Spark New Zealand Ltd Ord

Kia ora koutou katoa and thanks for joining us today for SPARC's full year results for the year ended 30 June 2024. I'm joined today by CFO Stephane Knight and as always we'll leave time for questions at the end of our presentation. As you know our FY24 financial results are cycling the significant revenue and net profit declared in FY23 following the Taoko and SPARC sport transactions. As such both reported and adjusted year on year comparisons are provided. I'll speak to the adjusted numbers which strip out the impact of the one-off gain to provide a like-for-like performance comparison. It's fair to say it's been a challenging year for Spark with recessionary economic conditions creating a tough operating environment. We saw growth in key markets with mobile service revenues surpassing a billion dollars for the first time and IT products, data centres and high tech continuing to grow. This was offset as economic conditions impacted demand in IT services. which were intensified competition of business mobile and led to lower mobile device and accessory sales. As a result, adjusted revenue decreased 1.2% to $3.861 billion. We accelerated our Spark 26 operate program in half two, but could not adapt the cost base to changing demand quickly enough, with benefits to be largely realized in the FY25. As a result, FY24 adjusted EBITDA reduced 2.5%, to $1.163 billion. Lower EBITDA, higher finance expenses and high depreciation impacted adjusted MPAT, which declined 21% to $342 million. Free cash flow reduced 32.5% to $330 million as a result of lower EBITDA and higher interest and non-cash earnings and contributed to high net debt. This was a disappointing outcome. But as we look to the year ahead, our business fundamentals remain strong. We've got a clear path to return to growth in FY25, which I'll speak to in more detail shortly. We're also pleased that customer satisfaction grew seven points, employee engagement remained strong, and our top quartile sustainability benchmarking was maintained. Finally, the board approved a total FY24 dividend of 27.5 cents, 100% imputed. So if we turn now to our telco market performance on slide four, Mobile service revenue increased 3.1% as connections grew and price increases were implemented. This was below our aspiration of 5% with headline growth impacted by business mobile, which declined 3.5% as price competition intensified and we saw some line shedding as businesses restructured. And consumer mobile service revenues grew 4.3% and for me it was up 1.6%. Broadband performance was consistent with This is a price-driven market with the recessionary environment tightening consumer budgets. We saw intensified price competition, particularly from non-talco operators. We continue to manage profitability through our annual price reviews and growing the addressable market for wireless broadband. If I look at our digital services market performance on slide five, cloud as businesses continue to digitise. It was in IT services that we saw the most significant impact from broader economic conditions as public sector spending cuts, project deferrals and lower private sector investment drove a 14.9% decline. Our focus in FY25 is to transform our enterprise and government division to deliver better customer experiences at a lower cost. Our data centre revenue growth as our Takanani campus expansion completed and new revenue streams came online. Finally, our high-tech revenues grew 21.5% to $79 million as IOT hit a new milestone of over 2 million devices connected to our networks and matter continued to scale. Looking at our ESG performance on slide 6, we were pleased to see our external benchmarking increase into the top quartile of all global telecommunications companies during the year. Our 5G rollout and skinny jump ambitions remained on target. For our science-based emissions reduction target, we're currently tracking 18.6% above the pathway we need to be on to hit our 2030 ambition. The most significant contributor to this increase was a one-off event where an alarm triggered the release of fire suppressants at one of our exchanges. Without this event, we would be 5.7% above our pathway due to the increased emissions intensity on the New Zealand grid. We did, however, make strong progress towards future emissions reductions when we signed a 10-year renewable energy partnership with Genesis. This will account for around 60% of our annual electricity requirements and will make a significant contribution towards our reduction target once it comes online in January 2025. Our FY24 indicators of success are outlined on slide 7. While we're pleased to exceed the number of our targets, including data centre, revenue growth, IoT connection growth, and our gross cost-out reduction target and our customer satisfaction score. We also made solid progress in mobile service revenue growth and 5G-capable sites. As I spoke to earlier, we did not hit our targets for IT and procurement, and while high-tech revenue grew 21.5%, it was below our original ambition. These areas of the business are more exposed to the current downturn we're experiencing. Wireless broadband growth was also below our aspiration as competition intensity increased. While we saw employee engagement drop slightly from FY23 as we made changes to our operating model, we are pleased to remain above the medium for large companies in New Zealand. Turning now to our strategy and our plan to return to growth in FY25, starting on slide 9. This was the first year of SPK26, our new three-year strategy. As we look ahead, we remain committed to the ambitions we set out in this strategy, with a particular focus on mobile, digital infrastructure and cost reduction as we transition through this challenging period. Positively, many of our key growth drivers are enduring. Our leadership in the growing mobile market will support top line growth as demand for data continues to grow. Customer experience remains strong, and annual price reviews enable us to realize the value of our mobile network investment. Through the Operate program, we will deliver further material labor and OPEX net cost reductions to help insulate margins. Our data center strategy is a strong growth opportunity over the medium term. With our development pipeline now sitting at 118 megawatts, we're well positioned to capture a significant share of predicted market growth. Finally, we remain committed to maintaining financial strength and flexibility. Our focus on free cash flow growth and net reduction through higher EBITDA and lower FY25 capex. Now I'm going to provide an update on our data center strategy as outlined on slides 10 to 12. It's a highly attractive market that is set to grow rapidly. Cloud uptake is still scaling in New Zealand and AI is driving significant increases in capacity demand globally across all sectors. Data centres are at the heart of that modern digital economy with the infrastructure we build supporting the long-term growth. Spark is a natural owner of data centre assets and a large user of data centres ourselves. We currently have around 25% market share and our pipeline now totals 118 megawatts. In the context of a market set to grow to 500 megawatts, positions us to maintain a material share of a much larger market. We have three strategic Auckland locations that deliver a compelling investment portfolio. Auckland remains the epicentre of data centre investments in New Zealand as the location of hyperscaler cloud regions and demand from customers has been there. A 12 megawatt TAC in any site is currently close to 100% contracted and an FY25 will commence construction on another 15 megawatt expansion. The campus can grow to a total capacity of around 75 megawatts in the future. Our 3 megawatt AOTS site is strategically sought after due to its location as a key connection point for large customers, international submarines, cable systems and national networks. This campus can grow to a total capacity of around 90 megawatts in the future. And during the year, we secured land and resource consent for our third strategic site on the North Shore. It's part of our 43 hectare master plan development with the surf park creator, Aventura. This campus can grow to a total capacity of 40 megawatts, which will be delivered in stages. This pipeline will see us invest around a billion dollars a capex over the next five to seven years, and we will be targeting an internal rate of return of around 10% to 15% over the expected investment horizon. The reinstatement of the dividend reinvestment plan for the FY24H2 dividend and a potential hybrid Capital notes issuance will help fund this growth opportunity in the near term. We'll also explore other equity funding options, such as capital partnerships. Steve's going to cover more on that funding plan in more detail shortly. So if we turn now to our focus on cost and our SBK26 Operate program, as we transition through the current economic conditions, we plan to significantly reduce our cost base to support margin growth in FY25. In FY24, we brought labour costs back to largely flat, and operating costs were down in an inflationary environment. In FY25, we must go further, and we're targeting 50 million net labour cost reduction and a 30 million new topics reduction. A key enabler of this cost reduction is the transformation of our enterprise and government division. This change will address structural segment challenges by integrating our subsidiaries into SPARC to reduce duplication, simplifying our product portfolio and processes, and delivering better customer experiences at lower cost. Lastly, I want to touch on our AI program as outlined on slide 14, which is another key enabler of our Operate program. This year has seen a significant acceleration in generative AI capabilities globally, which enables use cases with wider flexibility across our business. After years of investment in data-driven marketing, we are in a strong position to leverage this development with extensive in-house AI capability already in place. We have established a dedicated transformation team that cases across Spark, which are outlined on the slide for your reference. This will not only support our focus on cost reduction, but also sharpen our competitive edge by helping our people to deliver for our customers in new and more effective ways. So to summarise, FY24 was not the start to our three-year strategy we had aimed for, and like all businesses in New Zealand, we've had to adapt at pace. market conditions to persist some way into FY25, and we have a robust cost reduction program in place to insulate Spark. Cost focus is matched by a clear ambition to return to growth in FY25 through our core markets of mobile, our digital infrastructure investments, and disciplined capital management. I'm now going to hand over to Steve to talk you through the financials.

Thanks, Jolie, and good morning, everyone. So I'm going to go through the key financial summaries. So starting with an overview of the key movements in revenue as outlined on slide 17. So revenues of $3.86 billion were down 1.2%, with the impact of challenging economic conditions outweighing growth in mobile IT products and high tech. Mobile service revenues were up $30 million, or 3.1%, and Jolie's already outlined the key drivers of growth here. IT product revenue growth continued and was up $18 million, or 3.5%. The growth was driven by new client wins increased workloads as customers continued to move to the cloud. While it was pleasing to see growth in these core products, our IT services revenue were down 29 million, or 14.9%, as public and private sector spending cuts deepened and digital transformation projects were deferred. As market conditions deteriorated, we moved decisively on the cost base in H2, and when combined with the transformation of the enterprise and government that Jolly spoke to earlier, we will realize significant net labor cost reductions in FY25. Mobile non-service revenues, which primarily relate to devices, were down 26 million or 5.3%, as customers refreshed devices less frequently in response to the inflationary environment. Voice revenues also declined at a faster rate than FY23 and were down 51 million or 22.1%. As elevated 0800 volumes in the prior year did not repeat, and as we continue to decommission legacy technologies such as the PSTN. Lastly, other product revenue declined 36 million, or 20.9%, due mainly to the exit of Spark Sport, and we saw an increase in other gains revenues, which were up by 69 million to 102 million. And there were two primary drivers of this increase. So firstly, as we implemented our new three-year strategy, we secured a number of key technology partnerships with strategic suppliers, to support our 5G and cloud strategies. This included the investment of supplier equipment into our network at no cost, which helped unlock new markets or will help unlock new markets and customer growth in line with our strategy. Secondly, we made adjustments to mobile tower leases, which are including the tower relocations that we have seen leases canceled and new leases created. And this gives rise to a non-cash gain. we expect these other gains to return to more normalized levels in FY25. So also on page 17, we outlined that adjusted operating costs of $2.7 billion were down $17 million, or 0.6% as lower product costs were offset by restructuring costs and inflationary pressures. Product costs decreased by $53 million, or 2.9%, which included the exit of Spark Sport, lower procurement volumes, and lower voice input costs. Labour costs were broadly flat at $512 million. This represents a change in trajectory from the first half where labour costs were up $10 million and reflects interventions made as part of the SPK26 Operate programme to align labour costs with changing revenue trends. Operating costs increased by $35 million or 8.7%, driven by a full year of charges under the Connexa lease arrangement, bad debt costs and severance costs. With adjusted revenues down $47 million and costs down $17 million, we saw EBITDAI reduced by $30 million. And so while adjusted EBITDAI was up $20 million in H1, challenging trading conditions intensified in the second half, and as a result we saw adjusted EBITDAI reduce 2.5% to $1.163 billion for the year. The decrease in adjusted EBITDAI was one of the drivers of lower adjusted impact, which was down 91 million or 21%. Depreciation and amortization increased by $23 million as our asset base grew following increased investment in 5G and data center assets, while finance expense also increased by $45 million, primarily due to higher debt and increased rates. So overall, this is a disappointing outcome, driven by the recessionary economic environment and structural issues within our cost base, the latter of which we are addressing through our Operate program. Moving now to CAPEX on slide 18. FY24 CAPEX was $518 million, broadly flat with the prior year and in line with guidance. Over two-thirds of our capital investment was invested into our network and digital infrastructure, improving resilience and underpinning growth in key markets such as mobile, data centres and high tech. Maintenance CAPEX was flat at $359 million, with spend focused on mobile, delivering a 28% uplifting capacity. Our IoT networks, IT systems to support efficiency and better digital customer experiences, accelerated AI deployment and licensing for automation. Growth capex of 159 million was similar to prior year, however the composition was different. With less growth capex committed to data centers, as our 10 megawatt pod two expansion at our Takanini campus completed, and we commenced planning for pod three. This was offset by an increase in 5G as we accelerated our rollout and invested in the foundations of 5G standalone. In FY25, we'll reduce our capex investment to around $460 to $480 million. So moving now to free cash flow and net debt on slide 19. So it is important to remember that we started the year with around half a billion lower opening net debt, reflecting the receipt of Talco proceeds, which were reinvested in return to shareholders during FY24. So free cash flow for FY24 was $330 million, which was down $159 million on the prior year. The decline was driven by lower EBITDA and a higher portion of non-cash gains during the period, which were excluded from our free cash flow, and also higher interest costs. this result was significantly below our aspiration. Our capital investment program was heavily weighted to H1, and when the market turned significantly in the second half, we didn't have the flexibility to adjust quickly enough to impact our debt metric. As a result of this, our net debt to EBITDA ratio increased to 2.1 times at 30 June, in excess of S&P's A-minus credit rating guidelines of 1.7 times. We remain committed to our A-minus credit rating and plan to reduce debt back to targeted levels of net debt to EBITDAI around 1.7 times. Our on-market share buyback is now concluded and we have a clear focus on net debt reduction on FY25. So this includes growing free cash flow to between $400 and $440 million through EBITDAI growth and non-cash items returning to normalised levels. through reduced capital investment, the reinstatement of the DRP with a 3% discount, and a potential hybrid capital notes issuance to provide greater balance sheet strength and flexibility. As Jolie mentioned earlier, we're also exploring other equity funding options to support our data center growth strategy, including capital partnerships. We remain committed to the capital management framework, and on slide 20, we've outlined how it will be applied in FY25. Our focus is on maximising shareholder value by increasing dividends over time through free cash flow growth, continuing to invest for future growth, and maintaining our financial strength and flexibility. We are guiding to an FY25 dividend of 27.5 cents per share, which will be funded through a combination of free cash flow and the reinstatement of the dividend reinvestment plan. This does equate to a payout ratio in excess of 100%, but noting that the DRP will reduce the cash payment. For FY25, we'll impute the dividend at 75% reflecting lower FY24 tax payments. We'll continue to invest for growth with maintenance capex funded through EBITDAI and data centre growth capex funded through a combination of the DRP, a potential issuance of hybrid capital notes and exploring other equity funding options such as the capital partnerships I mentioned earlier. As previously outlined, we remain committed to the investment grade credit rating and have an active plan in place to reduce debt levels accordingly. So turning now to our outlook on slide 22, looking ahead to FY25, we are resolutely focused on returning to revenue growth while significantly reducing our cost base to insulate the business from the economic environment. We expect challenging conditions to persist somewhere into FY25 while noting some emerging signs of economic recovery. But we're not relying on this and have instead made material interventions during the year through our Operate program to adjust our cost base to match our revenues. This work will continue in FY25, and we're targeting a $50 million reduction in net labor costs and a $30 million reduction in net operating costs. Our focus on cost is matched by our focus on growth. We're targeting 3% growth in mobile, around 20% to 25% growth in high-tech revenues, and 15% growth in data center revenue as scale builds progressively over time and stabilization in IT services. This will be partially offset by market pressures and ongoing voice decline. So we've outlined our FY25 indicators of success on slide 23. These measures reflect our focus on revenue growth in mobile data centers and high tech, and our significant cost reduction program. As always, we've also included measures of broader organizational health, including customer satisfaction, employee engagement, and our sustainability performance. So lastly, moving on to guidance on slide 24. For FY25, we have set guidance subject to no material change in operating outlook as EBITDAI of $1.165 billion to $1.22 billion, capex of around $460 to $480 million, and a total FY25 dividend of $0.275 per share, 75% computed. So that now concludes The formal component of the presentation, let's move to questions. Operator, could I get you to please introduce the first question?

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. 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.

Good morning. Just on the guidance, firstly, and as you noted, subject to no material efforts change in operating outlook. I mean, given momentum currently in the business and the macro backdrop is difficult, could you just provide a little bit of clarity on what your base assumption on operating conditions through FY25 is for that guidance range?

I think if you break it into different components, there's sort of three key components there, Artie. Firstly, on mobile markets, it's expected to grow at around 3%, so it's maintaining share within that. If we look at our cost programme, so 50 million net reduction in labour and 30 million in OPEX, that underpins a lot of that growth. And then IT market, looking more at in terms of IT services because IT products was in growth already. And much of the work we've done around the cost reduction also is in that part of the business in terms of enterprise and government. So the other things that underpin it, we think about the macro conditions, first half of 25, we don't expect to see significant improvement in that. And then beyond that, I guess we rely on the work that we're doing internally within the business to support sustainable cost base and earnings.

Okay, thanks for that. I noticed there was nothing on fixed wireless targets for FY25, or maybe I've missed it. Could you just talk a little bit about that? Is it a feature of your other OPEX savings as the 5G penetration increases, what your plans are? What are the internal targets on fixed wireless for FY25?

We haven't set a target specifically for wireless broadband savings, to be shared, but it continues to be an opportunity for us to continue to grow within, particularly as we have the rollout of 5G, and you can see now that we have the SAMNOS modems have the measurement of the speeds, and you can see those speeds have grown quite substantially in terms of, particularly on 5G, I think it's significantly greater than 4G, so that looks to be an area of growth for us ahead, and it helps contribute to the cost savings. That market has matured more, obviously, and broadband in the current economic environment is very price competitive as well. So that, from an overall sort of settings perspective, it is still part of our growth ambition ahead, and we're investing in the network to help support that.

Cool. And just the labour cost savings, I mean, they're obviously pretty significant in the context of overall labour costs. I think you called out just... then the areas where those costs are focused. I mean, how are you sort of managing, you know, the risks within the business and also, I guess, the risk, you know, that you don't sort of cut costs or lose people in an area where, you know, cyclically you're down at the moment, but, you know, things should return back to growth in time. Could you talk a little bit about that?

Let me, so the Operate program, while it's mainly around enterprise government. It is not only around enterprise government, and we have made changes across other parts of our business. So we had Shema in the areas that look after mobile and broadband. They were made in the latter part of 24, and also in network and operations. Any time we shift our operating model, we're always looking at the balance of risk and making sure that we have a balanced approach to that, and we never take these decisions, obviously, lightly to do. In terms of cyclical versus structural, when we've thought about enterprise and government, while there are macroeconomic factors affecting IT services, we have also looked at where we have duplication. So part of our change is about integrating subsidiaries, simplification of product lines and processes which lead to both potential labour and OPEX costs. So we have thought about which parts do we need to sustain and the talent that we need to retain within that and which parts do we need to make some adjustments, I guess, to just fit where the markets are.

Okay, and then just on capital management, a couple of last questions. I mean, I guess it's proving challenging to consistently hit the aspirational target on free cash flow, and I know that the target for FY25 is below what it was for FY24. I mean, how long are you willing to sort of I guess, pay a dividend that sort of sits outside of the 80% to 100% of that cash flow figure that you're targeting over the long run?

Yeah. Hi, Ari. Steph here. So, look, the capital management framework outlines our long-run approach to the dividend. Obviously, we set, in conjunction with the board, we set an absolute amount for each year. So, The amount for FY25, you know, with free cash flow up $400 to $440 million funds a good portion of the dividend, but not all of it. Our intention is to grow free cash flow back over time, and that is absolutely aligned with our capital management framework, which is aligned around EBITDA growth and continues to grow that free cash flow so that it does fund the dividend over time. We'll obviously make a decision each year according to... And then last one, just on the...

data centre partnering is it a focus in the business for that partnering process to be completed in FY25 and can you just comment briefly on where in that partnering process you sit today?

The data centre funding approach is really in the immediate term a combination of the DRP and the potential issuance of hybrid capital notes We think that sees us through our, provides enough funding to see us through at least the next 18 months, so that gives us some time then to work through the capital partnerships. And so we'll commence work on that, but we wanted to make sure that we have funding in place to see us through our immediate requirements, which we do, and then we'll update the market as that evolves over time.

Thank you.

The next question comes from Kane Hannon with Goldman Sachs. Please go ahead.

Hey, guys. Maybe just the mobile service revenue outlook again. I mean, you're talking about 3% next year. I think it's basically flat in the second half. You talk of, I suppose, the building blocks to get back to that 3% growth, I suppose, what you're assuming from an enterprise market.

Yeah, so if you look at second half, you do see seasonal impacts for travellers and others. You can see that in our prepaid as well, which we saw at the time some of those coming through. We think about... If we break it into the components, consumer, we still see the opportunity to grow. Customers are looking for more data and are moving up plans alongside that. We'll also have, every year we review price and the different levers that sit around that and consider what we need to do there. In enterprise, the market does remain competitive. There has been also some line setting in relation to restrictions. As we go through 25, we expect that to stabilise. somewhat and SME is in growth. So we think all of those factors and the combination of continuing to demand for data growing will support the 3% growth ahead.

Yeah, perfect. And just, I suppose, the labour cost reduction, I think you made the comments in the presentation, but it sounds like we should be expecting more FTE changes, more initiatives through 25, and so maybe a bit of a benefit coming through in FY26. I suppose, just how do I think about the timing of those OPEX initiatives?

We've made significant changes during 24, but yes, there are some that commenced in 25, so you will have a component that will flow into 26 as well. as we do that into the first half of FY20.

Yeah, perfect. And just the capital partner data centre discussion. I mean, you guys have worn a lot of the upfront risk. I mean, you've got the strategic value sort of relationships. So just interested, I suppose, what you'd be looking for in a partner, how you think about, you know, the terms of any sort of agreement and how it might change the economics on your side. Cheers.

I think that we think about partners... there's an opportunity to consider whether we'd accelerate growth on the back of introducing a partner. There's a range of different partners that could come into this part of the business, but because we're still a way away from that, when we are closer to that time, I'm prepared to disclose more about who that might be and how we do that.

Thanks, Jess. Your next question comes from Andrew Rakowski with E&P. Please go ahead.

Hi, Jolly.

Hi, Seth. Hi, Joe.

Thanks, Jeff. My first question is on mobile. And just looking at the mobile slowdown into the second half, you've given us the components of consumer SME enterprise government for the full year, but are you able to break that down, first half versus second half? I guess just trying to work out whether that second half slowdown is... is only business mobile or are you seeing consumers slowing down a little bit as well?

It is mainly in relation to business, although we did see that, as I sort of mentioned, prepaid in terms of the mix of revenues within there in terms of people looking for greater value in a more challenged economy. That feels more cyclical. And then, so that component, and then in terms of pay monthly, largely that has been driven off people searching for greater data and the price increases we've taken. We have taken price, again, in FY25, we took it in FY24. Our price increases are being executed right now in August, so broadband and mobile. So that has gone out.

So we'll get the majority of the benefit of that, the affiliate benefit of it, yeah.

Yeah, still to come in terms of that growth.

Okay, thank you. And just, I don't know whether this is too specific, but I think consumer was up 4.3% for the full year. Do you know where that was in the first half? Or is that a number that you can disclose?

It would have been higher in the first half because you still had some remnants of roaming returning and there's some seasonality within that. And what we've seen now is roaming's pretty much returned to normalised, if you look at it for the year-on-year and you think about that 3% ahead. So that would be main drivers.

Okay, great. Thank you. And then if we look below the GP line, I know Steffi spoke about this in your prepared remarks for the full year, but other operating expenses were up quite significantly in the second half, up close to 20%. Is there any one-off element to those costs or is that the new baseline that we should be thinking about?

There's some costs in there, like severance costs, for example. There's some property electricity. We saw a small increase in there. And, I mean, they're the main drivers.

They're the main ones, and there was a little bit around the full year impact of Conexa and a small increase in bad debts, but I wouldn't call that as being overly material.

And if you think about the net reduction target we put around OPEX of $30 million... That is obviously addressing some of that cost base. Yeah.

Okay, so it's got those... So just to be clear, it's not those costs coming out, an additional $30 million that's included in those costs being taken out there. Yeah, they are included in the $30 million.

What we're saying is for FY25, we've got a net cost reduction for OPEX of $30 million. So, you know, you close 24 and on from there on in, there'll be a reduction against that. Yeah.

Okay, got it. Thank you. And my final question in the 90s, IT services revenue, just that question around what's cyclical and what's structural. Are you able to talk to how extensive the simplification of the product portfolio is in enterprise and government? What sort of number of products are you taking out? It feels like you can really get away with taking out some. And do you think much of the spend will come back in a better economic environment? I mean, I suppose you've got some projects and stuff like that.

I think when you break it into the different compartments of IT services, so you have projects, digital transformations, those have not gone away. They've probably gone on hold. So as we've seen, particularly in the public sector, but also private sector, as there have been large changes in organisations, those things are just holding until they start again, and we have seen some indication of that. Then you look at more... more across the product line of an enterprise and government against core products, whether that's sort of networking various components. We have multiple products across subsidiaries and SPARC, so really what you're talking about is refinement of the portfolio. So not that we don't really offer as many services as we did, but the number that we do within each of those areas starts to come down, which obviously has a flow on it based from a complexity reduction. but also in terms of slices of puffs or other costs to support that. That program will exist over a period of multi-year. It's not just going to be in FY25. But what we have looked at is what do we think structurally needs to adjust in our cost base to offset the things we don't see returning sickly. So we haven't taken an approach that everything is structural out of this last 12 months, because clearly it hasn't been. Some will return and we're clear about those costs but we're adjusting the base to make sure the things that are more structural or longer term, we're addressing them now rather than waiting for that to occur.

Okay, got it. Thank you.

Thank you. Your next question comes from Brian Han with Morningstar. Please go ahead.

Jolly, were you more surprised by the sudden economic impact in the second half or was it more the structural cost issues in IT that caught the company by surprise?

I think probably those two things are related because in the first half, we didn't see the same sort of impact that we saw in IT services, which aligned to really when public sector changes started to hit more, we saw private entities also reducing. So if you think about that, the revenue decline accelerated that meant we looked to our cost base to adapt and we did put in place things in the second half, but most of the benefits of that will be realised in FY25. So the combination of those things, of the economics of our accelerating further away in that second half is really what drove the changes.

Just out of interest, Jolly, Sparks various IT products and services and procurements How intricately are they tied to your mobile and connectivity businesses, do you think?

We offer a range of services to our enterprise customers, and so when we think about that, as I said, we're not necessarily removing all of those offerings, removing perhaps the number of offerings we might have within a portfolio as we look ahead to sort of 25, 26. So they have a role to play, but equally those services can be... go to market separately as individual towers and do so. So we think we offer a range of services that make enterprise customers need, but it's not to say that they can't be bought singularly as well.

Okay, and just last question. Are there any issues within the company that's kind of hampering the performance of fixed wireless in the broadband business?

No, not Nothing that I'm aware of. We continue to roll out the mobile networks and we're sitting at over 200,000 customers using our broadband.

So it's 31% of our base.

31% of our base. So by far the market leader in that by a long shot. And so no, we don't see any issues.

Okay, thank you.

Thanks. Your next question comes from Aaron Ibbotson with Foresight Bar. Please go ahead.

Hi there, good morning. Apologies for calling in from mobile, so hopefully you can hear me okay. Thank you. I've got a few questions primarily around capital management. You know, what's the sort of logic, I guess, around paying a partly unimputed dividend funded by the DRP and, you know, if you sort of continue next year not to be able to pay fully imputed? would you continue to pay partly imputed or do you think it's more likely that you would sort of cut the dividend?

Thank you. So when we consider what's our approach to capital management, we're always trying to get that balance right between shareholder returns, investing for the future and balance sheet strength and flexibility. We think that the approach we've got for this year actually is striking that right balance. So we understand the importance of the dividend balance holding it at the 27.5 cents per share and using, we think is an important step. We can then reduce the cash implication of that or the cash payment from that through the use of the DRP. We think that's a sensible approach and it also ensures that we've got then the flexibility to continue to invest in data centre assets. I'll just add one other point, Aaron. So the other thing that has obviously been essential within that is around the focus on growing free cash in FY25. So while FY24 was low, for FY25, you know, it's much more around returning back to EBITDA growth, and we've talked about that coming through mobile and cost reduction, and also through a normalisation of those non-cash or those other gains. And so, you know, Really, the driver here is about growing free cash over time, and that's very much what the SPK26 strategy is designed to deliver.

Okay, thank you, Stefan. Should we think about this as the dividend is covered by basically your adjusted free cash flow and the DRP, and then your hybrid capital notes is going to cover your growth capex, or where does the growth capex How does that get funded if you're not going to increase?

The reality is that it's a combination of all of those things. We don't specifically attribute one to a particular area, but that is clearly a way to think about it. The DRP will offset the cash payment or the dividend to ensure that the free cash flow can cover. And then we have got the hybrid capital notes, which help support the growth capex component of our capital investment program, whereas maintenance KPX is actually funded through the free cash flow.

Yeah. Okay, perfect. And can I just then finally on this topic clarify, I think it's slide 20 where you talk about bringing net debt back to target metric of 1.7. Yeah. And it sits under a title which says FY25 approach. So that would be quite substantial issuance of hybrid capital notes. in order to get that happening. At another place in the presentation, you talk about potentially issuing them, but if you're going to bring it back to 1.7 with your cash flow aspiration and your dividend guidance, you need to definitely issue quite a few of them. Is that correct?

So look, we won't go into the specifics of the exact amount. It is still a potential issuance, but really the key point is that there's a number of factors which help drive an improvement in net debt and so it's a combination of the growing free cash flow it is working capital initiatives it is pulling it is a reduced capital investment program and um and it is also the drp and so it's a combination of all of those things which help address the net debt position okay thank you uh it's very comprehensive final question for me

And it's just an EBITDA and what you're including, adjusted EBITDA, you know, it's a non-gap measure. It's sort of largely up to you to define it, particularly since it's adjusted. What do you think is the benefit of including all of these other gains in this metric? Do you think it sort of increases the transparency? Do you think, you know, the type of gains is something that the market should pay out multiple times? similar to what they pay for your other EBITDA earnings from mobile and IT services, etc. So it feels a bit excessive, if I'm honest, to include all of it. I'm just trying to understand the logic from your guys' perspective.

I think if you stand back, we've had a longly held position around the difference between reported and adjusted being around individual items greater than $25 million. So anything that is over $25 million. So in the past year, that was Taupo, sale, Spikesport provision is separately disclosed. Anything that sits below that individually sits within the result. What we have done, there's been no change in that approach, and that's how we think about our EBITDAI component between adjusted and reported. In any given year, there can be changes between what's in other games, what's in other parts of the business. We have very clear disclosures on them so people can see that and understand what they are. And as we said, as we're looking here for 25, our focus is on returning EBITDA to growth, leveraging cost reductions very clearly to get that sustainable cost base and growth in mobile and in terms of data centres and making sure that other gains are a smaller component of that.

So how do you get to below 25 then? I mean, how... Like, how do you cut it? Because you've got two items above 25 in your disclosures, as far as I can tell.

No, we haven't.

No? Gain on lease modification and terminations, $36 million. Gain on sale and acquisition of property, plant and equipment, $62 million.

Yeah, when you actually break them apart, there's a number of... They've been aggregated for the purpose of reporting, but they're actual individual reports quite separate transactions done at different times over different parts of the year and at very different contractor bases. And so don't trigger that $25 million threshold.

So when you talk about a $25 million threshold, if I think about gain-on-lease modification, which I assume are these tower leases, do you count each tower individually then? So if you've got, like, if each tower individually is a few million, if you have 20 of them, it's a 50.

No, so we look at the... So part of it relates to tower relocations. We aggregated all those together, and that's one component that sits well under the $25 million mark. Then there is another one, which is a change in the terms, which relates to some of our tower location capabilities in an entirely different basis. Once again, it sits under the $25 million mark and done with an entirely different rationale.

OK. Very clear. Thank you.

Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone. Your next question comes from Phil Campbell with UBS. Please go ahead.

Yeah, morning, Jolie and Stephan. Just a couple of questions on data centers. Obviously, it looks like you've increased the pipeline from 93 megawatts to 140 megawatts. Can you just give us a bit of color on what's driving that? Is Spark taking on vacancy risk for that, or do you have some... some orders from some large customers that kind of is underwriting a portion of that increase?

So in terms of the potential pipeline, the increase is to do with further land purchase, additional purchase of land adjacent to Takanini, which just allows us to have those three strategic sites that we will develop based on as demand grows, both in the North Shore and the centre of the city, and then Takanini. So we are seeing good discussions around demand we're building out Takanini, Pod 3 in 25, so 15 megawatts will be that stage development, and then after that we will look at the next sites that we develop based on a combination of the market growth and what we're seeing in customer commitments and demand.

And just obviously we've got a potential increase in the pipeline, but it also looks like the IRR 10 to 15%. Obviously previously you were guiding more of an ROI of 9 to 10%. What is the Because obviously CapEx for megawatts has obviously been going up. So what's kind of driving the kind of IRR 10 to 15?

Yeah, so we took an opportunity to stand back and go, what is, we think, the most appropriate measure? So hence why we've tried to be a bit more comprehensive and give some additional detail around the IRR. When we think about that, the way we've looked at it is what is obviously some of the cash flows over the period of the life of those assets. At the moment, that's around 25 years, which is a blended average, I guess. And the way we think about it is where we have got higher degree of certainty, then we're willing to accept a project with a lower IRR because it's obviously lower risk. But where it's more developmental risk, and there's a high degree of risk, then our threshold sits a little higher. And that's why we've kind of put a range around that. But it's still, from my perspective, broadly consistent with that same return on investment kind of profile of, you know, around that, about that 10%.

Okay, awesome. I suppose the other question is, you know, you're looking at the result today, the underlying telco business is obviously weaker, and we've discussed the reasons for that, but you've got an expansion of the data center side of things. So what's the best way, or how do you get people to value the data centre part of the business, because probably we can relatively easily value the existing telco business, but obviously the data centre is probably more of a medium-term growth place. So have you got any ideas on how people could value that?

Well, we've started by breaking out a lot more disclosure of both the revenues, but the capacity, the pipeline, how you think about those components in terms of modelling and sort of timeframe of investment over the next period. five to seven years, so that gives you a sense of the build profile within that and how we're looking at that growth. There's obviously a number of other markets you can look at too to see how that value has grown over time and how these businesses are being valued. So the purpose of pulling it out separately is to provide greater clarity and disclosure around that.

Great. And then just the last one, like if I was... say I was hypothetically a hyperscaler and I'm wanting to put some workload in New Zealand, why would I put workloads with Spark rather than just going to CDC?

Well, we have been in data centre business for quite a long period of time. We have demonstrated capability about building on time and at cost. We've got locations in the regions that hypothetically hyperscalers might be looking at in terms of and we have a range of broader services that we offer to enterprise and government customers too that complement those data centres. We also have significant renewable energy contracts as well that support our growth and help to separate out growth in business from growth in emissions.

Okay, great, awesome. Thank you. Thanks.

There are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.