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Executives

Mark Verbiest – Chairman

Simon Paul Moutter – Chief Executive Officer

Chris Quin Retail – Chief Executive Officer- Retail

Tim M. Miles – Chief Executive Officer-Gen-i

Jolie Hodson – Chief Financial Officer

Analysts

Chris Keall – National Business Review

Arie Dekker – Deutsche Bank AG

Tristan Joll – UBS Securities Ltd.

Sameer Chopra – Merrill Lynch Equities Ltd.

Greg Main – First NZ Capital Securities Ltd.

Richard Eary – UBS Securities Australia Ltd.

Adrian Allbon – Goldman Sachs New Zealand Ltd.

Paul Brunker – JPMorgan Securities Ltd.

Justin F. Diddams – Citigroup Global Markets Australia Pty Ltd.

Telecom Corporation of New Zealand Limited (OTCQB:NZTCY) F2Q2014 Earnings Conference Call February 20, 2014 4:00 PM ET

Mark Verbiest

Good morning I’m Mark Verbiest, the Chairman of Telecom. With me on the call today are Simon Moutter, our Chief Executive; Jolie Hodson, our CFO, Chris Quin, the CEO of Retail and Tim Miles, the CEO of Gen-i.

This is the significant day for our company in many ways as will become clear from the briefing. Around a year-ago, the Board endorsed a clear strategy focused on improving our market positioning and operational performance and for Telecom to again become a growing New Zealand business. Board continues to fully support the strategy and a strong focus on cost containment and process efficiency will always be important and with the first thing in terms of priorities we needed to address and we’ll continue to do this.

Equally, we can’t shrink away the success. We’ll only deliver sustained long-term shareholder value through growth. We’re a year into the strategy, we’ve moved fast and have already made a lot of bold decisions in big marketplace which are having a positive impact across our business and we’re announcing a couple more new big moves today in terms of our branding and our new Internet TV service.

For our investors, we’ve recognized the interim financial results published today do not yet fully reflect the positive financial impacts, resulting from the marketing moves and operational changes we’ve executed to-date. However we are confident in our momentum and expect this will flow through to better financial performance in both the second half of this financial year and subsequently.

We believe firmly that now is the right time to take some further big steps. Thank you for indulging us with a longer than usual briefing duration today, we’ve obviously got a lot of news to discuss and we are very keen to keep our investors fully informed.

And with that, I’ll hand over to Simon to get our briefing underway.

Simon Paul Moutter

Thank you, Mark and good morning everyone. When I closed the last May Strategy Day, I promised that we wouldn’t go wondering and around whether we could get this business back on a positive track and I can tell you there has been no twiddling of thumbs and no wondering.

We are executing quickly and decisively against a clear strategy. We have a great amount of momentum building with a lot of significant moves made during the six months period and a lot more to come this year. We do have growing confidence that our strategy will deliver the intended long-term benefits. The group operating earnings were maintained through a very solid performance from AAPT which of course was pivotal to achieving the excellent sale price for that business.

New Zealand earnings down as expected, we have been on plan the year, but they do reflect the ongoing legacy decline and the impact of the strategic choices we made in FY13 to put market share outcomes ahead of near-term financial results.

On the very positive side, we do and now have improving outlook for the second half of this financial year and flowing into FY15. Lead indicators generally are very encouraging and particularly in mobile, we’ve got a massive Turnaround Programme underway with over 200 business improvement initiatives being run like a machine and we are projecting improved performance from that given relative to previous guidance.

We have successful sales and marketing tactics and these are expected to moderate the rate of decline and fix legacy over future years and we got a tightening capital expenditure envelope now that we are through the rush on 4G rollout and spectrum purchase.

The continued rapid strategic repositioning of the Group is in full fled, we’ve sold AAPT to focus on our New Zealand customers. We have made huge investments in New Zealand’s digital future and I’m really thrilled with where we have got to on the all data network, it is now a reality, underpinned by superior anytime anywhere connectivity for customers and further backed-up by our recent win in the 700 spectrum auction.

We’ve got a re-engineering program absolutely on track to deliver the enhanced customer services capability we expect from it and all the related efficiencies first released during April. We have some selected investment in growth initiatives underway and in particular the pending launch of a new Internet TV business will be taking us into the online entertainment market and our success in the brand makeovers today has advanced the intention today as we have signaled to change the company name and core trading brands to Spark and the continued major strategic shift of our Gen-i business portfolio towards data, mobility, managed ICT, Cloud infrastructure and platform as a service is well underway and we are looking very positively at potential over time to sustainably increase ordinary dividends now.

So let’s have a look at the strategic priorities and how we are progressing and executing against those and just as a short reminder to the market we laid out this business strategy in May last year.

It is about becoming a growing New Zealand business, winning by customers choosing us to connect them at the speed of life. We’ve got goals to be number one in mobility, data, and effortless services and cost and we have four strategic priority plans that we are focusing on to deliver against that setting on a foundation of improvement on our people, our brands, our data networks, and the Turnaround Programme.

So moving on to the first of the strategic priority, revolutionizing customer experiences and a lot of a long list of proof points here; we have seriously up the ante on digital customer self service and these are number of proof points providing that might particular highlight here is the My Telecom air online account management services usage has doubled in the six months, nearly up to 254,000 of our customers now working with this completely online.

National WiFi network; this is big differentiator for us, it’s very easy to use, its full self service and is helping us drive mobile momentum. We’ve achieved want we wanted to achieve last year in refitting our all old data network platform through 3G and 4G rollout, nationwide WiFi, fast broadband, on VDSL and Fibre backed up with 5 terabyte for second Optical Transport Network up in the core.

We do feel we now have a significant superiority in data networking in New Zealand. We’ve optimized Gen-i service models for key customers, a lot of changes in there and I won’t go through those. I will leave those for Tim to address later on. We’ve got our business hubs re-launched; these serve the main market and they work of a terrific local like your concept in a making a real headway and gaining shares.

For those you who don’t think we are there yet, there are some big digital self service numbers in our business. We have had an amazing response to it and have taken Sec promotional work at over 100,000 people have left us comments on the online service which is in indicative of all the level of interest they have. We run through 7 million digital service transactions every month, so making a terrific progress on digital service.

The second of our strategic priorities is simplifying the business and this is an area we think is right with opportunity, we are a complex business stood up over many decades, so we are working very, very hard to advance here making some big ball course.

We’ve got the Turnaround Programme up and away and I will speak to that little further in a moment. Our IT stack re-engineering project first major drop coming, I will also expand on this, I am very excited about the potential changes that’s bringing to our business.

We have massively simplified our broadband and mobile plans and you can see is moving for example from 128 postpaid mobile plans down to 38 and will soon go from three core plan comes in prepaid to only one, much easier for customers to deal with us and much easier for us to run the business when we are making big moves like that.

The ongoing organizational process change we have in the telecom group made some game breaking shifts in what would be conventional HR process today radical overhaul of performance main event of remuneration with simplification absolute heart of it.

Gen-i continuing its portfolio shifts and by moving out of some of the more complex areas of the portfolio into areas where we are with data setup to be more scalable, more repeatable is helping reduce the complexity for Gen-i and its delivery to customers and of course we did promise that we would sort out our forward view of participation on the Australian market and we have done that, we have sold our AAPT for a good price settlements due in next few days and that’s going to allow us to focus all our attention on New Zealand at customers which in is a significant simplification in its own right.

Just tuning for a little more detail on the significance of the returns we are trying to get from the Turnaround Programme. This is a very important part of our simplification program. We have got setup now a dedicated group Turnaround office, it’s led by our Chief Turnaround Officer Matt Crockett, who is a full member of my leadership team. It’s a highly structured program. His full time Turnaround leads in each business unit supported by cross functional teams to deliver against it.

It’s a very disciplined approach to initiative management that would move through conceits from quantified ideas to cleaned initiatives to us through a full delivery to a full reconciliation of benefits in sustainability and a high regimented and very forcefully performance management program, has both financial and an organizational focus.

We are using this to improve the capability of our organization to execute against change programs. It looks at cost as well was looking for improvements in cost, capital expenditure, organizational health, revenue and general business improvements and execution is absolutely on plan.

We are very pleased with the progress and we are increasing our formally advised expectation of financial benefits from what we expected around $100 million to $200 million up to $200 million to $300 million as we flow through into FY15.

Our other huge multi-year simplification enabler is the re-engineering program and this is been on our minds for a long time. There has been a lot of preparation and talk and it’s very exciting that our first major release is on target for Q3 delivery. Its focus will be the prepaid market and mobile market as well as delivering some core overall capabilities for the rest of the business, this is a profound change.

For the first time in the 100 year history of this company, the center of our management systems will be a customer rather than a customer have been a couple while and that is a very, very significant move and the benefits for customers would be a much easier to buy from us, much more simplified plans and much better online service capability for our organization.

It genuinely marks a move from 1980s green screen concepts to a world-class beast practice easy-to-use CRM which operates in a way that people are familiar with software today. Much lower cost to operate major capital efficiencies, better customer insight, the list goes on, so fields to us also get through some of these reengineering changes, we literally will be able to compete without one arm tied behind our backs.

And finally, on the simplification and update on how we are doing with our staffing level. Look, as a reminder, we made a very blunted conviction in our staffing level in the second half of FY13. I told the market after we did that, we would need to pause, get organized, reset the business to operate after such a significant change in staffing and to be a bit more scientific about how we have been about the initiatives from their own data, what our Turnaround Programme is doing, we are moving on.

While we have made some reduction in staff level in the half, we will see that continue into the second half and its part of the improving performance we are predicting for H2.

Moving on to third strategic priority, the win in key markets priority, I am very pleased with the initiatives around their brands and our now service propositions, a big makeover of the telecom brand last year and a immediate 6 percentage point rise in brand preference with the younger Auckland market, a key target for us, significant uplift in store foot traffic in the Auckland region and Skinny and Bigpipe.

Skinny is doing part of the job for us on prepaid mobile, having been reset as a value brand and we’ve got our techs of value brand for broadband live this month and look forward to it playing a role as we move forward as well.

And a terrific performance in mobile connections, we will come to that a little further in the presentation. Ultra broadband going very well, very pleased with the market response on the higher speed broadband products in the up sell opportunity, it’s providing us. We’ve had a key win in the half in acquiring the network for learning contract and it’s absolutely exciting to be part of rolling out a nationwide world-class high-speed broadband network for schools nationwide today and that’s going well. And the Telecom SME market revenue and margin growth being achieved in mobile and markets here increasing, so we got that back on a very positive path too.

So just focusing a little bit more on mobile and broadband, we are really pleased about how we are going in mobile. We have sustained growth in the base over 100,000 customer adds in the half year that is the industry leading performance by some margin and when you look back over a year, we have now gained over 200,000 mobile customers in the last year.

The multi-brand strategy is proving effective here, our both Telecom retail and Skinny are both going well. Gen-i is holding share though and certainly does prices differ, competitive environment on price.

Customer mix and ARPUs are changing, postpaid ARPU is decreasing a little due to the price pressure mainly due to the price pressure in Gen-i and the shift towards open term plans. The prepaid ARPU is growing on the back of the success of the monthly prepaid packs.

On broadband, despite some significant product gaps and for example, not really participating strongly here in all of the UFB regions, we believe that we are close to holding share with 12,000 net adds in the half and the really good news is 78% of our base are now on a refreshed broadband plans and pleasingly a large number of customers are moving up to the higher speed plans, not the entry level plans; VDSL and Fibre providing us with good up sell opportunities.

And perhaps the biggest news for today and certainly in the public domain, we have decided to hang up on Telecom and log onto Spark. The investments in the brand refreshes that we made in the first half delivered immediate improvements. This has advanced our intention to change company name and core trading brands to Spark.

Spark is a word with the same energy, excitement, and creativity as the amazing technology that we are bringing to our customers. The brand will carry with it our existing highly recognized logo, which is known to most people as the Spark. It’s a branded core architecture, with flanking and specialty brands in the names that our company will move on from Telecom Corporation of New Zealand Limited will become Spark New Zealand Limited.

The retail business will be under the brand Spark. Our Gen-i business will change its name to Spark Digital Solutions and the Telecom Network will of course become known as the Spark Network.

We will retain and probably increase the number of flanking and specialty brands that we use, they play an important role under their branded tool. We are really excited about the potential for this new brand to resonate strongly with our customers and we are thrilled to see the thousands of people who are engaging with us on social media today. It just shows you how passionate New Zealanders are about this company and we will look to tap their passion as we move forward and seek the Spark brand is up for a very important role in New Zealand’s future over the next few decades. We intend to implement the brands around the middle of the year.

And moving on now to our strategic priority in the future, this is really staring to take some shape now, our Digital Ventures group has made great progress on the portfolio. It’s being instrumental in rolling out the national WiFi network and that’s going very well, we are headed toward 1000 hotspots now.

Bigpipe trialled and sets clear initiatives with that being driving the Skinny business along, we’ve have made other serious moves into mobile commerce, smart living. What we call smart data, but what’s off known in the worldwide is the big data business and we are really getting organized around health. We see health as the first sector where some of this existing new technology can make a very big difference to the health outcomes for all New Zealanders. We are setting ourselves up to take a big player, big role on that and be part of the success of that industry.

On 4G, we’ve made a very big commitment, we’ve got, we rolled out with both the largest slice of the 700MHz spectrum, and our 4G proposition is working very well and has great customer feedback. We are set to go on the new Tasman Cable. We are waiting our partners in terms of their approval processes, but good to go from our perspective and Gen-i is making terrific headway into the future businesses around Cloud and I will leave that for Tim to speak to when he takes the microphone.

We previously indicated that we’re working toward a decision on our role in content. We’ve made that decision now and look, we are clear that around the world, people have now watched their TV over the Internet and we have decided to enter. We are the world leading over-the-top platform, which is currently in-built and we have content deals under negotiation.

Our Internet TV service will be branded ShowmeTV. ShowmeTV will be a great option for New Zealanders who want to watch the shows when it suits them on whatever screen they like. It will offer New Zealanders an exciting new choice about how to get their home entertainment. It’s the future of how people will access TV and movies.

We are going to be on the right side of an innovative new technology that represents how people will access entertainment in the future. It’s a great example of how this company is changing by delivering the services our customers want with the latest technology.

For competitive reasons, we won’t be saying much more about ShowmeTV until its formal launch later this year, but take my word for it, ShowmeTV will be New Zealand’s premier Internet TV service.

But on the back of those exciting announcements, I’m going to hand over to Chris Quin, our Retail Business CEO to take you through the terrific market results we are seeing in retail. He will expand on where he’s taking the retail brand on the back of our Spark story which he and his team were instrumental in bringing to fruition. Over to you, Chris.

Chris Quin

Thank you, Simon and Mark and welcome everybody. Look, as Simon has covered it has been an incredibly fast and exciting time, and the retail business unit result that we are revealing for the half now will show, one thing we think quite important which is for the first time since 2008, we’ve managed to stabilize the revenue decline through real focus on the fixed market and the value in the cost we incur and how we hold share and the much positive economic way we can and then offset by some very strong growth in mobile.

So as you will see from the results, it is important that we are very conscious, but the EBITDA is down 5.8% as a result of the half, however that is reflected because of the increased cost of the excess growth that we’ve had in the fixed market and also some of the bandwidth cost growth that has occurred in that market.

The good news is that we now have as Simon mentioned, 78% of broadband customers on the new plan. So the migration to that completed – claims that is almost complete and nearly half of the base of broadband customers are on plans above their outstanding $75 mark.

So we are seeing some sign of the market, value and quality, larger gigabit send on new services. Access churn is very low. Calling has been declining at a pretty similar trend to previous periods and broadband revenues are showing that impact of the reset of 5% decline in revenues as we reset to these computed plans as part of that commitment to hold share on connections which we have managed to do.

The mobile as Simon has mentioned has been a really strong performance with both the retail and Skinny brands growing quite strongly in the period that we are looking at right now. 9% of total revenue growth in mobile between two pretty strong propositions now in the market and both teams doing a great job of taking the market pretty aggressively in mobile, 4% usage growth within that and then those reflect quite a shift towards the open term plans via customers are financing and buying their own mobile devices which is why we’ve also been able to bring down AAPT sales and acquisition cost as of the percentage of the revenues that we earn, thus improving the economics of the mobile business all further.

ARPU is often prepaid, but slightly down on post paid because of the way the customers are now buying their devices and that shifts the money outside the plan monthly, but also shifts the discount cost of the devices there.

We are pretty confident that we can continue to stabilize that revenue outlook and also we’ve made good progress on cost in that period, so we are down by about 8% labor costs.

Other costs you will note are up and that is because the mobile cost of sales increase that goes with that increased rate of acquisition as well as broadband just simple number of it, broadband new lines cost increasing and the cost of some backhaul and international bandwidth increase as we are growing our broadband base and customers are enjoying more use of those services.

Just as a note, with people wanting to understand what the numbers are, the Skinny EBITDA and TDV investment costs sit inside the retail numbers as we grow doesn’t pull the things like the WiFi services and those things to enhance the whole of the group’s percent.

On the next slide, I have gone back to a slide that I put up at the Investor Strategy Day where we committed around a few numbers that would give you an indication of where we are meeting, our commitments put to 35, 14 in terms of growth and it is really exciting to share that the mobile base has grown nearly 200,000 connections in the last 12 months, we are around 108,000 in the last six months across Skinny, Gen-i and Retail and then we are very, very excited about that result and the number of customers choosing our mobile network.

We are holding connections here at broadband of around 47%, which we take on the ground we see it in terms of boutique and longer term earnings as the shape of this part of the market matures and one that we are pleased with is business market revenues returned to growth and gross margin returned to growth year-on-year for the first time in quite sometime.

94% of service transactions are now online in our world and that is a big part of not only managing our cost we served down, but also the ease and quality of service and what customers are preparing in terms of what is available digitally.

We’ve improved the SARC to revenue ratio of further one percentage point as I mentioned and our labor savings and cost savings have us on track over that 2% improvement in support cost per revenue dollar improvements.

Most important to us is the highest quality out for some customers deemed to be less economics provide, so we measure every week this focus on number of customers that rate us well, it is with service and for the half we have averaged 68% of customers rate as five out of five on the effortless score posted to this transaction.

And finally as Simon mentioned, a bench point for us real focus was on the mobile Auckland, not just because of our weaker market share that we had at the start of the period again, but also because they are representing the future desire a lot of their customers appealing to be [Indiscernible]. And in the period, we’ve managed to lift our brand preference in that same segment by six percentage points.

If I move now to give you a little bit more of the story behind the brand, an exciting change that Simon has shared with you, to give you a little bit of background very briefly, and I think the most important point that we would stress is, we’ve changed the look and the feel of the Telecom Retail brand in October [indiscernible] last year and got some great impact from that for example, that brand preference list with Auckland under 35. The foot traffic through our physical stores half on half moved in by 14%, two good pieces of evidence, so it caused customers to reconsider us.

The key point I want to make is that that brand and what we are now doing with moving telecom to the Spark brand has been built on the back of a clear business strategy hence delivering customers different tangible things that they are choosing to buy.

So on this slide, you will see the Ultra mobile planning business hubs open to mobile WiFi and other things. There have been the things that really gave us the confidence to go to the new brand [Indiscernible] ultimately for the entire organization have the confidence to move to the Spark brand because fundamentally what we are now is way more than what telecom represented when it was made.

And on the next picture, I will reflect briefly on this has been based on through very strong work around customer insights. We have around $100 million digital transactions a year with customers we have 7.5 million plus schools. You can see some of the quite large numbers that we engaged with customers regularly, so there should be no excuses for this organization not to be inspired by what we should not.

And we as part of this brand thinking really to assume about with tight keepings on the mind of particularly consumer in small business Kiwi organizations and we have to be a brand that shows that we know who our customers are and we should do like them and manage them. We have to value and win their business and be committed to the keeping faith on investing customers will always be getting a best of stock and customers who are not with us can join and get the same in getting the distance back.

There is a real desire from TVs to bring them new and cool stuff. We are a country that’s like to be right up to-date and on the game and we need to be an organization that is primarily right things gives to them, making it easy for our customers to deal with us and being a company they would love to be what can be proud to be with. All important, quality signs of us understanding and having looking at the customers what they want from our brand.

Finally, that has turned into the consumer and small business brand story, but we think we have a role to play and can absolutely focus on unleashing the New Zealand’s potential. We think the services and the range of things we do our attention to small business growth, we think they are essential to consumers being able to get on what they have launched into this things they want.

And we now fundamentally and if you look at the shape of the business now, post the transaction of AAPT, we absolutely New Zealand is the best place on the earth, we have opportunity and responsibility that many people can live, work and play in incredible ways and enjoy the indispensable and amazing experiences of the data provides and data is the critical word, because we do see at everything our customers do becoming available, work not been done over data.

We’ve got be forward here, this place, this country that’s our priority and that’s we had the taste of success, for our customers for the NPO [ph] and for tomorrow, because that’s what they expect from us.

And what our people are excited about is the characters that comes with that so the way they will show up would be being courageous, caring, curious and colorful in front of that customers and that’s earned us 200,000 new mobile customers in 12 months and keep us in the game on broadband holding share and we think it is going to be an essential part of them depending the substance behind this exciting new brand as much as how that brand is going to look and feel.

So we really excited about that. We think this is exactly the right time and right thing to do to continue the certain growth and momentum that you both are seeing on these results.

And now I’ll hand back to Tim Miles to continue with the Gen-i part of the story.

Tim M. Miles

Thank you very much, Chris, well, good morning everybody. As with the core Telecom business for us in Gen-i to have sustainable growth assuming we are wining in the market. We have been making a number of changes and what I’ll be talking about today is that you will able to see the evidence of some of those changes, but be clear that there are other things we’ve made very good progress and that have not yet been fully reflected or reflected at all in our financials.

You will see here that our EBITDA was down 4.5% that is primarily the fixed line, fixed data and fixed voice decline being offset to some extend by the increase in our margins in IT services. As you would expect real competition in this area, it’s inline with our budgets and what we would expect, we have maintained our number one market position in mobile and business markets.

We are number one in mobile and in data and in IT services and the WiFi announcements particularly have been very helpful for us in the compelling proposition for our customers as well as our 3G network and our 4G and completing our total mobility story. We are really looking to focus on network and platform-centric ICT took a little more about that in the moment and I’ll just note here that between Gen-i and Revera.

Revera, being our cloud business, we have got the highest market share and the Hosted Infrastructure Services with about half of the markets. The acquisition of Revera has provided some real synergy. It is opened to a lot of doors to us and we’ve been able to win a number of contracts with Revera that we have a voice, but not have been able to participate in and in fact we are in a number of key bids at the moment that Revera has opened to door for us.

We had divested Davanti and Auldhouse. Davanti was a business consulting, and Auldhouse a training business and that is inline with our strategy that I’ll be sharing with you in a moment and very much rather than thinking about doing everything ourselves, we want to get very clear about what it is that we are going to be excellent there and can deliver real value and which places we need to be partnering in the market.

You will see here, we’ve hit some key wins. I want to highlight network for learning, as Simon has already mentioned, it’s a huge contract for us and we are very excited to be involved with the government in delivering Fibre and high-speed broadband experiences to New Zealand schools. There is about 2,600 schools to be connected. We are in the early days of that. We’ve got around 200 of those connected at the moment.

So a lot of work going on as we get those schools hooked into a digital future and we have also had a key win with Auckland Council this with Revera in providing infrastructure services to them.

You will see that our labor costs are down substantially at 17.8% and that reflects the operating model changes we made. We wanted obviously to be much more cost effective, but also frankly to speed up their business leading in the market means operating at a cadence that is at least the speed of the market, it’s not more quickly so we’ve made a huge number of changes and I think with very minimum disruption to our customers.

You will see from the tax graph that our IT services margins have improved substantially. Our focus has been on quality of business. Yes we want quantity, but quality has been more important and so our IT services revenue have been relatively flat that we had derived and we are deriving much more margin from that and that’s a key shift for us.

In data centers, we were making some big investment, those were on track. We completed new centers in Christchurch. We’ve upgraded [indiscernible] center. We completed a second building with Revera in Trentham [ph] and under construction at the moment we have a third data center in Wellington with Revera, and also a major facility in Takanini in Auckland.

But move to the strategic shift slide, what this depicts is if you have the full range of things that we or services that we can provide the market from networks across the business process outsourcing, we’ve drawn a clear line on the sand, you will see that black line there and what that's really indicating is that Gen-i is putting its flag around managed infrastructure services.

So that is where we are making a stand, that is where we can add the most value to our customers, it is a very differentiated position, there are better margins and you will note that with the investments the company has made in and around network and their acquisition of Revera and so on, we’ve already made very substantial progress towards that.

And this is also equally being clear about what we are not in. So I mention again we’ve divested Auldhouse and Davanti which are on the right of the chart and we are looking to partner for the activities on the right of that chart. So any successful business needs to be very, very clear about what its in and what it’s not in and we have made those choices.

Move now to the next slide, which is around repositioning. So just to remind you some of the things that have been achieved in the past few months, we have complete the reoriented 1000 services around the customer, we made a lot of changes around putting key people in to service at key clients, we have put additional resources to be focused on the government segment. It’s a very, very important market for us and obviously the acquisition of Revera helps us with that as they have a contract with all the government.

We’ve been upgrading our voice and data propositions and IP Voice will set us now in as a hot thing in the market right now and we are on track to be number one in IP voice and if what sustained and we have USB connected in all regions and we will have that done by the end of next month.

In terms of mobility, we’ve maintained our leadership position. We’ve had a slight growth in mobile market share in terms of numbers of connections, but the ARPUs have been under pressure. As mentioned in team price pace competition there, we’ve established a mobility practice with the services available in machine-to-machine in mobile applications, they are relatively low dollar value at the moment, but indications are there will be very high growth opportunities and we are working extensively with our partners of SAP, Cisco, Samsung and frankly many others.

IT services has had a lot of attention in the past six to 12 months. We have as you’ve already seen refocused our strategy around the network and infrastructure core and we are seeing the results of getting much improved contribution margins, we’ve got I think much better execution and our product mix is all that much better quality and our infrastructure and basements are on track. So again with Revera and data centers, just one thing I want to take a moment to reflect on is just sort of what's in our pipeline, so just to just to give you sense, for Revera at the moment have signed contracts for an amount of work that would re-proceed a services revenue up lift of around 25% to 30%.

So there is big backlog of work that we are working with our clients to actually get those workloads on and then we can see those obviously the financial results got through the P&L.

And in the terms of data center around allocation, again we had a very strong backlog and pipeline of work which would evaluate the total contract values would be well in excess to $200 million where we are very, very advanced and then we had some other opportunities which would be well in excess of that.

So there was a lot in the pipeline that we are working on, making very good progress and then in the coming months or so, we would expect to be able to tell you little more about that.

So, that’s the conclusion of my talk and I want to hand over to Jolie to talk about the financials.

Jolie Hodson

Thank you, Tim. And, good morning. So my presentation this morning I will firstly take you through the overall reported results and we will move to our revenue and cost performance during the half, we will then review our EBITDA performance and outlook for FY14 and then medium term value drivers for our business including the capital envelope.

First we will review the business of non-core assets and finally conclude with some comments on our capital management strategy, but before I take you through the result, I thought I will clarify how I require to count for the sales of AAPT and the treatment of call-ins. We’re in active discussions for the potential side of this business.

We are required to report both businesses how to sell and then in the case of AAPT, we expect to book a profit on sale which will be accounted for in second half of the year given we anticipated transaction will complete in February.

We are also required to treat this business as discontinued operation. The effect of this is that is being deconsolidated for the current period and also the comparative period. The net profit after tax is therefore included in one line as a discontinued operation.

We’ve also made some changes in our segment to reporting terrific changes in the business. So from July 1, 2013 Telecom Connect is classified as an operating segment and includes the aggregation results of TNSS, wholesale and international. Secondly, we are always trying to see the number of enterprise customers form retail to Gen-i which has resulted in the reclassification of just under $15 million of revenues on an annualized basis.

I will now move to the results. So the half year result reflects many of the trends that Simon, Chris, and Tim have already highlighted with total revenues from continuing operations decreasing 3% to $1.85 billion due to decline in fixed legacy revenues, will be at a low churn rates in previous periods. This is offset by growth in both mobile and IT services revenues.

Our operating costs from continuing operations which is up by 2.1% as we continued our cost as in simplification agenda to mitigate falling revenues while getting the business fit through [indiscernible]. As a result, EBITDA from continuing operations of $452 million was down 5.8% in the first half.

Financing cost reduced by 22.7% to $17 million, primarily due to maturing date being replaced by digital low interest rate. Net earnings from discontinued operations grew by $25 million to $20 million with AAPT holding Australian dollar revenue flat on the prior year to support of our significant improvements in the cost base following a simplification program. The combination of these factors mean the net earnings for the group was up 2.5% to $167 million. EPS was stable at $0.09 per share.

If we look at revenues now, from the first half, we saw decline by 3% to $1.85 billion. The mobile business continues to perform strongly with revenues up 5.8%. Within that we saw retail mobile service revenue grow 4% offset by reduction in Gen-i as Tim talked about the cross per share and competition in enterprise customers.

During the period we added 108,000 mobile customers to take our total connections to $1.9 million. This included strong growth in both and prepaid and postpaid. We grew ARPU in prepaid as our customers converted from casual stuff to the more popular monthly value pick. Our postpaid also declined by 4.5% due to price competition in enterprise and shift that Chris referred to in terms of going to integrate open plans in the consumer business.

We also saw growth in the sale of mobile devices from the shift of open plans and corresponding reduction in acquisition costs. New Zealand fixed line revenues have declined by $98 million or 9%. This rise of decline was impacted by a fixed voice being down 17% due to reduced calling, lower connection numbers and price competition.

The rebasing of our retail broadband revenues also affected this being partially offset by lower access churn and as we previously mentioned, 78% of that consumers are on these rebase plans. And finally reduced wholesale excess revenues due to commercial deal fund with customers during Q4 of FY 2013 also impacted our revenue but helped to stabilize our connection base.

Gen-i’s IT service revenues grew $7 million as the business repositioned it’s portfolio with the acquisition of Revera in the second half of last year offset by the disposal of both Davanti and Auldhouse in the scaling down of Gen-i Australia.

We received Southern Cross dividend of $43 million in the first half up $24 million on the prior year due to the prepayments of each capacity. Other revenues declined mainly due to lower insurance proceeds in FY 2014 and [indiscernible] gained on one of the foreign entity in the prior year.

Now let’s move to costs. The total cost declined by 2.1% to $1.39 billion over the half. With the growth in mobile connections and mobile device sales, we saw an increase in mobile cost of sales of $18 million. And to carry a cost decrease $20 million principally due to a $14 million reduction in base band and excessive charges as a result of lower access lines and more efficient consumption of inputs from Chorus.

Our broadband cost increased $12 million due to growth in connections while the remained is due to one-off from a UBA cost reduction in the prior year, an increased broadband backhaul cost in the current year as we migrate customers to new Chorus inputs.

Our LIBOR cost sales $55 million or 17% reflecting a significant reduction in [Indiscernible] FY 2013 partially offset by the addition of Revera. Other costs grew $10 million due to the upfront costs associated with managing our cost reduction program and our investment in the brand refresh and a deeper vision against receivables.

We move forward to EBITDA full year outlook. In order to better understand us, EBITDA from continuing operations or all of the key factors that have impacted our first half performance and the key factors we expect to drive an improved performance in the second half.

For H1, EBITDA was negatively impacted by the rebasing of the pricing on both the consumer broadband plans and the wholesale excess commercial arrangements which we renegotiated in the last part of last year. We will started to see this price rebasing in the second half of 2014 while our churn remains low with intended consequence of both the rebasing of the consumer plans but also the wholesale plans.

Our second half will be supported by continued momentum in mobile, stabilization and broadband revenues and turnaround initiatives delivering in the EBITDA benefits for FY 2014 and procurement for the LIBOR savings and operational model efficiencies. As a result, our full year adjusted EBITDA from continuing operations is estimated to be in the range of $925 million to $945 million excluding the one-off branding costs associated with the name change and again on [Indiscernible].

We now look ahead to the medium term value drivers. Either FY 2014 to FY 2017, we expect our fixed revenue decline moderate to a 6% CAGR, principally due to a slowdown in retail with continued declines in wholesale and Gen-i. The decline in the retail consumer excess base is lucky to slashing by 17 and intended to grow this broadband growth starts exceeding voice only decline assuming that we maintain a strong broadband share.

Calling revenues became a smaller portion of the retail asset and the number of retail lines that are voice only will form a much smaller portion of the base. And wholesale was taken steps to slow the rate of fixed excess decline of our commercial deals and we’ve seen the rate of connection decline reduce markedly.

We do expect to continue to content and wholesale data revenues over this period. At the same time, our strategy is focused on growing mobile revenue and returning to number one by mobile revenue share and that will be supported by our multi-brand approach.

Over the last 12 months, we’ve made excellent progress towards this goal getting 200,000 new connections. In IT services, we’ll continue to invest in infrastructure and network based cloud services creating a leading position in the growing market.

And finally, we selectively invest in either of the top opportunities like internet TV to create revenue growth. We’re aiming to stabilize our top line around FY16. So while our business is transitioning we would deliver sustainable cash benefits through the Turnaround Programme.

We now expect to deliver $200 million to $300 million versus the previous $100 million to $200 million we identified during FY 2013. These benefits will start to be realized in FY 2014 and FY 2015 across a range of initiatives with 75% of the benefits to be delivered from improvements in our operating cost in areas such as procurement, network sourcing and management, contacts into operational efficiencies including further LIBOR savings.

Approximately 10% of the benefits will be in revenues to enhance cross-sell, improve customer attention and pricing optimization, a further 10% in capital expenditure, through the human improvements re-engineering enabled systems, simplification and a tighter discretionary CapEx management. We focus a little closer on our capital envelope from continuing operations.

We’re seeing our capital envelope tighten FY14 with a significant investment in enhancing our network by the LTE 4G rollout underpinned by brand new core data network, a national-wide WiFi network and the re-engineering of the IT stack. We’ve invested $266 million in the phased off of FY14 in these key programs and ongoing CapEx. We’ve also committed $149 million to become the biggest player in the newly available 700 MHz band radio spectrum securing 4th lot subject to Commerce Commission approval.

The final allocation round is soon to be completed, the New Zealand spectrum investment compares favorably with other overseas markets at 83% to MHz to head of a population. Through the turnaround program we’ve also focused on creating a sustainable core CapEx program with the pathway over the next two years to below $400 million per annum, generating additional free cash flow.

FY13 full year results, now we committed to reviewing our strategy for Australia in determining a clear path forward. In December, we announced the sale of the AAPT business to TPG for A$450 million with the transaction due to completed at the end of this month. The [Indiscernible] steps that need to be set by prior of the transaction closing are progressing well.

I mentioned in my instruction, how this transaction will be treated in the results, the half-year results include $55 million of EBITDA in relation to AAPT and discontinued operations and at February, we anticipate this will grow to NZ$70 million of EBITDA and approximately NZ$48 million of depreciation and amortization.

We also have active discussions to consider the divestments of our 60% stake in the Telecom Cook Islands. H1 2014 included EBITDA of NZ$4 million in relation to this business. Successfully concluding these transactions means we can now focus principally on our New Zealand operations and the needs of our New Zealand customers.

Turning now to capital management, we remain committed to the approach we shared with the market previously which has the joint objective of mix margin returns to shareholders, maintaining our financial strength and retaining financial flexibility as we reposition our business portfolio inline with the strategic shift. In this regard, we remain committed to a capital structure consistent with a single credit rating whilst investing in the business for growth.

This requires the net debt to EBITDA does not exceed one-time than a long run basis for credit rating purposes this equates to approximately to 1.5 times. During the first half of 2014, we’ve been active in our portfolio management, we talked about the sale of AAPT, a potential divestment of Cook. We’ve got significant investment in our network, the acquisition in the 700 MHz spectrum and selective investment in growth year like the internet to the New Zealand, internet TV market.

Post the sale of AAPT and the acquisition of spectrum, we will have approximately $250 billion of debt headroom which we believe is appropriate given the stage in our business turnaround. Our aspiration is to deliver sustainable increases in ordinary dividends overtime, again consume $0.18 per share dividend is declared for the first half of 2014 and we intend to pay minimum of $0.16 per share in the FY14 and further review our dividend payout ratio at the end of the year.

I’ll now hand it back to Simon.

Simon Paul Moutter

Thank you, Jolie. Look I want to close with an update on the specific targets that we ask you as investors to hold us to in FY 2014. The first thing, we are around a more competitive organization and certainly we feel we’re on track to building a new wining culture more performance driven more agile and competitive, and I think the results give good evidence to that.

Hence the biggest news here is $100 million increase in our view of the crystallization of benefits from our re-engineering cost out and simplification programs which we now under the turnaround program concept, so these positive upside there. In terms of the market success measures, we feel we are on track for 1% to 2% point increase in mobile markets revenue share, albeit that we do have to buy set of lead indicators actually difficult to keep pay, get hard effects on mobile revenue share in real-time, but we feel we are on track there.

We’ve certainly got greater brand cut through in preference in key markets and Chris gave you one particular proof point for that in his presentation. We are stabilizing broadband market share. We’ve absolutely achieved that. We have double-digit revenue growth recurring from Gen-i networked ICT and that will continue to strengthen in the second half.

And on the future success measures, we are on track for some highly differentiated offices to consumers may and we’ve given you a taste of one of them to comment in terms of TV. We have more in the pipeline and we’ve clarified the strategic path for Australia, we’ve decided to exit. So we have cool head and achieved and our Digital Ventures team working along very steadily and have a product portfolio of new products and services into the market. So I feel like we are going well against the basic school catalog.

The closing slide is a summary of the outlook. Jolie has run through those in the expectations, but I think the most importantly for investors we are confirming a minimum dividend of $0.16 per share for the financial year, but if I had tuned around benefits do not basically forecasting will potentially review that payout at the full year.

So, well thank you all for your perseverance and thank you all for your perseverance and for that very long briefing. I promise not to do it again.

Let’s open now for questions. I think let’s go now for questions specifically around the brand issue, we’ll try and take a few on the brand change issue close that off, because we don’t want that to dominate the whole Q&A session. I mean move on from this. So operator, if we could open for questions on the brand change specifically please.

Question-and-Answer Session

Operator

Thank you, sir. Our first question comes from the line of Chris Keall with National Business Review. Please go ahead.

Chris Keall – National Business Review

Sorry, following out on what you had, a brand question, but if I could just quickly add, your base rate would be wondering how much are you going to budget for mostly for ShowmeTV, but [Indiscernible]?

Simon Paul Moutter

Okay, I feel there is probably a couple of question points around the cost of the capitalized initiatives. So since it was the brand session let me tell you I think one thing we’ve seen coming through and questions is what is the cost of the brand change likely to be. We’ll put a number in the order of $20 million on that, most of which we expect to take in the second half year because it’s mostly proprietary.

And on your question specifically around ShowmeTV, I think we will be budgeting in the order of $20 million cash spend and it's in any 515 sort of in the order of three quarters maybe a little more of that would be OpEx because it’s mostly counting costs. It’s not a curable OpEx around it and there is not much CapEx involved in that business from FY 2015 on and at this point will be hesitant to talk about revenues, we’ll sit down some specific performance metrics for investors on the ShowmeTV move at our full year briefing.

We just like to get it out the door in a bit more of the fact they just understood before we start sharing specific performance metrics that we are going on seek for ourselves. So hopefully that answers your question. Next, question please.

Operator

Thank you. Our next question comes from the line of [Indiscernible]. Please go ahead.

Unidentified Analyst

Hi Simon, you’ve already just re-launched a new telecom brand, I think in the last month, how much did that re-brand cost and are this going to be pleased in a year later you’ve come around and announced another $20 million brand change?

Simon Paul Moutter

Well, it’s not actually. What we did in the year in the first half was give the telecom brand a makeover. So we didn’t re-brand, we simply changed the look and feel of it. The cost of that wouldn’t have amounted to anything much more than $5 million in the half, so a relatively minor incremental cost in the scheme of about $3 billion a year of expenses and you can see the terrific results that have come off the back of it. So we call that a terrific advertisement and a very strong encouragement for going into the next year and the work was done last year was set up with a view to a potential name change in due course. The tremendous results we had from that have encouraged us to continue to move on now.

So you will see that you look feel, and style carry forward with the name changes. There won’t be a re-invention and a sitting aside of the expand was we were sitting up for a potential name changes in due course, so you can see this part of this branding change actually.

Unidentified Analyst

How long has the name change been in your plan?

Simon Paul Moutter

We’ve been pondering at I think for those of us who have been in senior roles around telecom pondering the possibility of moving on from the 1980s humble home phone that sort of the word telecom has come in to main since probably the mid 2000s actually and there was always going to be a time when we needed a name that was more representative of the future business we run, we are not about home lines anymore and landlines that’s a small part of the business, we are about mobile, we are about digital, we are about data, we are about TV, we are about entertainment side.

We knew at some point a name change is required, but look given the tremendous progress we are making, really strong scenes of energy and excitement around this business, the fact that 200,000 customers have noticed that in the last year and decided to join us is an endorsement and in correct now seems the possibility to move on and so we’ve taken the decision and we are moving on.

Unidentified Analyst

Thank you.

Operator

Thank you. (Operator Instructions) The next question comes from the line [indiscernible] Please go ahead.

Unidentified Analyst

Hi, guys. Just had a – how long you speak, I mean your re-branding is something that, it’s the well know brand and then I mean customers are like to continue thinking about [indiscernible] struggled with the same things still. I mean how many years has you picked in this sort of bid into people stock thinking advance telecom as Spark and at the new entity?

Simon Paul Moutter

Look, I think that depends on what type of a customer you are and look we only adopted the Telecom name in 1987 actually. Before that, we were the post and telegraph, the post office and it took a very short time actually given we’re one of the largest advertisers in New Zealand, our names and brands are everywhere 24/7, we have relationships with millions of New Zealanders already, data some what daily and monthly.

We think the new brand will transition very quickly, but yes of course we will have some carryover and some people will fondly remain with the telecom name and it does give us as a great foundation and so we don’t worry that if it takes a few years for parts of the market to move on beyond Telecom is what they know what says, but, if the name aids excitement and reasons to reconsider our product set into work with us as a provider and that’s a good thing too.

Unidentified Analyst

And just quickly what sort of opportunity cost of loosing the Telecom name because it is engrained in everyone who must be we talked in to a getting up a phone, getting a mobile phone, Telecom is still there, their name, was it a torturous process or was it just something that you knew it had to happen?

Simon Paul Moutter

Look, we know it had to happen and the opportunity cost of moving away from Telecom will be a fraction of the opportunity value and moving just back.

Unidentified Analyst

Understood and thanks very much for that.

Operator

Thank you. And our next question comes from Arie Dekker with Deutsche Bank. Please go ahead.

Arie Dekker – Deutsche Bank AG

Good morning, guys. Yes, just three questions only; firstly, you have some guidance to the free cash flow benefit associated with the reengineering and annualized in 2016 and obviously you are targeting the stabilization in the top line over that times sort of period. Do you have a view even a preliminary one in terms of what the free cash flow impact going the other way will be as that revenue stabilizes over the next two, three years?

Simon Paul Moutter

We’d be very hesitant to see that out, I think that’s your job Mike, so formal view on that, what we’ve try to do is give you some input measures, give you our opinion on fixed income decline provides some increase view of what’s securing from the Turnaround Programme. We’ll continue to do that, if and when we find more the capital envelope, we’ve you a bit of guidance here that sees that if we can see it now, being a little lower than we gave last year, so I think sorry mate, you will have to do the math and we’ll watch with interest to see what we come up with.

Arie Dekker – Deutsche Bank AG

Yes, and just those measures, I guess one of be the areas where clearly there is some cost growth and if you say some of connections relies at a mobile cost of sales program both. Can you just talk a little bit about what’s happening within the different component of mobile cost of sales been separating out, some of the subsidies have hand picked, but also happening in terms of margin associated with, would collaborate.

Simon Paul Moutter

What’s this quite a shift occurring in the mobile mix and it’s a very good shift actually and is representative of some of the changes particularly in make a behavior in retail, so I’m going to ask Chris Quin to comment here. He has a very strong view of those numbers in – he’ll help you understand why those dreams are very good dreams. So Chris, are you on the line still.

Chris Quin

Sure. Yes, thank you Simon. Harry, Arie, I think the couple of the things to think about in terms of tax for [indiscernible]. That we have had bit of 1%, 1 percentage point further improvement in the cost to revenue ratio in the mobile business. So what we are seeing is a quite solid shift in the mix of postpaid plans where customers are choosing to buy the device and buy out right themselves or finance frequently to the mobile plan, which is shifting the dynamics of cost of acquiring those postpaid plan limits hence the one percentage point improvement in what is cost us to acquire each customers as percentage of revenue.

So the bulk of the mobile cost of sales increased that you see in these numbers are simply volume driven in the that not growth number at 108 sales and connections growth or the half across Gen-i retail, is what’s driven the mobile cost of sales up. The gross margin has grown pleasingly. The revenue on is grown the usage lines, so overall that mobile business is basically in beta and it was last period.

Simon Paul Moutter

That helped Arie.

Arie Dekker – Deutsche Bank AG

Yes, that’s helpful thank you. Just in terms of the capital management and you’ve been recently created the effort, but just on the Commerce Commissions review of the spectrum, I guess one question is clearly it won’t be the case, but if you would turn down on that fourth block, would that be sufficient for you to reconsider competitors capital management outlook.

Tim M. Miles

I look at we will be watching the capital situation over time and so…

Jolie Hodson

Yes and we are committed to reviewing our dividend policy at the end of year, our preference is to do sustainable ongoing dividend growth. So we would watch that, that announcement and we reconsider our capital management at the end of the year.

Arie Dekker – Deutsche Bank AG

Okay, you said that the dividend grows definitely preference in terms of managing those return.

Jolie Hodson

Yes on a sustainable longer term basis.

Simon Paul Moutter

That’s what we’re signaling.

Arie Dekker – Deutsche Bank AG

Last question. Just the comment in terms of outlook in terms of late indicators and revenue performance in mobile and being positive in particular. Can you just expand just briefly on a pure post those indicators. Obviously we stay the hit line numbers are going well, the services revenue at this point lagging a little bit just wanted to expand on that outlook a little bit more.

Simon Paul Moutter

Look at and how we would capture the lead indicators Arie, I’d say, Chris gave you a very strong insight the retail for the first time in since 2008 has had a flat overall revenue performance, so it’s some deal to have rises offsetting decliners, that’s a very positive sign. We clearly stabilized share loss in broadband. We have clearly started to gain share in good quality mobile. We are not destroying our office in that process. We are winning on value.

We’ve clearly got more cost momentum in core operating costs emerging from the turnaround program and we just for the sake of all analysts on the call, I mean we’re clear that we had to have set up the turnaround program and get it underway, so we did not expect an enormous shift in the cost profile in H1, we were getting organized with a more sophisticated more targeted program around, continued cost reduction and that will show up in H2 and you will know me enough and I wouldn’t say that if I wasn’t confident about our ability to deliver it.

So those would be some of the lead indicators in the retail business and Tim has given you some indication that our shift toward cloud business, particularly at the hosted infrastructure end of the back of the Revera acquisition is building a very strong pipeline and that’s not an easy – its not a business that takes five minutes from when you win a deal to when you get it in, it’s a big complex transitions and so it’s one thing, signing a contract, it’s a whole another deal of many, many months to sometimes years to complete a transition and that’s what makes it such quality business, once it’s in its very, very sticky business.

So we are feeling good about the shifts we’ve made and the momentum we’ve got and it’s a big deal to have such strong performance in the mobile market. It is where the action is, it’s the preference lead us to it, as you will think most New Zealanders form their opinion about of the players in the sector around and to have taken 108,000 connections gain this half when our major competitor actually lost customers in that period is some deal for us. So hopefully that gives you a bit more of flavor. So next question please, operator.

Operator

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

Tristan Joll – UBS Securities Ltd.

Good morning. How is it going guys?

Simon Paul Moutter

Good morning Tristan.

Tristan Joll – UBS Securities Ltd.

If you don’t mind, actually just going, but I guess I will kick-off just by saying when we look at the guidance and we consider the half is gone, I mean you have had a fairly white Southern Cross dividend and it would be very helpful if you could give us some view as to what you are assuming for the full year. I mean I know this is an issue every year, but to me, if you are finding a picture of underlying in due performance will be good to know what you are factoring in.

Simon Paul Moutter

I think Tristan, we just – we would like to – we’ve seen a couple of the analysts notes coming through this morning on this sort of idea that the bigger Southern Cross employees are weaker in NZ core and I think actually there is a little bit of value to it for the offsets, so in fact we think that it make no difference at all, because there is some one-off offsets in this, I’ll just get Jolie to run you through why we think you should look that little differently actually.

Jolie Hodson

In the first half, we talked about before with the brand refresh, we had an increase of $5 million in marketing cost. We had a specific data provision of $10 million, we are increasing that for date, we are cycling a $6 million gain from the prior year on CTI release of one of the subsidiary and we’ve got $5 million of lower insurance proceeds from Christchurch earthquake this year and we have also got $5 million of incremental costs associated with the setup of the Turnaround Programme going into second half. So we believe that the -- while some Cross dividend was higher in the first half, it has actually been offset by number of these items.

Simon Paul Moutter

Yes, so not to stored on the underlying and look in terms of your specific question, can we guide you better on Southern Cross dividend in second half? The answer is no and it’s not because we’ve been a pain in the ass and then we don’t want to, we can’t, we simply don’t know. Southern Cross is a secret business, we are a shareholder in it and the ability to pay dividends is based on the closure of deals and receipt of cash and simply do not know so.

Tristan Joll – UBS Securities Ltd.

Yes, I mean I understand that. I guess the question is more on the other side of the equation, which is that if you are trying to find a picture New Zealand underlying which is very useful to know what is the sharing spot you know?

Simon Paul Moutter

No, I get it, but we just can’t, so yes.

Tristan Joll – UBS Securities Ltd.

Okay. Second one I guess is, just to go back over what I think was Slide 32, which is the cost out slide. It’s interesting I think that you are representing a view of fixed line stabilization. The cost out, I mean what I mentioned to them now is that we’ve increased the sort of price target from $200 million to $300 million. Does that reflect new opportunities that you’ve found or does it reflect a revenue reality that you think is potentially sort of worse? And I suppose, to add to that it will be helpful if you could frame that in terms of what you think the earnings will be doing at that point in time?

Jolie Hodson

[indiscernible] part of the question. The $200 million to $300 million of identified savings are part of a separate Turnaround Programme that’s been separately identified and driven in this as we focused and committed to focusing at the second half of last year on a full program across the whole business issue. Recall in the last year it was focused mainly on labor. We’ve switched that across procurement, our new working CapEx investment as well. So it’s a separate program unrelated to the revenue, any changes in revenue.

In terms of giving EBITDA guidance for years beyond 2014, we aren’t prepared to speculate on FY 2015 EBITDA outlook. It will be impacted by a number of factors. We talked about the legacy fixed line decline and mobile performance, exact timing of turnaround initiatives, the rate at which we scale our Internet TV business, but we are clear and seek to have free cash flows from FY 2015 principally due to some of those CapEx reductions and the savings which comes through.

Simon Paul Moutter

Tristan, we’ll provide guidance on 2015 at the full year result for 2014.

Unidentified Analyst

Okay. And then, just finally on the continuing stuff. You sort of answered the cost question, but I was going to ask a cost question, but as part of the game, more philosophically you think about this strategy. Well, can you give us some other sort of target that you’re going to see for those initiatives? I mean it strikes me that decently a strategy for changing world underneath, the continuing main scope is got up a competitor who is probably finishing [indiscernible] operating year. And would you look – are you potentially, I suppose sacrificing some short-term gain and then just having a longer term platform underneath there?

Simon Paul Moutter

Look I think that’s a valid conclusion. So there’s no way an Internet TV business is going to be cash flow positive in five minutes. It will take us some time at that position. And look, clearly it is the decision to invest in the future and look, we think we’ll have more than hoping just the [indiscernible] and internet TV and see this in its own rate. It also materially alters the positions of other customers towards our business. It helps us drive broadband uptake. It helps us drive volume on the network.

When you look today at the U.S. with broadband volumes to the household approaching 100 Gig a month, New Zealand was at 35. A big reason for the difference is Internet television, and so these things brought, make and manage really well, help us grow the value to consumers of all of that products and services, which helps us grow our revenues elsewhere too. So it’s more than just a secret play, but in the end we have done the business case based on it, washing its own face in a reasonable time and being a profitable secret service in due course.

But in terms of the metrics set at the outset, we will see those, but we just – we will see some metrics in terms of forward-looking view for shareholders to hold us to, but we’ll do that at the full year and the reason is we really are, first point, need to complete the commercial launch, which will happen in coming months and at that point we will be in a position very randomly. I would have a look at what the continuing liability looks like, what the price points and commercials are around that, what devices are competing to support. The roadmap for that is it just helps everyone form a more sensible view on that and that’s the right point I think to share some views of it for our shareholders.

Tristan Joll – UBS Securities Ltd.

Okay. Thanks very much.

Operator

Thank you. Our next question comes from the line of [indiscernible]. Please go ahead.

Unidentified Analyst

Thank you very much and good morning all. First of all, I’m just wondering if you could give me a flavor and then clarify the second bullet point on your slide 23, when you talk about consumer brand in New Zealand?

Simon Paul Moutter

[Indiscernible] just to explain what you mean the symptoms of stacks we believe?

Unidentified Analyst

Yes. It says we believe that New Zealand is the best place on the planet.

Tim M. Miles

…made a different view on that, but…

Simon Paul Moutter

Or we say we believe we’re not telling you have to believe.

Unidentified Analyst

Gentlemen, I appreciate and honestly, I’d note also, I’d hope that your new name is the start of some great firework Telecom uses and I sincerely hope so, but – and I hope it’s not kind of you actually acquiring some regulated or Australian utilities businesses, but more seriously, on April 14 guidance, just wondering can you clarify what you’re assuming in terms of new pro forma in terms of the FY2014 contributions for AAPT. The complex is that falling, when the TPG deal was announced.

You talked about a 12-month annualized EBITDA for AAPT of A$70 million arguable was a different currency et cetera. but now you’re talking of $17 million contribution only for eight months. So obviously that would imply a much bigger annualized number for AAPT for April 14. and obviously, the implication is that your pro forma would potentially – would have been higher then when normalized for AAPT, it’s right. I mean by that you – the sort of X number would have been different. I’m sure Jolie knows what was I mean…

Jolie Hodson

Yes.

Unidentified Analyst

And so is the AAPT an eight month number, the A$70 million or is it 12 months?

Jolie Hodson

Maybe, eight-month number, say which is New Zealand A$70 million, so New Zealand $55 million at the half and then for the last two months A$70 million…

Unidentified Analyst

Right.

Jolie Hodson

The number you’re refereeing, I think to in the – it relates to the time of it, so…

Unidentified Analyst

It is the announcement…

Jolie Hodson

Yes, was a recurring annualized EBITDA, so there have been some EBITDA movements in the first half of the year and I have to tell you around [indiscernible]…

Unidentified Analyst

Okay. Jolie, what I’m going with this with the – I’m just interested in actually just trying to work out what you’re underlying year-over-year trends on a pro forma basis and I’m just going to take you through the metric quickly for what it was. So you start with your previous consensus number you were sort of comfortable with was 1,035. now obviously, we need strip out AAPT from that.

So you get to your guidance of 9.25% to 9.45%. Now my pro forma like-for-like number for 2013 is 9.75%, just by stripping out AAPT, so that was implied that yield EBITDA this year on a pro forma like-for-like underlying basis would be down 4%. Is my math correct?

Jolie Hodson

Yes. That is correct.

Unidentified Analyst

Correct, fantastic, I’m glad we could clarify that. Last question, when – Simon, maybe for you, when you look at the next three years, it tells me that’s you guys are doing a fantastic job on costs and thought behind what any of the – kind of talk he is doing, so better reorganize that. What strikes me now is, because of your declining top line, you’re going to have to reinvest most of the cost saving into customer acquisition to actually reverse the top line trend. Is that a correct sort of characterization of – what the next couple of years going to be and at one point, can you pull back on your customer acquisition spend and therefore deliver next efficiency or net cost out to try to grow earnings?

Simon Paul Moutter

I’d say we are ambitious about this again, I think it builds this too much into giving future year guidance at a point in the year we’re not able to do that and we’d be inappropriate. but clearly, we rolled the belief that we can be growing a New Zealand business again and with appropriate reinvestment of some of the games we make from accrual cost out into driving market, market growth, and certainly seeing some of that this year in, accrual cost out funding acquisition in mobile in particular that we build along albeit a business long too in that.

There is a point at which we would clearly move to a more moderate view of aspiration but in the next year or two we determine to continue to move our mobile market share up. And so the one thing you won’t see shift in this out patience in energy and willingness to invest in growing mobile.

And that’s very, very important for the long-term health of the business.

Unidentified Analyst

Yes, Simon, just to follow up, where do you think compared to other markets you’ve operated in, where do you think you guys are in terms of the fixed mobile substitution curve in Australia both in terms of price deflation builds, in terms of volume migration onto mobile in line losses, fixed line losses. Where it’s on a 10 year journey, where are we on the point?

Simon Paul Moutter

I would broadly say we are sort of two to three years behind say, Australia is not a bad reference point in terms of their transition acquiring, we watched those results say with interest. We really admire the work I’ve done, and might a lot of these investments a few years ago they piled money into mobile now today everyone the market is very strongly rewarding them for their reference.

The truth is we are little behind the cube and so their good guide to us and watch them very closely and they help us in steer – we collaborated see the people and we learned a lot from them so, it’s the path we’re on.

Unidentified Analyst

Yes, it’s makes sense. A very last one for me, if I may. So obviously you’re deconsolidating a significant – I shouldn’t see significant some contribution from AAPT, that's going to have the effect of rebasing your impacts down. Your maintaining sort of your catalog, your dividend policy going forward, if you don’t do any buyback and we are looking potentially at 2015, the DPS could actually been down on 2014, I know you are not going to go into your guidance discussion, but I’m just thinking conceptually, if I’m thinking about it the right way, thank you.

Simon Paul Moutter

Wouldn’t be our plan to think that way. So, certainly we are really signally, we want to keep going forward on dividends. Okay next question operator.

Unidentified Analyst

Okay, yes.

Operator

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

Sameer Chopra – Merrill Lynch Equities Ltd.

Good morning. I had just one question for Chris Quin. Chris, the customers that you are adding in mobile and broadband phenomenal growth rate, I just wondering if you could talk about what sort of ARPU levels at these customers coming in on? I’m trying to get a sense about what sort of customers are you acquiring right now, thanks?

Chris Quin

I think [Indiscernible], I think we are reflecting on the ARPU shift we have seen 6% increase in prepaid ARPU. So that would tell you that a good amount of the customers that we are acquiring on prepaid, we are acquiring onto the value fix, and now they are offsetting at around $60 a month to Skinny, $19 a month for Telecom.

And then in the post-paid market, it is confused a little by the mix of customers that are no longer taking a subsidized device into their postpaid plan, but we are pretty pleased with growth across the mix of plans, our new plan range which came out at about the same time is a refresh of the brain last year, actually removed one of the bottom piece of the postpaid plan. So we dropped the 29 and started the 39, and market conditions haven’t forced us to go back to that.

So if you look to the fate of the devices coming out so to do the financing of the discounting and the charging for device coming out of the plan, the user revenue was up 4% across the portfolio. So that should help you understand what’s going on there.

Sameer Chopra – Merrill Lynch Equities Ltd.

Chris, just a clarify so you mainly targeting A,B sort of demo or that pretty much across expected right now?

Chris Quin

On just mostly [indiscernible] of your question..

Sameer Chopra – Merrill Lynch Equities Ltd.

Chris just with the current buyers, so you are mainly targeting AB sort of demo or is it pretty much across the spectrum right now?

Chris Quin

I’ll just missed the first part of your question there.

Sameer Chopra – Merrill Lynch Equities Ltd.

I was just wondering whether they will be shifting in this sort of demographics or customer base that you were targeting. I think you were initially weak in open and I’m just trying to understand whether there has been a pick up in…

Chris Quin

Yes, we are very focused on the open market which is where our market share has been lowest seriously. But not to the exclusion of any other market, simply just understanding what a younger more mobile customer looks like and what the preferences are and then also dealing with the brand affinity to have had all the brands in a pretty pathway with this brand change.

But in general, we are requiring customers at increasing levels of actual usage revenue or network revenues if you like, but the picture is confused somewhat by the effect of the devices coming out at reasonable rate from the plan. So, we do much more open term plans, which in the end are going to be more profitable in the margin positive for us.

Sameer Chopra – Merrill Lynch Equities Ltd.

Great, thank you.

Operator

Thank you. Our next question comes from the line of Greg Main with First New Zealand Capital. Please go ahead.

Greg Main – First NZ Capital Securities Ltd.

Hello, hi guys. Just a couple of questions. So just on the rebranding costs spit $20 million is all going to fall in second of 2014?

Simon Paul Moutter

We expect above the vast majority Greg and it will be a mix of capital and operational, so, and as you would copy clear on, we are still building all of that prior again. But we won’t mind advising on that we just don’t have those effects to hand currently so that – in the order of $20 million?

Greg Main – First NZ Capital Securities Ltd.

I mean just to clarify on that $200 million to $300 million annualized benefits. So, did you take 75% your expect that maybe flow through the cash flow most of the things from cash flow benefit laid to 75% of those savings in FY2015?

Jolie Hodson

The combination of the cost FY 2014 and FY 2015, we will see the 7% contribution in the second half of this year and then as we move into FY 2015 and there will be some further in 2016, but the majority will fit between the back half of this year and 2015.

Greg Main – First NZ Capital Securities Ltd.

Okay. And just…

Simon Paul Moutter

Greg, how we run the two [Indiscernible] and just for your info, we found it very challenging to train as light because external macro was looked at on a financial years actual basis. But, our program like that runs on what we call run rate or exit run rate. So all of that internal drive as to what we call exit run rate. So we try to exist the current financial year with a new run rate that is markedly lower running into the subsequent year.

And so, we do find a little bit tricky to get that right in terms of what happens in an absolute sense because things program, we’ve already got a number of these moves well underway, in fact many of them are closed off and what we call level 5, which means done and benefits flowing they materialized overtime in that path of the exist run rate. So some, an initiative could be in place now or could be in place on the 15th of June, and it still counts the same value in our fixed run rate calculation. So, we would find a little bit tricky trying to guide it to specific financial years, and it’s just – so forgive this sort of clogginess there

Jolie Hodson

You have a lot of initiatives with role play.

Simon Paul Moutter

Yes, and there is a lot of initiatives…

Greg Main – First NZ Capital Securities Ltd.

Okay.

Simon Paul Moutter

In our moving phase right, and there were exactly locked down. So, we’ll get more and more specific as we look actuals in and so we intend to update market every reporting time on. And overtime, we’ll get a little bit, we get more clear around how and when these benefits we show over these such early days right now we find that a bit challenging to be honest.

Greg Main – First NZ Capital Securities Ltd.

Okay. And can you just sort of say that we penetration is on your [indiscernible] moment?

Simon Paul Moutter

Christy or Tim Miles, do you know…

Tim M. Miles

Yes, considering just a little bit of the 60%.

Greg Main – First NZ Capital Securities Ltd.

Gotcha. So there is still some price available on that? And if we are starting to look towards the 4G transition obviously that will be the story over the next few years with mobile. And how should we sort of think about – I know you are not doing this differentiating pricing to the 3G. And how should we sort of think about the transition, that we sort of moving away from subsidies so much and people are bringing their own devices. Is there something that you’re going to actively push what we expect people to kind of maybe go towards move heavier data plans et cetera and how do you sort of see that phasing, I’ll take the 4G services?

Simon Paul Moutter

So, that will play out differently in the two markets have both Christy and Tim comment on that. So, Chris you’d like to lead often, Tim how that will plan yours and Tim to follow.

Chris Quin

Sure. So I think we are very pleased with the take up of 4G against the 4G comparable devices that are available are market today. Now the Telecom 4G capable customer base are almost all using 4G capable customer base or almost all using 4G, so there is some very strong take up there?

Simon Paul Moutter

As a device full operation widens and almost due reason when device 4G capable, I wouldn’t see any barrier after 4G take up so I think it will follow clearly that the penetration of smartphone and the availability of device, how much of the fleet can actually gives 4G and we are seeing basically every device now kind within, the big mix will be with the device range of 700 megahertz spectrum become available and that is obviously critical to our planning in backhaul there and there is no question of strongest use growth is occurring data part of mobile, we are talking some doubling every year, top numbers in mobile guide and consumption. The patent of use we are seeing in 4G and the 4G user definitely do use mobile data.

Tim M. Miles

You were saying very similar trends at Gen-i. I think our penetration is probably just a little behind Chris is at the moment and that’s because we have got companies who goes for refreshes and so that automatically count side when we release new technology, but with same for the customers we have quite a number of clients obviously using 4G, but they tend to look at the mobility, so they really just look at 4G WiFi 3G as a package of mobility.

We are seeing terrific growth in that usage, so very much the same trends though our penetration I think it would be just behind the consumer thought as Chris was saying.

Unidentified Analyst

Okay and just one last question; just on imputation previously with sort we haven’t fully imputed following the sale of AAPT does this could have impact how the level of imputation?

Jolie Hodson

No, it doesn’t. We will be imputing at 75% for this dividend, six more now in New Zealand tax payment list to the legal imputation.

Greg Main – First NZ Capital Securities Ltd.

And just going forward, by FY15 presumably you will be back to almost 100% imputation?

Jolie Hodson

We’re becoming closer towards 100% of tax payment.

Greg Main – First NZ Capital Securities Ltd.

Okay, thank you.

Operator

Thank you, our next question comes from the line of [indiscernible] please go ahead.

Unidentified Analyst

I just have three questions; just on spectrum, I was just wondering when the cash timing will be and whether you will paying to finance that?

Jolie Hodson

So the timing will be after – we got to wait for the Commerce Commission Review of the force [ph] law fit and then you have the last round of the auction which is really set on the duplex, so we need to avoid that so probably wouldn’t be till March or April and we need to finance set ourselves directly so not to use the government funding and that really just gives the ability two reasons; one, the rating agencies countless bit of money is deep so there is no change in terms of us and using with their own funds and what will able us to better mange our mid to short and long-term data if we finance that ourselves.

Unidentified Analyst

Excellent and just one more around the cost, you obviously said it was hard to gives the competitive number I am just trying to work out how much of that $200 million to $300 million would be captured in the first half of what you just reported?

Jolie Hodson

Of 2014, there is a small component around that in terms of that will be captured, but we look to get cost of execution and relation to that we see in terms of sitting ourselves up to some of these things do with severance cost whether its cost of setting the program up, so majority would be in the second half and in FY15..

Simon Paul Moutter

Assume a minimal intake in the first half.

Operator

Thank you our next question comes from Richard Eary with UBS. Please go ahead.

Richard Eary – UBS Securities Australia Ltd.

Good morning everyone, just a follow-up on mobile that just got a couple of questions; obviously if you look at revenue growth just on a group level 1.6% ex for handsets with subscriber growth of 12%, obviously we had some dilution in my office which I think you talk that expensively on the call, policy, but generally little bit weak from this side and for changing for the dynamics within retail, is there anyway that you can, just trying to get a look that how these are trending month to month, is these are selling that we actually wanted to see any signs of stabilization in postpaid in some of the market segments and how we should think about translating for this subscriber growth back to revenue growth that’s the first question.

The second question is I mean you don’t report given obviously the customer growth that you go through. Always starting to see any sort of improvements in postpaid and is that one of the reasons moreover actually started to see stock improvements.

And then the third question just on the launch of the IPTV service, I mean, it would be great, you get a feel whether you think this is sort of revenue opportunity or a churn reduction opportunity or combination of both, but it will be interesting to see which one you think it’s more leading to?

Simon Paul Moutter

I’ll ask Chris to deal with the first, two questions but just quickly on TV is most certainly not a churn reduction and we’ve been really, really clear that if we into the services business, we do it predominantly for creating value from the any services business, we are not in the job of retaining courses excess lines. Companies around the world, who are in the line infrastructure have compelling June reduction and seems it around the stuff we don’t – we are a more variable cost structure and fixed broadband so.

We are in the business because it creates value and because it creates an attraction to product seat is not a churn reduction, so Chris, do you pick up the questions okay on the earlier please.

Chris Quin

I think so, Simon, I do answer. So two questions, the first one is, on our lines for retailer and I’ll some will contribute for the Gen-i market, but the postpaid ARPU the single dominating effect on what is going on the ARPU there is the mix of customers who are no longer taking a contract that includes the device. So, it’s a little difficult to pull apart with the information we published and in fact with that we have but, the usage ARPU is growing, because customers are consuming more data basically.

So, what we are seeing happen is a plan that might be $99 with the free item becomes $69 or $79 with the customer buying their own device. And what’s the customer buying their own device and we goes to your second question around stack, stack improvement has come up lower acquisition cost rather than lower churn. And postpaid has never been particularly alarming. And it was pretty benchmark to what we see from most of the operators.

What we are doing is just simply that cost of acquisition is dropping because of the mix shifting to open churn. And also a very week to week focus on our plans or offers and investments that is going into device, that is included in the postpaid contracts to make sure that we are focused on being competed also maximizing value on this card, a huge net of focus over the last year that is paying off.

Richard Eary – UBS Securities Australia Ltd.

And Chris…

Chris Quin

I’ll just speak the drive that might be difference of G&A.

Richard Eary – UBS Securities Australia Ltd.

Chris just a follow-up in terms of BYO versus handset contracts out of that – customer growth that you are seeing, is it possible to share what that mix is and what the share is within that postpaid both. Just to get a feel in terms of where we can start to see some stabilization on the blended basis rather than on our product basis?

Simon Paul Moutter

We’d rather not – that’s competitively important information, yes, I’d rather not.

Richard Eary – UBS Securities Australia Ltd.

And maybe you ask in a different way if you look at the underlying trends, are we six months, 12 months, 18 months away from postpaid ARPU stabilization based on the mix issue that you are seeing underneath?

Simon Paul Moutter

No, look I don’t think we answer it realistically Tim, did you have anything to related?

Tim M. Miles

Smaller part of the overall mobile picture in Gen-i, that actually about churn, we are not seeing a big lift in churn, you’ll know that well you might be but a number of mobile connections she gone up slightly. I’m so not seeing a big lift in June at all that’s in pretty good height. But to maintain business because there is some very strong competitive pressures there is a very fiercely fought market and particular in around enterprise and government. So, what we have seen is pressure on the ARPU itself to keep those clients. So that’s the real story.

Simon Paul Moutter

At some point, that bottoms out is determined by the adequacy of returns I guess.

Richard Eary – UBS Securities Australia Ltd.

Okay. Thanks, guys.

Simon Paul Moutter

Thank you.

Operator

Thank you. Our next question comes from the line of Adrian Allbon with Goldman Sachs. Please go ahead.

Adrian Allbon – Goldman Sachs New Zealand Ltd.

Good morning, guys. Just one follow-up question from me; just in the Turnaround Programme in the $200 million to $300 million, I know its $100 million, just wondering do you guys conclude on that the reduction in what the deduction in the UVA [ph] charge or that will come through given the final determination?

Jolie Hodson

It’s not included into the Turnaround Programme and obviously it would be subject to what the founder determination is.

Simon Paul Moutter

Not really included in any of our modeling business, just so hard to see where its landing or when or what the policy is at the moment.

Adrian Allbon – Goldman Sachs New Zealand Ltd.

Yes, I can understand that. Okay, thank you.

Operator

Thank you. Our next question comes from the line of [indiscernible] with IDC. Please go ahead.

Unidentified Analyst

Hi, guys. My question is around on unbundling I guess, the market is a whole bunch of retail cluster and the way you are contesting, it has got much to lower cost of environment as there is lot of uncertainty as it coursed in for pricing and just wondering if you can give an update on whether your are marketing some CapEx unbundling or whether it’s actually too hard to actually implement and it wouldn’t be actually economic to do so, given this further?

Simon Paul Moutter

The short answer is we are not currently planning to move to what an unbundled future, but clearly we have to maintain the possibility of that dependant on what the outcomes of all of these price settings and final processes are and we live in a world today where we have a competitive disadvantage and in this regards there is clearly something we can’t live with permanently and provided the changes in the outcomes of the reviews et cetera end-up leveling the playing field and we won’t feel the need to, but at least still a very significant unlabelled playing field and that would be one of the options that we would have to consider that’s not an in any plans today.

Unidentified Analyst

Got it. Thanks and final question; whether you could give us an another update on the IP Voice product, either Fibre and where exactly you are rolling at, well any of you could actually telling in all the four areas now?

Simon Paul Moutter

On USB, we are recurrently active within enable and particular we’re in the early process with UFB for nothing and I think a bit further away still from mobile, I think consider of going in that order and it has taken us a long time. In our systems, when they were designed to talk to anyone else’s input products so its been a big build for us to create the capability to consume other third party inputs that we’ve been on and moving along well there.

On Fibre Voice, we have a very substantial Fibre Voice capability, we have a world-class broads of platform used heavily into Tim’s Gen-i market. We are currently scaling it out to SME and it’s Broadsoft that will provide the basis for our consumer for broadband voice, software voice service in due course and we are advancing through the technical program to make it scalable and deployable into that market at the moment and at this point I am not firm on a timeline there, I am sorry.

Unidentified Analyst

Okay, great. Thanks.

Operator

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

Paul Brunker – JPMorgan Securities Ltd.

Thank you. Just a question maybe as to Chris about this trend of whole data cost hitting retail possibility, so I don’t want to get impossible from the sense of is it just coming more from the fixed side or the label size and as you see it, been quite meaningful going forward, because there is I guess that if costs are rising because of daily uses and revenue have to start growing rather than simply stand still? That was one question

And just want to offer from Rich’s question, IPTV, so to be clear, you will be making that product available to non-Telecom customers, is that correct?

Simon Paul Moutter

Yes, the ShowmeTV is a service which all New Zealanders will be able to buy.

Chris Quin

Chris speaking. With regard to the first two questions, so part of the first – firstly the data driven cost voice is almost entirely in the fixed market, you have the observe and it’s partly because the number of connections has increased. So we’ve added around 12,000 for the period and now that is a variable cost from our partners of course, that just increases our cost of sale. There also there are some variability in the BlackRock and international bandwidth cost. So as that customers had been increasing markedly year-on-year. Their consumption of that will serve us those costs must. So you want to absorb there is a critical focus for us is how we purchase BlackRock and what it costs us and how we manage its cost to a scale rather in a variable level, we evenly possible can.

In the case of just purchasing the number of connections with the industry structure that will rise with the number of connections we have so. And as I mentioned nearly half of our customers are now moving to about the $75 basic plan, so we do think there is value to be focused on this market from heading into the plans what customers value the [indiscernible] directly low cost.

Simon Paul Moutter

I think in last May I put a slide up which I sort of illustrate what I call the resellers’ floor and if you think about a market in New Zealand today we have all the RSPs are effectively buying a [Indiscernible] product. We are all paying the same GST. There is a point at which you have to borrow amount in terms of your ability to the cost on the top of that is modest and I think it’s signaling that if we are going to continue to see cost growth in demand volume usage demand, we are getting awfully pressured on the current price points in the market which appeals to me, and so we are looking to up-sell and that’s why we are very cautious with things like unlimited and there is a real cost to that service if it’s not well managed.

Paul Brunker – JPMorgan Securities Ltd.

Thank you, just one quick follow-up as well on the when you get the voice over fiber provision for residential, will you be charging – in short what you’ll charging for that service?

Simon Paul Moutter

For the provisioning of it, you mean.

Paul Brunker – JPMorgan Securities Ltd.

No once you got voice on fiber.

Simon Paul Moutter

No, we’ve haven’t got anywhere near that yet so. No idea at this point.

Paul Brunker – JPMorgan Securities Ltd.

Thanks.

Simon Paul Moutter

If there are any further questions, operator just we are nearly at the 2 hours of [indiscernible] one more question if there is one, otherwise we’ll close the call.

Operator

Your final question comes from the line of Justin F. Diddams with Citi. Please go ahead.

Justin F. Diddams – Citigroup Global Markets Australia Pty Ltd.

Thanks good morning. It’s Justin Diddams. Just two questions guys, firstly just want to get a sense of the retail consumer market in New Zealand and where do you think it’s starting to – at the consumer end a little bit of [Indiscernible] and scope for potentially some after release through that market. And the second question is, have you guys around the economics zone bidding for the New Zealand rugby contact that’s coming up. That's currently under review and to the economic stack up for not be delivered rugby channel. Is that how we should be thinking about potentially good year to the excess free cash flow? If you could comment all together?

Simon Paul Moutter

Well, I believe not make one all fair look the answers, definitive no, we weren’t be looking at bidding for the rugby rights. We look to buy the rights for main stream sport and rugby in New Zealand brings with it a production obligation in anytime soon, its not our capability and so we are building a primarily television based content service, and longer term plans will be made when we’ve shorter term outcomes, and so soon you don’t need to be concerned about that level of risk taking with this initiative at this point. Chris, on the other matter on teams and the potential to grow athletes.

Chris Quin

Look I think it is reasonable to conclude there is some potential, I think Simon you noted the resellers floor and on show [indiscernible] on this call draw the conclusions about the sustainability and some of the pricing in the market. And in terms of – we are seeing customers use of that double at least year-on-year and going up significantly. We are creating more reasons for them to get value from services, TV services are that been tested example.

And they will be others that we think will drive the band, so we think and principle customers focused on getting more capacity available at consumers services and we think that’s very new in New Zealand. So we thought that this was [indiscernible] immature market today. Simon quoted the 100 gigabit virtual market today, and Simon quoted the 100 gigabit average in the U.S. basis at 56.

And then the second thing, we are also noticing is people are looking for quality in that connection, so speed and performance of the connection is got into play quite strongly for people to be on the gamer profiles and things like that very much. So now that we have near half that customization not on the base plan, I think that’s a good indication there was actually a market willing to choose the quality of service and capacity of service, and bandwidth value, and with the quality of service and capacity of service and bandwidth value, and we are going to be niche marketing to that as hard as we can.

Simon Paul Moutter

Thank you, Chris. And Justin thank you, you got lucky last, you look we’ll draw the briefing to an end. I really do appreciate you all allowing some extra time for us this time, in terms of the amount of news we had and look forward to catching up with some of you in ensuing weeks and be back here with some more positive progress to report in six months time. Thank you all.

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