August 30, 2024

H1 2024 earnings call transcript

TPG TELECOM LIMITED · H1 2024

TRANSCRIPT OF TPG TELECOM – HY24 RESULTS – 30.08.2024

Bruce Song

This is Bruce Song speaking from the TPG Telecom investor relations team. Thank you for joining us for the presentation of our 2024 half-year results. TPG Telecom acknowledges the traditional custodian of country throughout Australia and the lands on which we and our communities live, work, and connect. We pay our respects to their elders, past and present.

The agenda for today is as follows, our CEO and Managing Director, Inaki Berroeta, will present the results' highlights and our business update. Our CFO, John Boniciolli, will then discuss our financial performance in more detail and Inaki will then discuss our outlook before we turn to

Q&A.

Inaki Berroeta

Thank you, Bruce, and welcome to everyone joining the call.

Our first-half results reflect solid trading and a strong cast performance. In the second half, we're increasing our focus on cost efficiency and expect to deliver important steps in our strategy.

We were pleased to see continued growth in service revenue in mobile in the period, as well as continued improvement in margin and fixed broadband.

Mobile service revenue increased 7.2% as we continue to monetize higher consumption following our recent network investment. We're delivering great value options for customers with plans refreshes that have enabled us to continue to grow despite lower international arrivals and the impact of aggressive handset discounting by competitors.

In fixed broadband, AMPU increased 6.3% as our strong growth in fixed wireless and improved on net margin offset the impact of intense competition in the NBN market.

In enterprise government and wholesale, we delivered a resilient result in a challenging market with gross margin stable excluding Vision Network. In June, we successfully migrated Lyca

Mobile to our network as a major MVNO contract win.

Our cash performance was a highlight of the half and is continuing to improve. We are sustainably growing our operating EBITDA. Working capital is moving in our favour and capex is moving past peak levels. We expect these trends to accelerate further in the second half. We continue to expect material improvement in cash earnings over the medium term as these trends accelerate enabling us to reduce bank borrowings and interest costs.

However, while inflation impacts appear to have peaked, the cost environment remains challenging.

This month, we made the tough decision to remove approximately 120 rolls to deliver operational efficiencies and address employee expenses.

As a result of these and other initiatives, we expect overall opex growth to slow in the second half and into 2025. Depreciation and amortisation is also slowing as has been lower than expected.

In each of our three major strategic initiatives, we are making progress. We anticipate a decision from the ACCC on our proposed regional sharing agreement with Optus on 13th September.

Our business simplification program is on track with several customer journeys, milestones to be delivered in early 2025. Our five-year strategic review is continuing, and we confirmed earlier in the month that we have re-engaged in confidential non-exclusive discussions with Optus.

Disclaimer

We are confident of achieving an EBITDA result within our guidance range of $1.95 billion to

$2.025 billion excluding material one-offs.

We are tracking toward the midpoint of this range because of our solid operating momentum and moderating indirect cost growth. This is despite a slower mobile subscriber growth and the challenging market conditions in NBN and enterprise government and wholesale. As note in

April when we announced the regional sharing agreement with Optus, we have lowered our guidance forecast capex for the year from 1.05 billion to $1.02 billion.

My next slide shows our key financial metrics.

Gross margin continues to grow faster than service revenue, increasing 3.9% in the most recent period against total service revenue growth of 1.7%. Our sustained service revenue growth since the merger reflects the gains we have made in both mobile subscriber numbers and

ARPU over the period. Gross margin growth continues to reflect direct cost efficiencies in both mobile and fixed, as well as the growth of our fixed wireless offering.

We are also sustaining higher levels of EBITDA with first half growth of 2.2% on the basis on which we have given guidance reflecting growth for the fifth consecutive half.

Operating free cash flow is improving in line with working capital and capex trends.

Earnings per share adjusted for non-cash customer amortisation and material one offs was 4.8 cents. This was down from the prior period, but consistent with our guidance for increased depreciation, amortisation and interest expenses this financial year.

Return on invested capital is down slightly in the period reflecting the annualization of higher asset base but expect this key metric to start improving as earnings grow and we pass the peak of investment cycle.

Maintenance of our half yearly dividend at 9 cents per share reflects the board's confidence in the medium-term outlook despite the short-term pressure on net profit.

In mobile, we continue to perform strongly in a very competitive market. Mobile service revenue growth of 7.2% across the group was another great result reflecting sustained higher ARPU and the subscriber growth of the previous two years.

Since the first half of 2022, mobile service revenue has grown 15.9%, which is ahead of the market. We have achieved this growth by focusing on a simplified range of grade value competitive plans while monetizing increased consumption following our 5G investment. Post- paid service revenue increased 5.5% with ARPU up 6.1% on the prior corresponding period despite the impact of increased competitor handset discounting.

Post-paid ARPU has increased more than $5 in the past two years, and the gap to our competitors continues to narrow. Pre-paid service revenue was up 12.4% with ARPU increase of 4.8%. This was driven by plan refreshes and continued growth in our subscriber base with a particularly strong rate of growth in our digital brands, TPG, INS, felix and Kogan.

The main contributor to our subscriber growth in the period was the addition of 98,000 MVNO subscribers under the new Lyca contract. Revenue from that contract will accrue to the wholesale business. Unlike our competitors, won't be factor into our mobile service revenues or

ARPU.

Excluding Lyca, there was a slight decline in subscribers in the period. This was attributed to three main things.

Firstly, there has been a slowdown in growth in international arrivals following the tailwinds of returning travel post the COVID lockdowns.

Disclaimer

Secondly, TPG moved first to shut down our 3G network, which led to higher churn in the period. We estimate approximately 23,000 customers have churned away from TPG as a result.

Finally, increased competitor handset discounting had a distorted impact. Despite the net decline in subscribers in the hub, net growth in subscribers since the end of COVID lockdown era is 539,000, or 10.8%.

Looking to the second half, subscriber growth remains challenging in post-paid, but we do expect a stronger ARPU result as we cycle recent plan refreshes. In prepaid, we expect the modest subscriber growth trend to continue and to see more benefit to ARPU from recent refreshes across Vodafone and Lebara.

Overall, we expect to continue to grow mobile service revenue as we monetize a strong underlying demand while providing simple great value deals to customers.

Now turning to our fixed business where we continue to deliver on our objective of growing gross margin supported by our strong fixed wireless offering.

Gross margin was up 6.7% to $351 million against the first half of 2023 across our residential and small office business base of broadband and voice products. This was despite a small decline in service revenue driven by the challenging competitive dynamics in the NBN market.

The result include a strong contribution to our retail margin from Vision due to the lower wholesale cost and last year's plan refreshes. Excluding Vision, fixed gross margin across our residential and small office business base of broadband and voice products was flat.

Total ampoules was $27 up 6.3% on the first half of 2023. NBN ampoules was up 2.3% to $22.

This reflected plan refreshes in the large TPG and INS subscriber base offset by higher NBN wholesale costs.

On-net AMPU across fixed wireless and the total Vision business was $52.30 cents up 10.9%.

In fixed wireless, margins continue to improve as we roll out the 5G product and churn rates stabilise. The rate of growth in fixed wireless will, of course, as low as the base grows, but we continue to see material growth opportunity over the next couple of years without requiring incremental capex.

While total fixed broadband subscribers were down 30,000 to just under 2.1 million in the period, the rate of decline has slowed. We have experienced heightened churn created by our delay launch of Fibre Connect and an impact of about 7,000 NBN subscribers following our shutdown of our bundle email product at the end of last year.

It is challenging to maintain a strong NBN economics and also stabilise our fixed base. NBN's costs continue to increase ahead of market while new entrants are growing at low margin through cross subsidy or aggressive promotion. Nonetheless, our profitability in NBN remains strong relative to other operators. Vision subscriber numbers were again lower in the period, but these have stabilised in the past two months as we have delivered system improvements and began reducing prices in line with lower wholesale costs. We have now been selling the G-Fast product across the Vision retail base since June.

Overall, we expect our strong fixed wireless offering to continue to offset the challenges in the

NBN market and we expect to continue to stabilise the subscriber base, including throughout the strong value offering on higher-speed products such as NBN 100 plus and G-Fast.

In enterprise government and wholesale, our performance has been resilient amid challenging market conditions. We remain focused on delivering a simple core portfolio of great value connectivity offering while also being fast to deploy and easy to do business with. Service revenue and margin in the core enterprise and government business were both up modestly on the first half of 2023 to 321 million and $266 million respectively.

Disclaimer

This reflects our continued success in selling TPG Fast Fibre, NBN Enterprise Ethernet, Mobile

Private Network, and Internet of Things offerings at the same time as we phase out older technology products. Key customer wins in the period include the Lyca contract and a 10-year

Internet of Things contract with Southeast Water for Australia's largest smart metering rollout.

In wholesale excluding Vision Network, gross margin was down slightly at $104 million, primarily reflecting exits of non-core and legacy technology products. The reduction in Vision wholesale revenue and gross margin reflects our strategic reduction in wholesale pricing in January, 2024, to provide a stronger value differentiation from the NBN and create a more compelling platform for retail partners. Vision wholesale margins have stabilised from here, while the Lyca MVNO win will also contribute to wholesale revenue. Overall, market conditions remain challenging in

EGW segment, but TPG is holding up well and customer continue to respond positively to our approach.

I now want to spend some time talking about our cost outlook.

Costs have risen because of the need to invest in the business during an inflationary economic cycle. We are modernising and rationalising our IT systems, upgrading our mobile network to

5G while replacing Huawei equipment and uplifting our capabilities in cyber security and digital.

Therefore, our operating costs have increased over the past two years and cash capex excluding the spectrum, has risen to more than $1 billion a year. These investments have been vital to set TPG up to compete and win for years to come, and we have still maintained our operating costs advantage against Telstra and Optus.

However, I'm pleased to say that cost growth has passed its peak. Total operating cost excluding material one-offs were $606 million in the first half of 2024. This was up 6.7% on the first half of 2023, but the run rate was lower than the second half of 2023, and we expect a low- to-mid single-digit run rate in the second half of 2024, excluding material one-offs.

As I mentioned earlier, we took the difficult decision to remove 120 roles earlier this month. This will contribute about $20 million in efficiency in 2025, partially upsetting wage price increases and other factors as we look to deliver a flatter profile for employee expense growth in 2025 and a lower rate of total opex growth. We also expect efficiencies arising from business simplification to start to become more tangible from next year. As we prepare our budget for

2025, we are looking closely at cross-efficiency opportunities across the business.

In capex, our short-term profile is improving because of the proposed regional sharing agreement with Optus as well as the progress of our five-year rollout. The proposed regional sharing agreement means capex will be $30 million lower than we originally anticipated this financial year at $1.02 billion and $50 million lower than previously expected in each of 2025 and 2026 at $950 million. We continue to expect cash capex to be materially lower between 700 and $800 million per year from 2027 onwards.

Again, the investment uplift of the last two to three years has been essential for TPG's future, but we're now entering a period where investment growth will slow. Combined with sustained growth in gross margin and improvements in working capital movement, these trends will release more cash to allow us to reduce debt and strengthen our financial position.

Business simplification is one of the main drivers of future cost, cost efficiencies and a key strategic priority for TPG. The program is run into expectations in terms of both cost and operating milestones. We continue to expect to deliver annualised cost benefits of $140 million from 2027. Roughly half of that comes from capex, which will contribute to us achieving the target of $700 to $800 million per year run rate. The other half will come from EBITDA improvements, including the removal of incremental IT opex of 15 to $20 million per year plus gross margin benefits.

Disclaimer

There are three main aspects to the program, simplifying plans and products, increasing digitalisation of customer experience and modernising IT platforms. We made progress with our objectives in the first half. We have already removed about 1,300 back book plans and we are on track for our target to reduce the total of more than 3,700 plans by half by the end of the year. We have exited further eight legacy technology products in EGW and we are on track to reduce the total of about 80 products by about a quarter by the end of the year. We have completed the closure of legacy email platforms, which were creating operating and security risks. We are on track with our plan to remove a further 40 applications to the cloud and have now decommissioned a total of 50 IT systems. We have front-ended the larger, more complex systems. Hence, there was a relatively low number undertaken in the first half.

Business simplification will enable us to go to market with a clearer customer focus, fewer brands and a simpler products and plans. This will improve the care and buying experience for our customers and remove cross-selling constraints on a simpler IT stack at lower cost than maintaining the legacy.

We are working towards key upgrades and rationalisation of our billing and customer management system in 2026, but we will start delivering tangible benefits for customers much sooner.

In the first half of 2025, we will launch several features to deliver improvements in customer experience while bolstering TPG's digital sales capability. Three examples are shown here.

First, a technology-agnostic, fixed broadband product selection experience, giving customers flexibility to match value to the best fit network, whether that's NBN, fixed wireless, or vision. Not only does this ensure customers can compare seamlessly between plans based on value and usage rather than the technology of delivery, it also removes barriers to adoption of TPGs on net products. Second, a new multi-product experience, unlocking greater value for customers and improving TPG's ability to cross-sell product packages across mobile fix and other services.

Third, a new app and digital experiences related to credit check options ID verification, shopping cart, user interfaces and login, all designed to make it easier for customers to connect with us.

We're very excited to bring these improvements to the market.

We're making great progress in delivering a modern national mobile network. In April, we announced our proposed regional sharing with Optus under a multi-operator core network agreement or MOCN. This agreement builds on the success of our ongoing five-year rollout in metropolitan areas as well.

Our existing metro tower sharing arrangements with Optus. The ACCC's approval decision for the Optus regional MOCN is scheduled for 13 September. Behind the scenes, the implementation planning is progressing well and the MOCN is on track to be operational in early

2025.

The arrangement will double our network reach to 1 million square kilometres at about one-third, the cost of building, operating and maintaining a similar expansion. We expect gross cash cost savings over an eleven-year deal of between 575 and $675 million. We also note in April that the MOCN will have an estimate impact on EBITDA in 2025 of 55 million to $65 million offset by

CapEx reduction of $50 million.

Complementing our regional plans, we have signed a landmark deal with satellite provider Link

Global and will begin direct to sell messaging trials in 2025. Our five-year rollout is now about

60% complete and we continue to lead the industry with our innovative approach to deployment and modernization. 2025 promises to be an exciting year for TPG with the prospect of the

MOCN being approved. I will now hand to John to discuss the financials in more detail.

John Boniciolli

Disclaimer

Thank you, Inaki. And hello to everyone listening.

I'll begin with our key financial metrics before walking through the key P&L cash flow and balance sheet items in more detail. Inaki has already covered our trading performance, but I'd like to emphasise the strength of this result. Our continued growth in mobile service revenue and the resilience of our gross margin is pleasing in the context of overall market conditions.

EBITDA was up 3.5% to $974 million on a statutory basis and up 2.2% to $979 million on a guidance basis. The difference being that our guidance basis excludes material one-off transaction costs. These were $5 million in the first half of 2024, down $12 million because of costs associated with the unsuccessful regional sharing agreement with Telstra in the first half of 2023.

OPEX growth at 4.4% to $611 million shown here also reflects that reduction in transaction costs. On a guidance basis, OPEX was up 6.7% and I'll cover that in more detail shortly.

Our statutory NPAT was $29 million, down from $48 million in the prior corresponding period, and statutory EPS was down to 1.60 cents from 2.60 cents.

We also measure EPS adjusted for customer-based amortisation and material one-off. This provides a truer reflection of recurring cash earnings. On this basis, EPS was 4.80 cents down from 6.20 cents. These NPAT and EPS results reflect the increases in depreciation and amortisation and interest expense we flag when we presented the 2023 full-year results.

Turning to cash metrics, we are seeing positive trends as expected and a little faster than we anticipated due to lower handset sales volumes having a positive impact on working capital.

Cash Capex was $567 million, $103 million less than the prior corresponding period. Combined with improving working capital trends, this translated to a $340 million improvement in operating free cash flow.

The board continues to have confidence in declaring an unchanged dividend of 9 cents per share despite the short-term reduction in NPAT. Adjusted NPAT remains the basis for dividends as it excludes non-cash customer-based amortisation and tax as well as spectrum amortisation and material one-off. It was $264 million down 13.2%.

Return on investing capital for the half was 5.6%, down from 5.8% in the prior corresponding period on a comparable basis, no longer adjusting for transformation costs from earnings. Lower

ROIC was primarily due to investment growth in recent years. As investment stabilises and operating earnings grow, we expect ROIC improvement to follow.

My next slide looks at gross margin in more detail.

The overall increase of 3.9% to 1,585 million was driven by strong growth in consumer mobile and consumer fixed.

In consumer mobile service, margin growth of $70 million or 8.8% to $864 million reflected efficiencies in interconnect, intercarrier, and regulatory costs on top of our strong service revenue growth. Growth was a touch slower than in the prior corresponding period as plan refresh benefits were slightly less and noting the small decline in subscribers. Consumer mobile margin was also slightly impacted by matching of aggressive market officer students and by competitor handset discounting activity. The outlook remains positive for the second half as we cycle a full six-month contribution from plan refreshes undertaken earlier in the year, we saw modest increases in total subscriber numbers and ARPU in July.

In consumer fixed, margin growth of $25 million or 8.6% to $315 million reflected continued growth from fixed wireless as well as reduced wholesale costs for vision network. Excluding the movement in vision margin, the other side of which hits our wholesale margin, consumer fixed

Disclaimer

Growth was slower than in the prior corresponding period. Due to the slower growth in fixed wireless from a larger base as well as lower plan refresh benefits. We expect a full six months’ benefit from recent plan refreshes in the second half and for the subscriber base to stabilise further with more competitive offers on vision.However, those new offers mean the consumer margin uplift we saw in the first half from vision is not likely to repeat.

In enterprise and government service, margin of $266 million reflected growth of 0.8% and compares favourably with other operators results. The decline in vision's wholesale margin to 31 million reflected the reduction in wholesale rates, which was picked up in consumer fixed margin as well as the impact of lower subscriber numbers. The reduction in our handset margin reflects the impact of the aggressive discounting of handset from competitors as well as lower customer demand. We expect handset margin to improve in the second half with the iPhone launch in

September likely to drive customer demand. Lower other margin reflected lower spectrum lease income.

To summarise, the intensity of discounting the handset market has impacted subscriber numbers, which does mean postpaid subscriber growth. Momentum has slowed. However, we expect consumer gross margins continue to be driven by recent plan refreshes in both mobile and fixed in the second half.

In EGW, overall market conditions remain challenging, although this will be partially offset in the second half by the contribution in wholesale from the Lyca MVNO contract.

Now turning to OPEX, this was up 4.4% to $611 million on a statutory basis and 6.7% to $606 million on our guidance basis, excluding material one-offs. This growth rate is consistent with what we said at the 2023 full year result, that we expected growth in the mid to high single digits this year. It primarily reflects ongoing investment in people to support business simplification and IT modernisation and in specific areas such as network security as well as salary inflation.

I'm pleased to say we expect the growth rate to slow to low to mid-single digit percentage in the second half and we expect to deliver a flatter OPEX growth profile in FY25.

Looking more closely at the drivers for the first half of 2024, employee benefits expense was up

6.8% or $34 million to $219 million. This was net of the impact of the decision to outsource our

Manila contact centre to a third party, which resulted in approximately $20 million being recognised in consulting and outsource services costs in other OPEX. The increase reflected higher salaries and headcount increases. Excluding Manila, our FTE at 30 June 2024 was up about 75 people from 31 December 2023. FTE will be lower following the reduction of 120 rolls this month. Hence, while salary inflation pressures remain, we expect the rate of employee expense growth to moderate from here.

Technology expense was down 7% or $14 million to $186 million in the period. This reduction was largely due to the non-recurrence of one-off charges in the prior corresponding period associated with the Telstra regional sharing agreement, combined with some non-recurring third party spend savings in the current period, and tight expense control partly offset by inflation in network and IT support costs. This tight expense control related to decommissioning of third party network infrastructure. Other OPEX creases of $6 million, excluding the Manila impact in outsourcing, primarily reflected higher advertising and promotional cost. Maintaining our operating cost advantage to our competitors remains a key focus for TPG. We are working hard to ensure we deliver a flatter OPEX growth profile in 2025.

This slide shows EBITDA in more detail, reflecting the trends in gross margin and operating costs already discussed. Statutory EBITDA growth of 3.5% to $974 million was higher than our

Disclaimer

TPG Telecom - HY24 results third-party transcript - this transcript is prepared by a third party and is provided for information only. Anyone accessing the transcript should undertake with responsibility for assessing the relevancy and accuracy of the content. guidance basis growth of 2.2% to $979 million. This is because transaction costs treated as material one-offs were higher in the first half of 2023, driven by the Telstra regional sharing deal and the sale process for vision network.Transaction costs incurred this half of $5 million related to the fibre strategic review and the proposed regional network sharing agreement with Optus.

I'm pleased now to go into more detail about the $340 million improvement in operating free cash flow to $278 million in the period. The strong and improving growth in cash earnings reaffirms our confidence in the medium term outlook and in our capacity to pay down debt over time.

In addition to earnings growth, there were two main drivers of improvement in working capital.These contributed to a $247 million improvement in cash flow from operating activities to

$961 million or 99% of EBITDA.

The first was the impact of the unwind of our previous handset receivable sales practises, which peaked in 2023, meaning the negative working capital impact from that process reduced by

$117 million in the period to $97 million. This will be lower again in the second half at approximately $50 million and largely complete this year with approximately $15 million left to go in 2025. We continue to work with potential counterparties on a superior solution that will enable us to fund these debtors off the balance sheet at more favourable economics.

Other working capital improvements were $84 million in the period, an improvement of $97 million on the first half of 2023. This was also handset related as lower consumer demand and intense discounting from competitors meant we had lower handset sales and debtors. Handset inventories were also lower.

The other components of our operating free cash flow are Capex, excluding spectrum, and lease payments. Capex was $103 million lower to $567 million. As I've already discussed, driven by moderating growth in our 5G upgrade and IT modernisation spending as well as variability in the timing of supplier payments. Lease payments were $10 million higher at $116 million reflecting inflation and the annualisation impact of the new Amplitel tower leases we signed in the second half of 2023.

Free cash flow to equity, which is net of all uses of cash except bank debt repayments and drawdowns and dividend payments was $163 million higher at $18 million. This reflected the strong operating result as well as a $50 million increase in net bank interest due to higher rates as forecast and the payment for spectrum secured late last year of $128 million. The gain on sale of subsidiary of $5 million shown here relates to the Manila contact centre transaction.The outlook for continuing cash flow improvement is positive as working capital and CapEx trends move in our favour and headwinds from financing costs lessen.

Looking at investment in more detail. The rate of Capex growth is moderating, which means

DNA growth will also slow. Cash Capex was $695 million in total in the half including $128 million of spectrum payments made for the 3.7 gigahertz license acquired in November 2023.

Our outlook for Capex excluding spectrum is unchanged from what we said in April when we announced the regional sharing deal with Optus. We expect to incur 1.02 billion this year, approximately $950 million in each of 2025 and 2026, and between seven and $800 million per year thereafter.

Depreciation amortisation was $741 million in the half. This was up 2.6% on $722 million in the prior corresponding period and down 1.2% on $750 million in the second half of 2023. The slightly lower than anticipated rate of growth was driven by lower fixed asset additions and asset mix. We now expect depreciation amortisation for the four year to grow low to mid single digits.

Disclaimer

The impact of rising financing costs will also moderate as the interest rate cycle stabilises. Net back interest expense of $126 million in the half up 26% on the first half of 2023 on closing gross bank debt of just under $4.2 billion. This primary reflected the impact in the period of the

125-basis point increase in the cash rate over 2023.

We expect second half bank interest costs to be broadly consistent with the first half. With the outlook for interest rates becoming more benign and now improving cash flow performance, the outlook for bank financing costs is expected to improve in 2025. About 38% of our bank debt is hedged at present at an all in cost about 20 basis points below current floating rates. Lease interest costs were $64 million in the half, up $14 million on the first half of 2023, and down slightly from the second half of 2023 when there were some one-off impacts.

My final slide covers our dividend.

The board has declared an interim dividend of 9 cents per share consistent with the previous four dividends. As we have communicated previously, we'll use up all our historic franking credits with this dividend, which will be franked to 87%. We expect to start generating franking credits again once historic tax losses are fully utilised.

Dividends are paid by reference to adjusted NPAT, which adds back spectrum amortisation, customer-based amortisation, material one-offs, and non-cash tax. The policy is to pay out at least 50% of this amount and this dividend reflects a payout ratio of 60%. This reflects the continued confidence in the business to deliver strong and growing cash earnings despite the current reduction in statutory NPAT. I'll now hand back to Inaki.

Inaki Berroeta

Thank you, John. In February, we gave guidance for EBITDA of one point 95 to 2.025 billion in

2024, excluding material one-offs. We remain confident to achieve an EBITDA result within that range, and we are tracking toward the midpoint at present. This is because of our solid operating momentum in mobile and fixed wireless and moderating indirect cost growth. This is despite a slowing mobile subscriber growth and the ongoing challenging market conditions in

NBN and enterprise government and wholesale.

We note in April when we announced the regional sharing deal with Optus, that we do expect to recognise non-cash charges of 230 to $250 million at the full year result if we receive approval from the ACCC. For the avoidance of doubt, these charges are omitted from guidance as our transaction costs, the redundancy cost from our recent role reduction and any other material one-offs. As also noted in April, we have lowered our guidance for cash Capex for the year from

1.05 billion to $1.02 billion.

To summarise, 2024 is a year of consolidation of recent growth and investment, providing a strong platform for the next phase of TPG's development as we pursue further business simplification and the benefits of an expanded network.

We have been delivering this strongly against our objectives, growing mobile service revenue, growing fixed margin through fixed wireless and on net and undertaking our rollout of 5G.

Market conditions remain highly competitive into the second half with consumers continuing to be impacted by cost-of-living pressures. In mobile, there is a strong demand growth, but flattening subscriber growth as international arrivals is low and an aggressive promotional and discounting activity in handsets continues. The NBN market remains highly commoditized by non-telco entrants and the EGW market is challenging with the high levels of technology consolidation taking place on wholesale.

Nonetheless, we are trading resiliently and have renewed emphasis on cost efficiency and accelerating improvement in cash earnings as we look to 2025. We have continued focus on

Disclaimer

5G investment cycle. Our addressable market will grow with the regional network sharing agreement and our emphasis on digital channels is growing as we deliver our business simplification and IT modernization programs.

Thank you. We will now take questions.

Bruce Song

Thank you, Inaki. If you have a question now, please press star one. Our first question comes from Eric Choi from Barrenjoey. Please go ahead.

Eric Choi

Thanks, Bruce. And hey, Inaki. Hey, John. My first question is just on the current Vocus negotiations. Can you just explain what the difference in asset perimeter is versus the transaction that was proposed last year?

Eric Choi

Okay, sure. No probs. Second question, just transitioning to post-paid subs. I know you've called out competitor handset discounting and the 3G shut down as reasons for the first half weakness, but I'm just wondering could it also be your price increases being in January and

March, whereas Telstra and Optus have shifted theirs to August? And so, you just mentioned your mobile subs improved in July, but I'm interested specifically did post-paid subs improve in

July and also in August since that's when competitors lifted their prices?

And then the third question if I could, just on FY24 EBITDA guidance, that implies a $30 million increase in the second half versus first half. And just qualitatively, maybe for John, I know you get a full period of price increases, but the Opex base also steps up in the second half as well and then the average mobile sub base could step down. I'm just wondering is there any other key positive or key division that's improving half on half so far that's putting you on track for the midpoint? Thank you.

Inaki Berroeta

Thank you, Eric. And look, what I'm going on first to address the... We have, as we said on the

5th of August, re-engaged in discussions. At this stage there is not really anymore that we can update you on how those discussions are. I think that in due course, based on how they go, we'll make all the necessary description of the perimeter at that point. But nothing to update at this stage. For the post-paid subs, I'm going to ask Kieren to address that. And then John will go to the EBITDA for the second half. Kieren.

Kieren Cooney

Thanks, Eric. Thanks, Inaki. On the post-paid subs and picking up some of the points, I think it was two questions if I got it right, Eric. One, what was overall driving it down and the timing of the plan refreshes this year compared to competitors have an impact and does it have an impact going forwards? Overall, the biggest change that we've seen is really three drivers.

First of all, the decrease in international inflow that we've seen this year compared to previous years and it's been covered across the market. As part of that and combined with the cost-of- living pressure as well covered what we're going through in Australia, we've seen a shift which we believe is probably temporary that moves from post-pay towards prepay. And we start to see some of that market up now, we see in our own numbers.

And third of all in that space, what we're seeing is a lot more handset aggression going after that declining post-pay market, which we are very careful about. We place our investments; we

Disclaimer

On the impact of pricing and timing and plan changes throughout the year. What we're seeing is that plans are changing throughout the year. And we're not really seeing a dramatic change in terms of the shift in recent trading compared to those larger shifts that I just mentioned.

John Boniciolli

And thanks, Eric. I understand the math of your question on half to EBITDA by growth of 30 million. I'd point to a few drivers firstly, which you mentioned the refresh of the postpaid and prepaid mobile plans. It was May. Secondly, which you noted also was the continued focus on costs including the recent action on employment costs. I'd also note a few others. The recently announced front book plan refreshes on TPG and iiNet Mobile. We did note some improving trends in mobile trading, especially on our digital-first brands, TPG, Kogan and felix, continued growth in FWA on net. There is also a seasonal thing between half one and half two, e.g. on outbound roaming, wholesale in V&O revenues and we've got the upcoming iPhone launch in

September, October. They're the factors that I would point to.

Eric Choi

Super helpful, John. Just because maybe back to Inaki, a quick follow up. I understand you can't comment much. I guess one statement you've said is you've engaged in non-exclusive discussions with Vocus, so I was just wondering if you can confirm if you're actually still talking to other parties.

Inaki Berroeta

I cannot confirm or deny. I just don't comment on that.

Eric Choi

Got it. Thanks, Inaki. Thanks, guys.

Bruce Song

Thank you, Eric.

Bruce Song

Our next question comes from Darren Leung from Macquarie. Darren, please go ahead.

Darren Leung

Great. Thank you, guys. I just have three as well. I'm going to ask them all upfront. Just on the post-paid ARPU, it's obviously up and year-on-year, but it's largely flat half on half. To your point, there's obviously price increases that you did in January, but can you talk a little bit around why this hasn't accelerated a little bit more? And maybe just a bit of context as to how far progressed you are through your back book, please. That's the first one.

The second one. I know it's a little bit too early to be thinking about FY25, but given the number of contract wins you've had in enterprise and governments, can you give us a feel for what you think the revenue step up could look like into FY25 in the enterprise business? And then just the third one on the handset discounting which you've talked to. Is that something that we've obviously seen a little bit from you guys? But when I look at your handset manager for the first half, it looks like it's flat. Should we be expecting that to hit a little bit more negative into second half and maybe even FY25? Thanks.

Inaki Berroeta

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Thank you, Darren. Look, I think just to go very quickly and then I may ask as well Kieren and

Jonathan to answer. But in terms of the post-paid ARPU I think that because of the seasonality that were around the problem, which in our case this is an important part of the ARPU. And then also because of the timing of the plant refreshes, you can expect that is usually better to compare us that are same system. I think that that's a bit a variation that you will see. In 2025

EGW revenue, we just have to wait until February for that. I don't know if Jonathan wants to comment on that. Not really any comments. And then on the handset subsidy, I'll pass that to

Kieren.

Kieren Cooney

I won't mention anything more in the ARPU because I think that covers it really well. What we're seeing is a lot of handset aggression that we spoke about. I don't want to give too much of an indication of our plans with respect to how much we will be investing in that space. Therefore, what we can expect from a revenue side. What I would say is we just look at those, like I said before, like any other investments, be very careful as that market heats up. What I will say is the end of the year is a very different handset market to the beginning because we have the iPhone release, which is generally less discounted area. And then we go into a Christmas period, which is often a more discounted area.

Darren Leung

Okay, no, that makes sense. Thank you, guys.

Bruce Song

Thank you, Darren.

Bruce Song

Our next question comes from Tom Beadle from Jardens. Tom, please go ahead.

Tom Beadle

Hi, guys. Thanks for the opportunity. I've got three as well. Just firstly on mobile pricing. Just I guess I'm looking at this a bit differently. And while you've obviously increased your prices at a headline level, I'd note that at times you've also been offering significant discounts for new customers as long as they stay signed up to your plans from time to time. For example, $9 a month off in postpaid from time to time. I guess I'm trying to understand the rationale of these promotions. And just are these promotions potentially dilutive to your ARPU depending on the mix of the take-up? I'd be interested just to understand if those type of promotions are dilutive or accretive to your postpaid ARPU.

Secondly, just on Vision Network. Obviously the earnings fell quite materially and you've lowered your wholesale pricing there. I guess I'm interested in the rationale for that and just does that have implications for your strategic review of those assets? And was the reduction in pricing a required reset in order to potentially sell these assets?

And then just a third question on DNA, that obviously came in... Well, came in a bit below my expectations anyway. I realise it grew year-on-year, but fell sequentially versus the second half.

I'm interested just to understand the sequential decline versus the second half last year, especially that lease cost reduction, which I think was $82 million in the first half. Is that a reasonable base for the second half? Thanks.

Inaki Berroeta

Thank you, Tom. I'm going to ask Kieren to get the first one.

Kieren Cooney

Disclaimer

Thanks, Inaki. And thank you, Tom. The question in terms of, as I understood it was level of discounting in the market and the impact for us and the impact that it has on our mobile ARPU.

From an acquisition discounting point of view, it has in itself a relatively small impact on the overall ARPU because the amount of customers you're acquiring compared to your overall base. But what we're seeing is there is, as mentioned before, quite a lot of promotional activity in the market and we clearly can't be silent in that market. We are very selective about when we compete and where we compete on price. But what we find is not only from the point of view of acquisition offers, but also anytime we're attaining customers as well.

Inaki Berroeta

Yeah, I mean I would like to add on that. You were asking around why promotions or not. I mean it is a very competitive market and I think that you need to be looking at the different opportunities and also what are other competitors doing. But I do think that a good way to look at the perspective of that is that in the last two years we have had about over half a million customers. In that same time we've grown mobile service revenues by 16% and our ARPU is up

$5. If you look into what's the conclusion, I think that it's important that you look a bit into the perspective of the last two years of activity. On Vision I'm going to ask Jonathan to take that question.

Jonathan Rutherford

Yeah, there's two things, Tom, thanks for the question. One is obviously we were aware in vision of NBN's I guess market positioning, that's the largest one for Vision. We made a decision, priced Vision to be differentiated and even more customers. Second thing is why we do that is largely based on feedback that we get from the market from RSPs. Remember Vision, we launched a product known as G.Fast. And what was clear was RSPs saw a really impressive opportunity for G.Fast, but wanted it to be competitively priced to drive growth faster.

So we made decisions on the repricing of Vision, which we took in January this year.

John Boniciolli

Tom, on your question on DNA, firstly, I'd note that it's correct to say that DNA did come in slightly lower than the mid-single digit outlook that we provided at the full year '23 results. That was due to lower fixed asset and partly the result of lower investment and also due to asset mix and specifically some greater useful life than anticipated on that asset mix. In relation to leases, yes, the sequential growth. I do note that in the second half of '23, we did have some what I'd call life to date housekeeping in the leased books that impacted both amortisation of right of these assets/leases, but all interest expense. They were a one-off.

Tom Beadle

Great, thank you.

Bruce Song

Thanks, Tom.

Bruce Song

Our next question comes from Entcho Raykovski from Evans and Partners. Entcho, please go ahead.

Entcho Raykovski

Morning, all. My first question is also on the post-paid subs trends. I mean you've obviously spoken to this in great detail, but just in addition to that. You showed some different trends in the half relative to Telstra and Optus, their post-paid subs grew. Was it primarily the hand-dead

Disclaimer

TPG Telecom - HY24 results third-party transcript - this transcript is prepared by a third party and is provided for information only. Anyone accessing the transcript should undertake with responsibility for assessing the relevancy and accuracy of the content. subsidies that were driving this in your view? Or were there other factors? And I guess what I want to get to is this trend impact in future pricing decisions in post-paid, particularly given that you've said that trends likely to be challenging again in the second half. That's the first question.

Second question, probably a more straightforward one. Can you talk to the broad expectations you have around the subs benefits as a result of the Optus-MOCN deal? I appreciate it's yet to complete, but I'm sure you've got some broad expectations you've got. If you could talk to those would be appreciated. And then finally on working capital movements, suspect this one is for

John. There was the 84 million benefit in the first half. Do you expect this to reverse in the second half given the potential pick-up in demand for new handsets? Thank you.

Inaki Berroeta

Thank you very much, Entcho. I'm going to give Kieren the first one and maybe I talk about

MOCN and then I'll ask John to answer on the working capital movements.

Kieren Cooney

Thanks, Inaki. Thanks Entcho. The question in terms of how the shape of our half with post-paid subs compared to competitors, but there was a few different things that were going on in our world compared to competitors. First of all, we had our 3G closure already and the impact of that, whereas that's still ahead for our two main competitors. There was also the, as mentioned before, and it shouldn't be underestimated, I think Inaki used the term distorting impact of the level of aggression that we saw in the market. The third one was just around of our own pricing, which is a cycle compared to the cycles that others are going to. We're going under different cycles.

Inaki Berroeta

Yeah. On the MOCN, look, I think again, subject to ACCC approval on September 13. But as we have said, for us it is a transformational change for our position. We see it really as unlocking a bit of a market limitation that we have on the addressable market. We do see, and we have hinted that initially our view is that we'll see benefits in terms of churn reduction, but also the fact that across our different brands we probably have a disparity of [inaudible 00:57:14] do think that we can leverage much more on convergency. This year has been good. We have seen

TPG, iNet brands growing strongly, and we think that that will continue next year with the MOCN on the back of the increased coverage. So yeah, we are quite, quite excited about it and we do think that it is going to give us a good opportunity in FY25.

John Boniciolli

Yeah, and then I'll work in capital. Look, we're obviously looking at our balance sheet very closely, and always working to optimise the balance sheet, but what I would say is half-two seasonality on inventory is different normally, to half-one. And certainly we'll have periods through the second half where inventory will increase. And we'll just see how that plays out by the end of the year.

Entcho Raykovski

Okay, thank you. And sorry, maybe just a quick follow-up to the first question around the post- paid subs. I guess what I was getting to, is how influential is that post-paid subs trend in any future pricing decisions? Presumably it is a fairly big factor in whether you decide whether to go again in terms of high pricing.

Inaki Berroeta

Yeah, we don't make those type of comments around future pricing, so we just cannot answer that.

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Entcho Raykovski

Okay, I understand. Thank you.

Bruce Song

Thank you, Entcho. Our next question comes from Kane Hannan from Goldman Sachs. Kane, please go ahead.

Kane Hannan

Morning guys, just three quick ones as well. Just enterprise mobile. Revenue is still growing, but the growth did flow a fair bit in the half. Just any comments you can make around what you're seeing in the enterprise mobile market. Secondly, NBN, you're talking about the challenges of maintaining or stabilising subscriber growth and maintaining the strong economics. So is it still the intent of TPG to stabilise that NBN base, or are you comfortable holding profitability and then seeding a bit of share over time? And then thirdly, just on the cost base into FY25, so you're seeing a lower rate of growth than what you'll see in the second half this year. Is there any reason why that won't be low single-digit growth, given the comments you've made around the second half? Thanks.

Inaki Berroeta

Thank you very much, Kane. I'm going to ask you [inaudible 00:59:41] one and then Kieren can talk about the NBN questions.

Jonathan

Thanks, Kane. Two things. One is, and you would've seen it in industry results. Enterprise mobile is under a bit of pricing pressure, which we expect will continue. It's been a pretty aggressive market around enterprise. Let's pick from a pipeline perspective that it's a strong growth opportunity for a few years. And we think there's obviously some real momentum that could be built, subject to the regulatory approval being granted on the network expansion. In the smaller end of enterprise, there has been a lot of base cleaning, clearly being under a lot of pressure with respect to employee numbers. So I think those trends you'll see to return, continuing for the short term.

Kane Hannan

Thanks, Inaki.

Kieren Cooney

Thank you Kane. So on the NBN subs question, the question, yes, we still envision that we'll be stabilising that, that's still our plan. But I would also recognise that as a segment of the market,

NBN does have, its well covered, unavoidable, uncompressible, and ever-increasing costs, year by year. So we are very careful about the way we manage our own on-net opportunities as well.

We know they provide more options, they can provide a better value, and they provide some good flexibility. So we look at both the combination of where we're competing in NBN market, and balancing that with our on-net services as well.

John Boniciolli

As an [inaudible 01:01:11], I've noted we're sort of past the [inaudible 01:01:14], both on CapEx and. OPEX growth. We've noted low to mid single-digit growth in OPEX in the second half and a flatter profile in FY25. We are very aware of our relative advantage on cost, and we want to maintain and enhance that. So won't give any more colour at the moment on FY25, but I think you can see how the trend's going.

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Kane Hannan

Perfect. Thanks Guys.

Bruce Song

Thank you Kane. Our next question comes from Lucy Huang from UBS. Lucy, please go ahead.

Lucy Huang

Thanks guys. I have three really quick questions as well. So in terms of the NBNO subs in mobile, I saw a big tick up because of the Leica contract win. I'm just wondering how you are looking to play in that space in terms of winning new customers or wholesalers in NBNOs moving forward, and is pricing going to be a big feature to grow that subscriber number moving forward? And then just secondly on the postpaid ARPU, I think you mentioned that there was some seasonality impact from roaming. Just wondering if you can quantify what that amount was to the postpaid ARPU in this half. And then just my last question as well, I think you mentioned Fibre Connect last quarter was off to a slower start. Just wondering whether we've started to see a tick up in momentum in Fibre Connect take up. Thanks.

Inaki Berroeta

Yeah, thank you very much, Lucy. Jonathan, maybe you can answer on NBN.

Jonathan

Yeah, thanks Lucy. With respect to pricing, clearly no comment, and we wouldn't talk about that.

But maybe more on strategy, there's two things we see. One is clearly in the NBNO market, there's brands that give us access to portions of the market that we wouldn't normally get. And they're really attractive relationships for us to develop, especially as we subject to regulatory approval, expand our network. And then secondly, there's also the opportunity to work with more distributors that really look for mobile as part of their product offering, in the different segments of the market. Fuller than some of the bigger brands. So we see opportunities in both, and I think it's going to be a really exciting time for wholesale mobile in general.

Inaki Berroeta

Yeah, look, in terms of the seasonal impact of roaming, I believe it's about 40 cents of the dollar.

The difference between H1, H2. And then on Fibre Connect, I mean, we are seeing significant demand for higher speed across the board. Fibre Connect is becoming very popular in all the brands, and also what I can say is on vision, equally, G-fast is now 40% of the vision connection. So there is definitely a change in a sense in the way that consumers are buying a home-fixed broadband.

Lucy Huang

Right. Thank you.

Bruce Song

Thank you, Lucy. Our next question comes from Roger Samuel from Jefferies. Roger, please go ahead.

Roger Samuel

Oh, hi, morning. I'll speak to three questions as well. Firstly, with regards to your dividends per share, are you prepared to maintain and grow the dividend per share, even though you don't have enough funding credit? So it's less than 100% franked. Second question is on your fixed wireless access, definitely a very strong growth in that part of the market, but the [inaudible

01:04:59] is supporting government to introduce a levy yet original broadband scheme levy,

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TPG Telecom - HY24 results third-party transcript - this transcript is prepared by a third party and is provided for information only. Anyone accessing the transcript should undertake with responsibility for assessing the relevancy and accuracy of the content. which may extend to fixed wireless access. How likely do you think this is going to happen? And the third question is, just back to post-paid. Your competitor released in a best-of-day presentation yesterday, and mentioning about the pressure in the tier two market. How much do you think that pressure will spread to the tier one market as well?

Inaki Berroeta

Thank you, Roger. Look, I think on dividends, I mean, it's very difficult for us to talk about future dividends. In terms of the franking credits, I'll ask John to give you a bit a view around the amount of tax credits that we still have left, and where we see that moving forward.

John Boniciolli

Yeah. So I mean, first, future dividends are a matter for the board. And we're not here today today talk about future dividends. But on franking, as you will have seen, that the interim dividend is about 87% franked. That exhausts our franking credits. And based on what I'd call business-as-usual profitability levels, and noting the tax losses, the carry-forward tax losses that remain, we wouldn't be expecting in a BAU environment, to be generating additional franking until '26, '27, more likely '27. So that's the colour I [inaudible 01:06:42].

Inaki Berroeta

Look. In terms of FWA, yeah, we continue to grow on that product. It is one of the areas that is helping us also see the significant improvement on our consumer fixed margin. In terms of whether there is going to be a levy or not, and the the likelihood. Fixed wireless is already heavily taxed through a spectrum. So it just doesn't really make a lot of sense to do that. But you never know, I think that whether they're going to do it or not, is tricky. Fixed wireless is very similar to mobile, so the question would be whether there is going to be an incremental tax to the already expensive spectrum payments that the industry is doing in this market. It doesn't really make a lot of sense. And then the comment on [inaudible 01:07:40], I'm going to just ask

Kieren for that one.

Kieren Cooney

Thanks Inaki, thanks, Roger. Yeah, the comment, as I understood, was that they have seen increasing growth in competition in the tier two market. There is pressure on the top as well. As we were talking about, we've seen a slowdown of population and immigration, travel to

Australia, which does in the end constrain the available market in post-paying. And then what we're seeing is that combination where it's not just there's competition within what they're referring to as tier two. There's a movement currently within a cost of living environment where customers are looking to that segment as well. That's why we're very careful, whether it's in the

NBNO market, or whether it's in the brands we spoke about before, that we've got a really strong offering in that space as well.

Roger Samuel

Thank you.

Bruce Song

Thank you, Roger. Our next question comes from Brian Han from Morningstar. Brian, please go ahead.

Brian Han

Oh, thanks. On the handset discounting in the markets, when did that intensify in the first half?

Did it catch you by surprise? And how much of that, John, do you think contributed to the

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John Boniciolli

So, on the working capital impact... Sorry, I think the second question is on the working capital impact associated with the handset? Sorry.

Brian Han

That's right, yeah.

Inaki Berroeta

Yes. Brian, the first thing, whether it catches us by surprise, I mean, obviously all the competitor moves catch us by surprise because we don't know what they're going to do. So that's the reality. It is something that has been a bit different from probably what we have seen in the marketing in '23. That's as much as we can tell you. And then in terms of the working capital-

John Boniciolli

Yeah, as noted earlier, it did have an impact on inventory levels. Both the lower customer demand, and that was probably indirectly impacted at times by their competitive intensity. And then on spectrum CapEx in half two, we paid 128 million in half one for the 3.7 gigahertz, based on the outcome in November, or the 28 million in half two related to the millimetre wave.

Brian Han

Thank you.

John Boniciolli

Thank you, Brian. Our last question comes from Nick Basile from CLSA. Nick, please go ahead.

Nick Basile

Morning Inaki and team, a few questions from me. I think the first one just on operating cost and the decommissioning of legacy systems. I just was trying to clarify whether you may have brought forward into the second half, any of your plans to get rid of duplicate systems. I thought, based on conversations back in February that your expectation may have been only to get benefits by 2025. So just trying to clarify whether perhaps you're seeing some more positive momentum there than what you'd thought earlier in the year. And then a question on plan simplification. I'm just interested to kind of perhaps get Kieren's perspective on what the key call-outs there are, and how you think the customer is going to react to those. And then the final one, just on the overall strategy around cost focus and positioning to be the lowest cost operator, how should we think about that contributing to improved underlying EBITDA momentum over time? And particularly now with consumer spending so weak, at what point, if at all, can we expect that to show up as a clearer competitive advantage? Thanks.

Inaki Berroeta

Thank you, Nick. On the first question, yeah, we maintain what we said at the beginning of the year, around some of the improvements around the decommission of the systems. We'll start seeing them in FY25 and then farther in '26. There is not really any change into that plan, so everything is on a schedule. For the decommissioning to happen, it needs to be a transition and a migration of customers. So it is something that is done probably toward the end of the

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Kieren Cooney

Thanks, Inaki. Thank you, Nick. So first of all, as we've spoken about, we've taken out a lot of legacy plans. We've got a lot more to take away. The reason that's important, is the more plans, the more complexity we have in our systems, and the more legacied our systems are, it's basically gunk in the works. It slows us down and increases our costs, and it stops us being able to really innovate at the speed we need to. So when we talk about the simplification, it's not just about the reduction of the plans. It allows us to then build plans that flow through to a far more intuitive digital experience. It's far better for our frontline people, and it makes it far easier for our customers to serve themselves as well. But it also means that we can start to tune our plans away from what they've historically been, very mobile-only centric, to being far more easy to be combined with fixed as well.

John Boniciolli

Yeah. And then on the low cost operator comment, I think, look, first point I'd say is we believe we benchmark well relative to our competitors on costs. Secondly, it is true that we've come out of a [inaudible 01:13:53], and I think we've spoken about that quite a bit today. But that's key.

Thirdly, we've already taken action in a half-two, we have given a perspective of moving from mid to high single digits, to low, to mid single digits, OPEX, cost growth, and a flatter cost profile into FY25. And we are looking at all areas of our spend, including third-party spend, and we still see opportunity there.

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