U.S. Markets closed

Edited Transcript of VOC.AX earnings conference call or presentation 21-Aug-19 10:00pm GMT

Full Year 2019 Vocus Group Ltd Earnings Presentation

Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Vocus Group Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Kevin Steven Russell

Vocus Group Limited - Group MD, CEO & Director

* Mark Wratten

Vocus Group Limited - CFO

================================================================================

Conference Call Participants

================================================================================

* Andrew Levy

Macquarie Research - Analyst

* Brian Han

Morningstar Inc., Research Division - Senior Equity Analyst

* Eric Pan

JP Morgan Chase & Co, Research Division - Analyst

* Eric Choi

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

* Ian Munro

CCZ Equities Pty Limited, Research Division - Senior Analyst

* Kane Hannan

Goldman Sachs Group Inc., Research Division - Research Analyst

* Nick Harris

Morgans Financial Limited, Research Division - Senior Analyst

* Sameer Chopra

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by and welcome to Vocus Group FY '19 Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, 22nd of August 2019.

And I'd like to hand the conference over to your speaker host today, Mr. Kevin Russell, Managing Director and CEO of Vocus Group. Thank you.

Please go ahead.

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [2]

--------------------------------------------------------------------------------

Thank you, Amber, and good morning, everybody. Welcome to the Vocus Group Financial Year '19 Full Year Results. With me in the room here we've -- I've got Mark Wratten, our CFO; Antony De Jong who heads up our Retail business; Ashe-Lee Jegathesan, our Legal Counsel; and Bill Frith, our Head of Investor Relations.

I'm very aware today -- in today's presentation that we did a detailed update 7 weeks ago, 3rd of July, detailed strategy updates. So I'll keep my comments relatively brief, and I'll leave Mark to focus this call primarily on the financial year '19 results.

So just to start, maybe some contextual comments. The core Vocus opportunity is simple. We have a Tier 1 fiber network asset in Australia and the opportunity to substantially grow market share, revenue and profit in our enterprise, government and wholesale markets. At the same time, we have 3 reality checks to work through. We have not adequately integrated networks, systems, processes and cultures from a number of historical acquisitions. We have not invested in people capability, partnerships, products, systems and strategies to deliver on that market opportunity. And then finally, we have to work through and absorb the impact of NBN and the erosion of legacy voice revenues in our Retail business.

In summary, we have great growth opportunities at Vocus, but we have a lot of work, a lot to work through. It's all doable, but it takes time. And that's why we talk about a 3-year turnaround. This is a progressive 3-year plan. 2019 was a critical year because turnaround foundations were solidly in shape, not to rush and chase short-term financials. This is now my fifth time leading a start-up or a turnaround. My experience, if we get the foundations right, the results will follow.

2019 has been about 2 things. One, get the basic foundations in place to deliver in the long term on the market opportunity; and two, meet financial guidance, including cash, debt management. We have made a lot of foundational change, and there is a lot to be positive about.

I'll start just with organizational clarity, our core identity. Our core financial opportunity is to build Australia's specialist fiber and network solutions provider. We've also established now 3 discrete separate businesses with Vocus Networks, Vocus Retail and Vocus New Zealand that can each operate autonomously with accountability and speed.

On culture, how we do things has held us back. Resetting culture has been a key priority for me. We are small. We have to treasure the benefits of being small. Ease of collaboration and alignment. This must be one team with shared values not historical tribes, a higher appetite for change, risk and disruption and a ruthless focus on commercial returns. We are a work in progress, but the improvement of our cultural leadership has been significant over the last 12 months.

Comprehensive leadership changes and significant capability gaps have been filled. We have hired well, and whilst we've had delays and disruption from people changes, the benefits are starting to come through. I am crystal clear here, we have hired very, very well and the benefits of that will come through increasingly over the next 24 months.

We've worked through big strategic resets of Vocus Network Services and Retail. Our 3-year operating clients are clear and our goals set and aligned. It's basic stuff, but it's critical stuff. We know what we have to do, what our priorities are. We did not 12 months ago. Key improvement plans are underway in service delivery, sales commission and account management, product roadmap and, of course, areas to reduce cost. Benefits will flow this year. We have had and have a lot to operationally improve on.

Our technology programs to consolidate and modernize are now firmly underway with significant cost reduction targets committed 2 to 3 years from now.

And finally and critically, we have clarity and progress on a number of strategic fiber builds, which we will progressively update on as they land. It is critical as we build our identity as an infrastructure business that we continually, smartly expand our fiber reach and build associated annuity revenues. In the context of the volume change and foundation set, I'm broadly satisfied with our financial results. It was critical to our credibility with investors and lenders that we hit our financial guidance and deliver the improvements in cash conversion and debt profile. We have achieved this without compromising on getting the key foundational elements of our turnaround in place.

So with those comments, I will pass over to Mark to walk through the results.

--------------------------------------------------------------------------------

Mark Wratten, Vocus Group Limited - CFO [3]

--------------------------------------------------------------------------------

Thank you, Kevin. Before I commence, I will remind you that in addition to this presentation, we have also today published our statutory 4E and FY '19 financial statements, which does include our operational and financial review document, which does contain more detailed information covering the group and our operating divisions.

I'll start with Slide 4, the group financial summary. Full year revenues at a consolidated level were slightly above those of the prior corresponding period or prior year. At a higher level, revenue growth in Vocus Network Services and New Zealand was offset by declines in the Retail division, and I'll provide divisional level information in the following slides.

Our underlying EBITDA, which is now adjusted to exclude noncash share-based payments, and we have a slide in the appendix that you can refer to for the quantum, was down 2% versus FY '19 (sic) [FY '18] and was negatively impacted by the decline in the Retail division as well as the increased investment, mainly headcount, required in our infrastructure and operations business.

Underlying EBITDA was within the guidance we provided initially in August 2018 and then throughout the financial year. EBITDA margin decline year-on-year was mainly due to the impact of the lower margin one-off project revenue in Network Services as well as the strong growth in NBN wholesale revenues, which delivered lower margins. Underlying NPAT reduction was driven by the small EBITDA decline, coupled with higher D&A and finance cost expenses. Higher D&A expense was mainly due to the completion and capitalization of the ASC project in Q2, while finance costs increased due to higher debt levels throughout the year combined with higher interest rate margins as a result of our net leverage ratio.

Pleasingly, our full year cash conversion was strong at 100%, and this was assisted by the receipt in the first half of the large upfront payments associated with long-term IRUs sold on ASC. Sustainable levels of cash conversion are in the 90% to 95% range that we have previously guided to.

CapEx was again managed tightly during FY '19 and we landed within our guidance range. Our net debt and net leverage ratios, which both peaked in December 2018, improved in the second half. Net leverage ratio at 2.87x was down 21 basis points from December and is targeted to reduce further by June 2020, although it may move a little higher at the end of the first half due to higher first half CapEx and stronger H2 EBITDA.

Slide 5 sets out for the first time the allocation of our infrastructure and operations and corporate costs to our business, and shows how we allocate our $165 million of infrastructure and operations cost and $55 million of corporate costs to the Vocus Networks and Retail business so that we can give a full measure of underlying performance. Given New Zealand operates independently, we have not allocated any cost to that business unit.

Whilst we've spent a lot of time on these allocations, it's not an exact science, and we will continue to, over time, to refine and improve our allocation methodologies. The allocation of infrastructure and operations, which is our network and technology costs, to retail has been determined by identifying those costs that are directly attributable to retail [op] as well as allocating a portion of indirect shared costs to the Retail division.

Direct cost includes the retail-specific operating and billing system, support systems and includes maintenance, security and third-party network costs. Indirect costs are made up of external vendors and allocation of internal labor. No internal charges have yet been made to retail for the use of Vocus-owned Network assets, but that is the intention. Telstra refer to this as the internal access charge and we may do likewise.

The allocation of corporate costs, which are shared group costs with the highest component being facility costs across the network services and retail has been determined by specifically identifying costs associated with the Retail division, which is the $15 million, with the remainder allocated to Network Services. Retail costs comprised -- directly attributable office and warehouse costs, with legal, finance and human resource support costs determined using an allocation methodology,

In later slides, we'll show how these allocations with respective divisional -- fall within respective divisional results. And due to the time and effort involved, we've not gone back to determine FY '18 allocations.

So starting at the divisional -- looking at the divisional results and starting with Network Services. Whilst overall Network Services revenue increased by 23% year-on-year, the bulk of this was from -- was driven by nonrecurring project revenues, predominantly the Coral Sea Cable System project, which remains on track to be completed by December this year. Recurring revenue did grow 5% on last year, helped by the successful launch of the Australia-Singapore cable and solid growth in wholesale NBN as well as federal and state government business. An improving sales result was, however, offset by price erosion and churn and particularly the one-off churn associated with the VHA contracts

As we highlighted in our recent Investor Day, the manual provision processes on multiple networks continues to drive higher cost to serve and greater complexity in our business. A number of projects are underway to improve delivery and automate provisioning, and we expect continued improvement during the course of FY '20, with longer-term and more significant cost savings to be delivered with the future state technology program which we highlighted in the July Investor Day.

Moving to Slide 7. As you can see on this slide, we have included the allocation of costs against Network Services for the first time, and these totaled $159 million. However, as mentioned in the earlier slide, it does not yet include any charge to Retail for the use of Vocus-owned network assets. And this charge, once determined, will need to be on an arm's length basis. The allocation of cost makes it very clear that Network Services generates the majority of EBITDA and value for our group, and it is here that our greatest future growth opportunities are. Underlying EBITDA pre-allocation for the core Network Services division was up 5% on last year. EBITDA margins were 9% lower due to the lower margin on the Coral Sea Cable project and NBN wholesale revenues, much as the same as we experienced in the first half.

Recurring revenue gross margins are consistent with FY '18, if you exclude wholesale NBN. We did invest in people capability and product in FY '19, which also impacted FY '19 EBITDA growth. This SG&A increase will also flow into FY '20. However, this investment will drive growth going forward. We've also changed the commission structure of our sales teams, which was previously too heavily weighted towards new sales with insufficient focus on customer retention. This should help to reduce churn going forward.

Moving on to Retail. Revenue within our Retail division fell by $148 million year-on-year, with declines coming from 4 main areas, being: Copper Broadband, revenues were down $82 million driven by the migration to NBN and overall churn; Legacy voice revenues declined $66 million, again due to reduced services in operation, mainly driven by mobile substitution; Energy revenue reduced by $35 million, driven by a 5% decline in energy customers and lower average energy usage per customer; and finally, other revenue declined $22 million and comprises discontinued [Pendo] and insurance revenues and other -- and reductions in other fees and charges, which we no longer apply.

Offsetting this revenue decline somewhat was the growth in NBN revenues of $60 million. Whilst mobile revenue was slightly down, we do see our Optus MVNO arrangement as a pathway to mobile market growth, share growth, and future 5G and fixed wireless opportunities.

The 3 pie charts on this slide indicates the declining percentage of legacy product revenue versus total revenue. These legacy revenue streams have declined from nearly 2/3 of total revenue in FY '17 to just over 1/3 in FY '19. And this trend will continue for the next few years as we indicated at the recent Investor Day.

If we look to July 2019, our most recent month, legacy products contributed around 25% of total revenues for Retail, which suggests that we are substantially through the headwinds from legacy products.

Whilst our Retail business experienced material revenue decline during FY '19, Antony and his quite new management team have done a great job in driving cost savings, such that the 15% revenue decline has resulted in a much lower 7% EBITDA decline. As a result, overall EBITDA margins have actually improved to 19.1% pre-cost allocations.

Cost savings have been derived from marketing cost savings as well as a more efficient business operating structure, both the consumer and Commander combination in addition a 20% reduction in offshore headcount from a continued focus on digitization and automation has delivered material savings. Whilst energy SIOs and volumes declined, the EBITDA impact was offset by favorable long-term hedging positions.

As with Network Services, we have now allocated infrastructure and operations and corporate costs to the Retail division for the first time, and these totaled $57 million. With increased visibility that this process has given us, we are now very focused on how these costs can be further reduced.

Moving to New Zealand. Our New Zealand business had another great year in what remains a very competitive market. Mark and his team grew revenues by NZD 16 million or 4.5% and EBITDA by 2.5%. Whilst margins in our core telecommunications services have been maintained, strong energy revenue growth from bundled attachments at lower margins have changed product mix and overall margins. We do expect the New Zealand business to continue to perform strongly in FY '20, and the team has a great opportunity to gain further market share, particularly in the enterprise and government sectors.

Finally, strong cash generation, probably a highlight of the year for myself. We had a very strong cash performance, particularly in the second half, which was largely driven by an improved working capital management, and we closed the year with net debt at $1.34 billion. This is an improvement of $55 million from what we had in December of 2018. Our cash conversion, as I mentioned earlier, was at 100% for the full year, and this was helped by the upfront ASC receipt, which I also mentioned, and this is up from 88%, which we reported in FY '18.

As we mentioned in February, our net debt and leverage peaked at the end of the first half and post-funding of the ASC build and we would reduce going forward. We ended the financial year with net leverage ratio of 2.87x, down from 3.08x we reported at December. And we remain well within our covenant headroom of 3.5x.

With that, I'd like to hand back to Kevin.

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [4]

--------------------------------------------------------------------------------

Thanks, Mark. Just moving into FY '20 and some comments on guidance. As I mentioned at the start, we had a detailed update from plans and priorities at our strategic briefing on the 3rd of July. These have not changed. Those plans are consistent and will be consistent for the next 24 months. Financial year '19 was very much on getting the key foundations in place. Financial year '20 and '21 are quite [certain of] executing and delivering on our plans. Our priority is revenue growth, but it's important to highlight that we are also now more comfortable and confident in the cost improvement opportunities.

Interesting to reflect that in 12 months' time our core infrastructure business in Vocus Network Services is likely to be contributing well over 60% of our underlying EBITDA. That percentage will continue to grow. The areas highlighted here are critical for our financial and strategic success this year, and I look forward to updating on our progress as the year unfolds.

If I single out some key areas in Vocus Networks, improved revenue traction and technology consolidation, modernization are critical to long-term value creation. In Retail, we must get traction in mobile and energy and start to diversify away from NBN through wireless where possible. And in New Zealand, market share gains in enterprise and government are particularly important.

To guidance, our guidance remains consistent with that outlined at our Strategy Day in July. After adjusting for the impact of expected share-based payments, our guidance at $359 million to $379 million for underlying EBITDA is consistent with 2019. Within that guidance, we are highlighting 2 clear trends. Expected growth in the core infrastructure unit of Vocus Network Services of $20 million to $30 million, offset by a similar decline in our Retail business. Just to reflect, our expected VNS, Vocus Network Services, EBITDA growth would equate an annual increase of 10% to 15% at a time that we are not yet operating optimally. Our turnaround is progressive, and we expect the second half of 2020 to be stronger than the first. CapEx in the range of $200 million to $210 million. We have investments in technology, consolidation and modernization and also some committed IRUs. Cash conversion at 90% to 95%, and we expect the net lending ratio to continue to reduce. We also wanted to complete the shape of our 3-year turnaround by (inaudible) in 2020 to 2021. We expect to see higher absolute EBITDA growth again in Vocus Network Services in 2021. This will roughly guide us an underlying EBITDA higher than $250 million for our core infrastructure business in '21.

Our Retail business, we see stabilizing in the second half of financial year '21 and ready for growth in '22. And in New Zealand, we see ongoing strong and steady growth.

With that, I would like to open up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Eric Pan from JPMorgan.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Just 3 from me. First, would you go back and be more aggressive in Retail if the turnaround of NBN wholesale pricing review lowers the cost of CVCs or RSPs in general or if the current competitive environment eases? And then secondly, can you give us an update on how much of the 40 terabits of capacity on the ASC you sold thus far? And how does the pricing that you're getting compare to forecast? And then lastly, how should we think about the $30 million of cost outs by fiscal '23 in terms of timing? Is it more back-end loaded or will that be more evenly distributed over the next 3 years?

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [3]

--------------------------------------------------------------------------------

Okay, Eric. So just on the first question, more aggressive in NBN. We would be more aggressive in NBN if we saw better commercial returns in NBN. So those could be combined by 2 things. It can be obviously reducing wholesale access costs on NBN and also, secondly, the competitive environment. We're going to be crystal clear that our core capital allocation, our core financial allocation has to be prioritized to Vocus Networks, but if there's opportunities to make money, in Retail we will pursue those opportunities. The reality is that, that's not where we are just now. There hasn't been any change in pricing and the market dynamic remains competitive because NBN is strategically important to those who have large consumer bases like Telstra, Optus and TPG.

In terms of ASC, there was a couple of questions there. The pricing is pretty much consistent with what we expected and with the [undergoing] market we haven't seen any need to change our pricing. The first part, I think, was how much of the capacity have we used?

--------------------------------------------------------------------------------

Mark Wratten, Vocus Group Limited - CFO [4]

--------------------------------------------------------------------------------

We sold around – it's Mark. We sold around 4 -- just over 4 terabits. The system itself now, I think, as we mentioned in July at the Investor Day, the capacity is now at 60 terabits. So we've got a long way to go to fill it up. But yes, it's a tick over 4, I believe.

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [5]

--------------------------------------------------------------------------------

And then the third question, I think, was around the $30 million of cost out in infrastructure and ops. I think we gave, back in July, a pretty clear view as to free it up is (inaudible). Our infrastructure and ops costs in financial year '19 was $165 million. We expect that to come down in the financial year '20 to $161 million, financial year '21 $150 million, financial year '22 $145 million and financial year '23 $135 million.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Just 3 for me, please. Just in terms of that guidance. I suppose I was trying to work out the impact of the share-based payments. So I think around $6.4 million a year on a like-for-like basis with your prior guidance would be about [$364 million] in EBITDA. And then if we think about the FY '20 guidance, on the odd metrics of $350 million to $370 million and those comments of network gross offsetting retail declines, which obviously are unchanged. To comment on where -- I suppose you're making up that $6.4 million to get back to the midpoint given you haven't changed that range. Secondly, just on the allocation of corporate costs. So up to that point, this isn't an exact science, but could you comment on how you think that $160 million you've allocated to the Vocus Networks business would be impacted if you were to divest the Retail business? And then finally, just the recurring Network Service revenues, comment on whether that 5% growth would have been positive if we were to adjust for the Aussie Singapore sales?

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [8]

--------------------------------------------------------------------------------

Thanks, Kane. So in terms of guidance, yes, as we've set out in the appendix, you see the impact of the LTI expense for FY '18 all the way through to FY '23. It was $6.4 million cost this year, which was, as I said, we put below the line. So you're right, our $360 million that we're sort of reporting would be more like $354 million. As I said our guidance on the like-for-like basis is the $350 million to $370 million. I'm going to leave it up to you to figure out where we might land in that, but we're obviously confident within that range.

In terms of the allocation of corporate costs, obviously that's part of the challenge. I mean we are obviously looking to make Retail more separate going forward. And we've got a project underway in regards to looking at the various paths that would be required to make that happen. Part of that would be to understand clearly which of these costs can be moved across to the Retail business now versus the best managed within a consolidated sort of maybe infrastructure and operations team. And also what part of -- what of those costs might we lift and shift. As I said, they can move across stay-and-pay which might need some sort of form of transition arrangements. So we haven't done enough work on that. We -- it is a big focus of ourselves. But the allocations at this stage we're basing on if Retail was to go, we would be able to either move those costs directly to Retail or eliminate them from our business. And then -- sorry, the last question around recurring revenue. I just missed the last bit of, but can you just repeat that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Just whether that 5% growth, whether that's all been driven by the Aussie-Singapore sales? Or if there's any comments you can make there?

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [10]

--------------------------------------------------------------------------------

Yes. So well, it is. Obviously, the 5% does include, and you see a chart, I think, in the Network Services revenue bridge that you'll see a big chunk of it comes from NBN wholesale growth. We don't split out ASC growth, but there's -- obviously, we've had some nice growth in ASC. So that does contribute it as well as growth in the federal and government revenues as well. So -- but as I said, offsetting that has been the churn, particularly the voter churn as well as price erosion. And we talked about that in the first half. So that's sort of something that we're working our way through the voter churn. We'll have a little bit of an impact as we move into FY '20 as we lose a full year -- a lot of it, but it will work its way through the system.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I was just going to say that NBN wholesale revenue, is that aggregating other RSPs' business or is that more a corporate, enterprise, wholesale customer that you have through NBN?

--------------------------------------------------------------------------------

Mark Wratten, Vocus Group Limited - CFO [12]

--------------------------------------------------------------------------------

Yes, there are smaller RSPs where we provide a full sort of service connectivity to the NBN. Obviously, the revenue, the margins are quite low because we're passing through [ABC] and CBC. And obviously, then, putting on top of that, our network backhaul and other services, but that's a very small component of the overall deal. So -- but it is, yes, the smaller RSPs.

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [13]

--------------------------------------------------------------------------------

So Kane, I think it's fair to say our recurring revenue in Vocus Network sales and managing arrangements is not really consistent with kind of levels we would expect and follow. There's certainly been -- it's actually been an interesting year in terms of selling. We've actually sold actually pretty well. I expect us to sell better this year and the year after, but we've actually sold reasonably well. We have unquestionably had some churn that's come through probably from sales practices in historical years that weren't ideal and I think we can do a better job in managing price erosion as more products come to market and that's for sure. The benefit of whatever selling activity in 2019 also is, to some degree, is held up in sales delivery. Sales delivery can take in sales anything from 4 or 5, 6 months to actually be delivering to (inaudible) So a lot of the improvements we made in the enterprise will not come through until financial year '20, that will be in the second half of financial year '20. That's simply because the work done from negotiation to actually contracted and delivery can be a 12-month cycle. So it's a slower 2019 than we would expect recurrent revenue line in financial year '20 and obviously '21.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Your next question comes from the line of Sameer Chopra from Bank of America.

--------------------------------------------------------------------------------

Sameer Chopra, BofA Merrill Lynch, Research Division - Head of Australian Research and Co-Head of Regional Telecom Research [15]

--------------------------------------------------------------------------------

Three questions, 2 on margin and then one on cash collection, please. Just on margin, could you give us a guide around where the recurring revenue margins are sitting right now? And if there's any puts and takes into FY '20 for each of the businesses, just on the margins? And then on cash collection, just wondering how should we think about -- you've given us the 90% to 95% for next year, which is kind of great. Can you give us a sense of how that works out between the business segments? Is a lot of this being driven by preselling in the cable network business? And does the rest of the business still have a pretty good cash collection as well?

--------------------------------------------------------------------------------

Mark Wratten, Vocus Group Limited - CFO [16]

--------------------------------------------------------------------------------

Kevin is pointing to me on all of these questions. The margin -- well, we don't actually disclose our recurring revenue margin. But I think if you work backwards in the past, it's sort of been at the gross margin level in the above 50% -- high 50s, and we expect that to continue. That's obviously as it should be with when you've got an infrastructure business and you're utilizing your own assets, you should be expecting higher gross margins. So we're not, as I've said, sort of, if you take away the NBN wholesale revenues and the margin impact of that plus, obviously, the Coral Sea Cable project, our recurring revenue margins have been very consistent with prior years, which is what we'd expect.

In terms of cash collection, the 99, [99 above 10], sort of break it down by business and we're starting to obviously do this a lot better. New Zealand is very close to 100%. In fact, it will sort of be in the high 90s for sure. Same with Retail. Retail is a very good cash-generating business, and actually has a very good working capital profile. So the difference, or what drags us down is -- really is the Network Services business and that's predominantly as a result of the deferred revenues that we had on our book. And so that's -- we've sort of spoken about that many times over the past few years. A lot of that was inherited when we bought the next-gen business. And we -- in previous -- I've advised in investor presentations -- we've given you sort of how that deferred revenue runs off. It hasn't sort of -- it changes a little bit. We do like that big upfront that we received in the first half, that now is sitting in deferred revenue and will unwind over the coming years. But we don't expect to sort of do a lot more of those large upfronts going forward. So I do think that's why sort of as our EBITDA grows and our deferred revenue sort of unwinds sort of stays -- reduces that cash conversion ratio should actually climb above the 95%.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Your next question comes from the line of Ian Munro CCZ Equities.

--------------------------------------------------------------------------------

Ian Munro, CCZ Equities Pty Limited, Research Division - Senior Analyst [18]

--------------------------------------------------------------------------------

Just looking at the Networks business, can you perhaps give us a sense of when your product, sort of pricing, personnel mix will be ripe to really contest some of these enterprise-type customers? I know that you made the comment that federal and state is going well. And perhaps, can you comment on the size of the pipeline at the moment too, please?

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [19]

--------------------------------------------------------------------------------

So in federal and state is going well. That said, we've got some new secure network capability that will be launched into market really in January of next year, 6 months away, is really important and is really exciting. So we expect that to open up substantial new opportunities.

On enabling NBN, we really just have got ourselves into position to enable NBN ethernet in the last few weeks and that does open up market opportunities for us. I would say relative to where we were 12 months ago, we are in a significantly better position from a product standpoint going into 2020. We'll make improvements during the course of the year, but I'd say we're actually pretty competitive placed from a product standpoint, just now.

In terms of pipeline, pipeline is good, is strong. There's a couple of good deals out west that have landed that we'll talk about, and the next year results are positive. We've actually sold well during the last year. But a lot of that will come into financial year '20. And the pipeline will build competitively. We feel pretty good in market place just now. We think the competitive environment is probably working more in our favor now than it was 12 months ago. I think some of the changes that happened in account management at Telstra that were announced 3 or 4 months ago are very interesting for someone like Vocus because, obviously, when your key competitor says they're going to prioritize account management to the top 650 customers and the next 14,000 are not going to get individual account management, that presents opportunities for the Vocus [Group] as well. And we need to progressively work this through. Enterprise takes time, government takes time, wholesale is easier to switch on quickly. The impact we've had from the team getting built in enterprise has built over the last 6 months. So Andrew came on board in January, where it is today is in a far stronger position than it was in March or April, likewise with the product team. So we feel pretty good going into financial year '20, but I'm very clear that, that will continue to build as the year goes on.

--------------------------------------------------------------------------------

Ian Munro, CCZ Equities Pty Limited, Research Division - Senior Analyst [20]

--------------------------------------------------------------------------------

Just a follow-up on the Retail segment, please. Just the comment around second half FY '21 stabilization. Can you perhaps give us a sense of what sort of metrics you're looking forward to see that, that stabilization is occurring? And perhaps what gives you confidence so that's second half FY '21 and not sort of 6 months after that?

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [21]

--------------------------------------------------------------------------------

I think the key element around confidence is obviously the ability to get through the bulk of the legacy revenues. I think Mark owed it to the fact that by July we're kind of down to 25% legacy revenues to kind of transition through all of us. That's a big difference from 3 years ago when that number was north of 60%. So that absolutely helps in terms of the easing of legacy margin erosion. The key things you should look for in terms of Retail being able to stabilize is, obviously, growth in mobile and growth in energy to offset the margin challenges in NBN, and those 2 products are critical for us to get traction on over the next 6 to 12 months. So our expectation is we have a good opportunity in mobile market share and new clients launched just in the last few weeks and that is critical to get traction on. The other part -- piece of the puzzle you should see is -- sets on probably more in the second half of this year is all we do in wireless, in relation to broadband, and we think are (inaudible) opportunities to increasingly look at wireless broadband as and when appropriate as an alternative to NBN.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Your next question comes from the line of Eric Choi from UBS.

--------------------------------------------------------------------------------

Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [23]

--------------------------------------------------------------------------------

I'm probably going to pick on you as well Mark, sorry. First one is, just I'm just trying to work out the underlying Network Services EBITDA growth. So you've given us the sort of Vodafone impacts and if I back up the sort of one-off stuff, was the underlying EBITDA growth sort of circa $20 million in FY '19? That's the first question.

And then just second one on NBN mission creep that sort of impacted the Telstra results. I know that you guys have said you want to work with the NBN, but just wondering how that might impact your forward margin assumptions? And if it does impact the confidence in you sort of hitting that 20% to 30% Enterprise EBITDA growth that you've guided to?

And then just lastly on cash conversions. I think based on your previous comments, Mark, you were sort of alluding to the fact that FY '19 cash conversion would have been over 90% ex all the upfronts and IRUs as well. Can you confirm that's the case?

--------------------------------------------------------------------------------

Mark Wratten, Vocus Group Limited - CFO [24]

--------------------------------------------------------------------------------

Yes, Maybe I'll work backwards. So cash conversion, yes, I mean, if you ignore that IRU payment in the first half, we would have probably been around the 95% -- 95% for the year. So within that sort of range that I've been sort of talking about for a while. So that's the cash conversion. In terms of NBN, our assumptions going forward are that NBN remains as it is, very uneconomic, that they don't change their pricing structure in any way that's favorable for RSPs or for our customers. So -- and we'd hoped that if common sense does prevail at some point in time, that would be an upside opportunity for us. But certainly, we haven't factored that into our thinking for the next few years.

And in terms of underlying EBITDA growth for Network services, I can't talk to that specifically. Obviously, we've talked to the 5% growth that obviously does include. If you exclude the margins for the project -- the Coral Sea Cable project and obviously new margins that have come through from ASC, et cetera. But it's being offset by certain cost increases, which I also spoke about, but I can't specifically give you a number.

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [25]

--------------------------------------------------------------------------------

Just a couple of comments from me on that scope creep concerning NBN. I think it is interesting to reflect on where Vocus has its strength and its assets and, obviously, there is a couple of asset that are really strong. We've had some good regional network capability and then we've got some really good subsea cable capability in the North West Cable lines up into ASC. Where we do recognize that we are not head-to-head with Telstra and Optus and TPG, arguably is in metro buildings fibered up. And we felt it [strategic] here that we have 5,500 buildings fibered up. We don't intend to go out there and fiber up another 20,000 buildings.

So we do have opportunities with NBN because of the benefit of NBN's metro capability to partner with them selectively, as and when appropriate, to secure business we would not otherwise have. So we do see NBN in Enterprise, not Retail. But in Enterprise as some good incremental opportunities. That obviously may blend out to [lower] margins, but those would still be incremental margins that we would not probably be able to get to without access in NBN. So we see it as an incremental opportunity in Enterprise, but we do see it also as a challenge in Retail.

--------------------------------------------------------------------------------

Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [26]

--------------------------------------------------------------------------------

That makes sense. Can I ask a quick follow-up on the other one. Sorry for picking on the point. Can you tell us what the VHA contract drags in FY '20 will be and how much of the nonrecurring revenues will fall off in '20?

--------------------------------------------------------------------------------

Mark Wratten, Vocus Group Limited - CFO [27]

--------------------------------------------------------------------------------

So roughly, the VHA impact is probably going to be about the same, the $10 million that we've got there. Obviously, it's a full year view of it all, that's roughly. Bill is poking at -- pulling a face at me, so it might be slightly higher or lower. The project revenue, that project will finish in FY -- sorry, at the end of this year, so December this year. And the revenues in the first half actually significantly smaller than what we've disclosed to date. So I can't give you an exact number, but it's probably only $40 million or so of revenue left for that particular project. Obviously, then there'll be potentially other one-off projects that might come in throughout the course of FY '20. But the [Coral] say it's about $30 million or $40 million remaining revenue hopefully.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Brian Han, Morningstar Inc., Research Division - Senior Equity Analyst [29]

--------------------------------------------------------------------------------

Kevin, you mentioned how important mobile is for the Australian Retail business. Is it equally important to have that proper mobile offering in New Zealand to hit that 25% [USB] market share aspirations?

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [30]

--------------------------------------------------------------------------------

I think it would be beneficial in New Zealand to have a better mobile offering. I mean, to Mark's point earlier, the New Zealand business is really rock solid and performing well. They go through, I would think, (inaudible) [categories] are a really competitive consumer environment in the first half of last year. I think a lot of those competitive pressures have eased. The business feels really well positioned getting into financial year '20, but that position is without a strong mobile offering. And put simply, if it could access a strong mobile offering as a result, the potential would be higher. So it doesn't feel like something that is critical to achieve the targets in ultrafast broadband, but it's something that would be beneficial to add additional margin and profit on the business that's performing already very well.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

(Operator Instructions) Next question comes from the line of Nick Harris from Morgans.

--------------------------------------------------------------------------------

Nick Harris, Morgans Financial Limited, Research Division - Senior Analyst [32]

--------------------------------------------------------------------------------

Just 2 questions from me, please. I think in April of this year you pushed through a $10 price rise on your NBN back book. Just interested to see how that went. Did that spike churn or was that pretty much largely absorbed by customers without any major churn? And then just a second question was just a little bit more detail on your comments on taking about 6 months from -- on your network side from signing a customer to actually billing. Is that a hand brake on sales or does that still sort of match customer lead times and what do you need to do to shorten that? And also, do you think you'll be able to shorten that in FY '20 or is that still another couple of years away?

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [33]

--------------------------------------------------------------------------------

Thanks, Nick. So $10 price rise, I mean we have a very clear view that we're not going to sit and absorb price increases from NBN. We're going to -- we're going to push them on into the marketplace. We're not here to subsidize NBN. We're here to make money. The $10 price rise is one that [I think] reasonably well. I think those price points can be more inelastic for existing customers maybe than the market worries about. So yes, we've had a degree of incremental trouble that, a couple of months in, I think we would say that the results have been absolutely net favorable from a commercial standpoint. We'll update that again in more detail in 6 months' time, but initial signs would be net positive.

In relation to service delivery, our service delivery time lines are probably as good as anyone in the market. I think we have an average -- we have an average (inaudible) of 5 months, the competitors, some (inaudible) competitors right now can be north of 12 months. It's -- I would not say that it is a hand brake on sales, but absolutely does mean that when you're in a position where you're ramping up sales, you don't see that benefit for a period of time. It's one of these reality checks that churn happens now, that new sales take time to land. So we can make significant improvements during the course of this year on service delivery and that will be around efficiency in terms of timeline and cost. But the -- but I don't think it will be dramatically below 5 months. We can squeeze a month, 6 weeks out of it, but we're also often reliant on third-party deals, et cetera, which take a little bit of time.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Your next question comes from the line of Andrew Levy from Macquarie.

--------------------------------------------------------------------------------

Andrew Levy, Macquarie Research - Analyst [35]

--------------------------------------------------------------------------------

Just 2 questions from me. I was just wondering if you could give an update on where you're at with some of the cable build projects that you flagged at the Investor Day and also talk to those in the context of your balance sheet and where the balance sheet constraint on going ahead with those or it's just, I guess, finalizing churns in customers around those to progress and whether you think anything will get underway in FY '20? And the other one was you talked at the time about doubling revenues in the Enterprise space or in the VNS space. So I was just wondering if that ambition still fits given, obviously, it's a slow start this year?

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [36]

--------------------------------------------------------------------------------

So on the cable build projects, I mean, I think it was important -- when we flagged the cable build opportunities back in February and then we went through them in a little bit more detail in July. And Mark and I both felt that it was really important to start to give the marketplace visibility on opportunities that were coming through, particularly in relation to that North West Cable. Those opportunities are progressing. The ones we outlined, we've talked about couple in terms of oil and gas. Those are progressing solidly. There's been no substantive changes to the negative and good progress to the positive and then (inaudible) as and when things come through. We do have good funding flexibility in terms of the ability for customers to fund a number of those builds. In fact, the majority of the builds where we connect will be customer funded. So from a balance sheet standpoint, we still look as if we're in pretty good shape there.

In terms of doubling revenues in VNS, I absolutely have moved away from talking too much about it, but not moved away from the expectation and our aspirations to double revenues. I think in terms of time lines, based off the growth this year we're probably a year or 2 out where I'd like us to be. But one of the things I have reflected on as the year has gone on, is that we do have to, first and foremost, focus on delivering the next 2 years' results to get us on the right track. And two, we have to focus more on the cost opportunity in the overall EBITDA number. So (inaudible) what I saw a little bit was people looking at revenue opportunities that may be more marginal. At the end of the day, it's all about EBITDA growth and return on capital. So I think that the doubling of revenue target has been important and beneficial in the (inaudible) in the organization our own group, but we absolutely are fixing the organization more around EBITDA growth now in terms of internal targets. And then, (inaudible) in terms of how people are commissioned now as well.

--------------------------------------------------------------------------------

Andrew Levy, Macquarie Research - Analyst [37]

--------------------------------------------------------------------------------

That's great. Can I try one more [aim]. Just on the Coral Sea project. Is that reasonably steady margin all the way through the project if we sort of take revenues and just assume, I think you talked to a low-teens margin on that project or is it typical of those projects that you will release a contingency further towards the end of (inaudible) this financial year?

--------------------------------------------------------------------------------

Mark Wratten, Vocus Group Limited - CFO [38]

--------------------------------------------------------------------------------

Yes, no. We're certainly during the course of the year, Andrew, we're being quite consistent like it's a construction project. We've sort of tended it early on and then you sort of reflect a margin on the basis of the percentage of completions happening. But you're right, there is some contingency that we're building there and the project management team were very experienced at this with the North West Cable, ASC, et cetera, certainly delivering to allow us to release some of the contingency. We did release a little bit of it in FY '19, which was certainly within our internal plans and we've got a little bit left in FY '20.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions at this time. I would like to turn the call back to the management team for the closing remarks.

--------------------------------------------------------------------------------

Kevin Steven Russell, Vocus Group Limited - Group MD, CEO & Director [40]

--------------------------------------------------------------------------------

Thank you very much, and I think the -- I think certainly in the last 12 months there's been some pretty good communication coming out of Vocus, and I think the Strategy Day 7 weeks ago hopefully was very transpiring and comprehensive in terms of trying to build a better and better understanding of where we are, where our funds are and where we are going. Hopefully, these results have also helped fill in some of those gaps. So any other questions, look forward to answering in the days ahead. But thank you very much. Thank you very much for joining. And we'll talk again soon. Thank you.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

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