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Executives

Simon Moutter - Chief Executive Officer

Nick Olson - Chief Financial Officer

Chris Quin - Chief Executive Officer, Retail

Analysts

Sameer Chopra - Merrill Lynch

Richard Eary - UBS

Digby Gilmour - CLSA

Arie Dekker - Deutsche Bank

Tristan Joll - UBS

Greg Main - First New Zealand Capital

Paul Brunker - JPMorgan

Ian Martin - CIMB

Adrian Allbon - Goldman Sachs

Hamish Fletcher - New Zealand Herald

Chris Keall - NBR

Telecom New Zealand (OTCPK:NZTCY) F2Q 2013 Earnings Conference Call February 21, 2013 4:00 PM ET

Simon Moutter - Chief Executive Officer

Good morning, everyone. And welcome to this web and audio cast of the Telecom New Zealand Results Briefing for the first half of our financial year ended June 2013. I am joined here, it’s Simon Moutter, Chief Executive speaking, and I am joined here by Nick Olson on his last hurray as CFO and Chris Quin, our CEO of the Retail business.

We’ll be referring to the presentation, which is available on the Telecom Investor website this morning. The agenda will flow roughly. I will give some initial observations around the business. We’ll talk about the strategic direction of the business. We’ll go through the group result for the half year ended 31 December cover off the capital management issues and update guidance.

Look, in terms of my tenure here, I have been here roughly six months now. And I just thought it was worth recording the things I noticed most everyday about the business having listed a few years ago. I think it’s in the best shape to compete since 2004, particularly in mobile. We have some great assets, technology, products and people. Our brands are strong, and yet they can further broaden their appeal. Our people want us to be more competitive and ambitious. Little management time is spent on regulation, which is a very good thing, because we can focus on all of our resources on what matters most – our customers. And anywhere, anytime broadband connectivity to applications hosted in our network with the cloud is now a real prospect.

Post de-merger, Telecom needs to be a different business. Today, it is really what our team call, T1 minus Chorus, T1 being the old Telecom and T2 being the new Telecom and the lingo here. It is time I think for the real T2 to emerge.

The table on the page outlines I think some of the differences between what the real T2 needs to be compared to the earlier Telecom Group, much more customer intimate are moving away from vertically integrated returns to recognizing we have reseller margins in the fixed business, an increasingly mobile-centric company, a market-leading rather than regulatory-driven, simplification of our business right through rather than just continuing to cope with a legacy cost base and culture, and moving on to sensible growth rather than feeling like the best we can do is to walk backwards slowly. So, I promised at the outset that we would deliver a new strategy for T2 by May this year. We are actually ahead of schedule. And our new strategy is pretty clear.

Capturing these changes in a single expression of strategic shift, we are changing from a traditional fixed and mobile infrastructure company to a future-oriented competitive provider of communication, entertainment, and IT services delivered over our networks in the cloud. In short, we are shifting from a company focused on building things to a company focused on competing in the technology services market. This strategy is a conscious decision to rebuild the company for long-term value. It’s this that will underpin our ability to earn sustainable returns for shareholders and deliver the goods for customers.

We are now beginning to make this strategic shift under four strategic priorities. Revolutionized customer experiences, which is really about meeting the appetite of the market for simple digital self-service and acting quickly to capture customer insight and respond to it. Simplify the business, which is about radically simplifying the way we operate the technology platforms they use and all our go-to-market offers and building a performance driven lean and agile organization to support it, win key markets about maximizing the opportunities from the major shifts and how our industry is shaping, responding strongly to the multiple range of competition from traditional competitors over the top end IT companies and operating more granular and focused strategy in our markets to win where we choose to operate.

And then win the future investing in and winning the confidence of customers that if they are with a telecom group, our business that we will take them to the future, where they can gain the benefits of all of this exciting technology safely and with a high-value outcome. This framework will provide a structure for our reporting of progress over the next few years. And we will see it out in more detail on the initiatives and milestones that underpin these priorities in May as promised. We are already underway as we signaled last August time. We are being very busy over the last six months. And we build a new strategy and we are now moving on to implementation planning. We have refreshed our broadband and mobile plans to ensure that we are competitive in the market and we have undertaken initiatives to reorient the organization to sell data. The results are already showing in our market share performance.

We have maintained our cost out momentum with some new initiatives. We have undertaken an extensive piece of work around improving the management of our mobile, subscriber acquisition and retention costs. We have undertaken further simplification activity showing up on the labor cost down 7% for the half year, and we have reviewed our inputs from Chorus to ensure that we only buy the services we require in the most efficient manner possible. In addition to these initiatives, we have also announced strategic investments in optical transport networking, dual-carrier capability and the Tasman Global Access Cable in the last week or so. As promised, we have made some big moves to listen to customers and respond with great value product offers.

The three on this slide illustrate just a few. We have met the $75 market price point for broadband and calling bundle and followed the market up to 30 gigabytes in net package. We lead the $19 prepaid plan revolution and we have just delivered a breakthrough commercial contract around roaming which has already tripled the volumes on a year-over-year basis of roaming data. And our new more competitively priced broadband line up is taking effect and having good effect already has strong uptake from customers. We have achieved 13,000 net additions to our broadband base over the last six months as best we can determine. That’s roughly on the 56% or so share objective that we said we wanted hold share in that market. We think we are roughly there, but we won’t know that for effect until we see Chorus’ numbers when they announce the results, I think in the next week or so.

The heavy price competition is hurting returns through margins decline, but it is the right strategy to hold share at roughly 50% and we are determined to meet the competition on price. We are very pleased with our performance in mobile over the last six months. Connection numbers are a bit complicated due to the closure of the CDMA network. So, I’ll offer a few statistics to enable you to understand the trends a little better.

As previously flagged, our six-month active mobile base has fallen by 308,000 customers in the half following closure of the CDMA network at the end of the July. The base dropped 399,000 in the first quarter and then grow 91,000 in the second quarter. The 91,000 growth in Q2 comprised 15,000 postpaid connections and 76,000 prepaid connections. The chart shows the monthly movements in our one month active mobile base, which has grown for four consecutive months with 103,000 net additions since the end of August. At the same time, it’s pleasing to see accelerated growth in our mobile usage revenues, which were up 4% in the half. Within that 4% increase, usage revenues were up 3.6% in Q1 and trended further upward to 5.4% in Q2 so strong momentum there. Data revenues increased 14% and now comprised 46% of total usage revenues. Retail usage revenues up 6% and Gen-i down 2%, our Gen-i being impacted by the closure of CDMA and our intention is to continue to leverage the benefits of our smartphone network.

Smartphone is now comprised around 50% of our one-month active mobile base. And post the closure of CDMA, our average ARPU is $35, $59 in postpaid and $11 in prepaid, good results there. And look while we are on the subject of mobile, I really wanted to make a positive endorsement of the government’s announcements yesterday to put the 4G spectrum out to auction in Q3 this calendar year on commercial terms. We are very pleased with that and look forward to the terms of the auction being disclosed. We are expecting to see a good level playing field outcome that allows all the commercial operators to have if you go acquiring spectrum on good terms. It is so important to the rollout of 4G, particularly in the least populated areas of New Zealand. So, all-in-all, we have quite a few of our lead indicators are really looking encouraging. And as just discussed, good share growth in revenue uplift in mobile and stabilized share in broadband considered focused on SARC management improved the ratio by 6 percentage points.

Gen-i IT Solutions business EBITDA up 21% versus last year, labor cost down 7%, good progress in platform and product rationalization. And for instance, with the closure of our CDMA network, we have removed 4,500 product codes from our core IT systems. We do still, however, have some areas of concern. New Zealand fixed calling revenues continue to decline aggressively at 12%, while we have slowed the rate of excess line tune the new entry level broadband plans are not particularly profitable. The Gen-i market is evolving rapidly with increased competitive intensity. The economy is tough out there, customers seeking to rationalize the cost base, and we are looking to refocus the Gen-i business around the areas that are of the highest value to our customers in big data, mobility, and cloud. AAPT still faces a tough market structure with ever increasing price competition. Our wholesale business is performing strongly. However, there are some risks to revenues as customers seek cost savings and to take us out from being in between Beam and Chorus. And despite our cost activity to-date, our cost base unfortunately remains uncompetitive.

And look badly just I think to – I’d say as I mentioned earlier one of the key priorities emerging on our strategy is to simplify the business. As a retail service provider increasingly focused on data and mobility, we can’t continue with the legacy structures associated with our past as a traditional vertically integrated telco. While there have been a range of business improvement and cost-out initiatives over recent years, we need to do much more to address the new realities of our business today and into the future.

Today, our operating structures and processes are still highly complex. And this means we have a significantly higher operating cost base, employ more people than comparative companies in the telco and ICT seekers. While I am not going to share numbers today, I know that many of you have done your own maths on this. So, this won’t come as a surprise to you. We must have a competitive cost base to succeed in today’s fast changing marketplace.

Our higher cost base ultimately means that we cannot be competitive and offer products and services at a price and value that meet customer needs. And currently, we are keeping ourselves in the game with customers at the speeds of our margins, but this is not a sustainable strategy. And of course, we are in a fast changing industry with new technology and competitors able to emerge and change market dynamics very quickly. So, we believe we must move ahead quickly on execution of the new strategy. There is no scenes waiting until the next financial year or the year after there. And our operating environment will have changed even more by then. And this was not just about addressing costs we must also take decisions about what business areas we will operate in and those that we won’t anymore. We anticipate there will be significant impact across the group during the rest of this financial year. Each business unit has been charged with ensuring that they do what’s needed to quickly implement the new strategy. As I said earlier, I am not talking numbers today, we are still working through individual business unit plans and timings, but there will be – likely be a material one-off charge to implement the changes booked in the current financial year ‘13 and we will provide more information on this as soon as we can.

I’m not going to try to downplay the likely scale of these strategic changes, nor sugarcoat the impact that will have on a significant number of our people. Over the past couple of weeks, I’ve talked face-to-face with staff, the vast majority of ways I’ve spoken to and sustain the need for change and also the need to change quickly. The general mood is that if we’re going to do it, let’s get on with it. And I have mad a commitment to them that we will do things fast, fairly and fearlessly.

Now let me hand over to CFO, Nick Olson, for his overview of the key numbers.

Nick Olson - Chief Financial Officer

Thank you, Simon. Now, to the first half result, this result reflects the number of the trends that Simon has spoken to. And as a reminder prior year numbers are still complicated by the merger which occurred on December 1, 2011. Financial results for the period contained one adjusting item, the receipt of $10 million of insurance prices. Adjusted EBITDA from continuing operations was $506 million, up 3.7% on the prior year or down 5.1% compared to pro forma earnings. Adjusted net earnings of 156 million were 58% higher than the prior period, reflecting a 5% reduction in D&A and a 62% reduction in interest costs post de-merger. Earnings per share have increased 65%, reflecting the growth on net earnings and the reduced number of shares on issue following the share buyback.

CapEx increased $57 million and this increase included $55 million of spectrum, which was prepaid in the prior financial year. Total revenues declined 8.5%, over half of this decline related to AAPT, most of which was low margin business. There has been a $21 million negative impact in this half from the change to mobile handset accounting that occurred in February 2011. So, in the current period, there was a $1 million benefit relative to a $22 million benefit in the first half of FY ‘12. Severance cost dividends of $19 million were received and the half of this was $26 million in the first half of FY ‘12. Broadly, the underlying revenue decline in the New Zealand business was around 2%. This is consistent with the prior financial year as a result of ongoing declines in fixed line revenues that are declining at about 7% to 8% per annum partially offset by growth in mobile revenues that are growing at about 4% per annum.

Cost declined 11.7% in the half. There was a $95 million reduction in AAPTs cost base and a $12 million reduction in international inter-carrier costs. Mobile cost of sales increased by $22 million due to higher acquisition rates. Changes in trades relating to the Chorus de-merger reduced costs by $45 million. Labor costs, excluding AAPT fell by 5% or $26 million.

The first point to note in respect of the segment results is that we have moved to a partial cost allocation model. Under this approach, TNSS and corporate costs are now only partially allocated to other business units. Comparators have been restated on this basis. As noted, BU results are complicated by changes in tourist trades following de-merger. Adjusted EBITDA from continuing operations was $506 million, up 3.7% on the prior year, but down 5.1% compared to pro forma EBITDA of $533 million in the first half of FY ‘12. The $45 million adjustment relied solely to changes in the basis of trades of Chorus post de-merger. Now, for these reasons, we won’t provide a detailed analysis by BU on this call.

CapEx in the first half was $246 million and included $55 million of spectrum which was prepaid in the prior year. Our CapEx guidance for FY ‘13 remains around $460 million. We are undertaking a number of investments within this envelope that are consistent with the strategy Simon has outlined. The only real change since we spoke in August is that we have wrote for down investment in optical transport network and deferred some of the digest into CapEx. The optical transport network will cost a total of about $50 million to $60 million over the next two years. In terms of the datacenters, across your stated interest proceeding as planned, the Auckland datacenter is in advanced planning stage and we are giving further consideration to the Wellington datacenter.

In terms of other investments, prior to Christmas, we rolled out dual-carrier cost approximately 50% of our 3G mobile network and we have LTE customer trails beginning this week. We plan to have a commercial LTE service available later this year.

On the capital management side, we remained committed to our single A credit rating from both S&P and Moody’s. We continue to terminate out our debt and invested $250 million of seven senior notes. Our average cost of external funding is now 5.8% per annum. However, our net financing cost in the P&L is closer to 5% per annum when finance lease income from Chorus is taken into account. Following the successful completion of our $283 million share buyback, net debt was $919 million.

Now, for the share buybacks planned at this stage with the exception of the small buyback to neutralize the Dividend Reinvestment Plan. We have declared an $0.08 dividend, which will be imputed at 75%. Lastly, it is our intention to deregister our ADR program once average ADR trading volumes fall below 5%.

I will now hand back to Simon to take you through guidance.

Simon Moutter - Chief Executive Officer

Thanks, Nick, and all the best for your next gig over at Fletcher Building. Turning now to the outlook for the second half of the current financial year, we have previously indicated that we expected flat to low single-digit percentage EBITDA decline for FY ‘13. We now expect EBITDA to land between 1,040 million to 1,060 million. And this is primarily due to the broadband market having been more price competitive than anticipated in August last year when we set the guidance and a slight softening in our outlook for G&A in the second half. Secondly, this guidance excludes any one-off costs in the second half in relation to the implementation of our strategy. As I said before, we are unclear as to the quantum of those costs, but they could be material. We will update you in due course.

Our CapEx guidance for FY ‘13 is maintained at around $460 million. The dividend policy remains unchanged with a 90% payout ratio. So, six months into the job, I am pleased with the progress we have made and excited about the changes ahead as we get telecom in shape to connect New Zealanders better enabling our country to succeed, businesses to prosper, and customers to lead amazing lives. I will see you in May at the Investor Day on the 16th. Operator, please now move to questions.

Question-and-Answer Session

Operator

And the first question comes from Sameer Chopra of Merrill Lynch. Please go ahead, Sameer.

Sameer Chopra - Merrill Lynch

Good morning. I had a couple of questions. First of all, you shared some thoughts on AAPT, it was quite a disappointing sort of performance and I was just wondering if you could talk about AAPT? The second question is around net ads performance, you gave us some color around how net adds performed in August and thereafter. Could you sort of reiterate what happened from August onwards, do you add a 101,000 net adds in mobile, I thought it was a little bit higher than what I was expecting? And the final one is when you talk about material investment, is this more in OpEx or CapEx, how you are thinking about this?

Simon Moutter

So, look I think AAPT, look AAPT is in a battle ground out there as confronting continued price pressure and the industry consolidating prior to the rollout of the national broadband network in Australia. We of course moved the final consumer services over to an external business. They remained focused on cost management, but it’s a tough market and while that got a good solid business and our great management team it’s a grind over there. Chris why don’t you – do you (indiscernible) on mobile?

Chris Quin

Sure. Good morning, Sameer, Chris Quin speaking. The numbers that I can give you is some comment on our total mobile market to cover retail and the Gen-i market. And in total since August and the exit of the CDMA network, we have added a net adds of 103,000. To give you an idea about 91,000 of that 103,000 occurred in the second quarter, so the most recent three months of this result. And I think Simon confirmed usage revenue is up around $3.6 million in the first quarter and $5.4 million in the second. So, you can see the effect of the rate of the net adds showing up in the usage revenues there which we are pleased with and the good control over the cost of which those acquisitions have occurred.

Simon Moutter

Yeah, I think a solid performance in mobile in Q2 in particular. So, and look on the final point I think your question was related to my indication of a material one-off charge in the second half. We are talking about the potential for restructuring costs and portfolio decisions that can crystallize one-off costs in the period that’s we were at. Next question operator, please?

Operator

The next question comes from Richard Eary of UBS. Please go ahead, Richard.

Richard Eary - UBS

Thanks. Good morning, guys. Just a couple of questions, just first of all the 90% payout ratio just to be clear, is that based of reported or underlying, that’s the first question. It’s just important because obviously the franking balance effects obviously if there are material write-downs in the fourth quarter. The second one is that, obviously, we have had a step down in terms of EBITDA guidance for this year, not obviously which one basically takeaway probably what you talked about in May, but with this reinvestment strategy are we expecting a recovery in ‘14 or are we going to expect to basically see this scratchy evolve over a couple of years before we start to see some returns. The third questions just relates to – just the headcount numbers, I mean the headcount numbers I think were very good in terms of out, I think 349 reduction in New Zealand if my math was correct. Can you just talk us through where that sort of came and what were your strategy is to looking at the business going forward from a headcount like perspective?

Nick Olson

Okay. Richard, it’s Nick here, I will come with the first question. Our dividend policy is based on adjusted net earnings, so the policy is to pay approximately 90% of adjusted net earnings. So, historically we have excluded one-off charges and adjustments from the calculation for the dividend payment. And I will just leave you with the thought that ultimately old dividend payments are subject to Board review before they are made. Second question, I’ll take this as well, Simon. Just look, we’re not going to provide any guidance at this stage for FY ‘14. We are only in the early stages of our formal planning process for FY ‘14. And as Simon has alluded to, there could be a number of other changes which could impact the cost basis of this business in FY ‘14. So, at this stage we can’t be drawn on that.

Simon Moutter

Nick, I will pick up the point around the changes in our staff level. The changes you have seen to-date do reflect correct – you’re correct on that assessment, Richard. They have come from a range of efficiency improvement initiatives across the business in the order of 150 in our retail business, there was at least 100 in our technology services business and another 100 or so in various other parts of the organization. Looking forward, clearly I am not in a position at this point to give specific numbers around the changes ahead, but it is pretty apparent that it will well into the hundreds of staff who will leave us over the next few months.

Richard Eary - UBS

Can I just ask a couple of follow-up questions for clarity just on the back of that, just Nick, in terms of the dividend policy that the first half dividend was 75% franked. So, if we look at our underlying number into the second half and well, there are some material impacts on the reported number, are we right to assume the franking element for the final dividend in ‘13 to be less than 75%?

Nick Olson

No, I can’t show all that conclusion, now obviously any charge of that nature to the extent of tax deductible will actually reduce the generation of imputation credits. And so it will have an impact on how we impute in the future, certainly for a couple of years. We don’t know the impact yet. The imputation credit balance has to be positive at the 31st of March each year. So, it does not impact the decision to impute dividends at the full year. Next question please, operator.

Operator

The next question comes from Digby Gilmour of CLSA. Please go ahead, Digby.

Digby Gilmour - CLSA

Thank you. Thanks guys. So, just two quick questions. So, I see you are focused there on start to revenue ratio and I am just ahead of the formal announcement on strategy. Just trying to gauge is that prohibits a more aggressive customer acquisition drive and perhaps imply a more gradual change in share just how you are thinking about that? And then also you comment about neutralizing the DRP, no further buybacks planned in that context, but I just wonder how you feel about your balance sheet capacity, do you feel you have the option if perhaps the share price to mid to continue capital management initiatives during the implementation of the new strategy or if you view that as too much to try and implement at the same time? Thanks.

Chris Quin

Digby, hi. Thank you. It’s Chris Quin speaking. I’ll give you a comment or two on the acquisition drive and its relationship to outside cost. Look, I think the key is that we have and the team has done a great job of getting some pretty sensible and good margin acquisition activities underway. The prepaid propositions that are lifting our prepaid ARPUs in a good way the $19 pack in particular has been hugely successful. Our focus on our device only plans where the customer owns the device, and we supply a competitive plan to serve that device. And then what would regard as good sensible market offers around contract plans. All have combined to a substantial improvement in our ratio of cost to revenue dollar from mobile acquisition. We would want to continue doing that as fast as is profitably sensible and as good value business for us and for our customers as we go forward. So, no limitation as such, but just a good strong focus on the discipline of doing that at a sensible level.

Nick Olson

Okay. On to the question on the balance sheet, the whole trust of the share buyback was to correct our leverage post the merger and that’s been achieved. And we have decided to still have any further buybacks at this stage and we won’t consider those I think for a number of months. And we certainly wouldn’t attempt to do anything through the sort of exercise assignments, I talked about.

Simon Moutter

Thank you. Operator, next question?

Operator

The next question comes from Arie Dekker of Deutsche Bank. Go ahead please, Arie.

Arie Dekker - Deutsche Bank

Good morning guys. Just on the cost, I had a couple more questions. Firstly, do you expect that to extend beyond the LIBOR to the broader operating cost base and where do you see the majority of savings coming from at this point? Will this implication require any material one-off CapEx that could say that go over and above your existing envelope? And then finally, as part of just rebasing the business and looking at it, do you expect any write-downs within the one-off costs?

Nick Olson

Arie, sorry, you have to wait till May for all of that sort of details. Clearly, the organization is going to be cost-focused on more than just the personal cost line. We have been for many years and will continue to be. So, the simplification agenda we will communicate a clearer view of how that plays out in the sort of capability milestones that we are going to hold ourselves to account in May. And certainly as we revised the portfolio, there is the potential for write-downs as an element of any decision to reinsert business activities. But at this point, I can’t give you any numbers or areas to focus on. I am sorry. Next question, operator, please.

Operator

The next question comes from Tristan Joll of UBS. Please go ahead Tristan.

Tristan Joll - UBS

Good morning guys. Look I was going to ask the spend on transformation Chris slightly in a different way. I mean I guess, you are flagging a one-off cost in the second half year, my question is that, a lot of the IT reengineering prices for engineering would take longer than that. I mean is it possible that the cost elevation goes on beyond the second half. That’s my first question.

Simon Moutter

Look Tristan, we do not know the answer to that question at this point. So I am sorry, you’ll have to wait. The main answer we’ve got through – the detailed planning process, we’ve seen a strategy. We are signaling change, but we’re short on the detail and as always I promise that in May and we’ll deliver then.

Tristan Joll - UBS

Okay. Then just a couple of operating ones, and forgive if I’ve missed this. The broadband revenue pressure that you are seeing in half, has that alleviated – does that alleviate towards the backend of the half at all once you got some of that pricing in the market or is it fairly detailed. And then the second one is, could you just talk on general about the weakness in Gen-i and what’s driving that, you can see ITT and data, but I just wondered these specific trends you want to play?

Chris Quin

First, Chris Quin speaking. I’ll give you a comment on the broadband market. I think October, November we certainly saw a really aggressive period of offers. Current indications are that that is come off a little bit and probably would effect from April, May onwards. So, most of the competing offers were three to six month period. So I still have a little bit life to run and then potential it will stabilize. However I think the pressure on pricing broadband is here to stay. So I would not – I don’t think we’ll see a return to previous price levels. Our strategy will be about how we had valued back to those services in order to encourage customers to see more value in them. So I think it will take a couple of quarters to see the full effect and where levels might settle.

Simon Moutter

Indeed and obviously part of the challenge joined our cost base because if that is the new market level we’ve taken the revenue hit we need to get our cost in line with it. So looking in Gen-i, the economy is tough and large customers are all seeking to rationalize the cost base. That results in a lot of price based competition through most of the product lines. We clearly have continuing to decline in legacy voice and data revenue all around that sort of copper based products seeding particular and the substitution an increased competition continue to drive those trends. Mobile usage was down a couple of percent and I think that’s probably more to do with our how CDMA played, but it certainly each time we bid in mobile, we’re seeing material price pressure in that process. So, I think the focus going forward is we’re really optimizing the business around the areas that are of highest fairly to the customers and where we can make the meaningful return. So, we will share some strategic direction for Gen-i may as well.

Tristan Joll - UBS

Just one more sorry I forgot to ask, Yahoo! thing you haven’t raised that yet. But I mean -- given the price volatility the link that time it’s gone almost the probability you end up pushing out service credits to people or some sort of similar…

Simon Moutter

It’s not really a matter of service. Yahoo! is a global email platform. I think while clearly we disappointed to have had customers have to deal with the issues around Yahoo! and the cyber attack, it is unfortunately a reality of the world of email. And I have spoken to the Yahoo! CEO myself and when you hear just how meaner text they incur everyday on this big global platform that’s still a place where those things are unavoidable. It’s not really a compensation issue but it certainly a frustration for customers and our teams who have hit front (indiscernible). So, we do like we have got the rest of it behind us. We have got the customers through the past we have changed process and there has been no sign of anything more sensed or further developing in the email hacks. Next question, thanks operator?

Tristan Joll - UBS

Thanks.

Simon Moutter

Operator any further questions.

Operator

The next question, my apologies, comes from Greg Main of First New Zealand Capital. Please go ahead, Greg.

Greg Main - First New Zealand Capital

Hi, guys. Just a couple of questions from me, a bit more operationally focused just your D&A profile obviously had a bit of steep down this half is we knew was sort of coming down, can you give us a bit of feel for how you think that will be in the next half sort of flattened off or do you expect to further maybe decline there?

Simon Moutter

Ask your next one as well Greg, and then we will get organized while you’re talking. You said you had two questions.

Greg Main - First New Zealand Capital

Sorry, can you hear me.

Simon Moutter

Yes. Alright can you give us your second question?

Greg Main - First New Zealand Capital

Okay. Second question was just, you asked – or in slide 11 you had around your cost movements, and one of them was obviously with regard to fee and during the presentation you talked about a change in Chorus trading arrangements, was there actually something to do with the way you previously allocated costs in the de-merger, was there an absolute decrease in the amount that you would expect to pay Chorus in fee going forward?

Simon Moutter

Yeah. Sure. Nick will take those. Okay, question number one, D&A profile, yeah, we are predicting a fold of year at D&A. Now, because of the changing mix of CapEx, deferral of CapEx into (indiscernible) we haven’t actually I think that the forecasted D&A for next year. But we would expect a small downward trend that’s what I would have expected before the changes in the CapEx profile. So, that’s about the best guidance I can give you at the moment.

Nick Olson

Greg, I presume you’re just talking about the $45 million adjustment. Essentially when we de-merged from Chorus, internal trades became external trades and the way the trades are priced and they are almost entirely regulated prices. We ended up with about a $9 million benefit per month for Telecom relative to the internal trading environment and that was just simply the way that prices changed for the de-merger process. So, I think represents the first five months of FY ‘12, sorry, from the period from 1 July to November.

Greg Main - First New Zealand Capital

So, I think for an accounting and how you used to account to it rather than more a cash trade license?

Nick Olson

Great, basically it came from internal non-cash accounting entry to an external cash payment.

Greg Main - First New Zealand Capital

Okay. And just one other question, just obviously your interest costs as you said you got benefited from slightly lower interest rates and the lease arrangement from Chorus. Once again, are you expecting a fixed interest rate around 5%, Nick?

Nick Olson

Yes. I think if you are calculating average interest rates for financial model, you should use around 5%.

Greg Main - First New Zealand Capital

Okay. Thank you.

Simon Moutter

Thanks Greg. And operator I think we got time for maybe three or four more questions.

Operator

The next question comes from Paul Brunker of JPMorgan. Please go ahead Paul.

Paul Brunker - JPMorgan

Thank you, operator. Thank you, guys. Just digging a bit more into fixed broadband churn, can you give us any numbers about what churn levels are and where that come from. And just a bit of sense for those who aren’t over there. How easy is to customers to churn post-structural separation. And I guess, it’s a follow-up question to that is how much attrition are you seeing in the voice customer base from churn rather than call cutting product? And just on mobile obviously big drop off from the CDMA shutdown followed by a nice recovery, do you have any sense of how many of these customers were flowing back to like from CDMA closure timing suggest that wasn’t there any factor because it was back ended towards the end of first half, but do you think you can sustain that rate of gain from here?

Chris Quin

Thank you, Paul. Chris Quin speaking, firstly on churn look I talked about total fixed assets churn level, which I think Simon commented on. We have seen it fall from around 7% to 5.5% half-on-half or prior comparable period. Broadband within the market and the current structure with the de-merger well in operation, churning is no more or less difficult than it used to be, really. So, I don’t think there are any proceeds or industry barriers to churn. It’s essentially back to the competitive proposition we put in and how people feel about that. I think we would say that us the commitment Simon gave at the full year announcement at the end of last financial that we were committed to holding our share getting back to our ARPU share and broadband is playing out on our pricing. And you are seeing some of the positive impact to that and our lower churn net acquisition being positive. Of course, the price of that comes in the revenues that you own per line. Your question regarding the mobile based games, I think the fact that 91000 of the 103 game came in the second quarter is the answer to your question. I think somewhere between that sort of early 90s and a 100 is the real positive game that we have made in the quarter and as clean of any CDMA effect overall. Can we continue that right look, we are determined to be competitive in the mobile market it’s important to us, but we are pleased that we are doing that at our overall value level and trying to bode some sensible good offers in that we know are sustainable for customers.

Paul Brunker - JPMorgan

Thank you.

Simon Moutter

Thank You. Operator, next question?

Operator

The next question comes from Ian Martin of CIMB. Go ahead please, Ian.

Ian Martin - CIMB

Thank you. Just going back to Gen-i, it was the standout performer in full year results six months ago with EBITDA up 11% in mobiles in particular driving that contribution. And mainly I will recall in the enterprise segment. So, given your comments earlier on Gen-i, is this really an issue that your strong position in that enterprise segment, in particularly mobile revenue has eroded quite quickly. Is that what’s going on there in Gen-i?

Chris Quin

Look, I think it’s more lightly we took by really going, Chris Quin. Look I think that would be an incorrect assumption that we are suddenly seeding enormous market share, Ian. It’s just a slower Gen release, slower, tougher more price-based game out there at the moment. And usage in particular around the mobile usage revenue with the change in CDMA which had a lot of corporate base needed to make a series of moves will have impacted the half year. So, – and has a full year effect this year as we go into the second half. So, look we are not gloomy on Gen-i. We just got a – it is a softer outlook in the second half and I don’t really have anything further away there, sorry. Next question, operator?

Operator

The next question comes from Adrian Allbon of Goldman Sachs. Please go ahead Adrian.

Adrian Allbon - Goldman Sachs

Well, good morning guys. Actually most of my questions have been answered already, so thank you for that.

Simon Moutter

Next question, operator?

Operator

The next question comes from Sameer Chopra of Merrill Lynch. Go ahead please Sameer.

Sameer Chopra - Merrill Lynch

Hi there. I just had two other follow-ups. One is the LTE, when do you think you might be able to go to market with LTE? And Chris just on the roaming decision, can you give us a sense for how much price elasticity sits in roaming? When you cut price, what sort of P&L impact you get to that?

Simon Moutter

Sameer, look LTE, we will be commercially in market this year. We are not prepared to be any clear on the time that would be commercially seen sort of position, but we expect to be in market this year. Look on the roaming decision; it is too early to give you detailed numbers. What we know is the fixed price point in Australia trebled effectively trebled the volumes of data usage, but we haven’t had long enough to assist the financial impacts and that will need a few more months of information before we do that. I am sorry. Operator, next question?

Operator

The next question comes from Hamish Fletcher of New Zealand Herald. Please go ahead Hamish.

Hamish Fletcher - New Zealand Herald

Good morning Simon. Just want to get some clarity on headcount reduction. I know you said today that you are not going to sharing any numbers. When are we likely to get to more details on exactly what’s going on there?

Simon Moutter

Hi Hamish, we are clearly very concerned about the impact of these decisions on our people and the right thing to do in any organization is to put – get the plans work out properly to work that through with our people first and to treat them with the greatest respect to net proceeds as I see before. What we do know without sugarcoating, this is – that it is apparent, it will be a number well into the 100s. I can’t be more specific than that right now, but we will be in a position to share more information over the next two or three months as those plans are built and take effect.

Hamish Fletcher - New Zealand Herald

Do we know what area of the business is likely to be stated by these cuts as opposed to other?

Simon Moutter

There is no area of the business who was not being asked to look very hard at everything we do to make sure we remove the legacy culture, the layers of middle management, the duplication of effort and to find a way to make a contribution to getting our cost base more competitive. So that we can continue to be competitive and offer customers the sort of value they expect in the market.

Hamish Fletcher - New Zealand Herald

Alright, thank you very much.

Simon Moutter

Operator, any further questions, we have perhaps time for one more.

Operator

Thank you. The next question comes from Chris Keall of NBR. Please go ahead, Chris.

Chris Keall - NBR

Hi, Simon. I mean, you got 4G trial underway not looking at the financial year starting in August, do we have any significant or any CapEx for 4G rollout or is that going to be fairly down the track? And I was just wondering for the first half of the mixed financial year as well, would there be any material CapEx for that the UFB order trends has been cable? Thanks.

Simon Moutter

So, Chris just to confirm we are not in a position at this point to provide any view on CapEx envelopes for next financial year, we are confirming CapEx guidance at $460 million for the current financial year. And that $460 million contains a significant CapEx for our preparation in building capability around 4G, expansion of 3G dual-carrier, the core, the evolved packet core system, the optical transport network, and of course the fiber program. So, it’s – we have planned that. There will be continuing spend in future years and we’ll give the markets some guidance on that at the normal time.

Chris Keall - NBR

Hi. Just quickly, can you give any more detail on the UFB plans being noticed next month or how many residential fiber customers you would expect to gain over say the first six months?

Simon Moutter

No, not at this point Chris we’d like. We’ll come to market in March as we have indicated with our fiber offerings and at the time we launched them, you will see the shape of those. So, let’s – operator, I think we have two more questions, let’s take those and then we’ll close off.

Operator

The next question comes from (indiscernible). Please go ahead, Tom.

Unidentified Analyst

Hi Simon. I hate bang on about the job cut numbers, but you did indicate some hundreds of jobs will be tough over the next 10 months. A lot of our latest might have seen that mean – would mean that it will be in three figures that went from 3 to 1000 jobs, is that interpretation correct?

Simon Moutter

Look I am not willing to be any more specific at this point, Tom.

Unidentified Analyst

Thank you.

Simon Moutter - Chief Executive Officer

Alright, operator, I understand there are no further questions. So, thank you all for joining the conference call this morning. We look forward to seeing you in May at the Investor Day or at our full year briefing in August later this year.

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