Spark New Zealand Ltd Ord

Kia ora tātou and good morning everyone. Thank you for joining us today for SPARC's full year results for the year ended 30 June 2023. I'm joined today by SPARC CFO Stephane Knight and as always we'll leave some time at the end of the presentation for some questions. Look we're pleased to complete the last year of our three-year strategy delivering to guidance with revenue, EBITDA, cash flow and MPAT all in growth. Before I detail the FY23 result I'd like to quickly reflect on the strategy period we've just completed. It is fair to say this was a time like no other, and while the days of lockdowns and closed borders are thankfully behind us, businesses continue to experience the knock-on effects of the global pandemic. High inflation, challenging labour markets, and subdued confidence. Despite these headwinds over the last three years, we have remained focused on delivering what we said we would, and we've created a strong platform for future growth. Our locally unique data and AI capability, our simplified portfolio, and our significant network and technology investments have produced market leadership in mobile, a stabilised number one position in broadband, and strong high-tech growth across IoT and health. Our people are highly engaged at 70%, and we've grown customer engagement nine points since FY20 to plus 31. Our strategic divestment of a majority stake in our telco business delivered proceeds of $911 million, which has enabled us to return value to our shareholders. At the end of June, we've returned $146 million of the $350 million we had allocated to shareholders through our on-market share buyback. And as you know, we committed to an equal amount to future growth. And I'm going to provide an overview of that progress later in the session. Overall, our performance over the last three years has delivered a three-year total shareholder return CAGR of 9.3%, and that places Spark in the top four when compared to global peers internationally. So turning now to our FY23 performance, as overviewed on slides three and four, our Tower Co-Transaction and Exeter Spark Sport resulted in net EBITDA gain of $529 million, which contributed to reported revenues of $4.491 billion, EBITDA of $1.722 billion, and MPAT of $1.135 billion. Adjusted revenues increased 5.1% to $3.908 billion, and that was underpinned by our mobile service revenue growth of 9%. When combined with our discipline cost management, EBITDA grew 3.7% to $1.193 billion in line with guidance. Adjusted MPAT increased 5.6% to $433 million, and that was driven by EBITDA growth, low depreciation and amortization costs, and partially offset by higher tax expense. We were pleased to generate free cash flow of $489 million, and that was towards the top end of our aspiration, which will largely fund our FY23 dividend. The board has declared an H2 FY23 dividend of 13.5 cents per share and a total FY23 dividend of 27 cents per share, an increase of 8% year-on-year and in line with guidance. Turning now to our key market performance on slide six, as noted earlier, mobile continues to be a star performer in our portfolio. With 9% growth driven by the strength of our Spark and Skinny brands, our data and AI capabilities the launch of our new team-up innovation and a price refresh implemented in the second half. Our performance was also supported by the return of roaming to 86% of our pre-COVID levels, which contributed about 3.3% of that 9% growth. Broadband connections and revenues remained broadly stable in line with our strategy. Increased competition drove a 2% revenue decline to $626 million, while rising input costs put pressure on our retail margins. These costs were passed through in price increases during the year, and as a result, for second half margins stabilized, the ongoing growth in wireless broadband also continues to support profitability in a highly competitive sector. We're pleased to achieve our three-year ambition of 30% of our base on wireless broadband. Cloud security and service management revenues decreased 2.2% to $436 million. And that was driven by the ongoing mixed shift from private cloud to public cloud and lower service management revenues as we cycled a prior COVID period that saw a high level of health sector activity. Positively, the private cloud revenues were stable for the last three consecutive halves and we actively refocused the business to adapt, realigning our cost base to change margin profiles and investing in product innovation within hybrid cloud and enterprise service management where Spark is uniquely positioned to lead ahead. Future market revenues increased 1% to $122 million, with digital health revenues impacted by the delays and deferrals caused by health sector reforms. In IoT, we surpassed our three-year target of 1.2 million connected devices, growing 76% to 1.46 million, and our exit of Spark Sport was successfully completed at the conclusion of FY23. We've continued to mature our ESG practices and achieve top quartile benchmarking during the year through the Worldwide Benchmarking Alliance's Digital Inclusion Benchmark, it's a mouthful, and the Corporate Sustainability Assessment. Our performance has seen us join the DJSI Australia Index as well. Our emissions reductions are on track against our science-based target pathway with scope one and two emissions down 29.8%. This was driven by a higher share of renewables on the grid, We continue to focus on opportunities to support new renewable electricity production through our purchasing agreement as we balance our objective of maintaining lower emissions against the backdrop of a growing digital infrastructure portfolio. Our supplier audit program is underway with five audits to be completed by the end of 2023. This contributes to the broader activities of the Joint Audit Cooperation, which has completed 98 audits across its membership base in the last 12 months. A highlight of the last three-year strategy has been the growth of our not-for-profit broadband service, Skinny Jump, which now supports over 27,000 households in need. In FY23, the commercial value of the data provided to Jump customers totaled over $6 million. We'll now turn to our FY23 indicators of success. We are pleased to have met or exceeded the majority, building the capabilities that are delivering improved customer and people experiences and market differentiation. leading the market in mobile, growing wireless and IoT, maintaining our cost discipline and building a sustainable business. While we continue to improve our customer experience and grew IMPS, we did not hit our aspiration of a six-point lift in FY23. In FY24, we will continue to invest in frictionless digital experiences for our customers while using data to better serve their needs. As noted earlier, our cloud security and service management revenues behind our aspiration and performance improvement remains the focus in FY24. Spark Health and our aspiration to deliver growth in digital platform revenues didn't meet our ambition, however we continue to see strong customer demand to digitise the health experience. I'm now going to provide an update on the FY24-26 strategy we launched to the market in April. We start the year from a strong position. Our customer, people, brand and sustainability fundamentals are healthy and growing. We have maintained and enhanced our number one position in key markets and we've got a clear strategy to maintain or grow those positions. Our data and AI capability gives us a competitive edge and we are investing in data centres and high-tech solutions to grow incremental revenues and margins over time. And as we've demonstrated over the last three years, we have a strong track record on cost control. Our plan on page is outlined on slide 11 and sets a clear mission for our businesses to empower the people and businesses creating our Te Arawa's tomorrow. Because satellite has been topical lately, I'll briefly cover how we're expanding our portfolio in this space, as outlined on slide 13. Spark has owned and operated New Zealand's largest earth station at Warkworth for many years now, and we provide a full suite of satellite services through our wholesale business. For our mobile customers, we've announced a new partnership with Link Global, which will allow them to use their phones in areas that are not easily reached by traditional mobile coverage. It's important to stress that the satellite capability is still evolving, and so we'll be starting with a trial of a text only satellite-to-mobile service by the end of calendar 23, with a full rollout of the text capability envisioned during 2024 calendar. For our business customers, we announced a partnership with Netlinks to provide an enterprise-grade Starlink satellite broadband. A trial is currently underway with select customers with a full rollout planned for late 2023. And satellite overall is complementary to our existing connectivity portfolio, enabling us to reduce coverage gaps that may exist for customers and deliver greater resilience. Now I'd like to touch on the strategic investments we're making with growth capex from the Taupo transaction proceeds. A $40 to $60 million 5G standalone investment is progressing to plan, with our network build underway and new multi-access edge compute use cases in trial. In our digital identity business matter, we continue to focus on global markets with customers across the US, Canada, Switzerland, Australia, and New Zealand. As we updated in April, MATA recently won a multi-year contract with the New South Wales government as technology partner for its digital identity and verifiable credentials program, which is currently being implemented. The majority of our capital investment is focused on the high-growth data center market, where we will invest $250 to $300 million, and our targeting returns are 9% to 10%. Because of the scale of this investment, we've provided more background on our data centre business in the presentation material today for your reference. As we shared in April, New Zealand's data centre market is expected to grow rapidly over the next three to five years. SPARC is well positioned to gain a share of this growing market. We already operate the country's most extensive network of customer data centres across 16 sites, with $24 million in existing data centre portfolio revenue and the ability to add additional capacity. The diversity of our data center assets mean we are able to meet a very broad range of requirements, including those of hyperscalers, government, larger businesses, and small enterprises. And we have the technical, engineering, security, and infrastructure capabilities needed to deliver. Our core business is highly complementary and sets us apart from pure play data center operators. We can add additional value at the connectivity layer, providing international subsidy, national and metro fibre services, as well as across the top at the product and sales layer through our extensive IT and cloud capabilities and by acting as a sales channel to market for global. On slide 19, you'll find an overview of our data centre investments. These investments will generate long-term annuity revenues that benefit from inflationary pricing protections in support of market tailwinds. Capital deployed to the end of FY23 is connected to investments that are fully committed to customers. Our TAC and INI, 10-megawatt expansion was completed in August 2023, and this revenue will begin to scale in FY24 and then grow for several years until it reaches full billing. Once we complete the additional 1-megawatt expansion of our Aotea campus, which is underway now, our total data centre built capacity will reach 22 megawatts in FY24. In FY24, we will also commence the development of the second stage of our Takanini expansion while investigating other potential development locations. Our decision to proceed with further builds will be based on meeting the investment criteria outlined in our capital management framework. So to summarise, I'm very proud of what the SPARC final has delivered over the last three-year strategy period and that we've delivered to guidance, grown the dividend and returned $350 million to our shareholders through on-market buyback across this year and intending through the FY24 period. We've got a clear strategy for the three years ahead and a proven track record of adapting at pace when the plan needs to change. So I'm now going to hand over to Stefan who will talk through the financials.

Thanks, Jolie, and good morning everyone. So Jolie's already described the reported results and the adjusting items, so I'll focus on the adjusted results. So starting off with an overview of the key movements in revenue as outlined on page 22. So we're really pleased with the top line adjusted revenue growth of $188 million in a challenging economic environment. As Dolly noted, mobile performance was strong with service revenues growing 9%. Growth in the base was a key driver with pay monthly connections growing by $72,000 and prepaid growing by $156,000. Roaming contributed $31 million towards the overall growth of $81 million. And while revenues were averaging around 86% of pre-COVID levels during the year, they were consistently tracking at around 100% in the second half. We also saw the return of more inbound roaming, contributing a further $6 million of growth captured in the other mobile revenue line. Other product revenues grew by $89 million. And to provide greater transparency, we've split this into three parts. So $47 million of the growth was in Intelli. which delivered significant infrastructure contracts during the year, as well as public safety network revenues and growth in matter. 31 million of the growth related to a full year contribution of Kinect 8, and the remaining 11 million was driven by future markets and reflects the strong performance of our IOT business, which grew by 33% year on year. As we look to FY24, it's our intention to break this category into further detail as it reaches a material size, and we've outlined that in the appendix. Procurement revenues were the other key driver of revenue growth with strong software licensing deals, particularly in the health sector. Cloud security and service management revenues declined 2.2% for the year, which was below our original aspiration of 2% to 5% growth. Cloud revenues declined 2.1% as we saw private cloud pricing pressure. It is worth noting that the second half revenues for private cloud were broadly flat, reflecting the stability of the largely government customer base. and the fact we're now cycling periods which included price decreases. Service management revenues declined 7.4% as we cycled the prior COVID period where health sector revenues were higher than usual. Broadband revenues were down 13 million or 2% for the year, but more pleasingly have now been flat for three consecutive halves as we've stabilized the base and lifted prices. Legacy voice continues to become a smaller part of our business and future headwinds will moderate as it trends below 5% of revenues. During the year, we saw a higher voice revenue decline as calling volumes across 0800 and fixed to mobile normalised post-COVID. Lastly, other gains of $33 million were up $7 million on the prior year and relate to gains on sale of mobile network equipment and changes in our leases. On page 23, we outline the adjusted operating costs that grew by 145 million, or 5.6% to support revenue growth. Product costs grew by 108 million, with the largest growth in mobile, procurement, and other product costs, which is in line with the revenue growth that I spoke to earlier. Labor costs increased by 16 million, which was driven by the insourcing of field services, the full year impact of Connect 8, Pay rises for our people in a tight labor market and investment in our high-tech growth businesses. These increases were partially offset by ongoing investments in automation and efficiency across the business. The other operating expense increase was primarily driven by an increase in accommodation costs, which was due to increased corporate site maintenance as we cycled a period where maintenance was less frequent due to COVID restrictions. We also saw higher operating charges relating to Connexa leases and higher travel expense following the easing of travel restrictions. So after a tough start to the year, we finished with adjusted revenues up $188 million, adjusted costs up $145 million, which saw EBITDAI grow by $43 million. The key drivers of improvement from the first half to the second were the ongoing strength in mobile and return of roaming, Stabilisation of our broadband base and revenues, normalisation of other revenues and gains which were low in H1, and tight management of the cost base. The growth in adjusted EBITDAI flowed through to adjusted NPAT which was up 23 million or 5.6%. Depreciation and amortisation declined by 16 million as we sold a majority stake in our mobile towers during the period. Finance income was up $6 million, primarily driven by interest earned on the Tower Code proceeds, and finance expense was up $25 million, driven by an increase in lease interest expense relating to Conexa and higher debt interest rates. Adjusted tax expense was up $14 million as a result of high in these earnings. There was no Southern Cross dividends received during the period, but with Southern Cross Next cable now live, we expect to see a return to dividends from this financial year. So moving now to CAPEX and free cash flow. FY23 CAPEX was $515 million, up $105 million compared to prior year spend. This was in line with guidance, and the key drivers of investment are highlighted on slide 24. The increase of $105 million went primarily into data centers and 5G acceleration, with stage one expansion at TACANINI now complete, and with proof of concepts underway for 5G standalone and mobile edge compute. Free cash flow for FY23 was $489 million, which was up $56 million on prior year. This was towards the higher end of our aspiration and higher than our expectation at H1 due to tight management of cash capex. Free cash flow of $489 million largely funds the $0.27 per share dividend and is a really pleasing outcome as this is a goal we've been working towards for some time. Looking ahead, Our aspiration for FY24 free cash flow is $490 to $530 million, which reflects ongoing growth in EBITDA and tight capital management. As a result, we are guiding to a higher total FY24 dividend of $0.275 per share fully imputed. The combination of the FY24 dividend guidance of $0.275 per share, which equates to around $500 million, and the completion of the remaining share buyback of $204 million we'll see SPARC return in excess of $700 million to shareholders. So moving now to net debt on page 26. At the 30th of June, the net debt-debit-die ratio was 1.4 times, and consistent with Standard & Poor's A-minus credit rating. The decrease in net debt during the period reflects the proceeds from the TowerCo transaction. We expect net debt to continue to increase back to more normalized levels, while remaining within our credit rating as we complete the buyback and our investment program. We remain committed to the capital management framework that was most recently shared at our investor strategy briefing, which sees us focus on maximizing shareholder value by growing dividends over time through growth and free cash flow, continuing to invest for growth while maintaining a financial strength and flexibility. So now moving on to the FY24 indicators of success. In mobile, we expect the market to continue to grow and we're well placed to capture our share of this. We expect to see roaming average 100% of pre-COVID levels, as well as continued growth in both usage and connections as immigration returns. As a result, our FY24 aspiration for mobile service revenue is growth of around 5%. Connections in the broadband market are expected to grow modestly as we see immigration return, Our ambition is to continue the stabilization of revenues we've seen over the last three halves while maintaining our connection base in a highly competitive market. We will continue to support margins by growing the wireless broadband base by a further 10,000 to 15,000 connections. In IT, we are targeting a moderation in the rate of decline as we cycle previous price declines in cloud and as service management project activity normalizes post-COVID. and our new hybrid cloud and service management product offerings gain traction and market. As a result, we aspire to around 2% IT and procurement revenue growth. We're also moving decisively on the cost base to align it more closely to the changing margin profile of our segments in this space. Our expanded data center completed in August, and we'll see revenue grow by around 46% to around $35 million as a result. We'll focus on the development and commercialization of new high-tech solutions for our business customers, with $25 to $35 million of revenue growth targeted within the year. And we also expect to see other gains remain at consistent levels with the last three years. Our focus on cost out and tight management of discretionary spend will continue to support reinvestment in the business and to insulate Spark from economic uncertainty, with a gross FY24 cost out target of around $40 to $60 million. We've also included operational performance indicators that are aligned to our new three-year strategic ambitions, and we'll be targeting a three-point lift in customer IMPS, a five-point lift in employee engagement, and reductions in our greenhouse gas emissions in line with our science-based target. So lastly, moving on to guidance. For FY24, we have set guidance subject to no material change in operating outlook as EBITDAI of $1.215 billion to $1.26 billion, capex of around $510 to $530 million, and a total FY24 dividend of $0.275 per share fully imputed. It's also worth noting that we'll be adjusting our financial disclosures to provide greater clarity around the growing parts of our business, such as data centers. And accordingly, we've provided a copy as part of the full year disclosures. We've included a reconciliation of the movements in the appendix to the presentation and intend to start reporting under the new format from H1FY24. So that now concludes the formal component of our presentation. Let's move to some questions. So operator, could you please introduce the first question?

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Ari Decker with Jardin. Please go ahead.