Spark New Zealand Ltd Ord

Good day and thank you for standing by. Welcome to Spark New Zealand FY25 results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 and 1 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, CEO, Jolie Hudson. Please go ahead.

Kia ora koutou koutou. Good morning, everyone, and thank you for joining us today for SPARC's four-year results for the year ended 30 June 2025. This morning I'm going to provide an overview of our results and then going to hand over to our CFO, Stuart Taylor, to speak to our financial performance in more detail before we move to Q&A. FY25 was a challenging year for SPARC with demand impacted by materially lower customer spending and a tougher economic environment. We acknowledge, however, that not all of the challenges we faced were beyond our control and as we outlined in our half-year results back in February, we've implemented a significant transformation program to improve our performance. We finished FY25 with an updated EBITDAI CapEx dividend guidance. We've made good progress against our transformation priorities. Recognizing how much has changed since 2023 when we last set our strategy, we also set a new five-year plan, which we'll provide a summary of today and then share in more detail at our Investor Day on September 11th. As we reviewed strategy, the board has also undertaken a review of our capital management settings to support sustainable shareholder value creation over the longer term. I'll start with an overview of our FY25 result as outlined on slide four. To clarify our reported and adjusted results, our reported revenue in EBITDAI covers SPARC's continuing operations, which means we've separated out the results of the data centre business, which is now classified as discontinuing operations. Adjusted numbers include the results of the data centre business, remove the $71 million gain on the sale from the Connecta divestment, the $53 million of transformation costs in FY25 and the $26 million impact of the government's changes to tax depreciation rules in FY24. I will speak to our adjusted numbers now as they provide the best like-for-like year-on-year performance comparisons. Adjusted revenue declined 4.2% to $3.7 billion, driven by IT and mobile and the continued decline of legacy voice. Adjusted EBITDAI declined 8.9% to $1.06 billion. This is driven by lower IT services project activity, the mixed shift from private to public cloud, legacy voice decline and supply cost inflation offset by significant reduction in labour costs as part of our transformation programme. Adjusted impact declined 33.6% to $227 million due to low EBITDA and high depreciation amortisation costs. Free cash flow remained steady at $330 million as we moved to reduce CAPEX by 17.2% to $429 million to offset the earnings decline. The Board has declared an FNH2 25 dividend of $0.125 per share, bringing the total FY25 dividend to $0.25 per share, in line with updated guidance. Turning now to the action we've taken to improve performance, which is summarised on slide five. We shared our four transformation priorities at our AGM last year and we've made good progress against each of these. We have refocused SPARC on our core business of connectivity and we're seeing improved momentum in mobile as we enter FY26. We have reviewed and simplified our portfolio by divesting non-core assets and reshaping our enterprise and government division. We have delivered material cost savings in our second half and entered new technology partnerships. And we've realised value for our data centre assets while creating a long-term growth option. I'm going to talk to each of these priorities shortly. As we've focused on transforming our business, we've also brought forward the reset of our strategy. SPAC 30 takes a long-term view recognising the scale and pace of technology change that is reshaping customer expectations, ways of working, and the products and services we offer. This longer timeframe provides a shelter to clarity around Spark's strategic priorities and where we will invest to differentiate ourselves from competitors. We are refocusing Spark from a broader digital services ambition to our core business of connectivity. With our data center transaction providing clarity on funding of the development pipeline, our capital allocation will be prioritized to our core and will continue to build a scalable cost base through partnerships and AI. By focusing our investment on what matters most to our customers, our network and customer experiences, we will give our customers more reason to keep choosing Spark and create a performance-driven culture, a customer-focused culture. Ultimately, this will drive stable annuity-like returns for our shareholders. To illustrate the strategic choice, we have outlined the primacy of connectivity at Spark on slide seven. This includes mobile and broadband and consumer and then a broader range of connectivity products and business such as managed data and networks, IoT and collaboration. In FY25, connectivity contributed 70% of our revenue and 80% of our gross margin. This is why our connectivity performance has been the focus of our transformation program. It remains our priority for investment in the years ahead. Within connectivity, mobile is our absolute focus. In FY25, total mobile service revenues declined 2.3%, as we saw greater levels of price competition in key segments, and due to the non-recurring impact of insurance and consumers. To understand our mobile performance, it's important to break it down into its three component parts. Consumer and SME pay monthly is our most important segment, characterised by premium customers and accounting for most half of our base. In FY25, ARPUs in this segment reduced 0.6%, primarily due to the removal of Spark's owned mobile insurance product, which will not recur in FY26. If we remove that impact, ARPU was up around 3% in the second half compared to the same period last year, demonstrating the underlying momentum we have in this important part of the market. Consumer prepaid is characterised by more value-seeking customers and high levels of price competition. In a low-spend environment, This intensified in FY25, and SPAC connections declined 5.2% in H1. This connection declined stabilised in H2. A December plan refresh in price increases supported ARPU, which increased 0.7%. In enterprise and government, connections rebased during FY25 as workforces were reduced, which flowed through to lower mobile fleets. Positively, this decline started stabilising in the second half and the rate of ARPU decline also slowed. Despite this, the competitive market conditions remain. We do not expect a material improvement in the ENG ARPU performance in the near term. Moving to overall mobile performance as outlined on slide 9, original market estimates from IDC suggest the total market growth would be around 3% in FY25. However, actual growth landed at about 1.2%. We've seen more positive momentum in the second half with the market at 1.9% compared to a flat-off one. Looking at how Spark has performed over the same time period, our total mobile service revenues grew 1.5%. This led to a small share decline of 0.4% over that second half. Positively, our market share stabilised in the fourth quarter and its growth in the market also improved. We remain the market leader by some distance in mobile. Turning now to slide 10 and the momentum we're building into FY26. So within consumer pay monthly, we expect ongoing ARPU growth through our August price increases, new product development, and as we cycle out of the impact of the removal of insurance in FY25. In consumer prepaid, we're doing more to compete, using both our Spark and Skinny Rands to grow overall value. From Q4, we've upweighted our competitive response, and we're seeing this flow through to acquisition rates. And while connections declined in half one, This started to stabilise in half two, and performance in this segment remains the focus in the year ahead. In enterprise and government, as the rate of mobile fleet reduction has stabilised, we remain focused on customer retention and competing on more than price to mitigate ARPU impacts. Throughout the year, we retained more than 95% of our top 50 customers and continue to win new business, with another 7,000 connections being onboarded in the first quarter of FY26. So turning now to our broader connectivity performance in IT, while broadband connections declined 3.8% in the competitive market, revenue declined stabilised to largely following a 2.3% decline in the first half. Across the balance of the connectivity portfolio, we saw ongoing decline in legacy products with invoice and managed data and networks as customers migrate to more modern services, while collaboration and IoT continued to grow, with IoT reaching around 2.4 million connections. In IT services, we saw cloud revenues continue to grow off the back of strong public cloud growth, while this mixed shift from private cloud put ongoing pressure on margins, and in IT services, revenue was down 7.7% due to lower market demand, driven by some of the technology deferrals. Turning now to the review we've completed of our non-core assets, which is outlined on slide 12. As you'll be aware, we divested our stake in Mobile Tower's business, Connextra, in the first half, which delivered $309 million in net proceeds and valued the business on a consistent basis with the previous New Zealand Mobile Tower EBIT dime articles. These proceeds have been used to reduce net debt and will be partially returned to shareholders through the H225 dividend. We also divested our 10% stake in HTAIL, with $47 million in proceeds received in July 2025. This reflected a 45% premium to the upper end of the independent valuation range, and the proceeds will be used to reduce net debt. Within the enterprise and government, we integrated subsidiaries, CCL, Curious and Spark, divested our digital island business and undertook product portfolio simplification in relevant areas. We have also commenced a process to introduce new investors to our MATA subsidiary. Overall, our intention has been to maximize the value of these non-core but high-quality and valuable assets for our shareholders to further strengthen our balance sheet and to enable us to recycle capital back into our core connectivity business. I'm now going to speak to our expanded cost reduction program, starting with a new technology delivery model we introduced in the second half. So when we looked at our global peers, many had already moved to new partnership models in their network and IT business. Their experience showed that a partnership model would not only enable greater efficiency, but also create better customer experiences by tapping into considerable investments these companies make into new products, services, and technology. Our new model includes 4K partnerships, Nokia in the network, Infosys in HPE and IT, and Microsoft in cloud. Each partnership enables us to accelerate our use of new technologies for better customer experiences while delivering our operations more efficiently. I want to acknowledge that undertaking a transformation of this scale has brought significant change for our people. It is never easy to make changes that impact our teams, and we don't do so lightly. But in a changing market, we've had to make tough but necessary choices to adapt to changing demand and put Spark in a stronger position in the years ahead. We've also continued to invest in our AI capability, which has grown significantly over many years. Slide 14, we've called out some of the ways we're using AI and our focus for FY26. The AI tools we are implementing are improving the productivity of our people by providing rapid access to information and reducing some manual work that can be automated. For our customers, AI is delivering tangible benefits such as shorter wait times through our customer call centre as our AI assistants answer around 20,000 team questions a month and reduce queries to back office teams by 60%. AI is also supporting better network experiences with faster identification and resolution of network issues for our customers. With the acceleration of Agentech AI and the capability of our global partners, we'll continue to expand this capability to underpin both cost and experience improvements in FY26. Our technology delivery model and AI investment have both supported our expanded cost reduction program, which is outlined on slide 15. At the first half, we disclosed a combined labour and OPEX cost reduction target of 80 to 100 million when comparing to the second half of FY24 to the second half of FY25. This was put in place to address the high fixed cost of business that has structurally changed and inflationary pressure we've seen in some OPEX lines like network support and computer costs. We delivered 85 million in cost reductions in H225 compared to H224. This includes a $61 million year-on-year reduction in labour costs, $4 million in other OPEX costs, and $20 million in product costs. When we shared this target at the half, we had envisioned the network and IT cost reductions where Chief through partnership model would benefit mostly in OPEX. However, as you can see, some of that has landed in product costs. We've also set out the net labour and other OPEX cost reduction targets for FY26 on this slide. In FY26, we're targeting a net labour reduction in the range of 30 to 50 million and other OPECs to stay broadly fat as the annualised labour and partnership benefits flow through from FY25. We see additional benefits from further simplification. This is offset by severances associated with these changes, salary inflation and changes in capitalisation rates and new costs from outsourcing models and normal inflationary pressures in areas like software. We'll also be investing additionally in marketing, to remain competitive in the market and to support our growth. From H2, we'll also be deconsolidating DC costs of $10 million, which we've highlighted on the cause of change chart for completeness. We remain on track to deliver overall annualized cost savings of $110 to $140 million by the end of FY27. Before I move to our data center strategy, we've summarized our ongoing sustainability performance on slide 16. While our underlying electricity use declined 4.9%, the rising national grid emissions factor contributed to an 11% increase in Scope 1 and 2 emissions year on year. We remain committed to our FY30 science-based reduction target, and our new renewable energy partnership will decouple our reported electricity emissions from the national grid factor in the years ahead. To this end, we were pleased to see generation commence at Genesis Energy's Lauriston Solar Farm in Q3, We also continue to support more New Zealanders to participate in the digital world with over 34,000 households now connected with Skinny Jump. So turning now to our data centre strategy, as you would have seen last week, we reached agreement to sell a 75% stake in our data centre business to Pacific Equity Partners. This secures a funding pathway for a development pipeline and values the business at up to $705 million, representing an FY25 pro forma EBITS multiple of 30.8 times, which compares favorably to similar transactions. Importantly, this enables Spark to realize value for our data center assets in the short term, while also continuing to participate in this growing market through our 25% retained stake, creating further value for our shareholders over the longer term. We expect to receive initial proceeds of around $486 million at completion, with additional deferred cash proceeds of up to $98 million contingent on achievement of performance-based objectives by the end of calendar 2027. This brings the total potential benefits to around $583 million if the full earn-out is achieved. We'll use the proceeds to reduce group debt. This will also enable us to focus our capital investment behind our core connectivity business. DCCo will be established as a standalone entity with its own board and management team, and debt financing facilities, which are non-recourse to SPARC. This means our future annual capital contribution is expected to be modest. In H126, we expect to spend $50 to $70 million of CAPEX prior to the assumed transaction completion date. And I'm now going to hand over to Stuart to talk you through our capital management reset and the detailed financial performance.

Thank you very much, Jolie, and I'm going to start by – and good morning, everyone. So I'm going to start with the capital management reset, which is outlined on slides 22 and 23 of the results pack. So in the context of our new five-year strategy, the board has also reviewed our capital management settings and done that with three clear goals – Maintaining financial strength, ensuring an appropriate return from our spending and investment and delivering sustainable shareholder returns are those three clear goals. So firstly, to do that, we remain focused on a strong balance sheet. And within that, we are targeting metrics consistent with our current credit rating. Any investments or M&A we undertake for growth will need to meet our hurdle rates, specifically being NPV positive. and with a return on invested capital, or ROIC, that is greater than our own cost of capital. We've also introduced new definitions of CapEx. So this is to replace the current definitions, the new definitions being business as usual, or BAU, and strategic CapEx. So BAU CapEx now includes all capital investment in our core business, with the exception of Spectrum. And as a practical example, the 5G standalone investments that we have made would be included here going forward. Strategic CapEx includes all capital investment outside the core business. So going forward in FY25, the clear example here would be our data centre business. Now, this then feeds into changes to our dividend policy. which is designed to support a sustainable dividend paid out of free cash flow. We've introduced a new definition of free cash flow, which now includes changes in working capital and BAU capital expenditure, which is used to operate the core business. The exclusion from this is spectrum and strategic capex. Finally, the payout ratio has been updated to 70% to 100%, and this is to provide flexibility if needed in the future. Now, in that context, as you'd have seen, we have our FY26 guidance includes a 100% payout of free cash flow in FY26. Finally, in relation to the capital management reset in slides 22 and 23, you'll also note that the dividend reinvestment plan will be utilised when appropriate. But this has been suspended for the moment, given the anticipated receipt of proceeds from the data centre transaction and subsequent reduction in net debt that's expected to come from the completion and settlement of that transaction. So after the capital management reset, I'm going to move on to talk to the results summary. So this covers slides 25 and 26. Now, Jolie's already talked to many of the key numbers on slide 25, but I'm just going to pull out a few more points of interest. The first piece to note is that the reported columns for both FY24 and FY25 that we've shown here exclude the data centre business, which has been classified as at 30 June 2025 as a discontinuing operation. Now, the FY24-5 reported numbers do include the CONNECSA gain on sale of $71 million and the $53 million worth of transformation costs incurred during the year. Acknowledging that there's some complexity with the removal of the discontinuing operation, a reconciliation from reported to adjusted figures is included in the appendix of the presentation. Now, returning to the numbers, what we can see is that on a reported basis, revenue and other gains of $3,725 million and EBITDA of $1053 million were $95 million and $88 million lower respectively than their FY24 numbers. Our financing costs increased in FY25 as the average net debt was higher, which offset lower effective interest rates. Our tax expense declined in FY25 compared to the previous year, which was due – this was due to a combination of factors, lower earnings, the non-taxable gain on the Connexa transaction, and a $26 million of additional tax incurred in FY24 in relation to the government's changes to tax depreciation rules on buildings. Just moving, shifting across the adjusted results, the additional points to call out are the The fact that the effective tax rate is actually very similar year on year, and CapEx as a proportion of revenue returned to 11.6% in FY25, in line with our target of 10% to 12%. Having talked collectively to slides 25 and 26, I'm going to move on and talk to the capital expenditure slide on 27. Now, you'll see here that CapEx of FY25 $429 million reported in FY25 is $89 million or 17.2% lower than what was reported in FY24, excluding the FY24 spectrum spend. This reflects a proactive reduction in CapEx in line with the lower reported earnings. Now, maintenance CapEx of $350 million was similar to last year, reflecting that continued focus on investment in the fixed and mobile networks to support greater resilience, network coverage and capacity. Now, we continue to be disciplined around what we spend and we'll continue to focus on investing in our core connectivity business aligned with the SPK30 strategy that Jolie talked to. And this will mean that our CapEx to revenue will remain at that 10% to 12% per annum ratio. Finally, and as part of the capital management reset and talking to those changes in CapEx definitions, you'll see on the far right bar of the chart, we've split the $429 million of FY25 CapEx based on the new classifications. What this means is... is that the 51 million spent on the 5G network, which was previously considered growth CapEx, is now incorporated in our new definition of BAU CapEx. The only amount, therefore, included in the strategic CapEx category is the 28 million of spend on the data centre business. Now, turning to slide 28, free cash flow for FY25, and this was based on our previous definition, came in at $330 million. This was in line with FY24. This reflected lower EBITDA in FY25, largely offset by the lower cash capex number. Now, acknowledging that we're moving to a new definition of free cash flow, at the bottom of the table, we have shown a reconciliation of free cash flow under the previous definition to the new definition. And that new definition will be used as the basis of calculating the dividend in future years. Highlighting those changes, free cash flow will now be considered after the cash effect of changes in working capital and BAU CapEx, as opposed to the maintenance CapEx definition we'd used previously. Thinking in practical terms, this means that all CapEx other than spectrum and strategic CapEx would therefore be captured when making that free cash flow calculation. Now, moving on to slide 29, which is on debt and dividends. Slide 29 shows that net debt X leases reduced in the second half of FY25 by approximately 300 million to 1.475 billion due to the net proceeds from the Connexa sale. Now, with the inclusion of lease liabilities and applying the standard and pause methodology, the net debt to EBITDA ratio at 30 June was 2.2 times. With the HTAL sale completing in July and the expected completion of the data center transaction later in the calendar year, we would expect that net debt to EBITDA ratio to decline by around half a turn or 0.5 times. This highlights our focus on strengthening the balance sheet and targeting those metrics that are consistent with our current credit rating. The bar on the far right of the chart also shows that based on the successful completion and settlement of the data transaction, the net debt level before leases would be expected to be just over $1 billion. On the dividends, as Jolie previously mentioned, the final dividend for FY25 will be 12.5 cents per share, bringing the total dividend for the year to 25 cents per share. This is underpinned by the free cash flow generated by the business in the year, as well as some of the proceeds from the Connects to Sale. And with that, I'll hand back to Jolie to talk to the strategy section.