Spark New Zealand Ltd Ord

Thank you for standing by and welcome to the SPARC New Zealand HY25 results call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Jolie Hodson, CEO of SPARC. Please go ahead.

Thank you. Kia ora koutou koutou. Good morning, everyone. Thank you for joining us today for SPARC's half-year results for the period ended 31 December 2024. This morning I'll provide an overview of our results and I'll then hand over to our CFO, Stuart Taylor, who's recently joined the business, to speak to our financial performance in more detail before we move to Q&A. So before we turn to the first half results, as you would have seen from our market disclosures this morning, we've updated FY25 EBITDA guidance. So I'll start by providing some context regarding this change. So when we updated the market in October, we outlined that we were experiencing one of the longest and deepest recessionary periods in recent history. Since that time, we've seen no improvement in these conditions, and while there has been movement on monetary policy, this has yet to flow through to any meaningful change in consumer or business spending. As a result, we've seen further deterioration in the performance of our enterprise and government division, which has been impacted by spending cuts mobile fleet reductions across government and businesses, changes in product mix, and aggressive price competition in mobile. This has resulted in us reducing FY25 adjusted EBITDA guidance to $1.04 billion to $1.1 billion. This excludes the anticipated benefit from the gain on the sale of Conexa of $66 million and the FY25 non-recurring transformation costs of approximately $45 to $50 million. We know our shareholders will be rightly concerned about the ongoing headwinds we are facing. We're taking decisions, our decisive action to improve that performance, and I'll spend time this morning outlining these plans and our progress to date in some more detail. Before I do that, I will first focus on slides three and four to summarize our H1 performance. Reported revenue declined 1.9% to $1.93 billion, driven by mobile. IT services, and the continued decline of legacy voice, and partially offset by growth in mobile devices, cloud, data centers, and IoT. Reported EBITDAI declined 20.9% to $419 million, driven by lower IT services project activity, the mixed shift from private to public cloud, and the supply cost inflation. Reported impact declined 77.7% to $35 million due to lower EBITDA and the high depreciation and amortization costs. In FY25, we will recognize a non-recurring cost of transformation of $45 to $50 million, with $29 million reported in the half-done result related to the net labor and OPEX benefits we will deliver in FY25 to FY26. Normalizing for this non-recurring cost, Adjusted EBITDA declined 15.5% to $448 million, and adjusted MPAT declined 64.3% to $56 million. Free cash flow increased 67.4% to $77 million. When including working capital and growth capex, free cash flow improved further against the prior year. by $163 million as we disciplined on that capital expenditure, which was down 12% year-on-year, and we saw a working capital benefit. The board declared an H125 dividend of 12.5 cents per share, consistent with FY25 total dividend guidance of 25 cents per share, and in recognition of the receipt of the Conexa proceeds that are due in Q3 FY25. Turning now to the action we are taking to improve performance. which is summarised on slide five. As we shared in October, we have four strategic priorities that will not only improve Spark's underlying performance in the short term, but deliver sustainable competitive advantage in future years. We're firmly focused on driving momentum in our telco core, simplifying our portfolio, transforming our cost base and creating long-term shareholder value through our data centre strategy. I'm going to talk to each of these priorities in more detail now. We start with our telco core and our priority market of mobile, as outlined in slide 6. It's important to first set the market context for the H1 period. Mobile service revenue across the total market was broadly flat over the last six months. Sparks mobile service revenue declined 3.7% to $491 million, and there are a few different drivers of this. The predominant driver was a 17.7% decline in mobile service revenue within enterprise and governments. Our teams have done well to hold customers within a challenging and highly competitive market, but with high market share in the segment, we're more exposed to rapidly shrinking mobile fleets as customers have reduced headcounts or sought cost efficiencies, for example, within government. When looking at our connection loss in H125 versus H124, approximately 80% was driven by shrinking fleets versus losing business to competitors. We then also saw the ongoing impact of aggressive competitive pricing, which is driving down the value of contract re-signings and new business wins, and that impacted our service revenue share. The step now to consumer in May, we saw a 2.3% decrease in mobile service revenue, and that was predominantly driven by a decision to discontinue a Spark-owned mobile insurance product, which reduced ARPU. Outside of this, pay monthly connection growth continued, with acquisitions up 1.1% year-on-year, The prepaid market was tougher with mobile service revenues across the total prepaid market declining versus the second half of last financial year. While we saw connections decline, around 70% of this loss was attributable to casual users with low or no spend, meaning our prepaid ARPU increased. Of these casual users, over 80% of connection loss was due to investors' movement to competitors. Overall, we saw a 0.7 percentage point decline in our total mobile service revenue market share, with about 0.2 points of that attributable to the change in mobile insurance. Despite this, we remain the market leader by some distance in that category. While the mobile market was challenging during the half, we have built strong momentum that will flow into H2 as outlined on slide 7. In consumer and SME, we refreshed our pay monthly plans at the end of October. introducing big data caps for our customers. The response has been very positive with acquisitions over November and December, up 7% versus the same period in H124, and acquisition ARPU also up $1.40. We then completed a refresh in prepaid in December, which has improved our competitive positioning, and early data shows a good uptick in acquisition going into the second half. We implemented price increases across our pay monthly and prepaid base in December, offering customers customers more data for dollars, which will deliver further benefits in H2, equating to around a 3% of expected service revenues. In enterprise and government, we're pleased to see the rate of mobile fleet shrinkage slowing in the first half to around half the rate of what it was in the second half of 24. We are focused on retaining connection share through proactive re-signing and competitive bids to enable future organic growth. We are balancing this with mitigating ARPU impacts from aggressive competitive pricing through targeted product bundling and enhanced service offerings to deliver more for our customers. With mobile core to our growth aspirations, we continue to allocate capital accordingly. 45% of CapEx was invested in our mobile network, which is supporting product innovation such as our new big data caps. Our network quality with Spark awarded the number one mobile network for coverage and reliability by OpenSignal in September 2024. We will further expand coverage in early in 2026 off the back of a new partnership we have entered into with another US-based satellite provider to offer customers satellite to mobile services. We now move to slide eight. Broadband revenue declined 2.3% to $302 million as connections reduced and price competition intensified and cost of living pressures saw customers trade down to lower price plans. Overall, we saw a 0.7 percentage point reduction in connection share. As many of you are aware, that's a mature and more commoditized market with consistently lower levels of overall market growth. Within that context, our strategy remains focused on continuing to offer our customers a range of broadband products, improving margins by passing through the fiber company cost increases and expanding the addressable market for wireless broadband as our 5G rollout continues and capacity and speeds increase. Wireless broadband continued to grow and makes up approximately 32% of our broadband base. Total IT revenues declined 1.5% to $336 million, while IT products grew 1.1% to $264 million. Off the back of strong growth in public cloud, this change in mix contributed to a 10% margin reduction. Reduced IT services project activity across government and businesses saw revenues decline 10% to $72 million, while high-tech revenues grew 17% to $41 million, as IoT connections increased 25% to over $2.2 million. We turn now to slide nine in our second strategic focus area of simplifying our portfolio. This includes our review of non-core assets to further strengthen our balance sheet and product simplification to support our focus on our telco core. As we shared in December, we have reached agreement to sell the remaining 17% of our stake in Mobile Towers Business Conexa to CDBQ. We now expect around $310 million of proceeds and a gain on sale of around $66 million in reported EBITDA. All regulatory approvals required have now been received and we expect completion in Q3. We're continuing to progress our broader review to identify further opportunities to realise value in the medium term. In enterprise and government, our operating model transformation has been completed, with our subsidiaries now fully integrated into Spark. This paves the way for further product rationalisation and legacy product migrations to simplify our business and improve customer experience. We're also reviewing where we focus in the IT services market based on the evolving demand and margin profiles we're experiencing. Finally, we've agreed to the sale of Digital Island, excluding its mobile business, which we will retain. Beyond mobile, Digital Island provides collaboration and cloud contact centre services to small to medium business, and this divestment will further support focus on our telco core and enterprise and government. I'm now going to speak to our third focus, which is transforming our cost base, outlined across slides 10 to 12. In October, we shared that we were on track to deliver our 50 million net labour cost reduction, and we were continuing to make progress towards our net OPEX target of 30 million. We also shared our intention to expand the Spark26 Operate program to deliver more transformative change across the business, which would deliver higher benefits over a multi-year period. Today, we share the details of that expanded program. And that program has not been approached with just a simplistic cost out focus alone. We have instead taken the time to redesign how we operate while delivering greater efficiency and more for our customers. Our operating model focus in FY24 and the first half of FY25 saw changes across several areas of our business and included the transformation of our enterprise and government division. As a result of these changes, approximately 900 people have left our business over this 12-month period. It is never easy to make changes that impact our people, and we don't do so lightly. But to deliver a leaner, more competitive business, we have made tough but necessary choices that will set Spark up for future. Transforming our cost base does not start and end with our operating model, but also how we run our technology and our networks. Alongside labour, IT and network costs, they make up the largest proportion of our cost base. When we look at peers in global markets, many have moved to new models for technology delivery that leverage strategic partnerships. So our intention is to establish several partnerships across IT, cloud and networks to access the global scale, capability and innovation these partners bring and accelerate our existing strategic focus on AI and automation to deliver better customer outcomes at lower costs. This is expected to deliver an overall cost efficiency of around 20%. We will protect and enhance Spark's competitive advantage by retaining overall strategic decision-making, critical operations, intellectual property, and systems. We're in the final stages of agreeing an IT infrastructure and services partnership, which will deliver accelerated automation and efficiencies and a material reduction in annualized IT costs. We're also pleased to announce a new strategic partnership with Microsoft that will improve our overall cloud economics. Finally, we have a heads of agreement in place to explore network operations partnerships that will enable us to accelerate AI and automation, deliver greater efficiency, and enable access to global capability and innovation. We expect to be able to share further detail on this partnership in coming months. When we combine our focus on our operating model and our technology delivery model, we will deliver a transformation of our cost base that will not only support profitability during the short-term economic pressures, but create a stronger, more competitive business that can continue to compete and win in the future. This includes a net labour and office cost reduction of $80 to $100 million in FY25, which increases to $90 to $110 million on an annualised basis by the end of the financial year. This will be funded by a non-recurring transformation charge of $45 to $50 million in FY25, with $29 million recognised in the first half. Additional annualized benefits of $20 to $30 million commence from FY26 to FY27, meaning the overall expanded program is forecast to deliver $110 to $140 million of annualized benefits by FY27. Our fourth focus area is long-term value creation for our shareholders through our data center strategy. Data centre revenue increased 13.6% to $25 million as billing of our 22 megawatts of capacity increased. Our developments, as outlined on slide 14, are progressing to plan with land settlements for our new North Shore site targeted for early 26. We remain committed to building out our 118 megawatt development pipeline and we are continuing to target an IRR of around 10% to 15%. As we've previously shared, we are exploring capital partnerships that will enable co-investment and help us accelerate this growth opportunity. We've made strong progress establishing a dedicated data center business in preparation for external investment. We've commenced a process to explore interest from prospective partners in a preferred investment vehicle. We will continue to keep the market informed as material developments occur. So to conclude my summary, I note our continued focus on maturing our ESG practices, evidence through our ongoing investment and 5G connectivity across the country, the continued growth of our not-for-profit broadband product in Skinny Jump, and the commencement of our renewable energy partnership with Genesis Energy on the 1st of January. Now I'm going to hand over to Stuart to talk you through our financial performance in more detail. Thank you, Stuart.

Yeah, thanks very much, Jolie, and good morning to all of those on the call. It's great to be here with Jolie and present my first set of results since joining Spark in December. So I'm going to start with Slide 17 talks of the results in the table we've presented here whilst referencing the comments we've also made on slide 18. So first of all, you'll notice that the financial results for the prior comparable period in H124 were not adjusted for any items, so both reported and adjusted figures are the same. There are, however, differences for H125, predominantly due to the $29 million of Year-to-date non-recurring transformation costs that we incurred as part of the SPK26 operating program that Jodie spoke about earlier. Now, in terms of the P&L and starting at the top, total revenue of $1.939 billion was 1.9% lower than we reported in 1H24. There are a number of contributors to that. Mobile service revenue declined 3.7% or $19 million year-on-year, predominantly due to discontinuing a mobile insurance product and consumer that had generated income in the past and was approximately $7 million of the downside on its own. Reducing mobile fleet and price competition in enterprise and government were also significant factors. Now, mobile non-service revenue increased 3.8% to $248 million, driven in part by higher spend on devices and products, in our Spark retail stores, with the latest iPhone release in September 2024 being a significant contributor in that respect. Broadband and voice revenues decreased 2% and 17% respectively. The downside in broadband reflected a decline in connections as competition intensified in this market. The voice revenue decline is consistent with the long-term trend. On the plus side, both high tech and data center revenues continue to increase year on year as we see IoT connection growth in the high tech space and the benefit of the increased capacity in our data center businesses. Now, in terms of operating expenses, there was an overall 3.1% increase in H125 versus H124. An increase in cost is not the outcome we were looking for, but there are some important drivers that are worth drilling into on this. Of the total costs we incurred, net labour costs were $8 million lower, $271 million for the half year. This reflects the partial benefit of a number of changes made to the operating model that Jodie's already spoken to, with an expectation that there will be a much bigger improvement in net labour costs in the second half and into future years as the full annualised benefits of the reduced headcount and the new technology delivery model flow through. Higher product costs reflected a change in the mix of products sold and the shift from private to public cloud services, plus higher overall IT costs. Other operating costs were up 14% year-on-year, predominantly due to increases in software license costs and the timing of rebates from some suppliers that were present in the H1-24 result. Network support costs were 30% higher than the comparable period due to supply cost inflation and the investment in our expanding infrastructure. mobile network. The transformational technology delivery model and the establishment of strategic partnerships in this area will enable us to significantly improve these cost positions in the future. Now moving to the EBIT die line, the combination of low revenues and high costs led to the 3.7 percentage point decline in our EBIT die margin. and the $82 million reduction in EBITDA versus H124. Below this line, financing costs increased and a reflection of the higher net debt. The effective interest rate on this dropped from 5.9% to 5.7%. Appreciation amortization was up 20%. This reflects the intensive capital program that had been undertaken in the last couple of years with investment in growth assets like data centers and 5Gs. Finally, you'll see that although tax expense reduced by 38 million, the effective tax rate has increased by 5.6 percentage points. This reflected a few one-off non-deductible items, which while not significantly large in their own right, were significant relative to the amount of our pre-tax earnings. Now, I'm going to move on to slide 19 in capital expenditure. And you can see from the profile of our CapEx spend that in the most recent six-month period, both maintenance and growth CapEx were lower than the comparable period in H124. Now, this reflects an intentional intervention to align spend in the current operating environment and with our strategic priorities. Across SPARC, the main focus of our capital spend program remains investment in digital infrastructure and the mobile network. to support the performance of our key business units, in particular mobile. Growth CapEx is also centred around the development of our data centres business, and this has been lessened in recent periods as we go through the process of securing a capital partner to co-invest alongside us. Guidance for total CapEx spend in FY25 remains at around $415 million to $435 million, which means that the second half of the year will need to be around $160 million to $180 million, a significant reduction on the second half of last year, even taking into account the usual seasonality in capital spend. Now on to slide 20, which shows our free cash flow. The discipline around capital and expenditure and management of working capital has led to an improvement in the last six months versus the same period a year ago. Free cash flow of $77 million was $31 million or 67% higher than the comparable period, even though the EBITDA available for cash flow was $85 million. You can see the key drivers of the improvement were lower maintenance capex spend and the $23 million less of cash tax and payments for leases. In terms of free cash flow, including growth capex and working capital, the year-on-year change is even bigger. Bottom line, free cash flow was $163 million better than H124, although it should be noted here that within the release of cash from working capital, there was an increase in payables due to the timing of a small number of large supply contracts, which will unwind in H2 of 25. We've updated our aspiration of cash flow to be between $300 to $340 million for FY25. The key factors that will contribute to these cash inflows in H2 will be the benefits of the labour and OPEX cost-out program, the ongoing relative drop in CapEx, and a general improvement in our earnings profile. Turning to slide 21 on debt and capital management, here you can see that at the end of December 2024, net debt stood at $2.7 billion. sorry, the net debt stood at $2.7 billion, a result of lower EBITDA and cash outgoings associated with the CapEx program and dividend. The net debt to EBITDA multiple was 2.3 times, which is higher than previous periods. We'd expect the settlement of the remaining shielding in Conexa to occur in H225, which on its own will lead to a 0.3 times reduction in the net debt to EBITDA ratio. We're focused on further improvement in debt metrics with continued discipline around capital expenditure and the progress on our cost reduction program. A $0.125 per share dividend will be paid in April. This will be 75% imputed and subject to the dividend reinvestment plan with a 2% discount for any shares taken up under the plan. The interim dividend is in line with FY25 dividends Guidance of $0.25 per share, and this has been maintained in recognition of the receipt of approximately $310 million in the Conexa proceeds, which we talked about earlier and expect to come through in Q3. With that, I'd like to hand back to Jolie to talk about the outlook for the group.