Spark New Zealand Limited (SPKKY) CEO Jolie Hodson on Q2 2022 Results – Earnings Call Transcript

Spark New Zealand Limited (OTCPK:SPKKY) Q2 2022 Earnings Conference Call February 22, 2022 4:00 PM ET

Company Participants

Jolie Hodson – CEO & Executive Director

Stefan Knight – Finance Director

Conference Call Participants

Arie Dekker – Jarden

Kane Hannan – Goldman Sachs

Lucy Huang – Bank of America Merrill Lynch

Entcho Raykovski – Crédit Suisse

Aaron Ibbotson – Forsyth Barr

Brian Han – Morningstar

Phil Campbell – UBS

Wade Gardiner – Craigs Investment Partners Limited

Jolie Hodson

Thank you for joining us today as we share our Half Year Results for the period ending 31 December 2021. So I’m pleased to share a strong first half performance despite the ongoing COVID 19 disruption that characterize the second half of the 2021 calendar year.

Which is the market leading results in mobile, without the benefits of global roaming reviews and stabilized several band base. With wireless broadband growth continuing to maintain our margins as we compete vigorously and a price to the market.

Businesses continue to digitize growing our cloud security and service management revenues. And our investments in future markets like digital health, and IoT are paying dividends, we have been able to deliver these results through a combination of consistent execution. The benefits of our three-year strategy starting to flow through to better customer outcomes and the market differentiation and talent and adaptability of our people. At digital transformation is only going to accelerate from here and we’re well placed to support this journey, particularly through the significant investments we’re making in the critical infrastructure that underpins our digital economy.

Today we’ll share more about these investments, including our attention to a diverse [indiscernible]. This morning, I’ll take you through the overview of the results and then I’ll hand to Stefan to speak to the numbers in more detail before we move to Q&A.

With that now, let me turn to Slide four, for our financial snapshot. So we are pleased to report first half revenue, EBITDAI and NPAT growth. Revenue increased 5.2% to $1.89 billion and that was driven by standout performance in mobile. This led to a 7.6% increase in EBITDAI to $538 million.

NPAT increased 21.8% to $279 million driven by that growth in EBITDAI, a reduction in finance expense and lease liability interest and lower depreciation and amortization. We have declared an H1 FY22 dividend of $12.5 per share, 100% imputed and that’s supported by our free cash flow of $183 million in the first half.

We expect to be around the top half of our FY22 EBITDAI guidance range of $1.13 billion to $1.1 6 billion and consume our total FY22 dividend guidance and 25.0 cents per share 100% imputed.

I’m now going to move to the performance of our established markets as outlined on Slide five. So Mobile Service revenue grew 5% to $441 million with fastest growing mobile provided by both connections and revenue. A result we are particularly proud of. Growth in ARPU was underpinned by customer demand for data and precision marketing with 48% year-on-year growth and Endless plans. And while Broadband revenue decreased 3.9% to $324 million in a highly competitive growth driven market. The launch of our new simplified broadband plans stabilized our base 703,000 connections.

And our gross margin was maintained as the benefits of wireless broadband growth often higher fiber input costs. So we’re building on this momentum with further competitive wireless broadband offers already launched in the second half. Our accelerated 5G rollout is progressing to plan and supporting future growth in both mobile and wireless broadband, with 10 additional locations launched since the conclusion of FY21.

We also welcome the government’s announcement that it’s reached agreement with Maori on spectrum allocation which will pave the way for the C-band spectrum auctions. Cloud security and service management revenues increased 3.2% to $224 million. That was driven by demand for public cloud and growth in the health sector. Overall, that growth was lower than we would have liked it today with the shift and portfolio mix with public clouds continuing to put pressure on our IoT pricing. And our service management growth trajectory was impacted by access to cloud sites due to COVID.

We have a solid second half pipeline in place for service management and while Omicron will continue to create disruption, we believe it should be more manageable in these new times. The material upgradable of our Mayoral Drive exchange and the construction of a new data hall at our Takanini Datacenter are underway with up to 8MW of capacity already contracted. These are multi-year investments that will support future cloud growth and the development of multi-access edge compute capability.

So I’m now going to move to our strategy update and our progress in bidding the four core capabilities that will differentiate us in the market as outlined on Slide seven. We’re making strong progress delivering simpler, more digital and more intuitive customer experiences with removal of 38 legacy mobile and broadband plans during the half and we’ve made 66,000 customers in the process. We’re piloting a single digital interface across our frontline teams and our customers, which will improve speed of resolution and customer experience and enhances trust to Spark functionality also supporting self-service more.

Deep customer insights, we continue to scale more sophisticated use of data and artificial intelligence across our business. We can already see the benefits of those precision marketing and our mobile service revenue growth. Because as machine learning has enabled highly targeted campaigns and a 16% improvement in both conversion and mapping efficiency. It’s the combination of these two capabilities, simple intuitive experiences and deep customer insights that is particularly powerful, and will ultimately differentiate fact by enabling us to better understand customer needs, and to deliver on them with a frictionless experience.

We continue to invest in smart automated network that underpins our success in the market, with 5G launching in 10 locations as I’ve noticed. Rural connectivity expanding. The Optical Transport network 2.0 build now more than 50% complete and an acceleration of our shift from legacy to modern technology, with the target of 50 PSTN switch has to be decommissioned by the end of FY22.

As we build our high performance culture, we continue to create a growth mindset across our business. We’ve delivered our highest people engagement during the half, and we continue to invest in our people’s learning and development and well-being or creating a place where everyone feels they can belong. We’re on track to deliver our FY23 operational integration across all four capabilities, as well as our FY23 revenue growth aspirations $30 million to $40 million. We’re also making solid progress towards the collective $95 million to $115 million cost efficiencies we aspire to.

So as we look at our future markets now on Slide eight, where momentum is building in support of long-term growth and IoT connections grew 31% to 623,000 supporting strong revenue growth with our tech across metering, transport, emergency services, smart environments and asset management. Our enhanced platform and product solutions and smart environments, with water, soil and air quality management have been developed and will support further growth in the second half.

Spark Health revenues grew 25% excluding procurement or 51%, if you include it, as the healthcare sector continue to digitize Spark Health won the first national contracts for digital services under the newly established Health New Zealand, and we’re aiming to onboard visitors and customers to its new digital health platform by the end of FY22. A subsidiary MATTR also played an important role in the Ministry of Health’s creation and implementation of COVID-19 vaccine passes for both domestic and international students, which have been a critical enabler of increased freedom for New Zealanders.

Spark sport revenues grew despite the sporting calendar being significantly impacted by COVID-19, which is expected to continue for some time, feature revenue growth is likely to be slower than originally expected. We are considering the implications of the loss of Premier League and we’re accelerating our strategic planning options to drive improve returns. We are on track to deliver our overall FY23 future markets revenue exploration through continued momentum on health and IoT.

So I’ve moved now to sustainability on Slide nine. We are pleased to see continued improvement of our ESG performance during the half, which is a strategic priority for Spark. Our Science-Based emissions reduction target requirements have been embedded into our new electricity purchasing agreement and we’re in the process of designing an emissions reduction and energy efficiency plan alongside this.

We’ve made particularly strong progress on our inclusivity, with Skinny Jump connections up more than 5000. Our ethnicity data capture among our own people up 12pp, which will enable us to do more targeted interventions to improve representation in our business. And we launched the beyond binary code earlier this week. This further initiative to improve gender representation and data collection online for Kiwis of gender diverse backgrounds.

The key focus for the remainder of the financial year is strengthening our supply chain risk management processes and aligning our assessment and audit processes with our global industry peers.

Looking at our indicators success on Slide 10. We are on track to or exceeding the vast majority of those meters. As noted earlier, improvement as needed in our cloud security and service management revenue growth in the second half. We also experienced some delays in the development of the health digital platform for the full launch now to take place in the second half. We are pleased to have with the quality of the platform itself and we already have a number of health providers engaged in pilots and onboarding discussion.

I now like to share more about the next stage of our infrastructure asset review. So during FY21, we commit to review of our portfolio to focus if at an investment on our most strategically important assets. As you noticed, since that time, we’ve announced a series of investments in our critical infrastructure, including accelerate of 5G rollout, the material upgrade of our Mayoral Drive exchange and a significant increase in capacity at our tech in any data center.

We continue to optimize our investment in assets that are important to network resilience that includes the Southern Cross next bill which is on track despite COVID disruptions for the final equity contribution is expected to be paid on April 22. Today, we have announced plans to establish Spark TowerCo subsidiary to improve the performance, utilization and capital efficiency of our passive mobile assets.

We can see globally that shared ownership models are an effective way of improving returns from infrastructure assets that are not critical to competitive advantage. And mobile activators are what drives our competitiveness, including our core network and radio equipment. These assets leverage our spectrum holdings, provide differentiated customer experiences and support our wireless acceleration.

Our passive mobile on the other hand of the physical towers that support the sector of equipment. By separating these assets into subsidiary model, we can improve utilization through coverage expansion, feature service innovation, increased tenancy while still delivering efficiencies, in build, maintenance, technology and lease costs as we expand mobile coverage across our portfolio.

We intend to commence the process during the second half of FY22 to explore the introduction of third-party capital into Spark TowerCo. However, there’s no certainty that transaction will proceed. Should we introduce that third-party capital, we intend to retain a shareholding and will be a key and continence for the perfect agreements in place on arm’s length terms for operations and services. It will be no change for our customers and we’ll continue to embrace them modernizing our mobile network and improving coverage.

We will provide more information on Spark TowerCo in second half of FY22. So when I stand back and look our performance during the half, I’m really pleased to see that our three-year strategy is delivering new returns while also laying the foundations for future growth. We see a clear ambition to deliver that growth by focusing on a set of core capabilities that would differentiate us in the market. And we’re now seeing the benefits of the strategy solid growth and strong momentum in our established markets, while feature markets are now making a more significant contribution to our revenue growth.

We’re simplifying our business and delivering data, more digital customer experiences, our ambition in data and AI is delivering a higher return for our marketing business and it’s been improving customer outcomes. We’re making a significant investment in New Zealand’s critical infrastructure and opening up new commercialized opportunities in that process.

Our plans to establish TowerCo will improve the utilization and cost efficiencies of our cases mobile anticipates while allowing us to explore the introduction of third-party capital. We continue to focus not only excelling, what we do, but also how we do it. Our ESG performance continues to improve as we improve the sustainability of our own operations, supports the digitization of our economy, and champions’ digital equity and inclusion, both within Spark but also across our portfolio. And as we have delivered these market results, we’ve not lost sight of what’s most important to our success. And that’s our people.

We continue to build a high performance culture and invest in the capability and well-being of our Spark, by now, while creating a workplace where all people feel they can belong. So I’d like to close by acknowledging and thanking our people who despite working in a variety of different COVID settings during the half, to love each day to keep our customers connected, at a time when this was more important than ever.

So I’m now going to hand over to Stefan, to talk through the financials in more detail.

Stefan Knight

Thanks Jolie, and good morning everyone. So I’m now going to speak through the key financial summary. So what’s been a really strong start to the year. So let’s start with a summary of the key financials as sit out on page 17 of the results presentation. Spark generated revenues of $1.89 billion up $94 million or 5.2% compared to the prior year.

EBITDAI dine was $538 million up 38 million or 7.6% from the prior year. The profit after tax was $179 million and up $32 million compare to prior year and free cash flow increased $70 million to $183 million. And as a result, we’ve confirmed the H1 dividend of $12.5 per share fully imputed.

So I’ll now go through the key elements of the result in a bit more detail just to provide some more color. So let’s start first with revenues. The $94 million increase in revenue was primarily driven by three things. Firstly, our mobile revenues grew by $27 million, and within that service revenue grew by $21 million or 5% and above our 2% to 4% aspiration. This is really pleasing and reflect strong customer demand for data across all the site brands and the benefits of our investment and deep customer insights enabling precision marketing.

During the half we saw the pay monthly base grow by 61,000 connections with continued strong upsell from a prepaid base. Our pay monthly ARPU grew by $0.20 as we saw 220,000 more customers join our endless plans and data usage increased 25%. Prepaid ARPU increased by $1.89, with strong growth and Skinny and where customer data usage was up 33%.

The second driver of revenue growth was on procurement partners, which increased 65 million. During the period Spark Health was successful winning a large software licensing contract with the newly established Health New Zealand, which is important in securing strong sector relationships and creates ongoing opportunities to sell other products and services.

The third driver of the overall revenue growth was our continued growth and established market of cloud security and service management, combined with the revenue growth momentum in the future markets in health, IoT and sport. During the half, we saw ongoing growth in cloud as well as 51% revenue growth in health, 59% in IoT and continued growth in Sparks form. It’s really pleasing to see future markets now making a significant contribution to revenue growth.

As Jolie noted, our revenue growth in cloud security and service management are 3.2% is lower than our aspiration. So our cloud growth of 5% has been driven by ongoing demand for public clouds. We’re seeing slower growth in security than we expected, as well as COVID restrictions impacted our ability to get critical team members on to customer sites. The demand for cloud and the pipeline for service management will remain strong in the second half.

And lastly, just a reminder that the product here is included a non-recurring $17 million provision of wiring and maintenance refunds that we now cycle.

So as revenues have grown, total costs, operating expenses grew by $56 million or 4.3%. And the primary driver was a $59 million increase in procurement partners, in line with the increase in revenues. Excluding the cost increase for procurement and partners, profit remained broadly flat. With declines in mobile invoice being offset by growth and cloud security and service management. As well margin public cloud becomes a larger part of the portfolio.

We’ve seen some impact on our business from inflation, that believe we’re well positioned to manage through these increases. Many of our supply contracts and multi-year deals with agreed pricing some inflationary pressure and phases and over time. Labor costs during the half were up $7 million compared to the prior period. That was driven by higher salary costs as we bring on additional people to support our growth businesses at MATTR and Spark Health and R&D spending data and analytics. But also the need to manage talent scarcity in a tight labor market.

We continue to drive our cost out and efficiency programs with the same level of discipline that we always have, as this program ensures that we rebalance our business in a considered manner and drive efficiency into those areas that are saving or on decline to fund the investments we’re making into new growth areas, while also offsetting inflationary pressure.

We continue to see opportunities to cost efficiency by growing our vast broadband base, driving customer interactions to digital channels, increasing automation and removing duplication from across the business.

Moving now to EBITDAI, which was $538 million, and up $38 million, or 7.6% against the prior period and with the main driver being the strong revenue growth, particularly in mobile. Also, impacting the result was the fact that prior period included a non-recurring provision for maintenance of $17 million, which recycling this period.

It was also a one off game within the period relating to the renegotiation of property leases. However, this is largely offset by similar one-off items in the prior period, where we also had lease adjustments, embed the provision of leases. As we look ahead to the second half, we believe the current momentum we have, or as often EBITDAI around the top half of the guidance range. We expect to see a strong mobile performance continue, although we assumed a modest increase in roaming revenues for H2. However, as we look ahead to FY23, with the opening of borders, we expect this to provide a good tailwind.

We expect growth in cloud security and service management to improve. And while the impact of Omicron is difficult to predict. The current traffic light settings make access to client sites a lot more manageable. We continue to drive cost efficiency to underpin our earnings and provide flexibility and will continue to invest in future growth businesses.

The growth in EBITDAI has also translated into impact growth, which is up $32 million or 21.8%. Our finance expense reduced by $6 million as we lower lease interest, following changes to property leases and lower interest rates. And depreciation and amortization, reduced by 5 million, reflecting an increase in FY21 of the value of assets that were fully depreciated, but also our customer leases. We continue to expect total FY22 depreciation and amortization being broadly flat on FY21.

So shifting out of CapEx, which was $218 million for the half, up $28 million or 14.7%. Spend of $218 million is in line with our full your expectation of around $400 million, and a profile of spenders broadly consistent with the prior year where we typically spend around 55% in the first half, and 45% total in the second. [Indiscernible] was focused on the accelerated rollout of 5G in investment in IT systems such as the replacement of our ERP.

Looking forward, we continue — we expect to continue to be strong in infrastructure assets, specifically 5G mobile and data centers with to build Takanini now underway. When we look at free cash flow, in the first half, it was at $183 million and was up $70 million on the prior year. This was primarily driven by EBITDAI growth and improved working capital, which was $39 million lower than H1 FY20. The working capital improvements have been favorably impacted by the timing of receipts for large procurement deals which will be paid in the second half. We remain focused on driving ongoing improvements in the space and continue to see good opportunity for improvement.

As we look ahead to H2, we remain focused on delivering free cash flow of $420 to $460 million. Second half free cash flow is expected to be significant greater than the first half is around 55% of EBITDAI related to H2 versus around 45% in H1 whereas CapEx was the opposite end at 45% improved in H2 versus the 55% increase.

We’ve retained the dividend reinvestment plan as this a useful capital management tool, it will operate in a zero discount. Shares issued under the DRP will be issued at the prevailing market prices determined around the time of issue. If we look at net debt, we saw an increase in our debt levels of $77 million compared to FY21. The increase was driven by investments into Southern Cross MCS and a top up for the dividend which is not quite funded at a free cash flow yet. The prior periods will grant a DRP participation but with improvement during the discount was removed and participation is reduced.

Our reported net debt to EBITDAI ratio was 1.2 times, and we remained with an S&P credit rating with sufficient headroom to execute on our strategy and fund our investments.

So lastly, on our confirmed guidance for FY22. Our EBITDAI guidance remains unchanged at $1.3 million to $1.6 million. And we expect to be in the top half of the guidance range reflecting the strong business momentum in the first half. There’s no change to CapEx guidance, and it remains at around $400 million, total FY 22 dividend guidance of 25 cents per share fully imputed is also unchanged. And so that now concludes the financial summaries.

So we’ll open the line for questions and I’ll pass back to the operator.

Question-and-Answer Session

Operator

[Operator Instructions] We have multiple questions in queue. Our first question is from Arie Dekker from Jarden. Arie, please ask the question.

Arie Dekker

Good morning, and congratulations on a solid start. Since this question just on free cash flow aspiration for FY23, obviously a decent period — decent way through that three year period now. Are you still confident in your ability to deliver that in FY 23? And I guess what, what are the things that will sort of support the growth of the full 420 to 460 base in FY22?

Stefan Knight

Hi, Arie. So yes, we remain committed to the $500 million free cash flow aspiration. Looking forward, the drivers remain consistent with what we’ve talked about previously. So we still see opportunities for ongoing EBITDAI growth, managing our CapEx really tightly and continuing to drive improvements in free cash flows. I’d say a combination cash flow and working capital. And we think the combination of those three things puts us in line with that aspiration.

Arie Dekker

Yes, and so on the investment and because obviously you’re accelerating growth on that investment, and then also neural drive, you mentioned multi-year. So what you’re sort of saying is there’s going to be staged over sort of two or three years, right?

Stefan Knight

It is based over multiple years that obviously has pension trust as we scale things up. But if you, if you stand back from it, we’re confident we can manage that spend within that ongoing capital range of 10% to 11% of revenues. We would tend to manage within that envelope.

Jolie Hodson

And Arie if you think back to over the years we’ve always had a number of significant programs within CapEx program, whether that’s been reengineering, nutrient Kaizen cable, converged comm to avoid its significant elements within that, and manage that within the envelope. So I guess this is no different to that how we’re thinking about it.

Arie Dekker

Sure, thanks. Just on fixed wireless, made some further progress and getting the mix up there. And that’s now 26.5%. I mean, obviously, it’s pretty dynamic, what’s happening in that space on your side, you’ll by the end of this year, you’ll have pretty good critical mass in urban areas with 5G.

Now, on the other hand ComCom putting a bit more focus in the marketing of alternate technologies and chorus. I guess, increasing their anchor performance, and also introducing the 50-10 product. Can you just sort of talk a little bit about, what you’re thinking has previously talked about a 30% to 40% range for fixed wireless, just what you’re going to be doing over the next sort of 12-months and where you’re sort of fitting with what’s happened in the industry, you’re almost 30% to 40% range.

Jolie Hodson

Yes, sure. So if we stand back from our own performance, as you touched on, within our improvement, and then and wireless in the first half, but we’ve also since the end of that half, relaunched further wireless plans, which we’re seeing good take up of the coverage and increasing capacity on 5G as we roll out through that. So 10 new locations in the first half are continuing to progress in and if you look ahead to FY 23, ultimately, we’re looking to Calendar, the 90% or higher 90% coverage across populations. So the basis or the opportunity.

If we look at the range of plans that are there, there are already low priced fiber plans in the marketplace that compete. So we don’t see that this initiative creates a substantial shift in competition. Obviously, it is a competitive markets, as we’ve tacked on our own overview of the results and what we say. But we believe from our point of view, that the both the network moves that we’re making the experience shifts we’re making journeys, but also the pricing in which we’re looking our plans will enable us to be at that low end, as we’ve said, indicators, I think, last year around it, so are in the 30% to 40%. And I don’t think anything’s changed from our perspective in relation to that.

Arie Dekker

Well, that’s great. Thank you. Just a couple more just quickly on labor costs. Obviously, you do highlight the ongoing roads you’re making on automation and that sort of thing. I mean, on a net basis, there’s probably reasons for it. But can you just sort of talk about what’s happening in labor costs, and whether you do as pressure sort of as whether your expectation is that on a net basis, you can deliver sort of labor cost savings from here over the next 18 months?

Stefan Knight

Yes, so I think maybe we just start with the context of what’s driven the increase in the first half. So, we’ve continued to invest in our growth businesses MATTR, health, but also in our capability around data and analytics. So that’s been a part of the driver. Obviously, the labor market is very tight at the moment, and so particularly on the call here [ph] the great resignation is in flight. And so we’ve been very mindful that’s hit a bit on our labor costs.

But when we look forward, we still see plenty of opportunity. There was a lot of work that we haven’t plan around looking at automating some of our journeys, driving better digital experiences for our customers, which only helps encourage more of that volume online. And so we’re absolutely committed to driving those ongoing efficiencies and automation to improve our labor costs.

Jolie Hodson

Probably at the other end of automation, there’s also network and technology in terms of our networks. And you can see the work we’re doing to invest in and or others access, and aggregation. And all of those things led us to put in more automation enabled things to be provisioned, for example, in a much simpler way. And we’re also reducing the amount of technologies that we have in place to make it easier for our supporters.

So all those things can contribute to the point, this might as well in terms of a desire to make sure that we maintain labor costs in line with the business that we are affected, like. So we will invest in growth where we need to, but we will also make sure that we are things efficient as we can in other areas.

Arie Dekker

So on the last one minute, I’m sure others will have more questions on this. So just TowerCo, I mean it has been a year since you started the review. So just sort of interested in what additional color you can provide on a couple of those. So I guess the first one is, do you expect like interest in the towers to be enhanced by collaborating I would say, Vodafone and or two degrees and putting the transaction together or it’s a very much expecting that you would be doing something standalone from the other industry place something indeed?

Jolie Hodson

We’ve have announced the standalone is that TowerCo is that’s what we’re working on, at this time of year.

Arie Dekker

So you’ve actually made that decision that you will be progressing that standalone.

Jolie Hodson

Yes.

Arie Dekker

Okay, no, good, thanks for that confirmation. And then just in terms of I guess sizing, the earnings stream that this tower code could deliver, is there any color you can provide on that?

Stefan Knight

It’s too early in that process are Arie take into that level of detail. We can confirm obviously, that we’re going to look to commence the process in H2. And when we’ve got more meaningful information this year, we’ll obviously do it appropriately.

Arie Dekker

Great, thanks, guys.

Operator

The next telephone question comes from the line of Kane Hannan from Goldman Sachs. Kane, please ask your question.

Kane Hannan

Hey, guys, nice to see you taking our question? Maybe just starting the mobile GP margin some of the strongest margin you haven’t done. And that’s without the roaming. Just hoping that through some of the drivers that the service revenue momentum, the network automation you’ve touched on? How do I think about seasonality and global GP margins, which has typically been second half skewed?

Jolie Hodson

So I think if you think about what’s driving it, so obviously, it’s been in growth. And now both postpaid, or pay monthly and also prepaid, but postpaid. In both of those categories what you’re seeing is that continued drive for greater data and more usage on the networks of it, driving people up to broader plans. We’ve also through the AI and data work, the precision marketing it’s really helped us to be much smarter around where we’re putting those signs in front of people at the right time, and it’s improved conversion.

And then — so what was your other question?

Kane Hannan

Seasonality?

Jolie Hodson

Seasonality. So normally, what you see is…

Stefan Knight

We see some upfront acquisition costs prior to the Christmas period. And then you see the benefit of those customers coming on in the second half and that drive some of it. Are you talking about any margin?

Kane Hannan

Yes, perfect. Maybe just prepaid mobile? Jolie you talk about the role of extension in the half? Is that sort of sustainable number going forward that $16 price? Or are there any things I should be thinking about forecasting that up.

Jolie Hodson

Just people looking for more data. Again, it’s just another different form of payment, I suppose. What you do have, and it’s been well, I guess, discussed previously, as without travelers and other maybe shorter term, people in the country, sometimes in prepaid debt that can result to kind of reduction in the ARPU, because obviously, they need short periods of time. What you’re seeing here is probably more underlying and reflective of the domestic economy and people continue to seek out data.

Stefan Knight

And I think that in prepaid we saw 30% increase in data usage. So that trend I don’t see any sign of slowing.

Kane Hannan

Yes, perfect. And I am sure you’ve been asked a bunch of times, we’re just interested in any thoughts you can share around potential consolidation in your market can have an impact Spark looking forward.

Jolie Hodson

So you’re talking around the to the great degree focus?

Kane Hannan

Yes.

Jolie Hodson

Yes. Look, I think, obviously, it’s been well publicized again in terms of those two coming together. We’re focusing on our strategy here to find looking at sort of mobile business, again, to bring together broadband business, which has a reasonable market share. Nothing sort of changes in the computers in them in the civilized markets as a result of that, I don’t think. And so from our point of view, we’ll focus on our game, I’m sure they’ll be bringing together their game over the next few months in the market to my point of view, so it’s fairly similar.

Kane Hannan

Thanks.

Operator

And our next telephone question comes from the line of Lucy Huang from Bank of America. Lucy, please ask your question.

Lucy Huang

Thanks, Jolie and Stefan. Good morning. I just have three questions as well. So just following on from Kane’s question on mobile. So I was interested in some color and some proportion of customers that are now sitting on some of these endless plans. And what are your thoughts as well on underlying price increases, potentially, in the mobile business moving forward, given, we are seeing a lot more take up of data usage if that driver spoke to talk to kind of recurring price increases into that base.

And then just secondly, because the Spark kind of early days, just wondering if you can give us any color at all on metrics for that, what can be ratios of your mobile assets, or any color that can give them that would be greatly appreciated. And then just lastly, on broadband, just want to talk through more around the competition, and where is it coming from and which players in the market et cetera? Thanks.

Jolie Hodson

Okay, we’ll try and pick them up one by one. We like this simple bank. So the first one around, inland snowball, it’s around 48% of on base are on those plans. But in creating those plans, I get to create a structure across the different components of both prices and data included. So what we’re really seeing is, is the shift up through our portfolio by from either low in prepaid or lower in postpaid accounts up into those in the spread. So there’s nothing that would suggest to us at this stage that that’s likely to save.

But we also already have practically the marketplace. So to your question around, is there a significant price increase off the back of it? I’m not sure. We see that right now.

Second, it might be just on broadband while we’re talking about established markets. So there’s over 80 plus RFPs, and retail service providers in New Zealand, and it’s a combination of both pure TowerCo science but also converge both energy, you also see media and others internet space.

Nothing has really changed in that dynamic over the last six months, obviously, we’ve changed some of our plans, that pricing held thinking about it, we continue to expand our wallet footprint. And that also contributes to us being able to offer a competitive offering to our customers, but I think in terms of the extra dynamic of that marketplace is not there’s little that’s moved really in that regard.

Stefan Knight

What was on the last…?

Lucy Huang

Just highly driven.

Stefan Knight

Last question, so, could you repeat the last question maybe Lucy?

Lucy Huang

Yes. Just on the tower any color on metrics, why tenancy ratios for example on the distinct towers or anything that can provide an extra?

Jolie Hodson

So if you look at existing tenancy ratio, we said at 1.07 not our portfolio of towers, there’s about just also consider urban, state and regional city to rural and then a combination of macro being 70% 15% on buildings and then about 15% on light pole. So sort of in terms of the mix of both telcos — sorry towers that we have today. And probably to Arie’s question around attrition and so the process — assuming the process commences then the all the terms and the different components of go to suit and all the other things that would go with that and will be part of what we choose later in the year.

Lucy Huang

Wonderful. Thanks, guys.

Operator

Our next telephone question is from the line of Entcho Raykovski from Credit Suisse. Entcho, please ask your question.

Entcho Raykovski

Good morning Jolie, morning Stef. I’ve got one question on guidance and then a bunch of questions on TowerCo. Just the slight upgrade to you guidance. What has been the key areas we’ve done better relative to six months ago? And it looks like it is in mobile. But I’m just interested in that was a key factor. And then procurement looks like a good outcome. But it is obviously a much lower margin business. So any further color would be useful?

Stefan Knight

It’s primarily so to your point, it’s primarily mobile. I mean, that is where we have momentum. And so that has been a big part of the driver. And also, secondly, really the contribution of our future businesses future markets. So we if you look at health as an example, we have new 51% including procurement 25%, excluding IoT is growing very strongly.

So I think a combination of both mobile business, and those future markets are really being the drivers of performance to date. And then when we look ahead, we would expect those to continue. But also we’re looking for an improvement, I guess, in the rate of growth around cloud security and service management, business driven H2 pipelines.

Entcho Raykovski

Got it. And maybe a follow up to that just the level of comfort, you can get to aspirations for growth in cloud security and service management given the one age growth rate was amenity flag lower than the aspiration only about 3%?

Stefan Knight

Yes, sure. So if you kind of look at the component parts, cloud is continuing to grow the mix there is a little different with public growing strongly private not quite, we want but we still see really good demand for hybrid. And there’s opportunities there to drive to drive volume growth to help manage some of the price pressure we see in private.

I think the area we have seen the growth rate slowing has been in service management. And that really has been impacted by our ability to access client sites and its environment, when we look forward to pipeline, they look strong. So, it’s always a challenge, but we’ve absolutely got that inspiration of the [indiscernible].

Entcho Raykovski

Okay, great. And then maybe just a couple on TowerCo to the extent you can answer. If you are successful with monetizing TowerCo your priority at that point, debt reduction or capital management using some of those proceeds?

Jolie Hodson

Well, now, obviously until transaction occurs in, we won’t be talking about how we would use proceeds. But if you think ahead and any combination of that will be a combination of both investment in our current assets and growth, but also looking at capital management options around that.

Entcho Raykovski

Okay, appreciated. Might be too early. But again, I don’t know whether you can take this one because the intention to maintain a majority interest in TowerCo, couldn’t depend on the sort of price you’re going to pay. And you’d be happy with a minority as well?

Jolie Hodson

I think our ownership interests will reflect in terms of the broader transaction as it stands, materials and things that are in front of us. It’s too early to say at this.

Stefan Knight

Hopefully [Multiple Speakers]

Jolie Hodson

We will retain it and you will find that shareholding will depend on all of those factors.

Entcho Raykovski

And sounds like the majority and minorities, they consider the range of options at the moment?

Jolie Hodson

Sorry, could you just repeat that?

Entcho Raykovski

Sorry. It sounds like both majority interest or minority interests, sort of being considered the range of options you’ve got right now.

Stefan Knight

All I can say is we’ve said we’ll consider all the options based on the terms in front of us. The key point we want to reiterate is that we’ll retain a shareholding. We’ll update you as more detailed comes to hand. Understand your desire for that. That’s pretty early in the process.

Entcho Raykovski

Yes, good one. I’m sorry, I won’t put that part anymore. Is there also an intention to monetize the fiber assets given you flagged that the last result that was part of also part of that passive infrastructure? Or is really the focus now on towers, not really considering much else?

Jolie Hodson

I think the immediate if you look at the immediate concentration, it’s on TowerCo. We always consider things like fiber around where it makes sense for us not alone or where it really is opportunity to share and fiber plays an important part around our infrastructure. As we go here particularly when you think about that whole and also our execution by both sides that would be further out. We were looking at fiber.

Entcho Raykovski

Okay, that’s great. Thank you.

Operator

Next telephone question is from the line of the Aaron Ibbetson from Forsyth Barr. Aaron, please ask your question.

Aaron Ibbotson

Hi there. Good morning. Thank you for taking my question. Unexpectedly, I also have one question on the tower company. So I’ll start with that. And — but slightly different angle, I believe that the book value is something around $100 million or thereabouts. But my question is, if it’s possible for you to give an estimate of replacement cost, and failing that, growth cash invested, or how much you’ve spent on these passive parts of the towers? But ideally, sort of quote-unquote, replacement costs. And just to get an idea of magnitude of the assets here.

Stefan Knight

That’s not information that we’re sharing at this point in time. So you’re right, that the current book value is around $100 million. And we’ve laid out a few more details as Jolie spoke to before around, the number of towers and the composition that we’re just going to focus on the book value.

Aaron Ibbotson

That’s fine. Thank you. And secondly, on roaming, you did mention that, you expected some good tailwinds in FY23, which I think we all are. But it’s been — will have been almost three years since we had a full year of roaming. So just wanted to know, has anything changed in that market? Using the assumption, if we assume that travel and tourism, sort of both inbound and outbound, go back to pre-pandemic levels, should we expect roaming to go back to that level, more or less?

Could you just maybe update us as well on what the total impact was? There was a lot of half on half, if I recall, and I got a little bit confused.

Jolie Hodson

I think if you think about roaming overall, and that range is sort of $30 million to $40 million, around $40 million previously in a full year. I’m not sure that you say everything would return back to how it was before in terms of traveling and the ability to do that. But even within that, there’s also an opportunity to be looking at market propositions, making sure they’re competitive. And so we would be doing that as we come into that phase. I think, as Steve indicated with the announcements the government’s made today, that’s unlikely to occur before July this year.

So we’re really talking about 2023. And so leading into that we’ll be making sure we market competitive within that. But to give you a sense that was previously sitting up around on $40 million range.

Aaron Ibbotson

Yeah, and I wasn’t asking you guys to forecast travel patterns. Just if they did return, you would expect those $40 million to come back. Is that roughly right?

Jolie Hodson

What I’m saying is you probably ultimately, over that time, there’s probably been changes. So we would be looking at our — that’s good enough. So they’re running competitions, and so forth. So I suspect to be more likely to be a bit looser than that would be my read on that. But still a material number when you think of the context of how they are reading.

Aaron Ibbotson

Okay, thank you very much. And I know this is sort of nitpicking. But I’m a little bit surprised that say, for instance, security is not growing. And I appreciate maybe this was COVID restrictions. But more broadly, you tend to have strong growth in health, IoT, public cloud, etc. But could you give us an update or idea of what proportion in your cloud security and service management business is within growing business lines? And what proportion is sort of stable and versus declining?

Is there a small and fast growing business? And the large and shrinking or you know, what are the proportions and just, it feels like 3% doesn’t, paint a proper picture what’s going on there? And it feels like there’s a small bit that’s growing very fast, that I would like to know roughly how big that is. And if that it is potentially increasing over time, or could you give some color there?

Stefan Knight

Yeah. So you’re right. There are multiple moving parts within cloud security and service manager and I’ll just kind of get a bit of a flavor for them. I think if you look at cloud, obviously, there’s a — as we’ve talked about a shift in composition of mix here where you’ve got growing public cloud and price pressure in the private cloud and if you then went to kind of the composition within that, there are certain parts of the business, for example, health, which are growing strongly on the back of digitalization of the healthcare sector.

I can’t look around to kind of specific announcement. But that is a part that is growing well. When we look at some of our other private cloud business, our focus there remains on taking advantage of the opportunity for hybrid sales. That is still a market where we see really good potential as customers look at things like legacy applications. Not all of that can go to public cloud. So the ability to continue to grow private cloud there, remain strong.

And then I think, when you’re looking at something like service management, which is really the other material line within that part of the business, there was a mix between kind of projects in annuity. And in the past, we had some very strong project activity. That’s been a bit more a bit slower in this period. What we’d expect is that project activity to pick up. We don’t see any sign within the economy of this demand for digital transformation.

It’s just kind of accessing that ability to grow and get people onto site. So we still see potential here.

Jolie Hodson

And I guess it could be breaking into the hard split that number $120 millions clouds, not shy of $90 million student management and around $20 million is security. So you get a context of scale here as well.

Aaron Ibbotson

Okay, I’ll settle for that. Finally got a quote in which I expect you not to answer but I’ll give it a go. And this is your seventh year of 25 cent dividend. I appreciate it’s gone through from special to ordinary, but you know, looking at your free cash flow growth return on roaming, CapEx profile being contained? How should we think about your expectation over the next two to three years? Is it realistic to assume that that is going to start to tick up by a $0.01 or $0.005 a year? Or should we just get used to this quarter back?

Jolie Hodson

So what we’ve always said, around ambition is with growing earnings, growing free cash, we would look at our dividend profile. Clearly, I’m not providing dividend guidance outside two to three years at this point. But our ambition is to continue to grow there. Our three year plan had us reaching our $500 million free cash by the end of FY23, which we’ve touched on in our belief mission to deliver on that in the present position as we look ahead to think about what else might change in terms of our capital management around dividends. But it’s too early to say now, but we do have an ambition to grow.

Aaron Ibbotson

Okay, I’ll settle for that. Thank you very much.

Jolie Hodson

Okay.

Stefan Knight

Thanks, Aaron.

Operator

And our next telephone question is from Brian Han from Morningstar. Brian, please ask your question.

Brian Han

Oh, hi Jolie. Let me have a go on the TowerCo. Those and also a reason that you wants to release capital from each towers. And I don’t know what to a degree, the plans are, especially with the merger, but they’re probably thinking along the same line. So my question is, do you think all these rush of towers to the market could impact the multiples you have in mind? And is it possible that you may not go ahead with any partial sale because of that?

Jolie Hodson

I think obviously, any transaction we’ll look at, we will look at the value that’s here and really the terms and services that sit alongside that, because ultimately, this is a long term arrangement, if you’re an anchor tenant there. If you look at other markets offshore, and Australia within a range of transactions come to market. And I guess you can look at those sort of multiples and applications as we can. So from my perspective, I can’t forecast what will happen in terms of that.

But there is — I think the only thing I would say is there’s significant interest you can see globally in infrastructure assets generally. These are high quality. We’re a good counterparty. So I think from my perspective, it’s a good opportunity to have come to market.

Brian Han

Great and Stefan, can I please clarify the guidance you’ve provided? Even though there’s effectively no change? It absorbed about $5 million in higher costs, because of the private cloud accounting change, is that right?

Stefan Knight

Yeah, but we also restated the prior periods. So the impact like-to-like is relatively small.

Brian Han

Right?

Jolie Hodson

To your question on just the guidance, yeah, the guidance range is unchanged in terms of that. But are modestly in the top half of that. So nothing shifted on that we’re not making an adjustment of $5 million.

Brian Han

Yet but you absorbing that accounting change in the equation. You made that accounting change in the half that you just reported.

Stefan Knight

Yeah, correct?

Brian Han

Right.

Jolie Hodson

Sorry, so price seems to be whether it’s maintenance last year, all those things always are in operating results, and we need to treat them as not in their underlying. So we manage the ups and the downs that go with that in delivering results in the end in the guidance.

Brian Han

Okay, thank you.

Operator

And our next question is from Phil Campbell from UBS. Please ask your question.

Phil Campbell

Yeah, good morning, everyone. I was just wondering Jolie if you could give us a little bit of an update on the C band spectrum auction. Obviously, we’ve had the [indiscernible] announced a couple of weeks ago. Just some of the kind of industry stuff I was hearing was that the government may not be as focused on maximizing revenue from those auctions. So just be interested in your kind of take on at the moment.

Jolie Hodson

Yeah, sure. So we still to get the details of the spectrum auctions and the day. However they have, I think what you’re referring to is, are there any network deployment requirements and return for potentially a lower cost and so on? We haven’t — that has not been clarified with us. But if that were to occur naturally, you would have a lower cost of spectrum impact we’ve had in the past on the 700 megahertz option, for example, if there were deployment requirements for say, rural, for example, as part of it.

So we are eagerly awaiting that process. And obviously, the biggest thing was the news around the manufacturer that can now progress. And so we hope that will be completed, move forward within that in the second half.

Phil Campbell

Okay, awesome. Just had a couple of follow-ups on TowerCo as well. The first one is kind of why you decided to go standalone? The second one was just if you’re able to make some comparisons to what are the differences of TowerCos in New Zealand or your TowerCo versus some of the Australians? And the other one is, if you don’t decide to bring in a third party, will you be separately reporting TowerCo and the Spark accounts.

Jolie Hodson

Okay, so in terms of the separately reporting, look, we’ll look at, as we normally dealt with our KPI to pull out the things that are useful so people understand and execute would be something that we do regardless of whether we have capital in that or not. In terms of offshore, so if you compare to Australia, I guess the TowerCos that have been announced, so you’ve seen Telstra, which had a 49% shareholding in October. I think they are a minority in terms of that 30%. So there are a range of different options out there in the marketplace at the moment. Again, we’ll come back to — if a transaction were to proceed, we’ll be looking at the terms and things that are in front of us in relation to that to determine whether that occurs.

I think from a standalone perspective, happy with the improvements and efficiencies, we want to see utilization coverage expansion that serves us best at this point.

Phil Campbell

Okay, awesome, I suppose as the — again, kind of a follow-up is, if you look at this kind of operating metrics in Australia versus New Zealand for TowerCos. Is it fair to say that you would look for kind of implied given low occupancy ratios and probably lower growth, you would get lower multiples in Australia? Or is it other factors within New Zealand TowerCos like high lease costs and stuff like that, which would make an argument, you could get similar multiples to Australia?

Jolie Hodson

Look I’m not going to speculate on the models that might be available for transaction whether for sale. I think what you have to think through is around is obviously also the tendency but there’s also densification, as you look ahead with 5G, increasing infrastructure requirements within that. So looking at how those factors affect the impact of the TowerCos was an important part of it.

Stefan Knight

Yeah, value is driven by a lot of different factors and there’s so many personal at play. It’s really too early to call.

Phil Campbell

Yeah, and I suppose just again, just a quick follow up in terms of the third party shareholding. So obviously, most people will be thinking of a private investor or business coming in, obviously, obviously in Europe advantages, IPO of retail businesses, is that something that’s also on the table?

Stefan Knight

So that’s not our focus at the moment. The focus is running the process kind of more akin to what we’ve seen in Australia and other markets.

Phil Campbell

Okay, great. Thanks.

Stefan Knight

Thanks, Phil.

Operator

Our next telephone question is from Wade Gardiner from Craigs Investment Partners? Wade, please ask your question.

Wade Gardiner

Hi, I have said my go at TowerCo. Just to follow up to those question around why standalone versus doing a deal with others. Did you actually explore say with Vodafone, given they have announced a sale process, did you actually explore what it would look like if you went down with them and actually discussed it with them? Or was this totally sort of done in isolation?

Jolie Hodson

I mean, we’ve got nothing to say on in terms of, we’ve done our own work looking at this and make your own decisions on that. So in relation to that.

Wade Gardiner

Okay. Next question, just in terms of dividends, can you give a bit of guidance around where you see imputation availability going forward?

Stefan Knight

Look we, for the half, it’s fully imputed. For this year, we expect to be able to fully impute the whole dividend net sale turn expectation, but I can’t predict through for the net. But obviously, if drive dividend out of free cash flow, then generally support to well imputed dividends.

Wade Gardiner

But not necessarily 100%.

Stefan Knight

That’s clearly our goal. I can’t give you forward-looking dividend. That’s obviously a discussion we’d have with the Board and give guidance on at that time.

Wade Gardiner

Okay. And finally from me, just in terms of the guidance range that you’ve given in the first half, there was as it has been in previous years, there’s some property related revenue in there. What should we assume as in the second half in regards to that?

Stefan Knight

So just I guess, context wise, if you look at the first half, we did have some gains. We specifically called them out. But I think it’s important to note that there are other one-off items that sit within other lines within the P&L. And if you actually look at the property gains, we had this period, it’s actually broadly consistent with other one off items we had in the each one of the prior period, for example, things like the provision releases. So in our mind, when we think about a [indiscernible], the maintenance is the one off factor that’s kind of distinct, that we’re calling out. The rest of it is broadly consistent with prior periods.

If you look in a head, you can see that we typically have other gains, in the second half is the nature of our business, depending on what type of lease changes may happen, whether these things like property sales or mobile hardware, equipment sales. So we would expect to have some but clearly I can’t give you a specific number at this point in time.

Wade Gardiner

Okay, thank you.

Operator

There are no further questions at this time. I’d now like to hand the conference back to today’s presenters for closing remarks. Please go ahead.

Jolie Hodson

Okay, well, thank you everyone for joining the call and we will close this out.

Operator

Thank you for everyone for joining. You may all disconnect. Have a great day. Goodbye.

https://seekingalpha.com/article/4489301-spark-new-zealand-limited-spkky-ceo-jolie-hodson-on-q2-2022-results-earnings-call-transcript

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