Spark New Zealand Ltd Ord

Kia ora koutou katoa and good morning everyone. Thank you for joining us today as we share SPARC's half-year results for the period ending 31 December 2022. This morning I'm going to take you through the overview of our results and I'm then going to hand over to Stefan to speak to the numbers in more detail before we move to Q&A. But first I would like to acknowledge the tragic loss of life and significant impacts we've experienced as a country as a result of Cyclone Gabrielle. which has reminded us all of just how urgent our response to climate change really is. While Spark's network infrastructure was not significantly damaged, due to widespread power outages and fiber cuts, we did see services impacted in the worst affected areas. Our teams have worked tirelessly alongside our industry peers to restore services with urgency while providing support for our customers. At the peak of the crisis, we had 152 towers down, and this was reduced to around about 11 yesterday. It's a long recovery ahead and we remain committed to supporting our customers through this. With that, let me turn to slide three and our financial snapshot. The result really needs to be viewed in two parts. Our reported financials, which have benefited from the proceeds of our tower transition, partially offset by the provision we've taken to exit Spark Sport, and our adjusted financials, which speak to the underlying performance. I'm going to start with our reported numbers. So in October, our strategic divestment of a majority stake in our Talco business was completed, delivering net proceeds of $911 million and a gain on sale of $584 million. In December, we then announced our decision to exit the sports streaming market through a content partnership agreement with TVNZ, which resulted in a one-off provision of $52 million. The resulting net gain of the Tal transaction and sport exit was $532 million. This saw reported revenues increase 34% to $2.53 billion, reported EBITDA increase 93% to $1.04 billion, and reported impact growth to $837 million. We have declared an H1FY23 dividend per share of $0.135, which is fully imputed. We are pleased that through the effective management of our portfolio of assets, we're now in a position to return value to our shareholders while continuing to invest in our business, and New Zealand's digital infrastructure. We've today reconfirmed that we'll return up to $350 million to shareholders through an on-market share buyback, which will commence after our investor strategy briefing on the 5th of April 2023. We will also be investing an equal amount into growth, with $90 to $110 million of this allocation to be used to continue expanding our data centres and further developing emerging technologies during FY23. This ensures we're using the Talco proceeds to maximise value for our shareholders in both the short and long term. After adjusting for the one-off benefit from the Talco transaction, Spark's adjusted revenue increased 3% to $1.9 billion, driven largely by standout performance in mobile. Adjusted EBITDAI was down 5% to $510 million, with higher product costs and intensifying competition in broadband and cloud contributing to margin pressures during the half. Adjusted impact declined 8% to $165 million, driven by that lower EBITDA and higher finance expense. Now I'm going to move to slide five and just talk you through some of the drivers of those headline numbers. So as I noted, Mobile continues to be a standout performer for Spark. Our service revenue increased almost 9% to $480 million, and that was benefiting from an increased demand for data from our customers, greater connections, and also the continued return of roaming revenues as people started to travel. We've also seen the benefits of our data-driven marketing, delivering our customers more relevant and personalised offers, which helped to boost conversion. In broadband, revenues declined 3% to $313 million. We've also seen inflationary input cost increases, a higher fibre base, and retail competition squeezing margins. We've moved past through input cost increases where it made sense to do so, while also ensuring we continue to offer our customers options across the price spectrum. The benefits of the price increases are expected to flow through in the second half. While the market remained challenging, we were able to hold our connection base and remain on track to achieve our FY23 aspiration of 30% of our base on wireless, reaching around 29% during the first half. In cloud, revenues decreased 5% to $214 million, as the mixed shift of workloads towards public cloud continued and resulted in private cloud repricing impacting margins. The uncertain economic environment has also contributed to lower managed service project activity. So as we look ahead, we're focused on accelerating the simplification across our business portfolio, maximising our competitiveness in hybrid cloud, as customers seek diversification and a transition path to public cloud services. So if we move now to our future markets on slide six, we achieved our IoT connection milestone of 1 million connected devices during the half with growth of 39% to 1.2 million. Revenues increased 21% with Spark IoT solutions now being used across multiple sectors, including energy, property, transport, and agriculture. We maintained revenues in digital health and expect to see digital transformation project opportunities grow as public health reforms progress. And as I touched on earlier, we made the decision to exit the sports streaming market during the half and announced a new content partnership with TVNZ, which will see the majority of Spark's content moved to the broadcaster from the 1st of July 2023, and that's subject to rights holders agreement. Since entering the sports streaming market in 2019, we've delivered a wide range of high-quality sporting content to our customers alongside our valued partners, and we're proud of those achievements. But at the same time, it's been challenging to reach the scale we aspire to across Spark's sport platform with COVID causing major disruption to sporting clothes globally just a year after our launch. And in slower than expected start, coupled with the escalating cost of content rights globally, it makes it difficult to justify the type of investment sport requires when we have a wider range of investment opportunities across our business. So since making this announcement at the end of last year, we've been working with our people to identify suitable redeployment opportunities while discussing content licence agreements with individual rights holders. Those discussions continue and we'll provide a further update on what content will transition to TVNZ in addition to New Zealand Cricket prior to the commencement of the TVNZ partnership. So now if we turn to slide 7, we continue to lay strong foundations for growth through our capability-led strategy. Simplification continues with a further 81,000 customer lines migrated off legacy mobile and broadband plans. We launched our team-up proposition, which provides customers with discounts when friends or family members also join Spark, with take-up and ARPU performance ahead of expectations since launch. Data-driven marketing continued to reduce acquisition costs, which improved conversion by 17%, as we were able to provide customers with highly relevant and personalized offers. A 5G rollout is on track with 64 locations now live across the country and 5G standalone trials underway. These trials are delivering download speeds of up to 700 megabits per second, which gives you an idea of the kind of opportunity that will exist in the future once 5G densifies and standalone is rolled out at scale. We were pleased to reach agreement in principle with the Crown on key terms for a direct allocation of C-band spectrum in return for 24 investment million of investment into the expansion of rural connectivity. During the half, we also progressed a series of digital infrastructure investments and partnerships that will support future growth and efficiency gains. Our investment in the expansion of our Takanini Data Centre progressed to plan and is expected to complete in the second half. We established a new joint venture, Harua, which was awarded the contract to provide priority cellular services to the public safety network used by frontline emergency responders. And finally, the independent mobile towers business that was formed following our tower co-transaction is now jointly owned by Ontario teachers and ourselves. Conexa also announced in December that it has reached agreement with Macquarie Asset Management and Aware Super to acquire Two Degrees passive mobile telecommunications tower assets, and that's subject to the required regulatory approval. As we said at the time, we believe that the addition of Two Degrees passive mobile tower assets into Conexa will deliver greater operational efficiencies that will support more infrastructure, sharing better network economics and faster deployment of new towers. We continue to make steady progress, building a high-performance and inclusive culture at Spark. We delivered a 1% point improvement in our medium gender pay gap, while our work continues to meet our 40-40-20 gender target, with women currently representing 33% of our workforce. We're also pleased to achieve an employee net promoter score of plus 70 during the half. Returning to sustainability on slide 8, as we continue to make improvements across the broad ESG spectrum, we've now been accepted into the Dow Jones Sustainability Australia Index. We're on track against our science-based emissions reduction target pathway with provisional scope 1 and 2 emissions down 35% due to the high share of renewables in New Zealand's electricity generation. We also launched some new research during the half-title, Meeting the Climate Challenge Through Digital Technology. which highlighted cross-sector actions that could help to reduce annual emissions 7.2 million tonnes by 2030. That's equivalent to 42% of New Zealand's emission budget targets. So we're now engaging with representatives from these sectors to explore opportunities for collaboration in the future. Lastly, we were pleased to see Skinny Jump Connections hit more than 25,000 during the half, an increase of around 150% since the onset of COVID, and a significant investment in creating a more equitable digital future in Aotearoa. So looking now at our indicators of success on slide nine, we're on track for the vast majority of these measures, but as noted earlier, our focus on the second half is an improvement on our cloud security and service management revenue growth. We're also focused on growing Spark Health digital platform revenues and, of course, maintaining our focus on cost as well as we come into the second half. So when I stand back and look at our performance during the half, I'm pleased that we have been able to grow value for our shareholders in both the short and long term through the effective management of our portfolio, using the Talco proceeds to confirm a share buyback that will deliver up to $350 million to shareholders, while allocating $350 million to reinvestment in Spark and the digital infrastructure and emerging technologies that will be critical to the competitiveness of our business and our country in the years ahead. Our underlying results demonstrate that Spark's not immune to the challenges of our operating environment, and like all businesses, We have been navigating uncertain economic conditions as New Zealanders and businesses have adapted to this inflationary environment. We're now firmly focused on closing out the year and remain committed to delivering what we said we would, noting we expect to be lower in the range of our FY23 guidance of $1.185 to $1.225 billion. I'd like to close by acknowledging and thanking our people who are integral to the results, being able to deliver, and in particular our team who have been working tirelessly to keep our customers connected and supported as we face more extreme weather events in the country. I'm now going to hand over to Steph, who will talk you through the financials in more detail.

Thanks, Jolie, and good morning, everyone. So I'm now going to skip through the key financial summaries for the half. So as Jolie mentioned, the results include significant impacts from the Tower Coast sale and also from the exit of Spark Sport. So I'll start by going through the reported results and then move on to the adjusted results, which actually exclude those impacts. So on page 11 of our results presentation, we outlined the reported results, which show that Spark generated revenues of $2.5 billion, up $644 million, or 34%, and EBITDA of $1.04 billion, up $504 million, or 94%. Net profit after tax was $837 million, and up $658 million. Included within these results is a $584 million gain on sale relating to the sale of a majority stake in Talco, and a $52 million provision for the exit of Spark Sport. The provision for Spark Sport covers all content and other associated costs from the period from FY24 through to FY28, meaning that there will be no further P&L impacts from Spark Sport from FY24 onwards. All of our Spark Sport revenues and costs generated in FY23 will be captured in the FY23 result while the business continues to trade. So to provide greater transparency of the operating performance of the business, we've adjusted for both the Taoko sale and the Spark Sport provision, and on page 12, we outline the adjusted financial performance. So our adjusted revenues of $1.95 billion was up 60 million, or 3%, and adjusted EBITDA of $510 million was down 28 million, or 5%, with adjusted MPAT of $165 million down 14 million, or 8%. So let's go through those results in a bit more detail now so we can understand some of the key movements. If we start first with revenues, mobile continues to be a standout performer. Service revenues were up by 39 million, almost 9%. 20 million of this increase was driven by the return of roaming, with volumes returning to pre-COVID levels more quickly than expected. And this trend is expected to continue and will provide further tailwinds into the second half. Service revenues excluding roaming grew by 5%, which is also a very strong result, and driven by ongoing connection growth in both pay monthly and prepaid, which grew by 55,000 and 130,000 connections, respectively. Pleasingly, ARPUs grew by 3% or $1, highlighting the ongoing strong demand for data. The market in cloud security and service management continues to be challenging, and revenues declined 5%. We continue to see price pressure in our private cloud market, which was resulting in lower prices and some workloads shifting to lower-margin public cloud. While we had expected to see a lift in service management revenues, the level of project activity remained subdued in an uncertain economic environment, and as a result, revenues were down 8%. In the broadband market, our pricing refresh helped stabilize our connection base at 704,000 connections. The impact of these changes combined with a shift in the mix of plans saw revenues decline 11 million or 3%. And as Jolie mentioned, we've moved to pass through some of the inflationary cost increases during the first half and expect to see the benefits flow through in the second half. If we shift focus now to look at cost, Total adjusted operating costs increased by $88 million, or 7%. $64 million of that increase was related to product costs in support of revenue growth in mobile and in procurement. These costs were also higher due to more Spark Sport content costs as we delivered the Women's Rugby World Cup, the Rugby League World Cup, and the Indian Cricket Tour. Other expenses increased as we completed maintenance on sites that were previously not able to be accessed during COVID lockdowns, and we also saw higher electricity costs. We continue to manage inflationary pressure through the use of our multiple brands to meet customer needs across the price spectrum and pass through cost increases where it's appropriate. So with adjusted revenue up $60 million and adjusted operating costs up $88 million, adjusted EBITDA was down 28 million or 5%. While $12 million of this can be attributed to property lease gains that were recognized in the prior period that did not repeat, this is a slower start to the year than we aspired to. And we are focused on improving performance in the second half to deliver our full year guidance. So when we look at H2, we remain committed to delivering a full year guidance of $1.185 billion to $1.225 billion, noting that we do now expect to be lower in that range. We expect to see growing momentum combined with a seasonal weighting of earnings to the second half and improvements in the following areas. So first of all, mobile, where roaming is rapidly returning towards 100% of pre-COVID levels. Secondly, in broadband, we'll see the benefits of price increases, which were implemented during H1, starting to offset the increased costs, which we've experienced, while also seeing further growth in wireless broadband. In voice, we expect the rate of decline to slow as H1 of the prior year saw benefit from increased COVID-related calling, which returned to more normalized levels in H2 of the prior year. We continue to see opportunities for equipment sales through the normal management and life-cycling of our network equipment. And we'll also continue to manage discretionary spend tightly and realize the benefits from our ongoing cost reduction programs in H2. These improvements will help offset ongoing competitive pressures in cloud security and service management, where we are unlikely to achieve the revenue growth aspirations that we've previously communicated. So moving now to CAPEX. CAPEX during the half was $250 million, as we up-weighted investment in H1 in support of our TACANINI data center expansion. We've also announced our intention to lift CAPEX guidance by $90 to $110 million, as we begin investing some of the $350 million Talco proceeds set aside for investment in new growth and digital infrastructure. The additional funds will be used to bring forward capacity at our Takanini and Metal Drive sites and accelerate the rollout of 5G standalone network, which will increase speeds, reduce latency, and create better experiences for our customers. Some of the proceeds will also be used to invest in multi-access hedge compute, which will open up new commercialization opportunities in the business segment. These investments are consistent with our capital management framework and will deliver long-term returns in excess of our hurdle rates as they scale. We'll provide further details on how the remaining TAOCO proceeds will be utilised at our upcoming investor strategy briefing in April. We move now to free cash flow. Free cash flow for the period was $115 million and down $49 million or 30% compared to the prior period. There are two primary drivers. of the decrease. Firstly, the lower EBITDA, and secondly, the timing of tax payments. Looking ahead, we remain committed to delivering free cash flow of $460 to $500 million, but also expect to be lower in the range. It should be noted that this change does not impact the full year dividend with the board reconfirming FY23 full year dividend guidance of $0.27 per share fully imputed. Net debt. reduced by $724 million, reflecting the repayment of short-term debt following the receipt of Tower Code proceeds. And that results in net debt-debit die ratio of 0.66 times well inside our revised internal limit of 1.0 times net debt-debit die. We'd expect net debt to increase again as we return $350 million to shareholders via the on-market buyback expected to commence in April, and as we invest that $350 million of Tower Code proceeds in growth opportunities. So lastly, I'll now confirm guidance for FY23. Our EBITDAI guidance remains unchanged at 1.185 to 1.225 billion. And as previously noted, we expect to be lower in that range. CAPEX guidance has increased by 90 to 110 million and has been updated to around 520 million. Total FY23 dividend guidance of 27 cents per share, fully imputed, remains unchanged. So that concludes the financial summaries. I'd like to hand over to the operator and open the line for questions. Thanks, operator.

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