Telstra in a post-NBN future

Andy Penn, CEO of Telstra, talks about the profit result, and cuts to its dividends

Introduction: Telstra in a post NBN future

Ross Greenwood:  Welcome back to money news right around Australia. Well if you own shares in Telstra you might be a little alarmed this evening. The price of Telstra shares today fell by 10.6%, that goes down by 46 cents, $3.87. It’s the lowest Telstra share price has been for five years. Not only that but the company has foreshadowed that it will cut its dividend. Now in the past few years, Telstra’s paid out the best part of 100% of its profit in dividends to the shareholders. It didn’t retain indeed as dividends for future working capital that’s because the cash flows inside Telstra was strong. It’s now indicated it will cut those dividends to a lower proportion of the profit on an ongoing basis. That’s what’s caused the share price to fall.

On top of that also there’s other aspects going on, because the deal is Telstra is done with the National Broadband Network NBN Co, if you like. This is the 11 billion dollars deal which was the best part of $9,000,000,000 in cash, a lot of details of that have never been fully revealed. The fact of the matter is that ultimately that part of its business the copper wire the ducts, the pits, the customers, they generated money and profit for Telstra. That’s going to be disappearing or missing in the future.

Telstra now is going to try and build businesses that can actually fill that profit hole. Anyway to explain all of that let’s go to the chief executive of Telstra Andy Penn who’s on the line right now, many thanks for your time Andy.

Interview with Andy Penn, CEO Telstra

Andy Penn:  Thanks very much Ross, good to speak.

Ross Greenwood:  Do you think it’s a shock for the shareholders, that you’ve changed the dividend policy, and that really you’ve actually given them if you like a heads up that that’s a change in the business for Telstra going forward?

Andy Penn:  Firstly what I’d like to do, I’d like to empathize with shareholders because I know how important a dividend is, and it’s a key feature of their investment in Telstra. We did announce last November that we would be conducting a review of a our capital management framework, including a dividend policy. Because fundamentally the world is changing and we’re needing a shift from being a just purely a telecommunications company to being also a technology company. We’re very conscious of the impact on shareholders which is why we took a long time to really work through this very thoughtfully. We have implemented the change prospectively not retrospectively, the board declared the dividend at 31 cents this year.

We’ve given the market advance warning of what the dividend will be next year. To your point, this is fundamentally about moving us from a world where exactly we piled out 100% of our earnings of dividend, to a world where we’re looking to reduce that of 70 to 90% of underlying earnings. Which is far more in line with global peers, with local large companies and gives up the flexibility to invest in the future and to compete effectively.

Ross Greenwood:  The one thing being the big telco, the utility, if you like is that cash flow was never a problem for Telstra, which is why you could payout that much of your profit as dividends. Because the cash flows coming in were enormous. The problem that Telstra’s had for a long time because of some of those legacy assets, has been the ability to grow. The question is whether you can actually merge Telstra grow more quickly under the new arrangement, and also because you’ve got the capital that you’re retaining to be able to invest into other businesses, other enterprises.

Andy Penn:  That’s right Ross and you pointed out correctly earlier that one of the– Whilst the NBN was announced a good number of years ago and while people have theoretically understood what this really means is the essentially the government re-nationalizing a very significant proportion of our business. We’re only now at the sort of if you like the meaty end of the NBN roll out. We updated the market today to say essentially that decision to migrate to the NBN, basically takes about $3,000,000,000 of our ongoing profit away from the company. It’s essentially like selling a business. That’s the world that we are also in. One of the things we’re doing is obviously looking to accelerate our productivity plans, looking for investing in growth. We’ve announced our strategic investment to build new capabilities as a technology company for the future. It is against the background of $3,000,000,000 disappearing as a consequence of the government’s decision to re-nationalize that fixed line access network.

Ross Greenwood:  The money that comes to you from the government, that’s come to you from the government, the $9,000,000,000 it’s reported, plus there’s a £1,000,000,000 a year that you actually get in terms of your relationship with the NBN. What happens to that money?

Andy Penn:  The $9,000,000,000 effectively is the compensation for us giving up £3,000,000,000 a year in profit. That’s after receiving the £1,000,000,000 of recurring investment that I mentioned. With the $9,000,000,000, we’ve made a commitment to the market that we will return a new order 75% of that through dividend. In fact we’ve already returned probably, I would say more than $1,500,000,00 of it because we already received about that much of it. The vast majority is to be received over the next three years ,and is part of the dividend policy update this morning. We will return in the order of 75% of that money to the shareholders as well.

Ross Greenwood:  Then you ultimately in this new world, you are a customer of NBN Co and so you are therefore beholding to their price. One thing that I picked up from the presentation today was the fact that you expect the NBN Co charges to telcos such as yourself and your competitors to double over the next few years. Now just explain why those charges would double?

Andy Penn:  Well, it’s not the total charge but it’s a component of the charge and a charge from NBN Co as you say because we’re just a reseller of their services. Comprises two components. There’s essentially a fixed component per customer, but then there’s a variable component. The variable component is essentially for capacity and that’s driven by the volume of data. If data volumes are going to be increased very considerably which they have been by 50% per annum essentially. Then those what’s called the CBC charges are obviously going to increase over time, and that’s going to increase the cost of companies like Telstra. Who’re buying those services from NBN. They’re essentially the numbers that are in the NBN plan itself.

Ross Greenwood:  Just a little aside on this. Telstra even after the share price drop is worth around $47,000,000,000, it’s a big company it’s a meaty company quite clearly. To be able to make acquisitions to fill the gap in the earnings that’ll be lost as a result of the sale of the assets to NBN. It’s going to be quite a difficult I would have thought to be able to make acquisitions that are large enough in this space, to really make a fundamental difference to the growth outcomes. After all the underlying of continuing operations of increase profit, only 1.1% to $3,900,000,000. It’s hard to get growth when the company already has got such a large market share in Australia and also is such a meaty company in itself.

Andy Penn:  We are a very large company and as you say therefore, even a small percentage increase requires very large nominal announce, but ultimately our focus is more around how do we execute a strategy, and how do we add value to our customers. How do we improve the productivity and efficiency of the business. That’s where we can make a big difference, we announced an acceleration of our productivity program today. We think we can reduce our cost by £1,500,000,000 by 2022, that would make big difference as well. We also believe that there’s significant growth in what I call the applications and services, that sit on the network as well as the network as well.

Things like cloud computing’s a good example of an application today. Cloud computing is really enabled by connectivity because all this stuff is going in and out of a cloud, that’s really going out over a network and there are definitely new business opportunities for us.

Ross Greenwood:  Okay and finally what you say to a shareholder who has seen their price dropped by almost 24% over the past year, and is now suing the dividend in cut? Do you tell them to hang in there? What do they do?

Andy Penn:  Well firstly I have a lot of empathy with that shareholders, but ultimately this is about setting us up to success in the future, it is the right strategy. The board very thoughtful about the impact on shareholders but ultimately unless we retain the money to invest in the future, unless we change the business. We won’t be successful and we’re making the challenges which are necessary.

Ross Greenwood:  Andy Penn chief executive at Telstra, as always great to have a chat to you.

Andy Penn:  Thanks very much Ross.

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