Telecom Corporation of New Zealand CLSA Conference Chief Financial Officer Marko Bogoievski September 2006
CONTENT 2 OVERVIEW NZ BUSINESS OPERATING PERFORMANCE NZ BUSINESS STRATEGY AUSTRALIA BALANCE SHEET & CAPITAL MANAGEMENT SUMMARY
Significant presence in Australia and New Zealand 3 Market Cap NZ $8.0B, CAD $5.6B Listed on NZX, ASX, NYSE (ADRs) TCNZ largest listed Coy on NZX, top 20 Coy on ASX NEW ZEALAND Integrated service provider Revenue NZ$4.5B, Employees 7,037, 1.8m Access lines (June 06) Market Share Business Consumer Access 75 to 85% 85 to 90% National Calling 65 to 70% 83 to 88% International Calling 60 to 65% 80 to 85% Wireless 45 to 50% 40 to 45% Dial-up Internet 50 to 55% 48 to 52% Broadband 70 to 75% 72 to 76% AUSTRALIA (AAPT) Mass Market Focused Business Revenue NZ$1.3B, Employees 2,099, Customers 622,000 (June 06) AAPT s future growth strategy is shaped around 3 major themes: Pricing, promotion & packaging for the mass market Building a portfolio of sales channels for the mass market Building self service and back-end capability that assist in call centre & online provisioning
New Zealand regulatory environment has changed.. 4 Outcome of Government stock-take announced 4 May includes: Local Loop Unbundling (LLU) Naked DSL & removal of constraints on regulated Unbundled Bitstream Service (UBS) Accounting separation of the wholesale business Other initiatives to encourage investment in alternative infrastructure and to future proof the regulatory environment Legislative process expected to conclude by end of Calendar year Other regulatory issues in progress: Review of mobile services expected during Sept 06 Mobile Termination Rate (MTR) recommendation currently with Govt
..industry dynamics remain favorable; one major competitor in fixed and wireless 5 Fixed Line / Broadband TelstraClear Business markets - competing infrastructure in all major metro areas with approx 20% market share Residential limited cable infrastructure in Wellington & Christchurch, reselling local access ISP s (primarily Orcon, IHug & Callplus) hold approx 25% of ADSL market share International calling & Dial-up markets extremely competitive with a myriad of operators Wireless; +90% market penetration Vodafone holds approx 50% market share Currently rolling out HSDPA Considering local number service TelstraClear Currently resell Vodafone service Recently announced HSDPA pilot in Tauranga
Group Adjusted* Result 12 months to 30 June 06 6 12 months 12 months 30-Jun-06 30-Jun-05 Change $M $M % REVENUE 5,755 5,650 1.9% EXPENSES (3,558) (3,402) 4.6% EBITDA 2,197 2,248-2.3% DEPRECIATION & AMORTISATION (705) (698) 1.0% EBIT 1,492 1,550-3.7% NET INTEREST EXPENSE (254) (289) -12.1% INCOME TAX EXPENSE (414) (401) 3.2% MINORITIES (4) (3) 33.3% Net earnings 820 857-4.3% EPS 41.8 44.0-5.0% EBITDA MARGIN 38.2% 39.8% * Adjusted for the abnormal items
Group result - Key Points for the year ended 30 June 06 7 Another strong performance from NZ Operations offset by EBITDA decline in Australia NZ Operations EBITDA +2.7% YOY driven by momentum from: Mobile; strong EBITDA growth Broadband; volume growth accelerating following launch of new plans in April Solid revenue performance from Directories +8.3% YOY Pleasing performance in Access with revenues stable quarter on quarter Australian operations EBITDA decline YOY of A$77m (-50.7%) Australian carrying value reduced to A$270m reflecting operating conditions, wholesale arrangements and EBITDA performance
CONTENT 8 OVERVIEW NZ BUSINESS OPERATING PERFORMANCE NZ BUSINESS STRATEGY AUSTRALIA BALANCE SHEET & CAPITAL MANAGEMENT SUMMARY
NZ Operations a return to EBITDA growth in FY 06. 9 NZ OPERATIONS - EBITDA Growth & Margin 6% 60% EBITDA Growth (PCP) 3% 0% -3% -6% 50.1% 49.7% 55% 50% 45% EBITDA Margin (%) Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q2 05 Q1 05 EBITDA - Growth (PCP) EBITDA Margin Investment in Mobile, Broadband and IT Services has diluted EBITDA margin
built on solid mobile revenue growth.. 10 CDMA Connections (000) 200 150 100 50-89 143 116 108 140 175 118 64 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q2 05 Q1 05 200 180 160 140 120 100 Mobile Revenue (NZ$M) EV-DO coverage now in every main town and city Superior data performance of EV-DO driving mobile broadband business growth through CDMA net connections Voice & Data Revenue Freedom offer successfully launched 9 April: Integrated subscription service providing unlimited fixed to mobile & mobile to fixed (on-net) calling $10 Text confirmed until 2007
.and accelerating volume growth in Broadband 11 800 Connections (000) 400 374 360 343 331 310-260 302 340 384 435 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Broadband (DSL)* Dial- up New plan-line up launched in April: New plans from $29.95 (256kbps/128kbps, 0.2GB) to $149.95 3.5mbs/512kbps, 40GB) Alignment of business and residential pricing Next Generation Broadband (ADSL2+) upgrade starting from calendar 2007 Growth in online sales - approx 30% of new sales Total DSL connections now 435k (approx 25% of total access lines) *Comprised of 335k retail & 100k wholesale connections
while Access lines & revenues have remained stable 12 Retail Access (000) 1,420 1,410 1,400 1,390 1,380 1,417 Q4 05 1,418 Q1 06 1,412 Q2 06 1,415 Q3 06 1,414 Q4 06 250 200 150 100 50 - Wholesale Access (000) Access lines & revenues stable reflecting lower churn due to success of bundled offerings Focus on retention of high value customers through bundling, subscriptions, loyalty & reward programmes Residential Ac c ess Wholesale Calling revenues continue to decline due to price erosion, competition & substitution 350 NZ Ops calling revenues 1 Access Lines (000) 300 250 200 49 51 51 51 50 ($M) 210 200 190 203-6.0% 201-6.9% 198-5.7% 192-8.6% -4.0% -8.0% ( PCP Growth) 150 256 Q4 05 253 Q1 06 253 Q2 06 254 Q3 06 253 Q4 06 180 Q1 06 Q2 06 Q3 06 Q4 06-12.0% Business Retail Business Wholesale Calling revenues Growth (PCP) 1 Excludes transit revenues
CONTENT 13 OVERVIEW NZ BUSINESS OPERATING PERFORMANCE NZ BUSINESS STRATEGY AUSTRALIA BALANCE SHEET & CAPITAL MANAGEMENT SUMMARY
..our strategy is built around three themes 14 Protect & enhance the core communications business contain revenue decline while delivering greater cost & capital efficiency Develop and deliver a new, lower cost business model Next Generation Telecom (NGT) centred around simpler, more powerful customer offers that are complete, transparent & provide cost certainty delivered off a significantly reduced operating cost base, self service for the mass market Create growth options Develop online search & directories Create online trading option (Ferrit) NZ Channel for global technology providers Opportunistic ICT acquisitions
..protecting the core communications business. 15 Cost & Capital efficiency initiatives rationalise product portfolio online sales, provisioning and servicing clean sheet review of capital expenditure Managing the revenue impact accelerating delivery of converged offers & devices accelerating broadband penetration developing IP TV proposition re-balancing from usage to subscription based services
..accelerating our move towards a new lower cost business model (NGT) in light of the new regulatory settings. 16 NGT OFFERS Offers simplified set of communication, information & entertainment services 2006 Design offers Delivery Self service online 2007 Build system capability Pricing Subscription based prices Billing Automated and online 2008 Rollout to Customers transparency, cost certainty & self service
with renewed emphasis on customer retention ahead of the delivery of NGT services. 17 Growing broadband penetration Introducing unconstrained plans Upgrading network to ADSL2+ in major metro areas Launch ivoip Targeting 500k retail connections Leading Fixed Mobile Convergence Mobile broadband upgrade from EV-DO to Rev.A CDMA world-phone launch to enhance roaming Grow penetration of integrated bundles Enhancing service & price competitiveness Broadband customer helpdesk Review of non-customer facing operational costs Calling specials
.. near term operating performance will be impacted by our strategic choices 18 NZ operations EBITDA outlook FY07 Underlying Performance Drivers of Change +3.2% YoY +2.7% YoY -1.5% YoY Revenue +3.9% YoY Revenue +5.2% YoY Revenue +2.6% YoY Costs +5.1% YoY Costs +7.2% YoY Costs +6.6% YoY 05/06 EBITDA Broadband Mobile Managed IPTraditional Traditional Data Services Voice Data Other Businesses UnderlyingRegulatory Customer 06/07 EBITDA Impacts Retention Bring Organisation 06/07 Forward Redesign EBITDA NGT
CONTENT 19 OVERVIEW NZ BUSINESS OPERATING PERFORMANCE NZ BUSINESS STRATEGY AUSTRALIA BALANCE SHEET & CAPITAL MANAGEMENT SUMMARY
Australian business halfway through a major change programme, refocusing on mass & managed markets 20 160 152 Performance impacted by: AU$M 120 80 40 108 107 75 2005 2006 EBITDA Capex Tighter wholesale prices & terms with key supplier Telstra Continued downward pressure on retail prices Operating expenditure associated with major change programme (hyperbaric) underway in product, channel and backoffice capability Future growth strategy based on: Pricing, promotion & packaging for the mass market Building a portfolio of sales channels for the mass market Hyperbaric
CONTENT 21 OVERVIEW NZ BUSINESS OPERATING PERFORMANCE NZ BUSINESS STRATEGY AUSTRALIA BALANCE SHEET & CAPITAL MANAGEMENT SUMMARY
Increased CAPEX reflects NZ investment in Broadband and IPbased capability and accelerated Australian investment. 22 NZ $M 800 450 91 101 68 60 105 100 48 131 93 60 145 100 15% 14% 13% 12% Capex / Sales Ratio 100 348 435 479 495 FY 04 FY 05 FY 06 FY 07 1 11% NZ Wired NZ Wireless Australia International/C orp 1 Management forecast for capital expenditure, market forecast for revenue
.strong operating cashflow underpins balance sheet settings.. 23 Leverage NZ$M 6,000 4,000 4,694 3,756 3,520 3,652 2.5 x 2.1 x 1.7 x Remain committed to A rating and associated long run gearing target of 1.7x debt/ebitda 2,000 Jun-03 Jun-04 Jun-05 Jun-06 1.3 x Net Debt Gross Debt / EBITDA 1,900 Group Operating Cashflow 1,807 Southern Cross provides additional cashflow upside, repayment of shareholder advance (NZ$98m, Jun 06) expected within next 18 months (NZ$M) 1,650 1,566 1,681 1,703 1,400 FY 03 FY 04 FY 05 FY 06
.reduced shareholder distributions in FY07 reflect strategic response to regulatory changes 24 Targeted ordinary dividend payout ratio for FY 07 of 75% NZ CPS 60 50 40 30 20 10 Dividend (DPS) 10 10 20 27 38.5 36 31 1 FY 03 FY 04 FY 05 FY 06 FY 07 Ordinary Special (85% after adjusting for the depreciation benefit of the AAPT write-down) Telecom trading on attractive fundamentals: Net ordinary dividend yield 2 of 7.75% P/E Multiple 2 of 9.6x 1 Consensus market forecast FY 07 normalised NPAT of $820m 2 share price of $4.00, shares out 1.960B
CONTENT 25 OVERVIEW NZ BUSINESS OPERATING PERFORMANCE NZ BUSINESS STRATEGY AUSTRALIA BALANCE SHEET & CAPITAL MANAGEMENT SUMMARY
SUMMARY 26 Industry dynamics remain favourable despite change in regulatory settings Focus on customer retention and moving to a lower cost business model Strong operating cash-flow underpins shareholder distributions and capital programme Conservative financial profile, commitment to A credit rating
DISCLAIMER 27 This presentation contains not only a review of operations, but also some forward looking statements about TCNZ and the environment in which the company operates. Because these statements are forward looking, TCNZ s actual results could differ materially. The fourth quarter media release, management commentary and various documents filed with the US Securities & Exchange Commission, including the Annual Report on Form 20-F, contain additional information about matters which could cause TCNZ s performance to differ from any forward looking statements in this presentation. Please read this presentation in the wider context of material previously published by TCNZ and filed with the SEC.
Appendix 1 - New Zealand and Australian economic overview 28 NEW ZEALAND AUSTRALIA 2005 2006 2007 2005 2006 2007 Economic Indicators Jun Current Forecast Jun Current Forecast CPI 2.8% 4.0% 2.8% 2.5% 4.0% 2.7% Unemployment Rate 3.6% 3.6% 4.5% 5.0% 4.8% 4.8% GDP 3.1% 2.2% 1.9% 2.5% 2.8% 3.4% Current Account Balance (% GDP) -8.0% -9.3% -8.4% -6.4% -5.7% -5.0% Offical Cash Rate 6.8% 7.3% 7.0% 5.5% 6.0% 6.25% 90 Day Bank Bill 7.0% 7.5% 7.2% 5.7% 6.2% 6.5% 10 Year Bond 5.7% 5.8% 5.8% 5.1% 5.6% 5.6% Local Currency to USD 0.70 0.66 0.58 0.76 0.77 0.73