Telstra : Transcript – Analyst Briefing – Telstra’s revised FY18 guidance for nbn

Dear Sir or Madam

I attach a copy of the transcript, from the conference call held this morning, in relation to Telstra's revised FY18 guidance for nbn, for release to the market.

Yours faithfully

Company Secretary

Telstra Corporation Limited

ACN 051 775 556

ABN 33 051 775 556

MR BURLEY: Good morning, everyone. Thanks for joining us to discuss this market update announcement. This is Nathan Burley of Telstra Investor Relations. On the call today we have Telstra's CEO, Andrew Penn, and CFO, Warwick Bray. Andy will make a brief opening statement, and then we will open up for Q&A. With that, I'll hand over to Andy. Andy.

MR PENN: Thanks very much, Nathan. And firstly, thank you, everybody, for hooking in, and for those of you that are in Melbourne, hopefully you're taking precautions against the somewhat challenging weather we're about to see. Look, as Nathan said, I'll make a couple of comments before we open for Q&A. And as you will have seen earlier this morning, we announced that we have revised our financial year 2018 guidance as a result of the impact of nbn co's announcement that it would cease sale on HFC technology for a period of six to nine months from the 11th of December. By the way, just on that point, we're working with nbn right now to see if we can cease sale earlier than that, because we think that that's in the best interests of customers. And so we expect to be able to implement that over the next day or two.

We also updated guidance in relation to nbn's Corporate Plan for 2018. I want to be clear in our update this morning that our revised guidance is only in relation to these two delays.

Our operating outlook guidance remains unchanged to that which we provided to the market in conjunction with our full-year results of 2017 back in August. Also, importantly, we are reaffirming our 2018 dividend. That is expected to be at 22 cents per share, fully franked, including the ordinary and special components, which is in accordance with our dividend policy that we did announce in conjunction with our results in August.

As you know, when we announced our guidance on the 17th of August, it was based on the nbn Corporate Plan for 2017. nbn subsequently updated their Corporate Plan for the 2018 Corporate Plan on the 31st of August. That change did reduce the number of brownfields that would be ready for service, and also brownfield activations in 2018 relative to their previous plan. And of course, it did impact Telstra's financials. However, that impact did not result in our outlook falling outside of our guidance range at that time, and hence we did not need to update guidance at that time.

However, with the addition of the delays that were announced earlier this week from the cease-sale by nbn of HFC, which is much more significant - Telstra's outlook financially is now outside of our guidance range by virtue of these delays from nbn. And therefore - that is why we have updated our guidance, and which is the announcement that we're making this morning. The most significant impact from a timing perspective, I think as most people understand, is a proportion of the one-off receipts, including the PSAA and ongoing ownership receipts that arise to Telstra from nbn, are being delayed into future periods. And I want to make that point clear, as well. These receipts will ultimately be received by Telstra. They will just be received in a future period.

Also, there is an impact in the revenue recognition for Telstra commercial work contracts with the nbn, and the revenue recognition is being delayed. On this point, nbn has asked us to continue with the work that we're doing for them, but because the revenue recognition is associated withhow the individual areas are declared ready for service - that is what the revenue recognition is attached to, rather than necessarily the work. That results in an accounting delay in some of the revenues, but not a delay in relation to the work or a delay in relation to the cash received. And that's one of the reasons why you can see in our updated guidance the cash flow impact is lower than the earnings impact.

And there are other reasons for that as well which we can pick up in Q&A but I just really wanted to make that point clear as well. There are, of course, benefits that are offsetting this, including lower nbn costs to connect, lower network payments to nbn and retained wholesale EBITDA which will partially mitigate the reduction of the one-off receipts, but bearing in mind that this is happening in the second half of the year and the ramp-up obviously increases during the second half of the year. The impact of those is lesser in the year than one might otherwise expect and we can touch on that in Q&A as well.

So while the nbn rollout delays the impact on Telstra's outlook for 2018, it is actually anticipated to have a modestly positive financial effect on Telstra over the full rollout of the nbn and that's due to the effects of the natural hedge which continues to exist. And it's noted that nbn, in their announcement on Monday, indicated that they remained committed to completing the rollout for FY - by 2020, rather.

So, in summary, we've announced our revised 2018 guidance as a result of the impact of nbn co's announcements, including their updates of their plan in August of this year, but otherwise in relation to our outlook for the business, our guidance is unchanged. It's really just in relation to these two matters. And, importantly, notwithstanding this, and against this background, we are reaffirming that we expect, subject to the usual - obviously, conditions of the board etcetera, that the dividend for 2018 will be the 22 cents that has been previously indicated.

So they're my introductory comments and I'm happy to hand back to Nathan to facilitate the Q&A session, which we're happy to do now.

MR BURLEY: Great. Thank you, Andy. We will now open for questions, so, operator, if you could open up the line for questions. And our first question is from Raymond Tong of Evans and Partners.

MR TONG: Good morning, Andy. Just a couple of questions. I just wanted to see whether you could help us understand the quantum of the impact of - I suppose the change in the 2018 Corporate Plan and also just the - I suppose the delays announced earlier this week is my first question.

MR PENN: Yes. I mean, we haven't actually provided a breakdown between the two. And the delays are driven by slightly different things. And Warwick can perhaps if there's a follow-up question, talk in a bit more detail about how the relative impacts were - but essentially, the bigger impacts - by far the much bigger impact is actually in the delay in relation to the HFC cease sale that was announced earlier this week.

MR TONG: And just following up from that, in terms of the impact and the EBITDA outside of the $0.6 billion for the lower one-off nbn receipts is it fair to assume that it's the, I suppose, higher wholesale EBITDA and lower payments to nbn is just completely offset by the lower recurring income in commercial works? Is that a fair assumption?

MR PENN: Yes. Look, I think so. I mean, by far the biggest impact overall is on the one-off receipts. The things that you're alluding to obviously are the positive effect of the natural hedge happening the other way, and that would be smaller than if the delay sort of effectively happened from day 1 in the year, and that's - or, rather, the rollout was expected to be all fully completed within the year, and it's because the rollout is increasing and this decision has been announced in relation to the second half of the year, the positive impact of the natural hedge doesn't represent, if you like, one full year of that. It's actually a relatively

small proportion of the overall amount you would expect to receive in year. And of course, that will - therefore, the benefit of that will obviously flow into next year.

MR TONG: Yes, I understand. And just curious, just in terms of the delays, whether that, I suppose, has an impact on the broader business and the profile and the progress of your cost-out program over the next few years?

MR PENN: Look, I don't think so in any material way, Raymond. Our cost-out program is still targeted where it is and - no. I mean, obviously we've only been provided this information on Monday and we're focused on obviously making sure we implement the cease sale in the way in which is most supportive and the least disruptive for customers. But no, we're committed to our long-term productivity program and obviously our other strategies.

MR TONG: Great. Thanks, Andy.

MR BURLEY: All right. Thanks, Raymond. The next question is from Kane Hannan from Goldman Sachs.

MR HANNAN: Good morning, Andy. Good morning, Warwick. So firstly, could you just talk through, I suppose, the decision process and considerations that the board went through when reiterating the 22-cent dividend following the announcement, and then I suppose whether there's any impact on the future dividend expectations. And then, just the second one, just confirming whether the - in terms of saying you've got lower recurring nbn receipts, is that from the HFC delay, or is that more a change in the 2018 Corporate Plan? I'm just wondering how the HFC impacts the recurring side of things.

MR PENN: Yes, sure. Okay. Well, I think - look, in relation to the dividend consideration, I mean, the factors that we've taken into account are firstly that - and this goes a little bit to your point on the longer-term dividends, as well. Firstly is that this is an in-year delay and these payments will move forward into next year, and overall we believe this will be - our expectation is this will be modestly positive to the long-term economics of Telstra because of the impact of the natural hedge. And so therefore, for future dividends, this has no bearing on outlook or perspective in relation to future dividends. If anything, it sort of supports our long-term future dividend trajectory because of the more positive impact on Telstra, albeit in the great scheme of Telstra, I mean, in - aside from the economics, it's relatively modest.

But nonetheless, it's net positive. In relation to the dividend considerations this year, as you would imagine, the board would have considered all of the factors - the impact on EBITDA, how that flows through to NPAT, solvency, liquidity, and taking into account the dividend policy that we announced in August. And on the back - against that background, they're comfortable to reconfirm that it's their expectation to pay a 22-cent dividend. In relation to the recurring payments, I mean, essentially, as you know, the nbn is paying us for access to our infrastructure - pits, ducts, exchanges, dark fibre - and ultimately we expect those payments - which are called the infrastructure access payments, which are recurring - ultimately we expect those payments to reach just under a billion dollars, and then to increase with inflation thereafter at the point the nbn is fully rolled out.

But in the meantime, those payments - the recurring payments - increase in quantum roughly in line with how the nbn is rolled out, because they're attached to access to the infrastructure and, of course, nbn do not require access to certain infrastructure until such time as they arrive in all the various different service areas. And so, therefore, that's why not only does it have an impact on the one-off receipts, but it also has an impact on the rate and