service. We're seeing this product grow incredibly and it's having a lot of momentum amongst the small businesses.

During the year, our premium brand, iiNet, was voted by Roy Morgan as Australia's #1 Internet service provider of the year. We're very proud of this achievement, and this is a testament to both our staff as well as what customers think of our brand. During the year, our MVNO customer base ended at 410,000 subscribers. This is reflective of the increased competition and intensity within the mobile industry.

Moving over to our Net Promoter Scores, both the TPG Consumer Division as well as the iiNet Division experienced the year-on-year improvement when it came to NPS. This is impressive because of the cost-out that we gained in the business. And TPG Consumer ended at 43.6, iiNet, 51.7 and a very respectable result in our Corporate and Wholesale divisions with 69.6.

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

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Thanks, Craig. Turning to Slide 19. In Singapore, we easily surpassed our outdoor service coverage milestone of 95% at the end of 2018, and July 2019 testing measured our outdoor coverage at 99.69%. Our indoor coverage is already good and steadily improving and on track to meet the IMDA milestones, and work on MRT and tunnels coverage is progressing.

Sign-ups to our free trial are now close to 300,000, and we continue to get positive feedback on network coverage and quality. We've also launched free unlimited roaming to Malaysia and Indonesia, with India to also be added this month.

As mentioned earlier, aggregate Singapore CapEx incurred excluding spectrum to the end of July '19 was $147 million. This compares with the $200 million to $300 million guidance that we originally provided for the entire network build, and we remain comfortable with that guidance.

Turning to dividends. The Board has declared a final FY '19 dividend of $0.02 per share, fully franked, in line with prior periods.

Turning to Slide 21 and the outlook for FY '20. We have provided guidance for the year ahead, notwithstanding that the proposed merger with VHA could complete during the year. This guidance takes no account of the merger nor the associated transaction costs. We again refer to the guidance we have provided as business as usual, or BAU for short, because it also takes no account of mobile operations in Singapore nor the ongoing OpEx associated with the mobile sites installed in Australia, i.e., the guidance relates just to our core existing Consumer and Corporate Division operations.

The guidance also takes no account of AASB 16 which takes effect from the start of FY '20. AASB 16 will have the effect of bringing certain operating leases onto the balance sheet as a liability and a right-of-use asset. The right-of-use assets will then be expensed in the income statement through amortization and interest expense. This will have the effect of increasing EBITDA as certain costs previously recognized within EBITDA will move into amortization and interest expense. The exact amount of this impact is currently unknown, so guidance is provided on a pre-AASB 16 basis.

Turning to the EBITDA bridge on the next slide. FY '20 is expected to be the year that the group experiences the greatest financial impact from customer migration to NBN, with combined headwinds from residential DSL and home phone customers moving to NBN expected to be around $85 million.

In addition, the annualization of the deterioration of profitability of existing NBN customers experienced in the second half of FY '19 as a result of increased NBN wholesale cost per user is forecast to create a further NBN headwind for FY '20 of approximately $25 million. But by the end of FY '20, the group expects to have less than 15% of its residential broadband customer base remaining on ADSL.

Operating cost efficiency programs across the group are expected to continue to deliver savings, and another year of growth is forecast for the group's Corporate Division. But in this peak year of NBN headwinds, organic growth for FY '20 is not expected to be sufficient to offset the NBN headwinds. And consequently, BAU EBITDA is expected to be in the range of $735 million to $750 million.

Our final slide is a very brief update on the planned merger with VHA. Following the ACCC decision to oppose the merger, proceedings were lodged with the Federal Court in May to seek orders that the merger will not have the effect or likely effect of substantially lessening competition.

In relation to the merger and TPG standalone strategy, given the proximity of the court case, we do not intend to say a great deal. What we will say is this, we continue to believe that the merger will be the best outcome for consumers, competition in the telecommunications market and TPG shareholders.

The proceedings are scheduled to run in Melbourne for 3 weeks commencing on the 10th of September. We are very pleased with our preparation. Once the hearing is finished, we'll be in the hands of the court as to when judgment will be delivered. Other regulatory decisions, including FIRB, CFIUS and the IMDA, are pending the outcome of the proceedings.

Regarding the status of our mobile network, the position remains as stated in our announcement of 29th of January. We have ceased the rollout of our mobile network following the Huawei ban, and we can see no circumstances that would lead us to change that decision.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first 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 [2]

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I just had 3, if that's okay. Just the first one's around guidance. So you're saying that FY '20 will be the peak year for NBN impact. So I'll just -- I know you're not giving guidance for FY '21, but just wondering how we should think about that. And in particular, just are you assuming an impact from the NBN in your Corporate Division?

Just the second question's on costs. You've been doing a really good job of managing cost a long time now and -- but are there any fixed overheads that you can take out once the NBN is rolled out and once you've migrated all of your DSL subscribers over? And if so what could the size of these savings be? And just finally, just a quick accounting question. If you could -- just wondering if you could talk to the likely impact of AASB 16 on your FY '20 numbers.

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

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Thank you, Tom. Well, as you say, I can't give you a forecast beyond FY '20. But as I said, we expect less than 15% of our consumer broadband base to still be on DSL at the end of FY '20. In fact, my best estimate is closed around about 13%. So we'll still have the impact of the migration of those subscribers to absorb over FY '21 and '22. And in FY '21, we will obviously also have to absorb the full year impact of the migrations that occur during FY '20, and there will still be around $10 million of fixed voice GP to be eroded beyond FY '20.

But going to kind of another part of your question, partly offsetting those headwinds in those future years, we will expect to save substantial costs, particularly in TEBA and the TEBA costs, the cost of having our DSLAMs installed in Telstra exchanges, so there should be substantial savings there. And we do expect continued savings from back office simplification and marketing costs which are -- which should flow from the end of the NBN rollout. I'll then -- I'll let Nick make a comment about your question about NBN and Corporate.

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Nick Pachos, [4]

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The -- all the perceived erosion in the NBN impact in the Corporate Division, we don't expect -- it's baked into the numbers that have been published today. In terms of the future erosion, we continue our on-net strategy with our on-net fiber. And in fact, the NBN is agitating the market and we actually see that as a positive thing as the NBN complement our network and actually increasing the opportunity within our Corporate Division.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [5]

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And Tom, your final question was about AASB 16, which I sort of spoke to when we were talking about the guidance. And as I said, the exact impact on the P&L isn't known at this time. So we -- so I haven't provided that figure. If you look in the accounts and the notes to the accounts, you will see that there is an estimate provided of the balance sheet impact in terms of the quantum of operating leases which will come onto the balance sheet.

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Operator [6]

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Our next question comes from Kane Hannan from Goldman Sachs.

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Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [7]

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Just 3 from me as well, please. Just on that BAU CapEx next year, just comment on what's driving that 10% step-ups in sort of the core business next year. And then in terms of your current fiber reach, just comment on whether you're happy with where that is today and it's more around upgrading capacity on the network or you're looking to continue to expand your fiber reach. And then finally, just on Singapore, can you comment on how we should be thinking about the earnings profile of that business into FY '20, and whether there's any change in your expectations of the 5% to 6% market share for EBITDA and breakeven?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [8]

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Thanks, Kane. Yes, I mean question 1 and 2 sort of go together because, you're right, our guidance for BAU CapEx is slightly higher than we had in FY '19. And that is because our -- we expect that to be driven by our on-net fiber business, our Fibre1000. We're continuing to build, we're continuing to expand our fiber network, our fiber reach. That will be the main driver of the expected slight increase in our BAU CapEx which we expect to continue to drive our performance in our Corporate Division.

In relation to Singapore, we're still comfortable with that guidance that we provided about EBITDA breakeven for Singapore being around 5% to 6%. We -- with regard to FY '20 in Singapore, what I would say is that we don't expect any material impact in this first half of FY '20. We should be able to provide more of an update at the half year as that will be around the time that we are launching commercial services. We should be in a better position to provide an update, more reliable update at that time of the expected P&L impact for FY '20. But no material change in the first half of '20 to what you've seen in FY '19.

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Operator [9]

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

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Eric Pan, JP Morgan Chase & Co, Research Division - Analyst [10]

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Just 2 for me. With the -- with you guys going to court next week, if the decision ends up being overturned and ACCC decides to appeal, how much longer do you anticipate that would add to the time line? And then on the Corporate side, the Corporate segment grew nicely with strong on-net sales. Are you seeing increased competition from the NBN in this segment? And what is the strategy in dealing with the NBN?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [11]

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Thanks, Brian (sic) [Eric]. I will let Tony deal with the first question.

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Tony Moffatt, TPG Telecom Limited - General Counsel [12]

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Good day, Brian. Tony Moffatt, General Counsel. The hearing is set down for 3 weeks commencing on the 10th of September. After that, we're in the hands of the court as to when the final decision will be made. After that, we would expect the usual processes to flow with respect to the merger just getting [book flows], other regulatory approvals. It's hard to say -- put a precise time frame on when we'd expect the completion to occur, but some months after the finalization of the decision is what I would think.

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

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He didn't ask about the appeal.

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Tony Moffatt, TPG Telecom Limited - General Counsel [14]

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No, I think he was asking about the appeal. But just to confirm your question there, Brian, you were asking about -- sorry, Eric, you were asking about -- you're talking about the appeal that's [after] these proceedings, aren't you? Or you're talking about some other appeal?

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Eric Pan, JP Morgan Chase & Co, Research Division - Analyst [15]

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No. I'm talking of if the decision comes down and the court overturns the ACCC's decision and the ACCC decides to appeal, how much longer will that add to the time line?

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Tony Moffatt, TPG Telecom Limited - General Counsel [16]

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Oh, that's a bit hard for me to actually give you a view about that, would be in the hands of the court. But a matter of -- I would think it would be in a matter of months rather than years, that's for sure.

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

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Okay. Nick?

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Nick Pachos, [18]

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Yes. So in relation to your question about the NBN increasing competition. What we're seeing is that NBN are actually agitating change within the market. We're seeing a lot of customers who typically would not be going to market to change providers starting to talk to us about increased opportunity and looking at how moving to NBN is also an opportunity then to change their providers. So we actually see, as I said earlier, increased opportunity on the NBN side.

In terms of competition, we don't see it as competition, we see it as complementary to our business. And in fact, the NBN has products and services that suit a certain customer requirement in the corporate space. Our product set far expands further than that into higher speed services, data centers services, fiber services and a whole range of other products and services that our division sells that, together with the NBN, provide end customer solutions.

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Eric Pan, JP Morgan Chase & Co, Research Division - Analyst [19]

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Got it. And if -- one more, if I could. Just on Singapore, what is the progress on building out indoor coverage there? When do you expect to complete the build?

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

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As I said in the presentation, our indoor coverage is already extremely good. We are continuing to expand it, and we are on track to achieve the IMDA milestone at the end of this year.

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Operator [21]

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Our next question comes 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 [22]

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A few from me. Just firstly on the NBN headwind, Steve. So stepping up from just under $50 million to $75 million, yet -- I mean the others due to the NBN came out with their new corporate plans showing their number of connections would broadly be similar in '20 to '19. So just wondering why that big step-up?

And then my other one on the NBN headwind, the $25 million, does that assume a full year of those -- that higher entry-level CVC pricing? Because I think the current industry consultation is due to sort of be finalized in November, so I would have thought there's a pretty decent chance that entry-level pricing is revised down again. But I just want to confirm that you've got a full year in there. And I'll maybe ask a couple of more after that, if that's okay.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [23]

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Fraser, the $75 million, yes, is substantially higher than the $47 million this year. The drivers for that are -- if you look at the second half of FY '19, there was a very substantial acceleration in the migrations from DSL to NBN. The result of which is that although the actual decrease in closing subscribers in FY '20 we expect to be slightly lower than FY '19, the decrease in average subscribers on DSL, when you calculate that using the numbers you've got available to you, including our half yearly numbers, you'll calculate that there's a much greater decline in average DSL subscribers in FY '20 compared to FY '19.

So that's one of the drivers. Even when you take that into account, what you will then calculate, if I do the math for you, is that the margin erosion per subscriber in the second half of FY '19 was about $14.50 approximately. But then you will calculate that in FY '20, we're expecting it to be about $17. So why the increase from $14.50 to $17? That's mainly explained by the fact that in terms of the migration from DSL to NBN, to date, it has been more heavily skewed or weighted towards iiNet than TPG, and we expect TPG to catch up in FY '20, i.e., a greater proportion of the migrations will be TPG subscribers. And TPG, given its lower price points, it has a greater GP loss per subscriber on migration of DSL to NBN. So those are the 2 drivers of that increase. I hope that makes sense.

The -- in relation to your second question, you said $25 million is basically the annualization of the impact that we -- that took effect from December 2018 of the step-up in ARPU from the NBN.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [24]

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Great. That's really helpful. And just a couple of other ones, if that's all right. You've also kind of have previously talked about raising -- or not being able to make any money on that entry-level product, and if it continued you'd look at raising prices. You've not -- obviously not done anything to date. Just where you are -- maybe for Craig, where you are in your thinking on that. And then my other one would just be on the Vodafone dark fiber contract. Have we now got a full year in -- of that in FY '19? Or is there some more to come through from sort of annualizing in FY '20?

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Craig Levy, TPG Telecom Limited - COO [25]

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There has been positive signals in relation to the entry-level bundle. On the one hand, we've had [right sums] come out in my comments about the need to have an affordable entry-level wholesale product. And we've been having discussions both at the NBN and the ACCC. The signals are at this point in time that there will be an entry-level bundle at a fixed price. It has taken a very, very long time, as you know, this process that we are going through. But we are hopeful that we will land at that position.

We will have a fixed price, and we're pushing for a decent amount of wholesale inclusions to support what has been the increase of customer data usage over time. That will allow us as a business then to make a decision to continue offering an entry-level product. But there are still a number of elements that are going on behind the scenes. And once they're finalized, I think we can speak a little bit more. But there certainly are some positive signals there.

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [26]

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Fraser, in relation to the VHA fiber contract, we are now billing over -- well over 90% of the maximum monthly revenue under that contract. Under the contract, we actually only get to billing 100% of it by midway through FY '21. So it's a very gradual increase to go from where -- the 90-odd percent we're at to date to the full 100%. So you don't -- you shouldn't expect any material impact -- incremental impact.

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Fraser Mcleish, MST Marquee - Head of Australian Media, Online and Telecommunications and Telco & Media Analyst [27]

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So that would have been increasing over the course of '19, though, wouldn't it? So you wouldn't have a full year kind of -- within '19, there should still be some benefit in '20?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [28]

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No, no, not substantially. So we were close to 90% at the start of the year.

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Operator [29]

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

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [30]

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You keep on mentioning that NBN complements your on-net fiber strategy in the Corporate Division. So can I just confirm that NBN is signing up enterprise customers still through resellers such as yourselves, and they're not signing up enterprise customers directly?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [31]

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Yes, that's right. Any enterprise customer still has to go via an RSP.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [32]

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Right. Okay. And second question is I think I know how many buildings you guys have signed up as FTTB customers. But how many total buildings have you actually passed? And has there been a ramp-up in the FTTB rollout now that you're not spending any time on rolling out mobile?

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Craig Levy, TPG Telecom Limited - COO [33]

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In relation to the buildings, we haven't traditionally put a number out there. What I can tell you is that our growth has been consistent. In the second part of FY '19, we achieved 5,000. Obviously, the growth is a function of addressable market, and we roughly have been adding roughly about 2,000 new addresses a month. And it just depends on how we get into these buildings. But we do have teams of people working to increase the footprint.

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Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [34]

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2,000 new buildings a month?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [35]

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No. Just to be clear, that's addresses.

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Craig Levy, TPG Telecom Limited - COO [36]

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Individual addresses, yes.

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Operator [37]

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Our next question comes from Nick Harris from Morgans.

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Nick Harris, Morgans Financial Limited, Research Division - Senior Analyst [38]

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Two questions from me, please. Steve, just the first one, you mentioned Singapore, the CapEx there, spectrum is about $147 million today but you're still comfortable with your guidance which was at $200 million to $300 million. So should we be expecting sort of roughly $100 million spent in FY '19 and could you -- sorry, FY '20 and presumably in the first half given you're going commercial in -- towards the end of the first half?

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

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I don't expect that -- regarding the timing, no, that's not correct. We have a milestone to deliver coverage on the MRT. That milestone is still over 2 years away. So some of that expenditure, whilst we're trying to -- we want to and we're trying to achieve the MRT coverage as quickly as we can, I would expect it to be over a longer time frame than that.

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Nick Harris, Morgans Financial Limited, Research Division - Senior Analyst [40]

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And just my second question, I know clearly you're not providing any guidance for FY '21, but I guess if we think just sensibly about the NBN if they're disconnecting portions similar in FY '20 to FY '19, is it reasonable to look at the bridge that you've got on Slide 22 and think that a similar impact will happen with the cycling through of the margin erosion effectively? Is that a sensible way to think about it? Or is there anything significant that's missing in that logic?

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

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Nick, I'm just going to leave those calculations to you. And so those -- yes, we're a fast-moving industry and looking that far ahead is something which I don't think we can reliably do. So I think it'll be inappropriate for me to comment about FY '21.

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Operator [42]

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Our next question comes 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 [43]

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Sorry, just one more. Just what's your current thinking on the 700 megahertz spectrum. I mean if the -- it's obviously diminishing in value kind of every day. And if the Vodafone merger didn't go ahead, what would be your intentions for that?

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Stephen Banfield, TPG Telecom Limited - CFO & Company Secretary [44]

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Fraser, given the court case is starting just next week, we're not going to be getting into any further detail about those matters. It would be inappropriate to do so I'm afraid.

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Operator [45]

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Thank you. We have no further questions in queue. (Operator Instructions) There are no further questions. I'll pass back to your speakers for any closing comments.

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

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Thank you, operator. Thank you, everybody, for joining us today. That's the end of the call. So thanks, again, and have a good day.

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Operator [47]

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Thank you so much. Ladies and gentlemen, that does conclude the calls for today. Thank you so much for your attendance. You may now disconnect.