TELSTRA GROUP LIMITED — Call Transcript 2006

Aug 21, 2006

22 August 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 from Telstra's revised guidance on financial outlook teleconference

In accordance with the listing rules, I attach a copy of the transcript from yesterday's revised quidance on financial outlook teleconference for release to the market.

Yours sincerely

Pont brake

Douglas Gration Company Secretary

TELSTRA CORPORATION LIMITED TELECONFERENCE MONDAY 21 AUGUST 2006 REVISED GUIDANCE ON FINANCIAL OUTLOOK

DAVID ANDERSON: Good morning, ladies and gentlemen, and welcome to this conference call. I am David Anderson, General Manager Investor Relations at Telstra. I am joined by Sol Trujillo and John Stanhope.

By now you should have received a copy of our announcement to the Australian Stock Exchange this morning. We will begin our conference call today with some comments from Sol and John on the announcement. After those comments there will be an opportunity for you to ask a few questions and the operator will advise you on how to queue your questions when the time comes.

We would appreciate your questions being directly related to the announcement released this morning and that you ask one question at a time. We will be taking a few questions first from analysts and investors and then from the media. That is all we will have time for today. I will now hand over to Sol.

SOL TRUJILLO: Good morning everyone. I have a few comments that I will share with everyone on the call here and then I am going to let John Stanhope take you through the specifics of our earnings guidance for the FY2007.

Last night the Telstra Board met to consider the impact on earnings and dividends following the ACCC's series of interim decisions that we have been notified on regarding some of our wholesale customers and the associated ULL pricing and all of these letters we started receiving as of a week ago Friday afternoon and we received a few during the week last week, but they do now cover a majority of the volume of customers that we serve,

so we are at a point where this past weekend we felt we had enough of these interim decisions that we now will implement the pricing of and have implemented to start looking at a review of our guidance that we gave on 10 August.

The board I guess I would say in terms of a core principle has continued the philosophy that we articulated beginning last year when I first arrived and that is that the shareholder is at the centre of our focus and will continue to be at the centre of our focus. We obviously last year engaged in a transformation program to enable shareholder value creation to reverse the trend that has existed since T2 in 1999, but today's decision that we are sharing by the Board is reflective of this commitment to the shareholder.

So, as I talk about it I will talk about two things. One is the dividend itself and on dividends, obviously, despite the earnings impacts that I guess what we have historically called the value-destroying pricing decision of the regulator, we are going to go forward and declare the ordinary dividend of 28 cents per share for the fiscal 2007 year. This assumes that the company continues to be successful in implementing its transformation strategy which again we have shared some early milestones and successes that we have relative to our implementation and also that there are no further material adverse regulatory outcomes during the course of fiscal 2007.

At the same time, the Board has drawn the conclusion that we cannot give guidance on ordinary dividends for the fiscal 2008 year owing primarily to the continuing uncertainty attached to regulatory outcomes and impacts. Obviously the decisions that we have received at this point are interim and obviously as the year progresses we presume that the regulator will finalise both our filings as well as these determinations reflected here.

The Board in fact recognises the importance of dividends to our Telstra shareholders and so we are making this decision understanding that there are negative consequences associated with the regulator's decision.

The final amount of dividends declared for any year is a decision for the Board to make. Normally it is made twice a year in its normal cycle, having regard to, among other factors, the company's earnings, cashflow as well as other items that impact it such as regulatory. So, in terms of the details of our guidance and the updates relative to how we have calculated the impacts, I am going to turn it over to John Stanhope to take you through the revised guidance itself.

JOHN STANHOPE: Thank you, Sol. I will briefly take you through the revised earnings guidance. But before I do, I do want to remind you all that Telstra went ex-dividend today, meaning the shares opened 14 cents down, which is of course the value of our '05/06' final ordinary dividend declaration.

This guidance assumes again no FTTN build and it assumes a Band 2 ULL price of \$17.70 per month, applying for all wholesale customers for the remainder of fiscal 2007. That is down from our \$22 per month that I advised on 10 August. As was the case on 10 August, it also assumption no additional redundancy and restructure provisioning and fiscal 2007 is and remains the largest transformational spend year in our five year transformation program.

So, Telstra's revised fiscal '07 outlook is as follows: The revenue growth of 1.5 to 2 per cent which has changed from the previous 2 per cent to 2.5 per cent, that's plus 2 to 2.5 per cent; the EBIT growth of plus 2 to plus 4 per cent which has changed from our previous guidance of plus 4 to plus 6 per cent; and the underlying EBIT, that is excluding the transformation costs, will be minus 2 per cent to minus 4 per cent, which has changed from the previous guidance of flat to minus 2 per cent. There is no change at all to our guidance for operating cash capital expenditure, which remains in the range of \$5.4 billion to \$5.7 billion.

On our earlier guidance, just to state the facts again, Telstra's previous guidance for fiscal $2007$ was based on a price of \$22 per month in Band 2 for ULL access and this was the most reasonable and reliable assumption at that time, particularly as it was the last price mandated by the ACCC prior to the issuing of the first interim determination on the evening of 11 August and it was the lowest actual price being paid by customers at that time and Telstra had been in discussions with the ACCC about ULL pricing at various levels above those that were contained in the interim determination.

In addition, we note that since Friday 11 August when we received the first interim determination at \$17.70 per month in Band 2, the ACCC has issued several other interim determinations at that same level, \$17.70 per month, and Telstra expects the same outcome in the remaining interim determinations and that's why we have made an assumption that \$17.70 per month will apply for all wholesale customers for the remainder fiscal 2007.

Final determinations are yet to be made by the ACCC and the actual pricing mandated by the ACCC in those financial determinations and their timing remains a matter for the ACCC. It is worth noting that Telstra will continue to pursue all available avenues to achieve reasonable regulatory outcomes for the benefit of all shareholders.

Having said that, I will hand you back to David who will oversee the questions.

DAVID ANDERSON: Thank you. We are ready to take questions.

OUESTION: (Tim Smeallie, Citigroup.) Good morning Sol, good morning John. Just in light of this new guidance, if you look at the revenue and EBIT revisions, you'd need to lose about 2.2 million lines to equate to this

So I guess my question is: Is this new guidance more about impact. Telstra's defensive strategies and responses and price discounting than the actual line loss and, secondly, how many ULL lines are you assuming by June 2007?

JOHN STANHOPE: You have made an interesting conclusion or drawn an interesting conclusion there. The earnings guidance just doesn't relate to line loss if the assumptions behind our earnings adjustment also includes the pass through of the lower price into retail pricing and that is a reasonable assumption that our competition would do that and we have stated that we will fight for market share and we will fight for market share and therefore a simple assumption that it's just line loss is not correct, Tim.

QUESTION: I thought it would be pretty tough to lose 2.2 million.

JOHN STANHOPE: No, you are jumping to the wrong conclusion. It is not just the straight line loss, it is the flow-through of the price reduction into retail pricing which we may have to match and the assumption is that we will fight for market share in the market.

OUESTION: (Patrick Russel, Merrill Lynch.) Look, just a follow-on in relation to the last question in terms of cost, John. Is there any change in your cost assumptions, because I notice the EBIT decline is a little bit bigger than the revenue decline in dollar terms.

JOHN STANHOPE: Yes. There is some small cost increases in the earnings assumption and that is related to an increase in lines.

QUESTION: (Laurent Horrut, JP Morgan.) A quick question on the revenue growth items. Just wondering if it is reported or underlying given that there will be a full year consolidation of New World next year?

JOHN STANHOPE: The revenue growth and the EBIT guidance assumes that CSL New World is included, so it does include the increase.

OUESTION: So it is reported.

JOHN STANHOPE: Yes, it is on reported basis.

QUESTION: (Christian Guerra, Goldman Sachs) Good morning. Just a quick question on your dividend when you said that it assumes two things; firstly, continued acceptance on the transformation program and, secondly, no material further adverse regulatory outcomes. Just on the transformation program, I am wondering if you can give us your two or three KPIs just in terms of that; in other words, what are the sort of two or three most important vardsticks on the transformation program for you to meet that 28 cents dividend guidance. Thanks.

SOL TRUJILLO: Christian, the key considerations we discussed on the 10th were one in terms of our continued cost takeout, because if you look in the aggregate over the five year plan and three year plan, there is material value impact by streamlining the business and, as you saw, we announced that we had already taken out 3800 full-time equivalents. Much of that impact was later in the half than for the full half, so we are making good traction on the cost side and that is a milestone issue for us as we think about cost tracking.

Part of it was also the Opex that we talked about of the \$157 million of run rate Opex that we had taken out, part of it was the Capex, and all these are cash affecting items, where in Capex we said on run rate kinds of spend we had taken out about \$500 million. Obviously we are continuing to work that very hard.

On the other side of key milestones, one of the biggest milestones in 21.08.06 $-6-$

the transformation that we will have that will be noticeable to everybody in Australia will be meeting the commitment and the guidance that we said that we would roll out a 3G HSDPA 850 network by the beginning of 2007. Obviously that was a pretty bold commitment back then vis-a-vis a nationwide network and vis-a-vis anything that's ever been built in any country and if we roll that out obviously that will be a significant milestone because it gives us competitive advantage and that's part of what we are doing and also it will enable us to take significant costs out of the run rate of the business once we begin retiring the CDMA network and some of the associated costs there.

As you know, Minister Coonan has issued a letter last week or a release noticing that there will be an audit in place before we shut down the network, which we agree with because we have made a commitment. I have made a commitment that we will do everything that we said we were going to do and that's fine and then finally on top of that we are transitioning our core networks again to take costs out in terms of the transformation to the IP core or EDGE networks and some of the other core cost take-out elements that are not obvious to people that are not insiders in the business, but are big material impacts on our run rates cost of doing business on the inside of the business. So, we have several of these built into our plan and that's how we are tracking.

QUESTION: (Andrew Hines, Morgan Stanley.) My question goes to the dividend in '08. Interesting decision not give guidance to the '08 dividend given how important that must be for the T3 process, certainly for the retail investors at least. You say that that is due to further uncertainty on regulatory decisions I guess on what we have already had. I guess we have had the FTTN decision, we have had the ULL decision largely settled. What else is outstanding now?

country than I do. Apparently there is a history here in Australia where interim decisions are sometimes issued but final decisions do not necessarily reflect interim decisions and that has been a concern on the part of much of our management within the business as we looked at estimating impacts.

Clearly, in terms of these interim orders, they are not in any great detail as a final order would be outlining any terms and conditions that might be associated with it and again we are not trying to overstate this issue but, at the same time, until we have final determination we really can't look out beyond the coming year as we think about some of the estimates and obviously we have other ongoing proceedings in front of the regulator that will also be either revenue impacting or cost impacting as we go forward, but the key here, and I just want to emphasise this, Andrew, is that the Board has made a decision relative to maintaining the dividends for the coming 12 months and, when we think about that, we obviously had very significant conversations about the importance of the shareholders and protecting them as much as we can in the near term from some of these negative decisions that have been made and that will continue to be our driving philosophy. There's been no question about us putting shareholders first since all this conversation has begun and that will stay on the forefront of our agenda going forward.

OUESTION: (Andrew Levy, Macquarie.) I just wanted to say in the context of today's announcement and the ULL pricing decision, how comfortable are you with your longer term targets, particularly the revenue growth target and the margin target?

SOL TRUJILLO: Again, based on some of the items we are not clear on until we have final determination or at least further clarity, we are not changing long-term guidance at this stage because we still have that bit of an asterisk on our guidance. Now, we will provide more updates in the

coming months as we have a chance to take more time to do more analysis, to do some of our forecasting and other things, and we will update you as we have and it would be my intent that some time in the next few months that we will have another what I would call an investor day session that we can get into some of this detail.

QUESTION: (Richard Eary, UBS.) Good morning. Two questions. One is that with regard to obviously the new revenue and EBIT guidance a 50 basis points change to the revenue I think equates to around 110, 140 million in revenues. Just by looking at the ULL numbers that you gave at the end of last year, plus obviously the change in ULL price, it seems that obviously the bulk of that component is second order impact, so if I was to adjust the 100 million and divide it by the 7.8 million lines that you had on a retail basis last year, it effectively assumes a \$1 reduction in terms of pricing. I don't know whether you can confirm whether that analysis is sort of correct. That would be the first point.

The second point is with regard to franking. I understand obviously at the end of last year the franking balance was probably just minus \$17 million. Does the ability not to commit in '08 raise issues in terms of the franking balance for '08 if the dividend needs to be refunded from the balance sheet? I don't know whether you can comment on that.

JOHN STANHOPE: The most sensitive element to the revenue and earnings guidance is the flow-through of the price into retail prices and that is the point I was trying to make when Tim asked a question; it is not the number of ULL lines. Now, having said that, the assumption behind the guidance is there is an expectation increase in lines. I mean there were 120,000 unbundled local loop services at the end of 30 June and we do expect the '07 fiscal year for that rate of ULL services take-up to increase significantly and especially given that \$17.70 rate, but the biggest sensitivity behind the earnings guidance is the retail flow-through of prices.

Your second question, franking. Our guidance is unchanged about franking. We expect that, given that we achieve our plan, that we will be able to fully frank a 28 cent declared dividend in '07 and we don't see any issues in the following year with respect to franking.

QUESTION: (Derek Francis, UBS.) I guess my sort of backward engineering understanding is that \$17.70 is probably based on de-averaged ULLS prices - I would be fairly horrified if you could get there with average ones - and I have been scouring the world and can't actually find an economist that would support de-average prices, that they should actually be average, so I am just wondering, if the ACCC does this for final decisions, what is the sort of timetable for challenging them in court and getting average prices in, which I think a court would have to agree with because they sound common sense in getting the ULLS price up rather than the current trajectory of down which doesn't seem to make much sense given rising input costs.

SOL TRUJILLO: I guess I can only say that I fully agree with you. Obviously we have provided data and it is all public information relative to the price of copper going up three to four times in the last five years, the price of fuel going up, the price of labour. Every cost that is an input cost has gone up fairly dramatically in the last five years and reducing prices in the face of that doesn't seem to be a logical conclusion.

The second thing is that at the retail level the Government has made a decision to support average pricing, which we have been supportive of and we think makes sense and the only thing we have argued was symmetry at the wholesale level, which again is a logical conclusion so that you do have a balance. But obviously the decision has gone the other way and we anticipate that it is going to take a little bit more time probably for the regulator, and I can't speak for them in terms of issuing a final Obviously we will appropriately take whatever action on determination.

appeals if appropriate at that point of time.

I do believe that there are some arguments here but that's not really the point at this stage. What I want to convey to everybody here is that the regulator has spoken and we are trying to give the best insights that we can at this stage and we will do what we need to do in the marketplace to continue to transform this company, we will do in the marketplace what we need to do to compete aggressively as you have seen in the second half numbers that we reflected and we will continue to work on differentiation, putting again both our shareholders at the forefront and our customers at the centre of everything that we do.

QUESTION: (Fergus Maguire, Bloomberg.) Could you tell me what role did T3 play in your deliberations today to re-issue guidance and, secondly, on the regulatory outcome for 2007 and future years that's going to impact on dividends, are we specifically talking about ULL there or are there other outcomes as well which would play a role?

SOL TRUJILLO: Fergus, number one the Board has looked at the impacts specifically of these interim decisions which have come in in the last week and the primary focus of the Board is to look at the data and information at hand and not other objectives or other interests in terms of providing the guidance. Now, obviously we are mindful of all of that and clearly the Board believes that T3 and the privatisation of ownership of Telstra is a positive for shareholders because again shareholders are our primary interest and focus, but the consideration of dividend policy has to be based on the maths, it has to be based on the best estimates of the marketplace and how much cash, how much earnings, how much revenues we generate, which should be the driver in terms of living consistent with the guidance that we have given, the financial policies that we have articulated and also consistent with the strategy that we have had in place.

Relative to the second part of the your question on other issues, I think, Fergus, I tried addressing that in a prior question. We have ULL, we have interim decisions, there may be other considerations; we have to wait and see what the final determination looks like. We have terminating rate kinds of decisions at hand before the regulator, we have some other issues that are under consideration and these are big volume numbers and so we just need more certainty and more clarity relative to outcomes to give guidance beyond the next 12 months where we have a fairly clear view.

QUESTION: (Kieran Gilbert, Sky News.) Sol, I just wanted to see what you made of suggestions from some Government back benchers that shares should be parked in a future fund ahead of any T3 sale and what do you put the angst down to on the Government back bench towards your performance in recent times?

SOL TRUJILLO: Obviously I can't speak to the thinking there. The share price of Telstra has declined since 1999. When I came here it had already declined from \$7.40 to \$5, so let's be clear about that. At the same time, it has gone down since I have been here and most of that has been around disclosures and, secondly, it's been around the transformation plan so that we can reconstruct this company to create value for the next decade as opposed to for the next quarter.

In terms of the issue of a future fund placement, I think that it is the belief of our Board and it is a personal belief as well that, if you are an existing shareholder, a T2 shareholder and you bought in at \$7.40, it is in your best interests to get as many shares out in the market and placed and not have an overhang if the whole lot was put into a future fund.

Now, we have said that we would like to see T3 happen. We agree with the original purpose and intent of the Prime Minister when all this was started and so we have been out on roadshows; John Stanhope and I were out last week talking to institutions that are either current investors or potential investors in Boston, New York, Edinburgh, London and the feedback seems to be consistent and that is that most of these institutions got out of holding this Telstra stock two to three years ago. That is the feedback that we received.

The reason why was primarily the regulatory environment that exists and now they see it as an interesting moment in time to essentially perhaps come back if there is clarity in the environment and obviously the clarity in the environment is what is a dividend policy, clarity in the environment is what is the regulatory situation and clarity in the environment also involves whether there will be a placement of most of the shares into a fund where in their minds would create an overhang. But I am not trying to be judgmental in sharing that with you because the Government will have to make a decision based on all the considerations they have and there is many considerations that they have in mind as well. All I am trying to do is address the question about what's right, what makes sense and what are the facts of the situation.

(Lisa Murray, the Sydney Morning Herald.) I was just OUESTION: wondering, Sol, if you met with any ministers in the leadup to today's announcement, in particular finance minister Nick Minchin, and there has been some concern about, if the Government does go ahead with the retail offer, whether yourself and other members of the management team are on board in terms of selling the stock as part of a retail offer. I just wondered whether you had managed to assure them that that will be the case given your preference that it doesn't all go to the future fund.

SOL TRUJILLO: Again, in terms of I have not had any personal meetings in the last week or so. I did have a call this morning after we lodged our filing with the ASX, a phone call with Minister Minchin to inform him of the filing, as the shareholder minister and as the minister responsible for the process here.

In terms of any other issues and trying to manage issues, we share alignment on the direction of T3. I have said that before; I have said it many times. We think that putting the shares out to the public is a good thing and we have been trying to communicate to the financial community in Australia and outside of Australia that we are aligned in terms of that purpose.

Now, if there are other considerations that come inbetween that, again, as I said just a few minutes ago, that's a decision for the Government, that's not a decision for Telstra, because these are the Government shares.

DAVID ANDERSON: Thank you all for your time today. We will have to end the conference call there, so thank you.

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