TELSTRA GROUP LIMITED — Call Transcript 2005

Nov 14, 2005

15 November 2005

The Manager

Company Announcements Office Australian Stock Exchange 4^th Floor, 20 Bridge Street SYDNEY NSW 2000

Office of the Company Secretary

Level 41 242 Exhibition Street MELBOURNE VIC 3000 AUSTRALIA

Telephone 03 9634 6400 Facsimile 03 9632 3215

ELECTRONIC LODGEMENT

Dear Sir or Madam

Transcript of presentation by GMD Telstra Wholesale at the Telstra Investor Day

In accordance with the listing rules, I attach a copy of the transcript of the presentation by Deena Shiff, Group Managing Director Telstra Wholesale at today's Telstra Investor Day, for release to the market.

Yours sincerely

North brake

Douglas Gration Company Secretary

Telstra Corporation Limited ACN 051 775 556 ABN 33 051 775 556

DEENA SHIFF: Thanks, Sol. It's a pleasure to be here today to talk to you about the wholesale business. The wholesale business has actually been performing really strongly at Telstra for the last few years. We've consistently increased our top line growth year on year and we've improved the efficiency and the customer responsiveness of this channel.

However, our top line growth and the market dynamics within which we operate in the wholesale market are threatened by regulatory decisions. So what we decided to do is, rather than to follow these trends down, we've set a course for ourselves in the wholesale business that plays to the strengths of the business.

Before I talk about that further, let's just dwell a little bit on the wholesale market in which we operate in Australia. Over the last few years the wholesale market has seen increasing competition, as you're all aware, not just from new infrastructure owners building fibre in the CBD, inter-exchange networks, transmission links, but also in a variety of broadband networks in dense geographies. Believe it or not, we've actually learned to compete, and to compete quite well in the wholesale market over those years. We've improved our market share in many seqments, from international voice minutes through to domestic transmission. This last picture projects the likely rollout of ULL build in band 2 on the East Coast only. The next wave of ULL build around Australia will focus on the most profitable parts of Telstra's network, potentially based on cost structures very different from our own. This does create new and quite different wholesale market dynamics. So before I talk about that a little bit more, let's just talk about what's underpinned wholesale's performance to date.

This is a beautiful graph. I love this slide. The reason is that you can see that even though

the majority of our revenue streams there, which is the bottom five boxes, are largely declared, are regulated, they've actually proved to have very stable yield over the last three years, really, sort of contiquously with our undertaking period. The undertakings for our PSTN and local calls actually created that stability and enabled us to get out there and do some commercial agreements with our customers. But, at the same time, if you look at the top boxes, we've grown competitive services at six times the rate of declared services. That is, we grew 21 per cent last year on the previous corresponding period with these new competitive services. This is largely attributable to broadband, but we've seen gains across the board in wholesale markets where we compete with other wholesalers.

So that's the past. But going forward, the future does present three quite new challenges. Incorrect price signals for ULL will not only overstimulate direct loss of wholesale revenues from our network onto alternative broadband networks, but artificially deflated cost structures can distort the existing wholesale market for the sale of voice minutes across those networks relative to the PSTN. In addition, the undertakings that have underpinned the stability of our traditional yields in the last three years - our '03 to '06 undertaking - expires at the end of this financial year, so the ACCC will have an opportunity to re-rate the prices for those services in the absence of commercial agreements.

Thirdly, the policy instruments governing operational separation can impact the effectiveness of the wholesale business in competitive markets, where we have proved successful to date. For example, we risk having overstandardised prices and service levels imposed on us, rather than continuing to measure ourselves, as we'd much prefer, against what we're able to do for individual customers and their service needs.

So we are at a fork in the road, and requlatory decisions do determine the path that we're on in the wholesale business. The top line of that graph tracks wholesale revenue growth, assuming our new ULL and PSTN undertakings are accepted. The bottom line tracks the likely path of ACCC decisions, and that excludes second order wholesale effects, that is the loss of wholesale business to large customers who have gone and built their own ULL networks and who are then wholesaling in that new competitive dynamic. It also excludes retail flow on effects.

So what are we going to do? Well, this is what we're going to do. Firstly, we're going to ensure that PSTN recoveries reflect true costs. We also need to ensure that operational separation improves our customers' confidence in the wholesale business and doesn't impair our ability to compete as a wholesaler in this market. Second, we'll continue to focus on leveraging the scale of our network by driving volumes through the channel. This not only benefits shareholders, it also benefits wholesale customers because we'll move to reduce the costs of our network and operations and we'll pass on those benefits. Thirdly, and most importantly, we do want to deliver, as Sol said, great service. We want to improve upon the standards that we've previously set ourselves.

So what does this all mean in practice? On the regulatory side, ULL, PSTN originating and terminating access and local calls, as you know, all share the same cost structure of the CAN. We will lodge new undertakings for these services and we'll renegotiate commercial terms that reflect those costs. In the case of PSTN, as volumes decrease, sadly, the unit costs increase. In the case of local calls, we're convinced that, absent requlatory intervention, market forces will drive, both in retail and wholesale, the efficient price of calling minutes to efficient costs.

Our other focus is costs. We want to maintain our ability to operate as a low cost channel. Automation and efficiency of order flow has ensured that as orders increase, our related costs of sale, that's our direct costs of the front of house, have actually continued to drop. So last year in the wholesale business our transactions actually increased by 42 per cent, but our year on year costs decreased.

There will always be arquments in wholesale about price. There can be no arqument about our desire to really deliver a great service to our customers, and we're listening hard to what our customers want.

(Video played)

I can tell you with absolute certainty that there was no special wholesale deal to elicit that testimonial from MCI. But they, like many customers, are saying that service is really important to them - service reliability. These are inputs into their business so that they can do business with their end customers.

So where do we go from here? Well, we want to be easy to do business with, but I've got to tell you, we weren't always easy to do business with. What this graph is showing you is what our manual ordering systems used to look like. That little beanie baby is not an oppressed wholesale employee, it's actually the order flow that's bouncing around there with too many steps in the process, too many points of failure - it's ready, finally - after too much delay.

The next little visual shows you what automation looks like, system to system. Our customers' systems are talking to our systems and its shows how much easier that makes their life in terms of servicing their end customer.

Happily, 90 per cent of our orders are now on-line. This has not only delivered cost

savings to us, as I said before, but it's also made our wholesale customers' lives easier. Our on-line services have delivered to our customers quicker turnaround times, an ability to commit to dates with their customers and a much better capability on their part to track orders and check status.

More than half our orders, that's of that 90 per cent, that is about 62 per cent, submitted on-line have full automation, full auto flow through the systems with no manual intervention. We aim to improve that to 70 per cent by the end of this financial year and to continue to do better and to extend this automation. But we want to do more for the customers. We measure availability of the PSTN DSL networks and our on-line systems. No matter how well we perform on average, we're not convinced at all that we're actually measuring what our customers value and what they need to deliver to their customers. Accordingly, we'll be reviewing our service measures and metrics from our customers' perspective.

Finally, being a great wholesaler requires us to maintain the trust and confidence of our customers. That means the segregation of our operations from the retail channel. We remain as committed to doing this now, and to fulfilling those requirements, as we do to continuing to maintain high standards of billing accuracy and operational performance. We take those responsibilities extremely seriously.

So there are two straightforward objectives here for the wholesale business. We'll continue to compete hard, we will compete hard for traditional voice and data revenues, relying on the superiority of our infrastructure, be it for transmission links, voice minutes or data access. We will especially focus on improving the customer service experience. We'll do this in both the wholesale front of house and in the network business unit, on which our customers

rely for their full end to end service experience. Telstra Wholesale's business aims to deliver returns that are at least as good as the overall industry growth rates, based on balanced requlatory settings. But at the end of the day we'll do this by offering world-class service and performance.

SOL TRUJILLO: All right, Deena, thank you. But you're not going to get off without a question also. Now under the scenario that you described obviously there is a lot of pressure, and now there are real competitors in this wholesale space. As you think about competing, and if you were to describe to any one of the folks here, as a customer, what's better, what's different about Telstra than all the rest, what's your pitch?

DEENA SHIFF: Okay. We definitely have strength and capability across the fixed network. We have a broad product, we have greater coverage, greater reliability and we aim to improve that. Fundamentally we differentiate ourselves at the moment, and continue to do so, because of the service proposition delivered through the on-line experience, the fact that our customers' systems talk to our systems hugely differentiates us from our wholesale competitors.

SOL TRUJILLO: Great. All right. Thank you, Deena.