Telecom New Zealand's CEO Discusses F4Q 2013 Results - Earnings Call Transcript

Aug.23.13 | About: Spark New (NZTCY)

Telecom New Zealand (OTCPK:NZTCY) F4Q 2013 Earnings Conference Call August 23, 2013 6:00 PM ET

Executives

Simon Moutter – Chief Executive Officer

Jolie Hodson – Chief Financial Officer

Mark Verbiest – Chairman, Non-Executive Director, Independent Director

Analysts

Sameer Chopra – Bank of America Merrill Lynch

Tristan Joll – UBS Securities

Richard Eary – UBS

Greg Main – First New Zealand Capital

Paul Brunker – JPMorgan

Arie Dekker – Deutsche Bank

Ian Martin – CIMB

Chris Keall – NBR

Richard Eary – UBS

Simon Moutter

Welcome to Telecom New Zealand’s Briefing on its results for the year ended June 30, 2013. I’m Simon Moutter, Chief Executive, and I’m joined here today by our new CFO Jolie Hodson. Jolie joined us in June after 12 successful years with the Lion Group in Australia. I will run through an overview and the strategic context for the business in some of the product trends and Jolie will of course, cover of the group results and the capital side of things. And then I’ll make some concluding remarks and wrap up.

Look on the 16 May at our Investors Day, we did see out our detailed strategy to investors and analysts and today we totally believe in and remain committed to that strategy. The strategy is aimed at ultimately protruding telecom to long-term growth.

And just to remind you some of the context, globally we certainly do operate in the growth industry, but sometimes its feels very difficult to monetize that growth. Locally, we’ve seen unprecedented changes in the market structure and New Zealand’s market is to rapidly adopting and stabilizing. In the wake of those changes, telecom in context has still a position with 60% of our revenue comes from the fixed line business and only 22% from mobile, 13% from IT, and so we do need to work hard to change that revenue mix. We know customer preference is more important than ever before for our future success. So getting it right for customers will be central.

And our financial results for this year clearly reflect our strategic decisions to hold share and broadband, grow mobile, and to reduce cost, and they also reflect the ongoing declines in legacy fixed line revenues and the challenge that we have in offsetting those declines. And certainly a key-learning that I talked about in May was around the world. When we look at other income in telcos who’ve moved on this moving decisively and quickly to that is critical.

So I guess, for us, we feel like we are making those moves and to use a sporting analogy, we’ve got a new coaching team, a new leadership group, a new game plan. And we’ve made a solid start in terms of building a foundation for success. But it is clear that our strategic choices this year have added impact on this year’s financial results, and we have of course, undertaken significant structural change in the last six months to reposition telecom for future success.

And that’s it. I’d love to been able to share the result with you like the one that Telstra shared last week. But the reality is that we’re at a very different stage of our strategic shift, and we feel we’re broadly in the position that they were three to four years ago. We’ve seen a clear strategic game plan. We’ve got the right team in place now to succeed and we have made some real inroads into the necessary changes that would set us up for long-term success, but we do have a lot of hard work to come.

As I see it out at our Investor Day, our ambition is to be a growing New Zealand company, winning by customers choosing us to connect them at a speed of life. And to do that, we know we need to get back to the number one in mobile, data, effortless service and cost. And that needs a strategic shift from what we describe is a traditional fixed in mobile infrastructure company to a future oriented competitive provider of communication, entertainment, and IT services delivered over our networks in the cloud. And we will need a significant organizational reset to drive that shift. So we do to achieve it, we are working under four clear strategic priorities, which we set out in May. And I’d now like to give you an update on progress against each of those since we last talked.

Revolutionizing customer experiences will be keyed creating customer preference and we’ve made a lot of moves in this space. Our little Tech in a Sec video which covered products on the TV advertising have now hit over 400,000 video views online. A strong 14% of people who go and watch the video then go on to use and do what they’ve learned from the video. We know that a large number of users of those services are actually Vodafone and 2degrees customers. So that is helping build preference for our brand. And the feedback from viewers has been very, very positive.

Our Live Chats, another good example of progress, we are up from only a few 100 calls in February, chat sessions in February 2013 to 16,000 in the month of June 2013, but 130,000 Wi-Fi users on a complete self service model. We’re differentiating our broadband product. Trying some stuff to understand the customer experience around over-the-top video we can with the premier league content. And we have established in resource to new Gen-i leadership team to improve service to government, and of course, helped out roaming solutions have had a major impact on usage.

Simplifying our business is pivotal to creating a faster moving and more agile, more competitive organization. To that extent, we have reduced our full-time employee count from to 6,600, down from around 7,900 a year ago. This included the tightening of management and operational staff levels in all business units, a 37% reduction in the corporate center staffing level. A big reset of the scope of Gen-i Australia and the divestment of the Davanti Consulting business and of course, that number has been partially offset by the addition of 150 Revera staff.

We’ve achieved through that process an annualized payroll cost that’s including both so it’s a gross cost including both OpEx and CapEx reduction of $100 million to $120 million, excluding the addition of Revera. And we now established a centrally lead cost out and simplification program headed by Matt Crockett who has rejoined the team here as one of my direct reports.

The reengineering program is well underway and we intend to deliver its first big capability drops in the operating and business support platforms late in FY14. We have streamlined and speedup some of their performance in HR processes, breaking some new ground in those areas. We started rationalizing all of our products and channels and have adjusted the service model for business customers between Gen-i and telecom retail with over 1,000 customers transferred between those units.

To the change the service model for them, we started downsizing our broadband product range from 58 plans with an aim to get down to under 10. And at 30 June, we’ve migrated 60% of our broadband customers on to these new plans. We’ve done an awful lot of work to optimize our Gen-i portfolio around mobility, data, and the cloud. We bought Revera and downsized Gen-i Australia and divested Davanti. Long-term value of this business will be determined by our ability to win key markets. So as mentioned earlier on, we’ve made a strategic decision this year to hold the line on market share. They stayed an expected impact on this years financial results with a significant hit to margins, our objective is to grow share in mobile and hold share in broadband, and I’m pleased to say that we have delivered on both of those.

While it’s impacted on the near-term financial results, market share is a key driver of long-term performance, provides a bigger platform for services and provides better economies of scale and is crucial to shareholder value in the longer-term. Regard to broadband up and running, its early days, but the market response is positive, and we have got certainly no problems on the demand side and it’s proving to be a solid up sale opportunity.

Skinny was relaunched this week as a (inaudible) best value brand. Skinny was initially positioned primarily as a youth oriented brand. We have relaunched it this week as a much more mainstream value conscious brand to use [pick and save] and analogy. Skinny will offer right product at face value and one have the cost overheads in terms of complex product with service options.

Further in the long run to create more valuable business, we need to return to revenue growth. We do understand that and we can do this by improving our market share performance in our core telco products that we also intend to contribute by investing in future digital services.

To support this, we have established the Telecom Digital Ventures group in April and from a market perspective that will focus principally on mass market opportunities ideally with the ability to leverage telecoms existing assets and infrastructure to its competitive advantage. We have established a growth agenda comprising a portfolio of growth initiatives with five main areas of interest, connectivity, commerce, data and applications, verticals, and content. As part of the key mobility focus, the Telecom Digital Ventures unit is also responsible for the Skinny Mobile business and the Wi-Fi business development. And we have commenced the expansion of the Wi-Fi network to widen the national footprint and we already have over 130,000 users on that network.

Wi-Fi would be a component in enabling the data and mobility future with a seamless customer experience across our mobile and Wi-Fi operations. Within Geni-I, we bought Revera, one of the market leaders in cloud computing and we’ve expanded our data center capacity opening a new Christchurch data center a week ago, and we have a new Auckland data center on its way.

Gen-i is also looking to build the right sort of partnerships to complement its strengths in data mobility and cloud with new partnerships formed with SAP, Flexera, IBM, Microsoft, HP, Samsung, and CISCO in recent months.

Our 4G network build is underway, aiming to launch in Q2 FY 2014. And also quite recently we’ve signed Gen-i on as the IT partner for the government’s network for learning initiative and initiative I’m very keen on personally and I think highlights the important link between our technology and education. We are very proud to have won that major piece of business.

Looking at the product trends, starting with access revenues, access revenues have decision to compete on price to hold share and broadband [air has resulted] in the lowest fixed access tune and now retail business in five years. Tune was 5.5% for the full year, but in the last six months was down to only 3.3% on an annualized basis, now that compares to tune of over 8% in FY 2012. This proves that broadband is the new access. Also access lines have started to decline for the first time, due to reduced retail access tune and migration of customer lines to alternative technologies, mainly on bumbling. In H2 we singed a commercial wholesales deals, which will assist in managing the rate of wholesales PST and revenue decline in future years.

Calling revenues continue to trend down as they are globally with the rate of decline here accelerating slightly in the second half due to both volume and price reductions in Gen-i case due to ongoing line consolidation. In retail’s case, the introduction of the new broadband plans has contributed to the decline in calling revenues, the entry level $75 plan does not include a calling component other than free local calling.

So at least customers buy a call in bolt-on will make telcos no portion of the bundle is allocated to calling revenues. When customers buy bundle, the revenue allocations between access and calling in broadband are becoming less important we think. Overall, retail’s fixed revenues have declined 8.3% over the year, which is not a bad outcome in the context of the global trends and our change in strategy.

The mobile market continues to be highly competitive. Now focus on winning on value propositions rather than on price for our three brand strategy Gen-i, Telecom and Skinny looks like it’s working. Despite the heavy competition, we are very pleased with our positive need heads in the half with 92,000 need heads, 48,000 prepaid, and 44,000 post paid.

Mobile service revenues have continued to grow at around 3.5% with voice revenue stable and data revenues growing 7.8%. Retail service revenues were up 6%, very strong growth. Gen-i’s were down 4%, which reflects intense price competition in the enterprise and government markets. Since closure of the CDMA network, our postpaid ARPU is now $54 and our prepaid ARPU nearly $12.

Postpaid ARPU has declined slightly due to averages reducing as we took more value into the plans. Our prepaid ARPU continues to grow following the success of the introduction of plans and in particular the $19 value pack into the prepaid market.

The mobile market in New Zealand is essentially a three-player market. And some of the market facts and figures are less visible to us, so it is difficult to accurately to determine our mobile market share. But we believe it is around 36% to 37% of usage revenues today, which is up in the order of 1 percentage points since CDMA closed. So we do feel that we are on the right path.

In terms of mobile profitability, mobile cost of sales are now being more effectively managed. Despite handset subsidies increasing towards the end of the period, we’ve improved our SARC to revenue ratio by – through the percentage point, meaning a 7 percentage point reduction for the year, due to slightly a lower tune and more bring your own device plans resonating with customers.

In September 2012, we changed our strategy in broadband, focused on holding share rather than maintaining price premiums and continuing to share market share. We believe we successfully executed on the strategy. We’ve gained 18,000 net connections in the second half bringing our total number of broadband connections up to 630,000. We believe we will hold share in broadband market broadly around the 47% to 48% territory, but again this can’t be confirmed until Chorus report on Monday.

Our strategy hasn’t picked at broadband revenues, which is $24 million lower in FY 2013 than in the prior year. We have now 60% of our customers on the simplified rebase plans. And I just like to point out that not all customers are choosing to go on to the $75 entry level plan and with a rapid growth in household data usage up to 24 gigabits average now. We are giving the opportunity to up sale customers and we’re now with the launch of ultra broadband video selling fiber products proving very popular, they are also providing an up sale opportunity.

Turning our attention to IT services and data, it’s important to put Gen-i’s financial performance in the context of significant changes that Tim Miles and his team have made during the year and the intensifying price competition on both the ICT and telco side. Some of the changes he has made include the rationalization of Gen-I’s Australian operations. The exit from our low margin businesses, a mess of simplification exercise, which saw Gen-i staff level reduced by 23% before adding in the acquisition of Revera and a much stronger focus on the core strengths of mobile, data, and cloud, including the investment of Revera and expand the data center capability.

I don’t underestimate how tough a change program like that is to execute and then Tim and his team have done a tremendous job. Changes of that magnitude have undoubtedly had some impact on our near-term performance that in my view would be critical to the repositioning and long-term help of this business going forward.

One positive in the Gen-i performance is that focused on better quality has enabled Gen-i to improve its EBITDA margin. AAPT’s data revenues grew in the second half following the acquisition of Nextep and solid efforts in the market AAPT is on a good track and we believe they are close to retuning to sustainable revenue growth.

I’ll now hand over to Jolie Hodson our CFO to take you through the Group results CapEx and capital management. Jolie?

Jolie Hodson

Thanks, Simon. The full-year reported results reflect many of the trends that Simon has touched on. The total revenue is down 8.5% due to continued decline in fixed excess revenues, albeit at lower churn rate in H2 and price-based competition.

Our operating cost reduced 6.6% as we executed our cost strategy index mitigate polling revenue. Our reported EBITBA was down 14.6% primarily due to large restructuring costs which we have booked in the second half. The combination of these factors means that reported net earnings from continuing operations were down 23.5% to $238 million.

I’ll now take you through the adjusting items. In H2, we’ve booked restructuring cost of a $101 million, which comprised $38 million of severance and labor costs, $42 million of separate lease contracts, and $21 million of other restructuring costs, predominantly related to the rationalization of Gen-i Australia.

In addition to restructuring cost, we’ve also booked accident payments $26 million, which we like to write-down a property, plant and equipment and intangible assets, all a direct result of our strategy reset. We’ve also incurred additional natural disaster cost which has been booked in relation to the Christchurch earthquake to more than offset by insurance proceeds of $15 million. The tax effect on all these items is only $17 million.

Now, shifting our attention through the adjusted full-year result, it’s important to remind you that comparative is still complicated by the merger. So the prior year EBITDA of $1048 million would be $1093 million when changes in Chorus trades under measure taken into account, meaning that the underlying EBITDA of FY 2013 is down 65% on a like-for-like basis.

Our depreciation and amortization continue to fall down 6.4% to $539 million as it continues to strike down towards CapEx. Our net financing costs are lower due to lower debt levels following the merger.

The effective tax rate is 26% slightly below the 28% corporate tax rate due primarily to the prior period tax benefits from 2011 and 2010. Our CapEx is 18.6% higher due to the recognition of $54 million of 815 megahertz spectrum in FY 2013, which was prepaid in the prior year. Also due to our firm writing of our strategic investment programs of 4G mobile, the OTN, and reengineering.

Net earnings have grown 21.7% reflecting a lower D&A and financing costs. EPS has grown 26.9% to $18.4 per share, reflecting a high net earnings and reduced number of shares outstanding following the share buyback undertaken during the 2012 calendar year. We now have a look at our adjusted revenues, a decline by 8.1% in FY 2013. If we look at the compilation of that, firstly, international transit continued to decline, as our International business rationalized its operations.

AAPTs external revenue saw 23% as it exited low margin business. That rate of decline tapered off in the second half significantly to 14% following the migration of services to the consumer division.

We received the Southern Cross dividend of $37 million ion H2 bringing full-year Southern Cross dividend to $56 million versus $58 million in the prior year. In our New Zealand operations, our mobile revenues were down $9 million. However, we need to strip out $47 million impact from changes to mobile handset accounting mobile revenues were up $38 million primarily due to the 3.5% growth in service revenues.

New Zealand fixed line revenues excluding transit have declined a $160 million, 7.6% over the year with the rate of decline increasing from 6.3% in H1 to 9% in H2. The increased rate of decline reflects accelerated decline in retail broadband in calling revenues being partially offset by lower retail access tune. Lower Gen-i revenues has affected intense price competition and reduced wholesale access revenues due to commercial deals with customers and lower access lines following the reduced gen in retail. And as Simon touched on, ICT services revenue has declined as Gen-i repositioned its portfolio.

We now look at our cost decline 10.3% over the year. During the declines in revenues we put transit costs for $26 million, while AAPT cost sell $122 million. We also booked $12 million of accident payments related to IT projects, which have not been adjusted in our result as they are not part of the strategy reset.

The change in Chorus trading arrangements from December 2011 reduced our cost base by $45 million on a like-for-like basis. Our mobile cost of sales are flat for the year, but the phasing has varied into the year with cost of sales higher in H2 of FY 2012, partly because of the CDMA network.

Sales in the current year related to the normal trend have been higher in H1 in the late up to Christmas. Our labor costs, excluding AAPT fell $91 million or 13.6% due to significant FTE reductions in a lower year in both beneficial. Other New Zealand costs fell $90 million due to reduction across most cost categories, the biggest component was lower into carrier costs due to lower volumes.

If we now take a segment view and look at our numbers from a different perspective across the business units comparing the second half reflected into the second half of FY 2012, we can see that our EBITDA declined 4.1%. If we look at the retail, EBITDA declined 5.5%, which is a satisfactory result in the context of the change in strategy to holding share in broadband and competing more actively in mobile.

Gen-i EBITDA was down 8%. The softer H2 performance reflects intense price-based competition across all product categories, which is partially offset by 14% reduction in labor costs. Wholesale and international EBITDA was down 2.6% due to declining access revenues.

AAPT’s EBITDA fell 20.8% and reflects the continued rationalization of low margin business, the final migration of services of the consumer division, pricing pressure, and market consolidation prior to the gain going live (inaudible) business has stabilized between H1 and H2 reflective chain. Our TNSS and corporate costs reduced merely due to the lower labor costs. Our results in H2 highlight the need for us to continue to reduce our operating costs and stabilize our top line through mobile growth.

Now, shifting our attention to CapEx, the FY 2013 CapEx was $465 million, including Revera $4 million which is in line with guidance of approximately $460 million. The competition of our CapEx is being refocused towards our three key strategic programs; mobile, IT and reengineering, in H2, it’s been $55 million on our mobile network, $19 million on IT, and $17 million on reengineering. All three programs are on check before G60 launched a bit tough of FY 2014. The feedstock of the reengineering program, which is the replatforming of prepaid mobile will occur in H2 FY2014.

As previously said, we pick up CapEx for the next three years to average $400 million to $500 million pan and the sizing could vary. We expect our spending will heavily weighted to the front end with FY 2014 CapEx media going to this range, excluding spectrum due to the rollout of our 3K strategic program. We are undertaking a rigorous review of our CapEx envelope and putting in place disciplined processes to ensure we optimize our capital spend over the next three years. The timing and dollar value of spectrum acquisition remains on position.

On the capital management side, we remain committed to our single accretive rising from both Standard & Poor’s and Moody’s. Net debt is slightly lower than you might expect it (inaudible) at $875 million. This is due to the year end Chorus panel falling into July. Our average life of net data is now 3.7 years. And our average cost of external funding is 5.3%, our only financing cost in the P&L was slightly less than 5% due to finance lease in comp in Chorus.

Turning to dividend policy, we have shifted to fixed dividend payout to provide yield and basis with a high degree of patiently as we transition the business to our new strategy. We have declared a final FY 2013 dividend of $0.8 per share and subject to no at this change in operating outlook we plan to payout a $0.16 share dividend in FY 2014. The balance of our imputation credit account remains low following excess write off (inaudible) and the restructuring charges that we booked this year.

For this reason the H2 dividend is imputed at 75% of the corporate tax rate. This feed competes FY 2014 dividends at a range of 17% to 19% while replenishing the import tax in credit account balance. Lastly, our intention is to register at IDR program.

I’ll now hand back to Simon to take you through the FY 2014 outlook and guidance.

Simon Moutter

Thank you, Jolie. Look, as I outlined at our May Investor Day, we do have real expirations on where we want to end FY 2014. We know that successful strategic shifts in other companies have been underpinned by strong internal focus on winning being more performance driven, more agile, more competitive, and more conscious of our costs. We are aiming to crystalize a $100 million to $200 million of additional annualized benefits from reengineering costs out and simplification programs. We previously said these benefits would be relative to FY 2014. But given the trends in our revenue lines, we are now targeting to deliver some of these benefits earlier by our centralized cost-out program.

Success in the mobile market would mean a 1% to 2% increase in service revenue share underpinned by new mobile platform including 4G. And from a customer perspective, we think about mobility as opposed to mobile, and data and mobility driven future. Customers want access to data services anywhere, anytime. So Wi-Fi is a key complement to the mobile networks and Telecom is building a strong customer proposition in mobility generally.

We are also aiming to get greater cut through in customer preference for their multi-brand proposition in mobile. Skinny has relaunched this week and there will be a lot more activity around reinvigorating our brands in coming months. We’ll be looking to maintain broadband share and driver the up sale opportunities created by Ultra Broadband. But we’ll also be looking to start seeing revenue growth from the repositioning of the Gen-i portfolio around data, mobility, and cloud.

Success in the future will be driven by some new and highly differentiated customer offers and a new portfolio of products and services that will emerge out of the Digital Ventures Group. And as I indicated in Investor Day, we are looking to have a clear pathway on Australia by the end of the financial year.

To achieve these expirations, we’ve got some clear delivery priorities for the first half of FY 2014. We’ll be looking for digital self service options to be expanded and taken to the next level. And we will be looking to help educate more and more customers on how to use these sorts of options and we believe their appetite for them is growing.

The reengineering program to simply our IT stake will continue. It’s well underway and will help us unlock some material business value when we get the first big capability drops later this financial year. The centralized cost out in simplification program is still in its early stage, but we are starting to a get a clearer view across all of our profit and loss lines, and our variable costs will be – where they will be in a position to consider some choices that hopefully we can share with you at our half year briefing.

We’ll continue to reinvigorate our brands. Internally, we are going to get much more aligned around performance in winning. 4G remains on track to be launched later this year and will be a big part of our broader mobility offers offer to customers. We’ll continue to migrate and simply our broadband offers and look to up-sell customers to the benefits of Ultra Broadband.

The future will be driven by our improved cloud and data capabilities with Revera by our emerging Digital Ventures product portfolio and through leveraging the new government investments you would be in [IBI] and through the integration of our Wi-Fi product into the mobility proposition.

Telecom is at the early stages of a major strategic reset and there were still a lot of repositioning to come. Competition in the retail market remains tough. Gen-I has a lot of change underway. Our centralized simplification program is at an early stage and the timing of benefit realization is uncertain. With all of these moving parts, we simply don’t have enough uncertainties or issue formal EBITDA guidance within a narrow range this year. We do note that FY 2014 market consumes EBITDA as currently $1,035 million, and at this point, we are not uncomfortable with us. As Jolie mentioned, we speak FY 2014 to FY 2016 CapEx seem like to be in the $400 million to $500 million range per annum.

Although the phasing may vary from year-to-year. We currently speak FY 2014 to be nearly upper end of this range, excluding speak from. With regards to the 700 megahertz spectrum option, there are a range of variables to consider, the timing of the option maybe delayed by the white (inaudible) claim to be frank, we’re not uncomfortable with the delay there and that in the accessible devices for 700 still we’re seeing for some way of. So we prefer the government took the time to get those matters resolved before running the auction. We have the uncertainty around the timing of availability for a significant device range to utilize the 700 spectrum, the accounting treatment may require immediate capitalization. And we have of course, the option to spread the payments over full year, so a lot of moving parts here.

And lastly, we anticipate, again, likely $0.16 per share dividend in FY 2014. So to summarize, we’re clear about our game plan. We know that the strategic decision to focus on share has had an impact on revenue this year. However, we are also clear they share as a key driver in underpinning economies of scale in providing a stronger platform for future growth. And our strategy will maintain a near-term focus on share, margins, and cost, longer-term, we’ll be driving opportunities for revenue and margin growth, and throughout, we will be disciplined about capital management.

It’s not a conflict strategy. However, we have seen clearly in peer organizations around the world there with commitment and relentless execution over time, this is a strategic pathway that came build long-term shareholder value.

So that’s our presentation for the morning. I would now like to hand back to the operator, so that they can open the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Sameer Chopra with Merrill Lynch. Please go ahead.

Sameer Chopra – Bank of America Merrill Lynch

Good morning. I had two questions, first on the mobile, I mean you had very good growth in the mobile (inaudible) Vodafone when we look at that subscriber trend. Can you talk to what’s going on – you both the economy that’s improving and there’re is industry growth or you able to pick up share from 2degrees, is that therefore driving lot of trends?

My second question is on the Investor Day, you mentioned that there is a focus on government and often. I was wondering if you could give us the perspective right now and how mobile, broadband, and IT are winning those two markets? Thanks.

Simon Moutter

Sameer, look on mobile, I think if you can consider the mobile performance you see very strong – we really focus nowadays on service revenues very strong performance in our retail business. Gen-i holding share but heavy price pressure putting a dent on the revenue position. Solid growth in data but within the – so data revenues up 7.8% but when we look underneath the cover there we’ve got as the trends are worldwide a significant decline now in SMS revenues but mobile broadband data growing very strongly up 29%.

So that’s sort of the make up for us relative to competitive we have very little inside at this point on 2degrees progress. We have seen Vodafone’s most recent results. I’m interested that (inaudible) the numbers as solid growth our observation is that the likely consolidation of the TelstraClear acquisition base and we would certainly point inventors to more clearly understand that but we don’t think that was real growth. We think that was the customer base they acquired being consolidated into the numbers.

On Gen-i, we have had a very strong focus as I said in May on reestablishing our presence and performance around the government contracts across a range of activity to emphasize that we’ve relocated two of our Gen-i back down to Wellington to joint the GM who was already based there. We’ve reorganized the business to have a group lead by Robin Hartendorp focused entirely on government. Robin came from Dimension Data was a highly respected and very successful CEO in our industry with selling into and performing on delivery for government. And we’ve seen our success rate improved rapidly as we have reconfigured our approach to winning the government contracts, and of course, the acquisition of Revera, who are very embedded in a number of government business activities has assisted us again, in reopening doors and enhancing our proposition.

So I would say, nearly pay, face only two or three months of relief that we have repositioned strongly. We feel much more positive about our ability to win government business from here, but I guess time will tell over the coming year, whether they will show up in our results. Operator?

Sameer Chopra – Bank of America Merrill Lynch

Just on the dividend guidance pool, I think as well, what kind of drove the thinking behind that, why don’t you believe at the floating payout ratio?

Simon Moutter

Simply that we’re not offering earnings guidance at this point. So we wanted to alleviate any concern that we might be trying to dampen on the yield on the yield expectations on the business.

Sameer Chopra – Bank of America Merrill Lynch

Thank you.

Simon Moutter

Operator?

Operator

Thank you. Our next question comes from the line of Tristan Joll with UBS. Please go ahead.

Tristan Joll – UBS Securities

Good morning.

Simon Moutter

Good morning, Tristan.

Tristan Joll – UBS Securities

Just a question on, I mean I realized that the TN35 EBITDA number is not guidance, but (inaudible) I guess, so what we’re really saying is that if you take out Revera, which I think about – first thing you’ve got through the 3% growth EBITDA decline for the next year, is that the number that you had. As far as my question is, what are you writing in around Southern Cross. And that, I think probably selling cost is surprised this year and do we expect to see dividends in the order of sort of odd $55 million (inaudible) next year as well?

Simon Moutter

Sorry, Tristan, we can’t speak for Southern Cross and say, we wouldn’t be able to comment on that.

Tristan Joll – UBS Securities

But if you got a level of comfort with analysts consensus, you must have an internal project for DD or not really?

Simon Moutter

Well, of course, we do, but we are not a little bit yet at this point to disclose those numbers.

Tristan Joll – UBS Securities

Okay. And then just with the restructuring stuff, $100 to $300 million sort of it’s exciting to see possibly that comes forward. I’ve got a question, I mean, what does that range actually baselined also a bit baselined of sort of fiscal 2012 cost base or can you give us some idea where we should anchor that?

Simon Moutter

Yeah. I think, we think about it is run rates all the time. So it is always a little bit focusing. Jolie, do you have any sort of thoughts to clarify that?

Jolie Hodson

In terms of our labor costs, figures fluctuating 14, based on our exit run rate from FY 2013, we’d expect FY 2014 labor cost to be approximately $15 million lower than FY 2013, once you’ve taken into account the rollout of FTI for most staff in the addition of Revera, so that for instance, some of the restructure obviously we see value from FY 2013 and then adjust the additional costs with Revera and FTI.

Tristan Joll – UBS Securities

Okay. So it’s actually very helpful. So that $50 million is extra cost from Revera. That includes (inaudible) that’s very good. I mean, just finally, I just interested to say the comment around AAPT and finding a pathway, I think is becoming strategic path. I guess, I mean, my perspective of being that that was kind of looking after sales for more than two bigger case drain, has something changed there or something changed in terms of your outlook to make you go back and have a look?

Simon Moutter

No, Tristan, I just simply at the May in Investor briefing and if you recall we sort of descoped our Australian operations from that whole days conversation, because we see it, we haven’t gone up to it. And I get asked most weeks what direction are we taking in Australia and we have not yet done the work to determine what the future direction around our participation on the Australian market is – so I indicated in May and we’re still indicating that during this financial year. We will clarify to our investors and our intentions and aspirations for Australia. And we don’t have an update at this point.

Tristan Joll – UBS Securities

Okay. Thanks very much.

Simon Moutter

Thanks, Tristan.

Operator

Thank you. Our next question comes from the line of Richard Eary with UBS. Please go ahead.

Richard Eary – UBS

Good morning, everyone. Just two questions for me, I think that probably a little bit more housekeeping. John, you mentioned on the call that net debt benefited from obviously delayed payments to the Chorus. I noticed it just by looking through the stat accounts and obviously what you published on CapEx. So there is always a reasonable side difference on the accrual difference. So I don’t know if you can gives us some sort of feel in terms of obviously how do you crew tie on CapEx plus obviously the magnitude of Chorus influence to that net debt in terms of the number. So that’s the first question.

The second question is just in terms of the mobile numbers, I mean, actually service revenue grow – similarly grow to what it was in the first half. But I think we were expecting a sort of pick up based on obviously postpaid guidance kind of sort of some degree of optic growth that we saw in the first half, which further seem to thinks around in the second half. Is there any reason for that, I mean, Simon you mentioned that (inaudible) was a little bit tough in that market, but the underlying optic trends half on half down. Is there anything in there that we should read into or you can give us a bit more color that would be helpful.

Simon Moutter

Jolie, do you want to add….

Jolie Hodson

So in terms of the Chorus payment, approximately $60 million which can impact between FY 2013 and which will fall into FY 2014.

Richard Eary – UBS

And on the accrual difference circulating further CapEx and actually cash CapEx? Is that just a step in terms of payment for supplies given that year end?

Jolie Hodson

Yeah. We will come back to you offline on that.

Mark Verbiest

Too complicated question, Richard.

Simon Moutter

Look, on mobile, I think it’s – I think broadly I would say, our range thoroughly is sort of key performance drivers. And I think you can reasonably conclude retail postpaid very strong performance, retail prepaid a bit more average in the second half feels like a bit of blood bath out there at the moment. So we are sort of sticking to it, missing in the sort of higher end of the prepaid market and as if try to avoid going down to the bottom end there where to ask the subsidies and things on prepaid at least down almost some $50 device is starting to look a bit silly.

And so that has given us a sort of slightly softer half I think on prepaid and we are scratching out our head around how to play a bit more strongly in the year. We will be at naturally putting Skinny back in with a more clear cut offer or to help there, and then the bigger issue, I think in mobile in the second half has been extreme price pressure on the re-wins in Gen-i. I think we had one significant customer lost the NZ Police account, which was significant. But just we are just noticing really, very, very difficult pricing pressure in that market, which is dampening the performance a little bit.

So I think your overall rate is, we satisfied. We are growing mobile share use. We particularly self congratulatory about it nor we’d like to maintain solid momentum this year, that’s for sure and we got some way to do.

Richard Eary – UBS

Simon, just a follow-up on the general side, are there a substantial move recontract, again, price for 2014 that could obviously mean that the recovery and price takes a bit longer to actually flow through?

Simon Moutter

Yeah, Richard, we have 4,000 customers in Gen-i, so we are recontracting hundreds a year. So I don’t, you wouldn’t see it as a sort of particularly lumpy. We have, say, big customers coming to bid every year in a pretty routine process. So, I think is, we don’t feel like we are through the pricing pressures in Gen-i and we will be working hard to try to shift the game on from a fewer price pay in terms of our integrated apps and solutions what we are doing with mobile, cloud ads will be integrating Wi-Fi as a strong point of difference and providing sort of full integrated cloud ICT capability as a way of differentiating from Vodafone routines to be still mostly about a pure mobile telco offer. So it’s the game plan, but got a lot of way to do to bring that to fruition.

Richard Eary – UBS

Okay, thank you.

Simon Moutter

Thank you.

Operator

Thank you. Our next question comes from the line of (inaudible) with CLSA. Please go ahead.

Unidentified Analyst

Good morning, all, and thank you for the questions. First one, just on the decision not to give form of earnings guidance for FY 2014, is there an element you want to keep some element of flexibility and how you respond to market development? You’re comfortable giving the EPS guidance, but not an earnings guidance, first question.

Then the second question is on the broadband back book repricing, you mentioned that 60% now on new plans, do you need to reprice 100% of the debate, so you are comfortable having 40% of your customers on an ABC plan?

And lastly, just on the – you mentioned an up sell opportunity on fibre and VDSL, just wondering if you could give a bit of color on sort of the quantum of this up sell opportunity, what are you seeing in terms of new customers coming on this plans? And maybe just how many customers are now on VDSL and fiber products there standard plans? Thank you.

Mark Verbiest

Thank you. Look, I think answer to your first question sort of less about preserving flexibility in relation to be up and willingness to narrow the range of guidance. But more that we have so many things moving in the business right now. We just don’t feel confident enough to lock down in a narrow range, just a lot happening as a lot of timing uncertainty. And as you know, we certainly not in control of the activity of our competitors and so that is part of our concern.

So that’s the reason, but on broadband repricing, yes, the answer is simply yes. We are going to move our entire base to the new plans. We will not achieve a radical simplification of the business if we persist with legacy products, so we will be repricing them and we try to be a bit more sophisticated than just simply trading customers down in the process. We work with each customer, they will offer them a higher value outcome move for the same type product rather than necessarily migrating downward. And I would remind you that, data usage – in household data usage growing very rapidly. So if we manage that process, we don’t necessarily have to trade where you like.

And on fiber and VDSL, we got roughly 3,000 sales made in fiber and 4,000 on VDSL that not only connected, because we can sell it a bit faster than Chorus concurrently provision. And what we are excited about is what, relatively recent above the line marketing effort the demand is very strong and the appetite for speed amongst our customers is very strong. So it is providing a genuine and up sell opportunity. And I think it’s not something that the industry can take half and because broadband has become a bit of a profit for its own. So having a chance to move people up the stake and get a little bit more margin back that’s attractive to us. Operator?

Operator

Thank you. Our next question is from the line of Greg Main with First NZ Capital. Please go ahead.

Greg Main – First New Zealand Capital

Yeah, good morning. I see just hardly assets cushion, now just one of the key things I’m trying to get my head around was just how much pricing of that legacy back book is still to go on and looks like you obviously taken a bit of a hit the top, you kind of alluded to that, you are still going to transfer quite a bit of broadband pricing, what about on the calling side as they still expect some impact of lower calling prices on people’s plans or is that across the border ahead of this kind of went through?

Simon Moutter

You agree, how I look at core, I just think we’ve been on a track on calling. I think personally see it – they would sort of twin changing much successfully, it is a pretty steep path. And the reality is that sort of customer interested in fixed line calling is declining at a real pace, right. Calling is still a great business, it’s just moving to mobile and then it’s moving to apps and services that run over broadband networks.

So it’s not cooling as a product, that’s declining, it’s simply the revenue of all fixed line calling. Repricing the migration of customers to the new broadband plain line offers is indicated thus in a way and stimulate that decline and that we don’t include calling in the basic bundle. It’s a bolt-in and so it highlights a more conscious decision from customers, but being to the (inaudible) there is the market reality (inaudible) customers preferences. So we still got some flow through the evidence, one of the harder things to pick to the almost where we land?

Greg Main – First New Zealand Capital

Just on mobile, are you going to be pricing your 4G services that are slot premium to your existing services. And then can you just sort of explain on sort of what benefits you get out of the reengineering of that. I think you said the prepaid platform and what were in there we need to do that you can’t do at the moment?

Simon Moutter

Prepaid reengineering. Greg, look 4G pricing has – can actually secret of course, so you’ll see how we price when we come to market. And look on the mobile platforms, I think you can broadly think about the first big reengineering capability drops is taking mobile across from the legacy environment on practically all that matters on to a world standard modern platform, which is significant flexibility and a lower cost structure to manage.

So it would be sort of first base in terms of sandy is one product set. That is now on a modern platform across most of the interfacing between customers in the network that will speed us up, allows to do more modern pricing move more quickly respond to the marketing and reduce the cost.

Greg Main – First New Zealand Capital

Okay. Should we expect any sort of marketing type expense, obviously say the first half is related to the 4G launch? Or is it all just going to be pretty low key rolled it out around the country top scenario?

Simon Moutter

Our marketers would love another pile of money. I’m sure they won’t be getting it. So their job is to market out evolving product set for more than a sensible and benchmarked marketing funds allocation. And so yeah, I wouldn’t be looking to indicate to you that there would be larger lumps.

Greg Main – First New Zealand Capital

Okay. Thank you.

Simon Moutter

Thank you.

Operator

Thank you. Our next question comes from the line of Paul Brunker with JPMorgan. Please go ahead.

Paul Brunker – JPMorgan

Thank you. Good morning. My question about the wholesale revenue, Simon, you mentioned there has been a volume hit maybe from unbundling. I’m just wondering whether you are getting any price pressure from your customers in that product, given that going for the same sort of margin pressures that you mentioned, Telecom is seeing?

But the other question, I have which is pretty different area is the Wi-Fi offload just put interesting product, so I wondered what sort of take up you are seeing there? And do you see it more as a churn reduction tool, is it capacity management tool?

Simon Moutter

And so, Paul, on wholesale – because we’re still the owner of the PSTN. We sell and we are the wholesaler of the combined sort of access and PSTN service in the base band product seat, that our competitors buy a lot of that through us. Naturally now in a world of software voice and unbundled inputs, and some of those customers, wholesale customers have significantly migrated and we’ll continue to migrate to their own these links, and provide their own thesis studies a natural decay.

We view PSTN wholesale is a sunset revenue line, we don’t give the habit of it, it will follow its natural course. We have negotiated, arrangements with some of the more significant customers to provide some margin benefit in return for a different technical path they would take, which gives us a sort of flatter a skip down about being a flatter rate of decline on that. And that’s about – we’ll probably do, I wouldn’t waste much more time our energy thinking about PSG and also what it will be.

On Wi-Fi, we are very proud of our emerging position in Wi-Fi. We have a unique proposition there. We are rolling out a nationwide network with thousands of hotspots and we are soon going to integrate it into our mobile offer. It will not be matchable by any competitor for a very long time. And we see it as an economic driver in terms of enabling the courage of increasing amounts of smartphone and device data without the crippling cost in CapEx roll that cellular networking requires.

So it’s very solid for our economics and very good for customers in enabling them to be able to utilize our Wi-Fi network for data and continue to build the appetite for data usage that will have a slow on benefit to our cellular data revenue. So we’ll be pushing this hard, it’s head over a 130,000 registered users already on a relatively small network of only a couple of hundred hotspots. We have it open to our competitors at the moment customers to use and of course in return of their information.

So we will be delighted to offer them the opportunity to switch supplies and continue to use that Wi-Fi proposition once we integrate it into our plans. It’s currently offered free, so it’s sort of done on a trial basis. And as I say, we’ll commercialize quite soon. Operator?

Operator

Thank you. Our next question comes from the line of Arie Dekker with Deutsche Bank. Please go ahead.

Arie Dekker – Deutsche Bank

Good morning, Simon.

Simon Moutter

Good morning, Aire.

Arie Dekker – Deutsche Bank

Just a couple of quick question. Just following on from the [indiscernible] (00:18) just wanted to sort of on a constant volume basis what the financial impact on FY14 might be from these renegotiated plans and then just further to the point you made and after the previous question, what should we be thinking about in terms of volume decline for that step down towards flat label.

Simon Moutter

Look, Arie, those agreements are confidential. Obviously there are a number of customers who would be very interested in watching if we see specific things and trying to do the math backwards. So we don’t feel idle to disclose anything to point there at this point I’m sorry. But I think you can think of the impact in the low teens of millions of margin would be a sort of broadway of looking at it and I’m not sure that I could help you much on the decline rate. And we’ll have look at that and see if we can help analysts with that in due course at least some sort of generic guidance. I’ll get back to think about how we might give you some steer on that at same point in the future.

Arie Dekker – Deutsche Bank

Okay, thanks. And then just on FTA, just in terms of and obviously very good progress second half on that. Just in terms of what you had left to complete for initiatives underway and any other things that you’ve got underway currently, where do you see that level landing say by the end of first half of 2014?

Simon Moutter

Arie, we – hopefully I’ll be able to give you some steer at the half year but I just reluctant. What we’ve done to date on staff level, I think in Phineas we would say was done in a reasonably unsophisticated way. And we do need to be more sophisticated from here because we just keep doing that unsophisticated trimming. We’ll start to break some things in the business. So we’ve got the centralized program underway. They are only in the early phases of what you think of a diagnostic working out where the opportunities are and that will flees up the opportunities across the board on cost.

I would remind you our focus from here is the whole cost base not just labor. So yeah, that’s a bit short for what you guys would like to hear right now but I just want to I would prefer to hold until we got a bit of substance and then give you some clarity which hopefully we can do at the half year.

Arie Dekker – Deutsche Bank

That’s fine. But what you are basically saying also is that going out of the second half or the full year ‘13 position, there wasn’t any other major cut that was in the process of being finalized?

Simon Moutter

Arie, that’s correct. Broadly the numbers we see it in the initiatives we had in mind when we indicated we would drop by 900 to 1,200 staff by the end of the financial year. Those initiatives have been completed and we are now into this new phase of considering a wider cost base opportunities and that has not at this point completed with any firm moves, but we will do so on coming months.

Arie Dekker – Deutsche Bank

Thank you.

Simon Moutter

Okay.

Operator

Thank you. Our next question comes from the line of Ian Martin with CIMB. Please go ahead.

Ian Martin – CIMB

Thank you. Good morning. I just have some questions around your CapEx budget and the profile of that and how well it matches up to your best opportunities are. Obviously mobile the (inaudible) of that I just wonder if you can outline what you probably been spending there and what you hope to achieve in terms of rolled out target this year. What part of that network will end up being built this year with that CapEx budget?

Secondly, in relation to the opportunities in (inaudible), cloud and data, were that CapEx is going to contribute to that? We’ve been in other markets terrific build up in spending on data centers and particularly put them on network. I just wonder what path, what your plans are there in terms of cloud capacity and what part of that will end up being on your own network versus backbone, whether you got any plans to expand that backbone in transport network.

Simon Moutter

Martin, I will help Jolie to speak to the CapEx and the G&A (inaudible). But just on mobile broadly, our mobile program in FY14 is a large one because it rose the 4G out on the 1800 spectrum to the urban centers around New Zealand. As you see before, we are intentionally cautious about disclosing a tight timeline there. We would like to hit something in our bag when we launch to make some market and we’re signaling Q2 major centers and but a significant roll out at pace on 4G.

Ian Martin – CIMB

With the bulk of the market coupled by them?

Simon Moutter

A very substantial portion of the New Zealand urban market inside ‘14 and certainly in terms of the population base, we’re significant. So this 4G in there, because 4G is a transition, we still got 3G on the rise. So there is quite a bit of capacity store required for 3G data as the volumes continue to absorb that capacity and in the 4G world, because 4G drives much more efficiently of some of the newer core boxes we have been upgrading and are still completing the process of doing the evolved packet core and the big new AAPT’s boxes and we got a rebuild of our service gateways for the data channels underway too. So there is a lot going on in the mobile program and it would be heavier than normal. Jolie, on the data center?

Jolie Hodson

On the datacenter, the CapEx will be included in our FY15 CapEx number.

Ian Martin – CIMB

Okay, perfect.

Operator

Thank you. Our next question comes from the line of Chris Keall with NBR. Please go ahead.

Chris Keall – NBR

All right. Simon, are you able to comment on the number of USB customers who have been signed so far and also update on the progress of voice over fiber and billing services for fiber? Thanks.

Simon Moutter

Chris, I don’t have it hand the number of customers connected to USB, but as I indicated before we’ve made around 3,000 sales. Some of the those will be stuck in a longest queue because I (inaudible) legitimate issues around multi-tenanted properties with finding the process of getting excess challenging and others will just be in the order backlog. So I’m assuming we will be in the thousands but somewhere under the 3,000 mark. I’m sorry I just don’t have that number on hand.

On voice over fiber, we’ve been working with our technology and business partners here to see what is the best way to deliver a basic voice or calling service on fiber. I had to say in the most recent weeks, it’s becoming apparent that technical challenge around doing that in PSTN emulation type product is looking very difficult and a bit unsatisfactory in terms of the service experienced.

So we have indicated to Crown Fibre Holdings that we are not particularly enamored with we would got to hear and we are not at this point certain that we’ll meet the December deadline and we’ve seen to have technical teams off to have a look at whether there might be a better way to deliver the voice service on fiber than we were currently planning. So at this point, I would say we are off track there.

The good news is, this model of that we’ve been working with selling fiber alongside the copper as an interm solution to provide the continuing PSTN service is very satisfactory to customers. It’s a bit expensive for us incurring the cost but customers find it very satisfactory because it does ease the transition to fiber. So at the very least, we’ll continue to offer that and we’ll be looking at some alternatives. So that’s the reality on that one. Does that cover your issues?

Chris Keall – NBR

With the (inaudible) getting uncut plans with the billing software where it’s been completed with better.

Simon Moutter

Again, I don’t know the answer to that. Maybe I’ll get the commerce team to tell you. I’m not sure whether that has been sorted, closed off yet or not Chris?

Mark Verbiest

Thank you, Chris. Operator?

Simon Moutter

One final question I think. We’re getting a bit low on time. So let’s make this the last one. Thank you.

Operator

Yes. We have follow-up question from the line of Richard Eary with UBS. Please go ahead.

Richard Eary – UBS

Thanks, Simon and Jolie. Just to come back to Jolie, I think you mentioned early on the call that you were looking at a $50 million reduction in head count for FY14. Just to be clear, do you we think about that as type of second half run rate annualized less 50 or is it literally the full year cost of FY13 minus 50 because the reason why I asked that is that second half labor cost were down $65 million and the bulk of obviously the head count reductions was in second half. So what I thought $50 million seems liked in that context.

Jolie Hodson

It is the G&A exit right out of FY13. Remember of course we have the acquisition of Revera coming in as well. We offset some those savings which is why is a net $50 million.

Richard Eary – UBS

Okay, we take the 315 labor cost by less than 50?

Jolie Hodson

No.

Simon Moutter

Maybe, Mark, you could probably clarify for any analysts. I think its confused Richard by the fact we started to reduce some months ago. So you’ve got some of the benefit already in the ‘13, so when you referenced to ‘13, it’s not a whole 100 because a reasonable portion was…

Jolie Hodson

$25 million was in FY13.

Simon Moutter

Already incurred has been started to step down from…

Richard Eary – UBS

So we just tied to FY13 cost and less 50.

Jolie Hodson

Yeah.

Richard Eary – UBS

Is that right?

Jolie Hodson

That’s right.

Simon Moutter

And make two or three, but the guys can help you out for that offline.

Jolie Hodson

Yeah, try to call offline. Perfect.

Richard Eary – UBS

Thank you very much.

Simon Moutter

Thank you, Richard, and thank you operator. I think we’ll close the line there. We’re running a little overtime. So thank you all for joining the briefing and we look forward to potentially meeting some of you as we do the rounds over the next few weeks. Cheers.

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