Spark New Zealand Ltd Ord

Kia ora koutou katoa and good morning. Thank you for joining us today as we share SPARC's half-year results for the period ending 31 December 2023. This morning I'm going to provide an overview of our results and an update on our strategy. I'm then going to hand over to Steph Knight, our CFO, to speak to our financial performance in more detail before we move to Q&A. So as was the case for most businesses, we experienced a challenging operating environment during the half, with high inflation, cost of living pressures and uncertainty resulting in lower levels of consumer and business confidence. Our core Taupo products are resilient during economic downturns, but not immune, and uncertainty did dampen demand in some parts of the public and private sectors. Despite these challenges, we continue to deliver top-line growth and made solid progress in implementing our new three-year strategy. I'm going to speak to the adjusted numbers for the purposes of providing a like-for-like comparison, which strips out the impact of the Taoko transaction and the exit of Spark Sport and FY23. So if we move to that, we delivered adjusted growth of 1.3% to $1.98 billion, driven by a standout mobile performance and momentum in data centers and high tech. When combined with strong cost control, holding operating expenses broadly flat. We adjusted EBITDA grew 3.9% to $530 million. Adjusted impact decreased 4.8% to $157 million due to higher average interest rates on debt and higher interest payments on Connect releases. We expect to see a second half improvement in line with stronger H2 EBITDA and Seth's going to talk through that a bit more shortly. Capital expenditure was higher in the first half as we accelerated investments to gain a fast start on our new strategy and as we implemented upgrade programs like ERP and this in turn impacted free cash flow. We remain committed to delivering our overall CapEx envelope within guidance and achieving our free cash flow ambitions. Finally, we declared an HYFY24 dividend of 13.5 cents per share, 100% imputed. I'm now going to move to slide four in our telco market performance. Mobile remained central to our growth, with mobile service revenues up 6.3% to $510 million as the benefits of annual price review flowed through and we captured 47% of total connection growth. Broadband revenue held broadly flat, so with a 1.3% decline to $309 million, despite high levels of competition in an inflationary environment. Margins were maintained as fibre input cost increases were passed through and wireless broadband grew to 31% of our base. So moving now to our digital services market performance outlined on slide five. So pleased to have cloud back in growth with revenue up 3.8% through increased private and public cloud workloads and the launch of our new hybrid cloud service. Cloud growth margins grew 7.6% as the cost base was reset with benefits continuing to flow through the second half. Overall IT revenues held flat at 345 million. That was impacted by a 10% decline in service management, primarily due to lower public sector demand. Our investment in the high-growth data centre market is progressing to plan, with a 10 megawatt expansion of our Takanini data centre completed in August 23, and revenue streams coming online during the half. This drove a revenue increase of 38.5% to $18 million, and I'll provide more detail on our data centre investment shortly. High-tech revenues grew 12.9% to $35 million, That was driven by strong IOT connectivity growth with Spark's IOT networks now supporting around 1.8 million connections. With several converged technology proof of concepts underway with customers to identify future commercialization opportunities. Digital health revenues were down 8.7% to 42 million and also impacted by public sector slowdown. We were focused on growing new revenue streams through further expansion of supporting the private sector. So looking at our indicators of success on slide six, in high tech, the slowdown of public sector activity did impact growth in our data business, Curious, which we expect to improve in the second half. More broadly, we're on track for making solid progress towards all of our measures. So H1 marked the first six months of our new strategy, and we've been operationalizing our new ambitions across the business. On slide eight, we overview our Operate program, which is focused on accelerating growth investment in digital infrastructure and redesigning our operating model to align to our FY26 goals. To do this, we are directing labour investment to new growth areas and are reducing investment in areas where EBITDA profiles are changing, such as cloud. When we combine this work with our ongoing focus on AI and automation, simplification, Digitising our customer journeys and growing wireless broadband, we are on track to exceed our growth cost out target of $40 to $60 million in FY24. The dual focus of growth and resilience is a key feature of our strategy. The strategic digital infrastructure investments we are making build on the strengths of our core connectivity assets and when combined with the last cost operating model creates the flywheel that underpins ongoing strength in our core businesses. and new high-tech commercialization opportunities that will build out our future growth engines. On slide 10, we provide a roadmap for these high-tech opportunities. In the near term, our ambition is to continue scaling our presence in IoT and digital health, leveraging what are now more mature technologies and mature markets. We'll continue to expand into new sectors while moving up the value chain into high-tech or converged solutions. Our investments into emerging technologies, including 5G standalone, and converged technology will open up new commercialisation opportunities in these markets. We're making progress with our satellite trials, capability matures. We sent our first satellite text message on our network in November last year, and we have a Starlink business-grade satellite broadband solution and market for our business customers. BonaWebMatter, which is focused on building entirely new markets with new digital identity technology, our ambition is to support the establishment of the market locally and globally and secure high-growth SaaS-based annuity revenues. building scale over time. This is turning now to our data centre strategy on slides 11 and 12. We continue to experience positive tailwinds with the ongoing growth in data, business digitisation and the rapid uptake of generative AI accelerating demand for data centre capacity. We're well positioned to capture our share of this growing market and our strategic ambition is to create three large-scale data centres in Auckland, at Takanini, our Aotea campus and on the North Shore. The completion of our 10-watt 10 megawatt expansion at Takanini brings our total built capacity to 22 megawatts, with 88% contracted utilization. We then have a further one megawatt expansion due to complete at our Aotea campus by the end of the calendar year. Our potential development pipeline beyond this is significant, now titling up to 70 megawatts. Of this, we have five megawatts in design at Takanini, which is expected to be under construction during the first half of FY25. and we have a conditional agreement to purchase land within a new development on Alton's North Shore. Our intent is to develop an initial 10 megawatt hyperscale data centre campus on this site with the option to add an additional 30 megawatts in the future. We'll consider appropriate funding models or partnerships for this investment and the broader potential development pipeline as we progress those opportunities. Overall, we're targeting returns of 9% to 10% over time as utilisation scales. Finally, I'll touch on our sustainability performance. So to support Aotearoa's economic transformation, we remain focused on investing in the digital infrastructure and technology capabilities our country and New Zealand businesses need to become more productive and sustainable. We recently released new research into the role advanced technologies can play in addressing New Zealand's well-documented and persistent productivity challenges. The opportunity here is significant with just a 20% uplift in the use of these technologies, increasing industry output by up to $26 billion over 10 years. and GDP by up to 2% each year. So we're exploring these opportunities now with our customers. Our digital equity broadband product, Skinny Jump, is now supporting over 29,000 households, and we continue to invest in community solutions through the Spark Foundation and increased online protection for our customers. We've completed five supplier audits we committed to delivering in the 2023 calendar year, During the half, our Scope 1 and 2 greenhouse gas emissions were down 8% compared to H1 FY23, and people engagement continues to climb. Overall, we're pleased to see that our continued ESG progress secured our ongoing inclusion in the Dow Jones Sustainability Australia Index during the half. If I stand back and look at the overall result, we've delivered a resilient performance in a tough economic climate, while reorienting the business towards our new strategic growth ambitions. Our business fundamentals are healthy and growing with customer satisfaction up five points and people engagement up three. With an ongoing focus on cost discipline, investment and new growth, and as signs of improvement in our broader economic environment start to emerge, we are well positioned to build further market momentum in the second half. I'm now going to hand over to Steph to talk you through the financial performance in more detail. Thanks, Steph.

Thanks, Jolie, and good morning, everybody. So I'll stick you through the key financial summaries for the half, starting with the reported results, where the prior year numbers include a $584 million gain on sale from the Talco sale and a $52 million provision relating to the Exeter Spark Sport. So reported revenue of $1.98 billion was down 22%. Reported EBITDA of $530 million was down 49%. And reported impact was $157 million and down 82%. So I'll now focus on the adjusted results which exclude the impacts of talco in this five sport provision. So adjusted revenue, $1.98 billion was up $26 million or 1.3%. Adjusted EBITDA of $530 was up $20 million or 3.9%. And adjusted impact was $157 million, down $8 million or 4.8%. So let's actually step through each of the components of the adjusted results in a bit more detail so we can understand the key movements. So first of all, if we start with revenues, where we maintained top-line growth despite the challenging economic conditions. Growth was underpinned by strong performance across key areas such as mobile, momentum and data centres and high tech, the ongoing stabilisation of broadband and a return to growth in IT products. In the telco market, mobile service revenues grew by $30 million, up 6%, and $7 million of this growth related to roaming, with volumes now sitting above pre-COVID levels. Service revenue, excluding roaming, grew by 5%, which is also a very strong result and consistent with prior year trends. This was driven by ongoing connection growth in both pay monthly and prepaid, which grew by 54,000 and 92,000 connections, respectively. Pleasingly, pay monthly ARPUs grew by 55 cents, highlighting ongoing strong demand for data and the impact of price increases. Within the pay monthly customer base, we saw ongoing growth in consumer segment APUs, which grew 4%, and a decline in enterprise segment, reflecting the highly competitive nature of this market. Prepaid APU declined by $1.17 as the impact of inbound travelers caused dilution. We saw broadband revenue stabilize, with a small decline of 1.3%, which was very pleasing in a highly competitive market, and following the path to a rising fiber input costs. Voice continued to decline, as consumers shift to alternate technologies and businesses shed lines reflecting the impact of hybrid working in a tougher economic environment. As Jolie mentioned, IT product revenue returned to growth with cloud revenues up 4%, while the IT services market remains challenging with service management revenues down 8 million or 10%, reflecting lower public sector demand. High-tech revenues grew 13% to 35 million, through strong IoT connection growth, and data center revenues grew as the new facility at Takanini came online and is now billing. We also saw a decrease in other product revenue, which was driven by the closure of Spark Sport and offset by growth in Intelli as it expanded delivery of 5G products, projects, and increased distribution customers. So if we now shift to look at costs, where total adjusted operating costs were already flat, increasing by 0.4% with $6 million, which was pleasing given inflationary pressure in the market. Product costs declined by $5 million as voice costs continued to decline and we exited Spark Sport. These declines were partially offset by growth in procurement and Intelli in support of revenue growth. Labor costs increased by $10 million, or around 4%, reflecting the impact of wage inflation in low-unemployment markets and higher headcount in Intelli as we insourced field service teams to support additional work and new margins. As Jolie overviewed, as part of the Operate program, we are redesigning our operating model, and alongside other efficiencies, we are on track to exceed our gross cost reduction target of $40 to $60 million in FY24. So with adjusted revenue up $26 million and adjusted operating costs up $6 million, adjusted EBITDA was up $20 million, or 3.9%. While this is an improvement on the prior period, we experienced muted demand in some areas of the business, accompanied by a higher cost environment reflective of the broader economic environment. We expect top line growth, which I'll touch upon in more detail shortly, coupled with a strong focus on labour and operating cost efficiencies to deliver improved performance in the second half to achieve our four year guidance. So if we now shift to the second half outlook, as outlined on page 18, We remain committed to delivering a full-year guidance of $1.215 billion to $1.26 billion. 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 connections continue to grow and we'll see further positive impacts from the price increases implemented to date. In broadband, we will optimize the margin as input costs are passed through and wireless broadband continues to grow. We continue to see growth opportunities for hybrid cloud and data centres as favourable market tailwinds support demand in these areas, and in high-tech as IoT connections continue to scale. Further support for high-tech growth will be provided by MATA as it moves customers into production, and we focus on growing new digital health revenue streams and expand further into the private sector. We'll implement a refreshed operating model aligned to our new three-year strategy, And alongside other efficiencies, we're on track to exceed our gross cost reduction target of $40 to $60 million in FY24. These improvements will help offset the transition to the new IT services offerings and ongoing inflationary pressures. So now moving to CapEx. So CapEx was heavily weighted to H1 at $286 million as we accelerated investment to gain a fast start on our strategy and continued our simplification and upgrade programs. Maintenance capex increased to $235 million as we continue to invest in IT systems such as our new ERP and better tools to support enterprise service delivery. These tools create the platform to drive greater automation and efficiency across our business. Total spend across 5G and 5G standalone increased and we now have 5G in 95 locations and our 5G core build is on track. The balance between 5G and 5G standalone will flex as we optimize delivery across the program. We continue to invest in data centers in line with the management framework, but spend in H1 was lower following the completion of the expansion of our TAC and INI site, and while we begin work on the next phase and investigate further land purchases to support our growth strategy. While spend in the first half was higher, we remain committed to delivering our overall CapEx envelope within the guidance range of $510 to $530 million. So moving now to free cash flow. The free cash flow for the period was 46 million and down 69 million or 60% compared to the prior period. The primary driver of the decrease relates to the timing of capital investment that I just outlined where the balance of spend is heavily weighted to H1. This will reduce significantly in H2. Free cash flow has also been impacted by higher interest costs as we saw higher debt levels and higher rates combined with less costs paid to Conexa. Looking ahead, we remain committed to delivering free cash flow 490 to 530 million. We'll deliver this through high rebate dire growth driven by mobile data centres and high tech, and as we drive the cost base lower through new operating model and ongoing cost discipline. The other key driver will be a lower capex spend, which will see total spend for the year in line with guidance. So net debts increased by 759 million, reflecting high debt levels, as we've almost completed the on-market buyback and invested additional capex in growth areas such as data centres and 5G standalone. Net debt during the period has also been impacted by an increase in working capital, driven by higher receivables and seasonally higher inventory levels. We would expect net debt to stabilise below 1.7 times net debt to EBITDA. As the buyback completes, we see higher EBITDA and lower capex in H2, and as working capital returns to normalised levels. In 2023, in New Zealand, $100 million bond matured, and our next long-term maturity is a $125 million bond in March 2024. Accordingly, we're considering making an offer of $250 million of unsubordinated, unsecured fixed-rate bonds with up to $50 million in oversubscriptions via our wholly-owned subsidiary, SPAC Finance. And if this proceeds, we expect to release the full details of the offer in the week beginning the 4th of March. So to summarize our outlook for the second half, FIAT's well positioned to build momentum as economic conditions start to improve and as the ongoing demand for data and travel supports our core growth engine of mobile. Our strategy is on track with key digital infrastructure investments accelerating and building a platform for future growth. Our Operate program is progressing well with a number of initiatives already underway to create a more efficient operating model and benefits starting to flow through in the second half. A lower balance of CapEx spend in H2 will support the delivery of our free cash flow ambition, and we have reaffirmed our FY24 EBITDA, CapEx, and total dividend guidance. Finally, our business fundamentals remain strong in brand, customer experience, people, and sustainability, supporting ongoing competitive advantage. So lastly, on our confirmed guidance for FY24, our EBITDA guidance remains unchanged at $1.215 billion to $1.26 billion. CapEx guidance remains unchanged at around 510 to 530 million, and guidance of an increased total FY24 dividend of 27.5 cents per share fully imputed also remains unchanged. So that now concludes the financial summaries. I'd like to hand back to the operator to open the line for questions.

Thanks. 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 Jarden. Please go ahead.