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.