TELSTRA GROUP LIMITED — Call Transcript 2006

Sep 14, 2006

15 September 2006

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 John Stanhope, CFO of Telstra, at CLSA Conference

In accordance with the listing rules, I attach a transcript of a presentation by John Stanhope, CFO of Telstra, at CLSA Conference, for release to the market.

Yours sincerely

North brake

Douglas Gration Company Secretary

AUDIO TRANSCRIPTION OF PRESENTATION OF JOHN STANHOPE CEO OF TELSTRA AT CLSA CONFERENCE

$MC:$ We can start. Our current presentation is with Telstra, and we are very happy to have John Stanhope here, the CFO of the company, and also David Anderson, the head of IR for Telstra. The company has a lot of big plans over the next half year or so, and I'll let John tell you all about it.

MR STANHOPE: Thank you very much, Frances, and good afternoon ladies and gentlemen. It's a real pleasure to be here. I flew in at 6:30 this morning so if my eyelids start to drop you'll understand why.

I am going to start off with a summary of the financial results for the year just gone and then I'll talk more generally about Telstra's strategy going forward because, as those of you who have followed Telstra, we are in the middle of a significant transformation of the company. I guess it's the transformation we have to have. It's a transformation that we've been talking about for some time, but with the arrival of the new CEO and his access to some very good people from his previous experiences has made this transformation come to life. And so I will touch on the transformation programme being rolled out over the next three to five years.

Before I start, we have the normal disclaimer, and given that there are a number of forward-looking statements in this presentation, it's important that you just note that.

I'd like to start by giving you an overview of the highlights of the financial year that has just concluded. Our underlying earnings were at the better end of our expectations, down 6.9% to \$6.5 billion, which reflects the tough steps that we have taken at Telstra.

I guess on a more positive note, sales revenue was above our guidance range at 2.7% for the full year. In particular, the second half accelerated to a 3.9% growth, more than double the growth rate in the first half of 1.5%.

We are tackling the decline of PSTN head on. And, as you know, PSTN was down 7.6% in the first half of the year. The second half decline slowed to 5.8%, and we did this by integrating services, initiating customer winback programmes, and the introduction for the first time of value based subscription plans.

What we call the "new wave" revenues, that is the revenues that have come from new platforms and products on our new networks, so 3G, broadband, online, for example, Sensis business, they grew by 46% to be now \$2.7 billion and now account for 13% of the total sales revenue. And just as a reference point, at the end of the financial year PSTN was about 32% of our total revenue.

We've reduced our work force by 3,800 full-time equivalents, that's excluding of course the people that came into the business that resulted from the merger of CSL with New World here in Hong Kong. This means that we are ahead of our target run rate for head count reduction. And because most of the headcount reduction (2.800 of the 3.800) occurred in the second half of the year, the benefits will really be seen more in fiscal 06/07, and there will be the introduction in the form of an accelerated exit rate. And of course we are funding the transformation with some of these savings.

We've also taken out a large amount of costs to enable us to improve our ability to fund the transformation programme. We've achieved \$157 million of opex savings through better handset sourcing, through our relationship now with Brightstar, staff reductions, and the improved efficiencies in addressing and serving our customer needs, particularly in the field work force.

We've saved over \$500 million in capex, stopping a lot of projects, over 800 projects that didn't align with our strategy, and we toughened our approach with procurement negotiations. Much has been written about our procurement, but let me assure you it's still a very competitive process, but we are just playing the game a lot harder.

Thanks to market-based management, which is a plank in our transformation, we are now systematically targeting what we call "high calorie" growth. Now this has led to a strong second half performance in mobiles, broadband, IP solutions, and our Sensis business.

For example, in mobiles, 3G subscribers were up 297,000 in the second half, 255,000 of those occurred in the last quarter. So we have been quite aggressive on the 3G front. The 3G we believe is the future with high speed data access on those 3G networks. We've added another 100,000 customers in 3G since June. We are seeing that 3G ARPU is \$20 higher then 2G post paid ARPU, and we believe that within one year we will be the market leader in 3G, and remember that we sort of started 18 months behind our competitor 3, or Hutchinson.

In broadband we've increased market share by 1% in the second half and 3% (this is retail broadband) and 3% for the year to 44% market share of retail broadband customers in Australia. We've been adding retail customers at the rate of 3 to 1 versus our nearest competitor. Broadband churn at the same time is at 1.3% per month and we believe that represents global best practice.

In the enterprise market, the corporate customer end of the market, we have delivered strong growth in integrated IP offerings with improvement in margins, and we are now leading the IP migration in the industry.

Sensis, our information, search, and interactive applications and services business, delivered a strong 6.9% revenue growth and a 10% EBITDA growth in the fiscal year '06. Yellow pages online is now the largest contributor to revenue growth in dollars terms at Sensis.

So the result really is a story of two halves: The first half was characterised by modest revenue growth of 1.5%; and in the second half sales revenue growth grew by 3.9%. So more

than doubling the first half revenue growth despite the significant focus on executing our transformation. So we are keeping an eye on the underlying business as we do this major transformation

Sales revenue grew by 2.7% to \$22.8 billion, and when you exclude the \$66 million that came into the books if you like, related to the three months revenue from the newly merged New World part of the CSI group, sales revenue growth was 2.4%.

EBITDA and EBIT declined by 8.5% and 20.7%, respectively, as the transformation costs took effect in the second half. And it's important to add here that two things impacted the bottom line of the company. As we brought forward costs in terms of redundancy and restructuring, that was \$427 million, and the acceleration of depreciation, which was \$422 million, you will see about \$850 million of costs have been brought forward into the '06 year as we prepare properly for the transformation.

The net profit after tax decreased by 26% to \$3.2 billion. Free cash flow remains strong at \$4.6 billion, despite the significant increased spend in the second half on our transformation in terms of capital expenditure.

The transformation began in full swing in the second half with more than \$2.3 billion capex and opex and operational expenses invested over the six months. I just want to make clear as we are looking at the financials, and you've got them in the presentation packs, that we have during the financial year the first full financial year were we've reported under IFRS, or the Australian equivalent of IFRS, but the full year or the fiscal year, I should say '05, comparatives have been restated. So you are looking at like-for-like, so there's no accounting anomalies or things that you should look for there.

Okay. Now let me just turn to the EBIT and Restructuring and Redundancy Provisions.

Let me explain. As we move from the left-hand side of the screen "reported EBIT" across to the "underlying" position, because it's important to understand. It's important to get to the underlying position because that the performance, the true performance of the business before all these "overlays", if you like, come into effect. Reported EBIT for the full year was \$5.5 billion and, as I said, that was a decline of 20.7%.

From the reported result we add back the restructuring and redundancy provision (that's the first orange box on the left there) to derive an EBIT position pre-restructuring and redundancy provision, and there you have a decline of -14.6% to \$5.9 billion.

We then remove the net current year transformation costs of \$535 million, so these are costs that would normally be incurred in your business and they are made up of some savings from the benefits now programme, which is part of the transformation. The current year redundancy costs above what we usually have. I mean we often -- we usually have in a year some redundancy costs, but those that have been driven by the transformation: Accelerated

depreciation and amortisation, which I mentioned before at \$422 million, and transformation programme opex costs, so those costs that are expense related to the capital programme.

So after those adjustments we arrive at our earnings or EBIT from our underlying operations of \$6.5 billion, which represents a decline of 6.9%. You can't continue to have those sorts of declines in your earnings and that's why we are on a transformation.

You will recall that our guidance for the underlying business for the year was between -7% and -10%, so you can see that we are on the better side of that guidance as the result is the result of the full year fiscal '06.

The restructuring and redundancy provision raised to \$427 million represents \$186 million of redundancy, so recovering about 2,600 staff being made redundant over the next one to two vears, and \$241 million covering mainly the CDMA migrations. So as we roll out our 3G 850 megahertz network we will be closing the CDMA network, and so there is some migration restructuring costs in there. Penalties associated with exiting some leases, and of course the costs of decommissioning many of our systems.

So let's take a look at the sales drivers. Broadband, Sensis, and mobiles continued strong growth in the fiscal year. In relation to mobiles, revenue grew by $6.1\%$ to just under \$5 billion for the year, including terminating revenues, wholesale revenues and data revenues.

Mobile handset revenue growth was 23% to \$467 million, with the second half growth driven by our aggressive approach to 3G, as I mentioned earlier.

Mobile services in operation were up 3.2% or 261,000 to 8.5 million mobile customers, and data was the driver of mobile services revenue which was up 26%, so the data part of the ARPU.

I'll cover Broadband and Sensis in more detail later.

In relation to the other areas, the revenue highlights, or lowlights if you like in terms of PSTN. PSTN revenues in the fiscal year '06 fell 6.7% for the whole year as the migration continues away from the use of fixed line phones to mobiles and of course to broadband, that continues.

Internet Direct and IP solutions revenue was up 29%. It's driven by the increased use of IP services by our business customers, a trend that we believe will continue.

Wholesale broadband revenue was up 77%. That was driven by strong customer growth of $61\%$ .

So lastly, other people buying wholesale DSL services. There was only 120,000 ULL lines in that wholesale growth.

Solutions management revenue, this is sort of management services type of function, increased 6.2%, mainly driven by some significant contract wins that our KAZ business achieved.

And our pay TV revenues continue to grow. We use pay TV, it has very low margin. We use those pay TV in our bundle so we've got a quadruple bundle.

So let me move to Operating Expenses. Operating expenses increased by 14% to \$13.5 billion, and of course that has everything in it including restructuring and so on. Excluding transformation, operating expenses increased by 9.1% to around \$13 billion. The key points are:

Labour expense rose 13% to \$4.4 billion in the year and only 1.7% when you exclude the redundancy expense. So in the year that has just passed redundancy is certainly been a major part of that labour expense growth, and not surprising when we reduce staff by 3,800.

Redundancy, pay rises, and increases associated with the controlled entities has pushed labour expenses up, of course partially offset by the reduction in staff number. But as I say, we'll see more of the flow through effect into the 06/07 year.

Good and services purchased increased 12.3% to \$4.7 billion. There were small increases across most categories, but the biggest drivers of cost growth in this area were: Costs of goods sold, was up 26.3% driven by mobiles, and a strong mobile marketing campaign towards the end of the year, as I referenced earlier; and of course BigPond, the growth in BigPond broadband demand. Handset subsidies were up 18.9% following the increased marketing activity around 3G, and CSL New World in Hong Kong here launched an aggressive handset offer also.

Other expenses increased 16% to \$4.4 billion and excluding the transformation related costs other expenses increased around 12% to \$4.3 billion. The key components of the other expenses were: Service contracts were up 18% driven by the transformation programmes. It's probably important to explain that a lot of this transformation is being done on a turnkey basis so that when we engage people like Accenture, Alcatel, Ericsson, etc. where there are expensed items as distinct from capital items they go into this category called service contracts, but they --it's about as variable as in the costs of the transformation.

Marketing costs were up 7.9% and that's because we have become more aggressive in the market with our marketing.

Let me just talk about depreciation and amortisation a bit. As expected, our depreciation and amortisation grew. It grew by 16% to just over \$4 billion, but as I alluded to earlier it does include the \$422 million of accelerated depreciation because we are taking CDMA and other things out of our network a lot faster as we do this transformation.

Excluding the accelerated depreciation then and the accelerated amortisation, the depreciation and amortisation increased 3.9% and that's an increase that is consistent with the growth in our asset base over the past few years and of course the inclusion of New World's assets into our asset base.

So we'll talk about cash capital expenditure. Total cash capital expenditure increased 4.2% to \$4.3 billion. That was within our revised guidance range of between 4.1, to 4.4. You will recall we revised that down to that level and we were within that range. Excluding acquisitions, capex increased 20% to \$4.25 billion as we execute the transformation.

Domestically we spent \$1.35 billion on transformation in the second half, including \$634 million on building the new core IP network and the next generation Ethernet transmission network which will support high speed broadband.

\$455 million spent on building the 3G 850 wireless network which at June was about 60% complete.

\$159 million, and this was just the start, on our operating support system and business support system transformation, and it was aimed in the first instance at customer care and billing solutions.

Total domestic capex spend on existing networks was about \$2.6 billion, so it sort of the maintenance capex level was about \$2.6 billion. We expect that to drop down this year and transformation to go up. I'll talk about that a little more in the guidance.

Internationally, we completed the merger, as I said earlier, between CSL and New World PCS on the 31^st of March. New World has been consolidated into our group numbers since the 1^st of April, so the last quarter of the fiscal year. The merged entity grew revenue at 12%, of which 8.7% of that was due to New World. And CSL's revenue growth was driven by rising data revenues, both local and international, and international voice and prepaid revenues.

EBIT was down 5.4% to HK\$686 million. That was driven by the inclusion of the merger costs and increased subsidies as part of the increased promotional activities that I was talking about earlier. And there were some higher offshore out payments associated with higher international voice revenues.

Telstra Clear, on the right-hand side of the slide, which is our business in New Zealand, reported an increase of 2.5%, on the top line, the revenue line, to NZ\$693 million. And the increase is attributable to stronger revenues in the consumer space, having more products and services to offer, and the full year inclusion of Sytec. Sytec being a small ICT company that we acquired in the prior year.

I'll cover the recent acquisition of SouFun in China shortly.

So, Cash flow and financial parameters. Free cash flow declined 12.4% to \$4.55 billion due to the lower earnings of course, higher tax paid due to an instalment rate adjustment by the tax office, higher capital expenditure that was incurred in the year due to the transformation, and we had lower asset sales occur in the year also.

With regard to our financial parameters on the right-hand side of that slide, we are very comfortably sitting below all those measures and we will see in the fiscal 06/07 that we will start to touch, go into those areas, our target areas, as we spend in 06/07, which is our largest spend year on the transformation programme, which leads me to a discussion on where we are with Telstra's transformation. It is on track and it is gaining momentum.

With regard to the deployment of our wireless 3G 850 high speed data packet access network, the radio installation is 75% complete, with transmission build 80% complete. And operating in the 850 megahertz band will allow our network to provide superior depth of coverage. This is all about Telstra developing a wireless competitive advantage, being able to differentiate. We have the only 850 megahertz, we are licensed or we have the only 850 -- sorry, there are two small little bits in Melbourne and Sydney, but we have the only national 850 megahertz spectrum and it does provide us with greater breadth so we will have the only 3G network that is national, so 98% coverage of the population and we will have, because it is at the lower end of the spectrum band, better in depth or in-building coverage.

HSDPA is now endorsed globally as the standard for high speed data access on wireless and peak speeds at launch will attain about 3.6 Mbps increasing to 1.44 Mbps by mid '07. Now these are peak speeds and of course the average speeds are lower but they are very high wireless data speeds.

Our wireline programme is in full swing and we are on the way to increase capacity, scalability, and reliability, and reduced costs. We are going to do this by having a single IP/MPLS core and 60% of the sites are completed.

So, what does all that mean? It means that we are going to get rid of a lot of other platforms we've got, like intelligent network platform, special services network platform, digital data network platform, and all of our services will sit on the single IP core. It'll have a multiservices edge capability that will be deployed at four main sites, and IP-DSLAM deployment is well underway.

Our market-based management programme, which is part of our transformation as well. The company is transforming its way of going on the market and going to our customer base, understanding our customer base. It's well-advanced and is already spurring growth in the high calibre revenues. And the \$20 improvement that we're seeing in 3G ARPUs versus 2G ARPUs has a lot to do with our approach to the market and marketing that service.

Our IT transformation is on track. We have selected fewer first class vendors and packages to minimise customisation and reduce the total costs of ownership of IT, but it's also about reducing the number of systems that people at the front of house and the field force have to cope with to do their jobs.

Our analysis shows that with our selected platforms over 85% of required capabilities can be met "out of the box", so we are resisting modification. And we think best practice of doing this is about 65%. So that is our aim. We think we can do that.

We will deliver in the next wave of headcount reduction by reducing the complexity and improving productivity, and this will translate into an annuity stream of cost savings in hundreds of millions of dollars

In August we opened Telstra's new \$50 million state-of-the-art integration laboratory. It's a significant milestone in Telstra's transformation to a next generation network. The laboratory itself is set up as a mini-next generation network and will deliver next generation services across five capital cities to 5.3 million of our customers over the next five years. And this is where we have our two soft switches working in a laboratory prior to us rolling soft switches out into the network.

Going forward the momentum will continue. The fiscal '07 capex spend will be the largest investment effort in infrastructure in Telstra's history, and will include the completion of the initial footprint of the 3G 850 megahertz wireless network roll-out. It will see us continue the wireline transformation, and expenditure aimed at further reducing single points of network failure, of which we do have some and cannot afford to and that is about reliability, as well of course the platform rationalisation that I spoke about.

Driving Long-term Shareholder Value. We've got to go and we are going through a couple of years of -- I guess our CEO has characterised it as tough medicine. It is, and it's a very large transformation programme that I've outlined.

In terms of strategy, we really are in a unique position to deliver on the transformation because we've got the scale, the scope, and now we have the talent.

The suite of assets owned by this company is really unmatched anywhere in the global Telco sector. We still have our wireless and directories businesses intact: some don't. We are the leading player in broadband, and have a 50% share of the main pay TV operator in Australia, Foxtel, which recorded its first operating profit and has in excess of one million digital customers.

Telstra, therefore, is very well positioned to take advantage of the convergence opportunities and as customers require integrated solutions we will be able to provide them.

The value creation opportunity from convergence stems from – will give us higher ARPUs and lower churn. For example, in our consumer business we are currently observing up to a 350% uplift in ARPU and a 4-fold reduction in churn as customers take more than one product and up to four products, including mobiles, their fixed line, internet, and pay TV.

The opportunities are exciting, but tempered by current complexity and duplication. Our "one factory" approach, IT, the network, all the rational aspects of the company have been put into one factory under the Chief Operating Officer. That approach together with IT transformation will deliver an annuity stream of costs savings as we simultaneously reduce complexity and the duplication, and improve service levels.

Let me just talk a little more about two of our main growth drivers: BigPond, our broadband retail ISP, or really it's more than an ISP, it's a portal; and Sensis that are behind our convergence strategy and our integrated services strategy.

So, BigPond first. The increasing strength of the BigPond brand, the success of our marketing and differentiation, is providing real value for our customers. In fiscal year '06 retail broadband revenue grew 58% to \$730 million, and the retail broadband customers base grew by 72%, or over 600,000 to 1.5 million customers. This occurred as we continued to migrate narrow band customers to broadband, reduced churn to 1.3%, and increased market share to 44%, an overall increase of 3% for the year.

And we continue to lead the way in broadband with BigPond introducing two new access products during the year: BigPond Wireless Broadband delivering Australia's widest wireless broadband coverage; and Cable Extreme. Because remember, we also are a cable company. We have an HFC cable and Cable Extreme provides customers with speeds of up to 17 Mbps on our HFC network.

Integrated delivery of content and value added services is a significant differentiator for BigPond. Innovation has been a feature at BigPond with the launch of the first online movies and game services. New online content channels launched include BigPond TV and showcasing the range and depth of BigPond on-demand and live content.

Integration and innovation will be a continual focus in fiscal year 07 with the launch of the HSDPA network. In terms of BigPond it's not about the land grab for access, it is very much also about applications and content and driving ARPU up from the unique applications and content that we can deliver.

So let me talk about Sensis now, the other part of our growth story or one of the other parts. Sensis is our advertising, transaction, and directories business. It grew revenue by 6.9% to \$1.8 billion.

Yellow Pages revenue grew by 5.8% to \$1.2 billion with print revenues still growing. They grew by 2% to just over \$1 billion, while Yellow Pages online revenue grew 54% to \$124 million.

The White Pages revenue is still growing, grew by 12% to \$302 million. The underlying EBIT of the Sensis business grew by 10.2% when you exclude some transformational D&A (that's depreciation and amortisation) because we have actually accelerated there as well, the take out of their old system. So inside Sensis we are modernising or upgrading their core suite of systems. So the reported EBIT was up 7.7%.

The search industry is helping us, not hurting us, with over 2 million customers a month using search to find our content. Increased usage is driving yields and margins up. As a result, Yellow Pages online margins are now close to print and is now the largest dollar contributor to revenue growth in the Sensis portfolio.

Sensis continues to innovate with recent initiatives including the world's first location aware search engine, Sensis mobile, and Australia's first SMS search service and mobile satellite navigation service.

And Sensis is not just a directories business. We have a suite of high growth emerging business which delivered 19% revenue growth in the year and revenues in excess of \$200 million.

Sensis has the capabilities that matter in local search: Trusted iconic brands that are synonymous with local search, deep content, mainstream sales, and customer relationships, large user base of buyers, and multi-channel capabilities and integration within Telstra.

I've been asked a question throughout the day, you know, why isn't Google a threat? Well, Google is a threat of course, but the statistics tell us that about 15% of people who go into Google buy (say purchase), 60% who go into Sensis buy. So, if you are an advertiser where would you prefer to put your advertising? With respect, a local search.

So, some recent developments I mentioned that I would touch on a little later. So let me move on to the recent developments.

Telstra announced two transactions on the 31^st of August that were aligned to our growth strategy that we announced back on the $15^th$ of November 2005. The net cash outflow for the two transactions was \$91.5 million, so we did those two transactions at the same time.

We purchased a 51% shareholding of SouFun Holdings Limited. It is China's leading real estate and home furnishing website. Telstra has made this acquisition at a very good price, a total cash consideration of A\$342 million.

SouFun will be cash flow positive from day one and is already profitable. In the 2007 financial year it is expected to contribute net revenue and EBITDA of A\$52 million and A\$18 million, respectively. It is expected to -- SouFun is a high performance business, has been growing net revenue at near triple digits, and is in the top 100 most visited websites in the world.

Souf un gives us an opportunity to play a part in the rapidly growing Chinese online advertising market through an internationally experienced and high performing and wellrespected local management team lead by the CEO Vincent Mo.

The acquisition is consistent with our commitment to our growth strategy for Sensis as one of Telstra's core growth platforms for the future.

We also announced that we sold the superannuation administration business called Australia Administration Services for A\$215 million. In addition, at the same time we took out of that business A\$35.5 million cash that was surplus prior to the settlement. Telstra will recognise a profit on the sale of that superannuation administration business of around A\$56 million.

This business was sold since it was not strategic to us and it has a risk profile that really is outside the standard risk exposure that we want in the Telstra business. It was a part of KAZ when we purchased KAZ. KAZ is not for sale. It's still a valuable asset to us and it continues to be a crucial part of Telstra's ICT strategy and service delivery, particularly in the enterprise or corporate market.

So, just a few other regulatory or recent developments, particularly the regulatory area. Regulation is central, of course, to Telstra's business. It does affect shareholder value, can affect it adversely by increasing Telstra's costs or reducing the opportunity for Telstra to earn revenue and grow.

One of the most important current regulatory issues is unbundled local loop or known as ULL. ULL pricing refers to the de-average national price for wholesale access to its copper network by our competitors.

The ACCC has issued interim determinations at \$17.70 per month in Band 2 for unbundled local loop access. Final determinations are yet to be made by the ACCC and the actual pricing and the timing is up to the ACCC.

The regulator's decision confirms the reduction in wholesale prices paid by competitors serving consumers in urban areas. However, the ACCC's decision is inconsistent with the government's policy of national uniform retail prices and destroys value for Telstra's shareholders. The decision defied logic and ignored Telstra's real costs and its real and significant annual investments.

Therefore, while Telstra is committed to vigorous competition in the marketplace, it will appeal the ACCC's decision on Telstra's proposed ULL pricing to the Australian Competition Tribunal.

And you may have seen yesterday there was another decision by the regulator concerning originating and terminating access prices and local call service prices, where it rejected our position where we said access should go up and calls should come down. They flipped it around to access should come down and call should go up, which also defies logic in our mind with respect to where costs are rising and where costs are decreasing. And of course we are looking at that decision now, but are likely to appeal that also.

Let me move on to the current guidance that we've given. This is guidance that has been adjusted because of the unbundled local loop decision by the regulator.

In developing the guidance for fiscal '07 we've made the following assumptions: There is no FTTN in our plan, so no fibre to the node; ULL pricing in Band 2 is \$17.70, it applies for all wholesale customers for the remainder of the financial '07 year; it is the largest year for transformation spend, capex and opex with the company, and I've told you it is; and that no additional provision will be raised for restructuring or redundancy in the 06/07 fiscal year.

The guidance is also based on reported numbers, so the numbers that come out in the statutory accounts. We expect revenue growth of 1.5% to 2%. Depreciation and amortisation will continue at levels in line with the 05/06 year. EBIT will grow in the range of 2 to 4%. We expect our underlying EBIT, so when you factor out the transformation costs and so on as I described earlier are on a slide, we expect our EBIT to be in a range of -2% to -4% when compared with the '06 underlying EBIT of \$6.5 billion shown on the slide.

Our cash operating capital expenditure will significantly increase from last year to between \$5.4 billion and \$5.7 billion. Fiscal '07 will represent the peak of the capex spend for transformation.

It is the current intention of the Board to declare ordinary dividends of 28 cents per share for the fiscal '07 year. This assumes Telstra continues to be successful in its implementation of its transformation strategy and there are no further material adverse regulatory outcomes during the course of fiscal 2007.

The level of future dividends beyond 2007 will be subject to regulatory outcomes and other normal Board considerations.

I just want to bring something to your attention which I did on our announcement day. I think it's important. Because of the unusual nature of our spend profile in 05/06 and when we actually took the accelerated depreciation into the books, and when we took the provision for redundancy and restructuring into the books, we are going to have an unusual half year.

The following factors, and they are on the screen, will affect the half on half performance in this fiscal year.

There will be a delay in the revenue recognition of the Melbourne Yellow Pages book until January 2007. The revenue recognition policy with respect to directories books, the yellow pages, is when it is at least 60% distributed to the market.

New World consolidation for the full 12 months will obviously be in the result.

Transformation costs in first half '07 compared to none in the first half of '06 will impact the outcome; and no accelerated depreciation amortisation occurred in the first half of '06, it all occurred in the second half, so it will have an impact as well.

So, what does all that mean? The impact of all these results will cause a significant reduction in our first half '07 EBIT in the range of -17% to -20%.

Now, we've given guidance for the full year. The reason I am doing this is to make sure when we get to the interim result or the half year result in February everybody doesn't say, "Gees, you know, the wheels have fallen off here." So we just want --- I just wanted you to understand that that's how the year will unfold.

Finally, I just want to note for you that on the $6^th$ of October, Friday, $6^th$ of October, in Australia, there will be an Investor Day. The reason for that activity is to again bring the market up to date with where we are with our transformation programme. It is very important. We are very mindful when we are in such a large transformation programme to continue to bring the market and investors up to date with what we are doing.

Thank you very much for your attendance. Thank you for listening to the Telstra story. I'll just take a seat over here and we'll take some questions.

MC: Okay, We're running a bit short on time. I only have time for one question, or two questions. Please.

MR STANHOPE: Yes.

QUESTION: You talk about new management versus old management, what's the difference?

MR STANHOPE: I'm old. What's the difference? That's a very good question. As I said we -- the old management recognised transformation was necessary for the company. We couldn't stay on a path of what I call "the death of a thousand cuts", but quite frankly we didn't have the management talent to pull it off. And what I've noticed, and in January I will be there forty years, what I've noticed in the company, you know, Sol has done this sort of thing before, but what he was able to do because of his Telco experience in the U.S., in Europe, was able to and has done go and say, you know, handpick people to come and do this. So you know we've got Greg Winn, the COO, that he's known for a number of years, and he's just a "hard ass". pardon the language, Chief Operation Officer, but below that he's got very good engineering skills he brought in. We've got a guy called John Gonner, he's probably the world's leading wireless engineer. That's what's different. They are people who will be able to and are demonstrating they can deliver on this transformation. We've attracted, you know, Fiona Balfour from Oantas, a CIO that's also done transformations, did a transformation in Oantas. We've got a guy called Tom Lamming whose done major IT transformations when he worked for Accenture. and so on. So that's the difference between, and I hasten to add the old management complement the new management. I'm biased of course, but I really think the combination of the two will get us there. We've got to get there anyway. There was no choice really but to do this transformation. Yes, you can argue about the speed and execution risks and so on. I would say to you the execution risk is made smaller by Sol's ability, the new CEO's ability to attract this talent.

QUESTION: Alright. Sorry, two quick questions. First of all, based on the information that's come out so far, what if the government does sort of sell off its stakes, etc, will they leave some takeover protection in place? And, secondly, can you tell me when in the financial year does management share options get priced?

MR STANHOPE: Firstly, when the government sells - I mean there is already take over provisions in the Corporations Law in Australia. There is a 20% takeover provision. Also, there is still on foot the foreign investment limitations, so 5% individual holding, no more than 35% foreign ownership. So, those conditions are still part of the sale.

The assessment of the share prices $-30^th$ of June, the end of the fiscal year.

MC: Okay, we're out of time.

OUESTION: Sorry, just one more.

MR STANHOPE: You can't see behind there.

MC: Okav.

OUESTION: Thanks. Just two quick questions. Talking about under your recent development slide, slide 17 where you talk about the ACCC decision, what's the government's overall view? Is there any update on what the government is saying about consumer tariffs, you know just tariffs to consumers? And appeal, what's the basis for your appeal?

MR STANHOPE: Okay. The government hasn't changed their communications policy with respect to consumers having average retail pricing. So, retail price parity means average retail prices. So if you live out in the bush in Australia you get charged the same amount for basic access service as you do in urban Australia. So that government policy objective is still on foot. And one of the issues that we argue about is that it ought to be symmetrical, that wholesale prices therefore should also be averaged. And one of the debates and one of the things that will be part of our appeal will be it is unconscionable to have that sort of policy for retail and not have averaged prices for wholesale. That's one part of the appeal.

The other part of the appeal is that we just do not agree with the costs calculation. Now one of the things when regulators apply long running incremental costs, economic models, you know, it relies on what is the replacement technology, what is the technology of the future to ascertain the costs. And so, there will always likely be a debate around costs, but we will simply point out that, you know, when you are talking about the last mile, the copper access, copper prices, they are by implication arguing that copper prices have gone down, the labour costs of providing the service has gone down, that, you know, fuel for trucks have gone down. I don't think so. I don't know if anybody knows that or thinks fuel prices have gone down and wages have gone down, So that will be the basis of our argument, that the costs analysis is incorrect.

MC: Okay. Thank you very much.

MR STANHOPE: Thank you folks.