TELSTRA GROUP LIMITED — Call Transcript 2006

Apr 11, 2006

12 April 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 Sol Trujillo, Chief Executive Officer Telstra, at the Goldman Sachs Private Client Forum

In accordance with the listing rules, I attach a transcript of a presentation by Sol Trujillo, Chief Executive Officer Telstra at the Goldman Sachs Private Client Forum, for release to the market.

Yours sincerely

Lead.

Fiona Mead Acting Company Secretary On behalf of Douglas Gration Company Secretary

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

TELSTRA SOL TRUJILLO 11th April 2006 Svdnev

TERRY: In the interest of time, I think we'll start with the lunchtime presentation, while all of you are eating. The question that I'm asked more than any other - sort of at the golf club, or at social drinks, or particularly at the office - is "What should I do about Telstra?" So today's presentation by the chief executive officer. Sol Trujillo, is very timely.

Earlier on in the lunch, Sol and I were talking about, sort of, how many people in a room like this might own Telstra. I explained to Sol that there had been a little bit of selling lately, but I think it would be interesting to - are people prepared to sort of indicate, put up their hands if they are shareholders of Telstra? For the record - for the record, Sol put up his hand.

Sol took over as CEO on 1 July last year. It's been an eventful nine months. Last year the Government asked if I would be the chairman of the selling group for the T3 sale of the remaining shares in Telstra. It hasn't been straightforward, but one of the pleasant benefits has been that I've had the opportunity to meet and get to know Sol.

Sol's CV is set out in the program notes that you were given, and I am not going to repeat it, but what those notes do show is that Sol has spent his whole career in the Telco industry, in various aspects of it. And, it seems to me that it's this background that has led Sol to ask the questions at a time of change that has forced all sectors of the Telco industry, and those that regulate it, that we really need to confront reality.

No one in the investment community could disagree with Sol's very strong view that Telstra should only invest on a basis that provides a proper return on shareholders' capital.

Sol, we look forward to your comments today.

(Applause).

MR SOL TRUJILLO, CEO: Thank you, Terry. It's really a pleasure to be here, especially when I saw so many hands go up. Because Telstra is, in my opinion, if not the most important company in Australia, it is one of the most important companies in Australia. And I say that with a very straight face, and with all the seriousness that I can share with you. And that's why I'm here.

Now, when the job was opened up, I wasn't seeking the job. I was recruited by the Board of Directors of Telstra. Part of the reason why, apparently, they were seeking me, was the fact that I've kind of lived through this movie before. I use that phrase over and over again, in terms of having seen this movie before, in terms of the changes that are occurring in the telecom industry, the changes that a Telstra has to go through as it has Government majority ownership moving to a lesser either point of ownership, or perhaps zero ownership.

Most importantly, because of the transition that is happening technologically, culturally, and market wise in the business, there is dramatic change that's happening.

If you look at all the telcos in the US, starting in the mid '90s to today, you'll see that they've undergone a major transformation. And in the case of the US, you've seen literally hundreds, if not thousands of competitors in the market, consolidating now into a number that's probably one-tenth what it was 10 years ago. And that's because the economics of providing this kind of service in the marketplace is very difficult. Because it is a capital intense business.

And so the lesson I've learned in my 30-plus years in the industry is you have to be very serious about your shareholders' capital. And, I don't take it very lightly when people say, "Gee, you ought to spend money on this or that?", without thinking about our shareholders first, and I like to put myself in the shareholders' shoes, in terms of how to think about it.

So when I was asked to come here. I had a long conversation with the Board of Directors about how serious were they about the transition that was needed, as we looked at a company like Telstra, because Telstra is a terrific company. It is a company that's got an iconic brand within this country, and it's a company that is filled literally wall to wall with great people - people that are well intentioned, people that know how to deliver really good service, but a company that, at the same time, has been hindered in many ways by structures that were created in the '90s, while Telstra has to operate in 2006 through 2010, in a whole different environment. And that is part of what we have been talking about, and I personally have been talking about since I got here.

So we've had an agenda for change, and the change is multifold. One agenda item has been this notion of the regulatory structure. It was created, essentially, in 1997, and it was created as a temporary phenomena, based upon what people knew in 1995 and 1996, in terms of the nature of the technology, the nature of competitors, the nature of the economics of the business, and all that was considered at that point in time.

But we are now in 2006, planning for 2010, because our investments that we make when we talk about things like fibre to the node, when we talk about things like internet protocol and the networks that are to be built - they are networks and infrastructures that are built over four or five years. They are not built in four or five months, and they are not done with \$1,000 or \$1 million or \$100 million. They are done with the "B" word, and the "B" word, to me, is a big, big word. That's why it starts with "B".

So, when we think about the agenda, clearly this notion of the regulatory framework is important. But I also want to say to all of you, as shareholders, and those of you who might want to be shareholders, is that that's not the only part of an agenda.

The other part of our agenda is about changing the way that we do business, and I'm going to talk about that, because that is equally important in terms of what we do; and so we've undertaken a dramatic change that we think will put Telstra at the top of the heap, not just in Australia, but when you look at us three, four, five years from now, our cost structure, our go-to-market capabilities, and the kind of innovation that you want to see in this kind of business will be comparable to any company anywhere in the world.

Now, I've had the good fortune to compete in the US, and I've had the good fortune to compete in Europe, and around the rest of the world, and I know what world class looks like, and I've run some companies that were world class. My view is that Telstra can and should be world class in what it does, because it serves a market here in Australia, a people that really do want the best, and the infrastructure, and the role that Telstra plays for the economy is so critical and only grows as time passes, that it's imperative that we become world class as a company.

We move from good to great, and that's the agenda and that's the objectives that we have decided upon as a Board of Directors at Telstra. So when we think about that - and now I'm talking to those of you who are shareholders, and those of you who might become shareholders - it's important to understand the driving element that I think about in every business, and how important it is when you think about multibillion dollar investments, when you think about innovation, when you think about the size of the customer, this notion of scale is very important, and being the biggest.

So let's take a step back here just for a minute or two, and talk about Telstra, because I think Telstra is well positioned to take advantage of what we are all calling, in the industry - and I used to write papers about in the early '90s - around this notion of converged communications.

And convergence is where you no longer think about Telstra as really just a telephone company, or a company that provides communication services, but it's a company that will help you not only communicate, but also help you be entertained. if that's what you want to do, or to be informed, if that's what you want to do, or simply to take advantage of all of those elements, but with one more distinction tied to it, and that additional distinction is: you shouldn't have to be a technology expert to be able to do all of those things". We should make things nice and simple for you, right, so you don't have to figure out how to make all these things work together.

And it should be as simple as what I call one click, one button, one touch, one screen, one call simplicity that we have to drive within the business. So the way you do that is to take advantage of the scale position, the broad customer relationships that you have, and to drive innovation within a company, and that's what we are doing today.

So when you look at Telstra today, we are the largest wireline company in Australia within parallel reach to essentially touch customers almost everywhere in this country. We have the largest wireless network already in Australia, but our network, I would say today, honestly, to all of you, is kind of like those of our competitors. We reach a little bit further out into the regions and into the bush but, you know, not all that much better today, other than the way that we maintain it, the way we service it, and some of those kinds of things.

But by the end of this year, you are going to see the most advanced wireless network in the world right here in Australia. It's going to be high speed, because we are putting in place some technology that we refer to in the industry as HSDPA doesn't matter, just think about it as high speed, that's what the HS is for, and the DPA - I can't even tell you what all of that stands for.

But the key point is that here in Australia we will have a nation-wide network that we are calling city to country, a nation-wide network that, in the ideal scenario, will provide over three megabits of bandwidths on your mobile phone, right, so if you want to take advantage of downloading things, receiving images, graphics, whatever it might be, you are going to be able to do that, and we are moving to a different spectrum range so that you will have even better coverage inside buildings, and that's when you hear and read about 850, the 850 range. That's

what we are going to have. So we are going to have high speed, nationwide, and inbuilding coverage that will be unmatched unparalleled anywhere by anybody in this country.

So for anybody that isn't a Telstra customer, taking advantage of our 3G services or in-building capabilities, all of that, you just are going to be missing out on the best. But that's not going to be enough, because we are going to be offering some services and capabilities beyond that that I'll talk about in a minute.

But beyond that then, we also have a business called Sensis, which is the largest Yellow Page and online advertising business in Australia as well, but we are extending the capabilities of that business into search - as you think about the Googles and the MSNs and the Yahoo!s and all these other businesses. Today, our business at Sensis does as much search and is growing just as fast, if not faster, than those other businesses, except for one difference: our search capabilities are more relevant to an advertiser, because the question I would ask any of you sitting here, those of you who might be running businesses, and you want to run ads on Google or Yahoo!, or whatever it might be, you say, "I'm going to pay for how many eveballs you are going to bring to me when people are doing searches?"

My question to you is you want to pay for somebody who is looking for who is Einstein's grandfather? Is that relevant to you, or is it more relevant to pay for somebody that literally is looking for a lawyer, or looking for a restaurant, or looking for whatever it might be that's part of the heritage and the nature of our Yellow Page business, except for we are extending it out into more categories, and all categories literally of what any of us searches for in terms of our daily lives, and charging them for that.

I think that's a more important value proposition for customers and advertisers ultimately. But that still isn't enough, because we are also taking our Sensis business one step further, and it's about not only enabling you to find what business you'd like to buy from, or in the case of Trading Post, enabling you to find a product that you might be looking for, but we are going to take it one step further, which is enabling you to actually do the transaction.

We've started that with our Trading Post business, but we are going to be extending it again across our business, but we are going to be taking advantage of our market size, the heritage, the capabilities that we have in the business.

On top of that then, we have this other business called BigPond. Now, BigPond is our broadband business today. A couple of years ago we used to have about 37 per cent market share. Today, as of - I shouldn't say today, but I will say as of our last financial reporting period, because I am not going to disclose anything that we haven't already disclosed today - if you look back to our last reporting period, we announced that we were at 43 per cent market share, and that basically on new connections we are taking almost one out of every two customers that are signing up for broadband today.

Now, think about how significant that is, if you are an investor in Telstra today. In my mind, having a broadband connection today is like having dial tone 20, 30, 50, 80 years ago, because it is the connection that enables you to do whatever it is you want to do, whether it be communicating, being entertained, being informed, whatever it might be that you like doing, playing games. So we are driving our business hard, prioritised this notion of broadband in terms of our business, and we do have the best capability in Australia, and we are going to make it competitive with probably the best anywhere in the world.

We have a brand name that is iconic. When we do our research about brand recognition, there's only 98.5 per cent of the people in Australia recognise the name Telstra. I'm trying to figure out who those other per cent and a half are, because, you know, when I used to come here on holiday to Australia, I mean, I'd see Telstra all over the place, and I knew who Telstra was, and I didn't live here.

So, strong iconic name, and obviously the market share position, the economy, is a scale we have in our business, and the balance sheet, and the cash flow that we generate in the business say that this is an important business, it is a business that is not unhealthy, it's just a business that needs restructuring, and that's what we are going to do.

But I also like to remind ourselves, inside the company, and also in a fully disclosing way to those of you that are shareholders, or those that might be interested in becoming shareholders, that there are some core issues that we have to address. One is this notion that says, "Our old line of revenues". What we call PSTN, our public switch telephone network service - they've been in decline, and again in the mid '90s I saw this in the US. In the early part of this decade I saw it in Europe, where every company reaches this point where it just starts falling off.

We reported in the first half that our decline in these revenues was about 7.6 per That's pretty serious. Pretty serious for a business like us. And these cent. revenues are the most profitable revenues that we have had in this business, and are common across all companies like Telstra throughout the world. Which then drives what happens to income, which drives what happens to cash flow, and all the other relevant metrics that those of us who run businesses off of fundamentals think about all the time.

At the same time, when I came here back in July, I saw that our costs, in terms of running the business, were going the opposite direction of our revenues. - Our revenues on PSTN were going like this, and our costs were going up. When we reported our annual results last August, our retail revenues were essentially flat, meaning 0 per cent growth, and our retail expenses were going up 10 per cent. Not a pretty picture.

And in the case of our wholesale business, both costs and revenues were going up about the same percentage points in a double digit fashion. So there is some restructuring we have to do in the business. We have to take costs out of the business, and there are smart ways for us to take costs out of the business, and that's part of the transformation program that we have undertaken here at Telstra.

So, as we look at the business then. There's another rule of thumb that I like to talk about with our people inside the business, and that is not all dollars are created equal. Right? What does that mean? Not all dollars are created equal.

It's that, you know, there are certain revenue streams that are highly profitable. and some that are less profitable, and so in the case of our PSTN revenues, we basically have margins that are double of most of our other product lines in the business. So it almost says that for every dollar we are losing on PSTN, we have to generate two replacement dollars on our other service, so that means we have to get moving pretty hard, pretty fast, about innovating around new products, new services and new revenues are our sources. And again, that is really part of the major focus we have on our transformation. So we are on the move.

When I think about the business here - I have not been good in coordinating here. on the slides, but we are on the move in terms of driving a new customer experience, driving new revenue sources, reducing complexity in the business, because as customers have dealt with us, and as I've heard the stories over and over again from individual customers when I first came, and all the emails and letters I received, as well as on the street conversations with folks, and then when I heard about some of the barbie conversations - did you know that in Telstra in the past, employees were given barbie cards, meaning when they were at the neighbourhood barbecue or friend's barbecue or relatives barbecue, and somebody came up to you and had these questions about Telstra, there were ready-made answers that some of the employees used to have to carry around.

Now, obviously Telstra has always been a really good company but, you know, when you only perform at 96 per cent perfection, you are not perfect, right. And that 4 per cent of the time, if you are one of those 4 per cent, Telstra - I'll be nice here -

stinks, if you've had a bad experience. So what we want to do is reduce that percentage even further, so we can be as close as the highest performing company that we can be economically. Again, I'm thinking about our shareholders.

So we are doing many things that are going to change our customer experience, are going to change our cost structure, and are going to help us bring new products, new services going forward. That's where, when I say that we are on the move, we are driving everything that we can drive in this business, because you have to drive revenues, you've got to drive costs down, and you have to change the regulatory SCMA in order to change the picture, and finally then you have to innovate in this business aggressively.

Now, part of what we are doing is also in order to effectively manage our business, and to be better than our competitors. I have a core belief - and I've done this in every company that I've run - is that you have to understand your customers really. really well. And you can't assume that everybody sitting at this table here has the same needs. Just because you are high network individuals, doesn't mean that you have the same need sets as far as it relates to what your lifestyle is like.

So what we are doing right now is we've surveyed about 22,000 Australians so far, and we are probably going to end up researching around 70, 80, 90,000 Australians to make sure that we understand what their needs are, and from that we are segmenting our business. We are actually organising the front end of our business around those segments, so that when we deal with you as part of a segment, hopefully you will feel like we are talking to you, right. Not talking to you and 5 million other people, but talking to you, in terms of what your needs are.

And we are also structuring how we operate, again around your needs, so that we have a good understanding if you are a web-based person that just want to interface with Telstra all through the web, will enable you to be able to do that. But, if you like the personalised service of having a technician come out, do all the things for you that you want to have done, we'll do that for you as well.

We are going to give our customers options, and that's part of what we are going to be doing, but it also drives the innovation part, the services, the capabilities, the products that we want to deliver to our customers as well, and so this whole notion of market-based management, to me, is fundamental to the transformation that we are making at Telstra as we operate the business today, and if you want examples, take a look at American Express.

American Express is a company that came in, basically, after Visa, Mastercard and all these big credit card companies established their market position, and they

basically came in and said, "How do we differentiate, how can we be better, and how can we deliver better margins for those who are going to invest in our company?". and what they did is they went out and did a lot of research, and they really understand their segments and they know who they want to serve, and they also know who they don't want to serve in their case, as they run their business.

Whereas if you move over into the automotive side, I had a chance to go, in the early '90s, to visit this company called Toyota, who back in the early '90s, most people didn't know much about: who back in the early '90s, barely made the top 10 of car manufacturers in the world. Very shortly, within the next year or so, most are predicting they will become the number one car maker in the world. Why, because back in the '90s, they were segmenting the market, and they were really understanding customer's needs, not just with low and cheap vehicles.

They were working then on this notion of Lexus, right - this car called Lexus. And it took so much market share back in the mid 90s when they first introduced it, and to the late '90s, it really did damage to the Fords, to the GMs of the world. And since then they've spread their product line, where they've virtually covered every segment, and they know the differential points, segment by segment by segment.

So I'm a believer in this notion of market-based management. I've been a student of it, I've been a practitioner of it. And I can tell you it works every time. So when we think about it, it is always about driving competitive advantage, but delivering competitive advantage to deliver value. Value to the customer. And so when the customer sees the value, they are willing to pay for it; generally if they are willing to pay for it, you can generate good margins because it is something in the value equation mix that creates more value for the customer than what we charge, and that's ultimately how we think about value-based price.

But there's one more dimension to it, and that is really understanding what are those things that make life better and simple for you. Because I'm going to be clear about that, and I've been clear about this since I had a business. I want our customers to use our services more. I want every one of you as Telstra customers to spend more money with Telstra, not because you have to, but because you want to. And not because you have to go to school to learn how to take advantage of all this new technology, but because we make it easier and simpler for you.

So for those of you that might have been at the Commonwealth Games last month, you would have seen some of the new things that we are starting to do for our customers. Now, I have a phone here that says Samsung on it. It's a nice little thin phone, one of the latest in the market phones, which is a cool phone; I like it, it fits nice in the pocket, doesn't bulge - you know, all that sort of thing. It's a 3G phone, so I can do video calls on it.

But there's other phones that can do that. What's different? What's different is as you can see it here. I don't have a camera here to focus, but you can see here there's two words on the screen at the bottom here. The two words say, "Big", and "pond". Now, some of you might have heard about BigPond. Again, it's a great service that we provide. It's our broadband service, but now with BigPond you have a lot of services that go with it. It's more than just getting you access to broadband.

It also has security and other things, but it also gives you access to sports news, weather and all that sort of thing, but at the Commonwealth Games - we were broadcasting the Games live, and it's one click, one button, one touch, simple; so that basically if you want to go to your BigPond site, all you have to do is click one button, and in anywhere between 12-15 seconds, you'll see that you are now onto BigPond.

Then you can go into whatever it is you want to get into on the BigPond site. Why is this important? It's important because we know that all of you, as customers, all of us - I'm a big broadband user. I want things to be easy. Now, I can teach you, if you become a Telstra wireless customer in five seconds or less, how to become a BigPond user on your mobile platform. That's how simple it can be.

And I want our stores - if you go into a store, to be able to have you set up when you walk out of that store with whatever capabilities you want set up at home, on your mobile device, and I want it to be seamless, ultimately so that this device can become the remote control for your life.

So when you get in the car, and you want these same capabilities in your car, and you want them activated, all through Telstra, or in your home, when you are in your garage, going in your study, or going into your kitchen, or going into the family room, you can make it all simply work seamlessly, and that's part of what we are building for you.

This is the first stage, because we are going to integrate Telstra as one company, and you can get one click to Sensis, whether it be wireless, or any other feature or service that you are looking for, because we are going to make it simple for all of vou.

So, when you see us talk about our business here, you can see here that we are going to integrate services. Why? Because the vast majority of our customers have said, "This is getting too complex right; broadband, wireless, this kind of stuff that Sensis is now doing - search, transactions, all that. Can you make it simple?", and

there's one company in Australia - one company in Australia - that can do that, and that is Telstra.

So we are working on it, and this graphic here indicates to you how we are looking to integrate these things so that again it is simple for you, and it will be personalised to you. So that, again, not everybody has the same requirements.

I use another device personally, and I don't mean to bore you with a lot of handsets and toys - my wife tells me that I have too many toys - but you can see here that I use a different device. This is for my business use, and on this here, if I want to check my calendar, it's one button, and I'm into my calendar, right.

We can see all the things - and I can go on months, I can go back days, I can do whatever. Let's say now I want to check my email. It's that simple. I'm now into my email. One click, one button, simplicity.

Down here on the bottom, if I go in and check an email, you can see down here on the bottom, I can hit "delete", "forward"", "send, whatever. It's simple. And that is the key, because if you like simple, generally that means you are going to use it more, and if you use it more, then I get to charge you more.

That's kind of the story behind what we are doing in our transformation at Telstra. because it is about business. It's not about politics, it's not about regulation, it's not about Government. It's not about a lot of things. It really is about customers.

So I like to talk inside the company when I meet with their employees, I like to say to everybody, "Look, we are about our customers. We are going to drive this company based upon what our customers want, and everything we are going to do is going to make money for our shareholders. Our job is to create value for our shareholders", so when you get up in the morning, instead of looking out the window, and looking to Canberra to see what we should do today, you forget that. And you look out the window and you see that customer, that building, that city, whatever it might be, but it's about the market. It's about how we are going to drive our business now, going forward, based upon the market.

Now, I do need to talk, just before I close here, about this notion of regulation, because that is the most often asked question in terms of well, you know, what's happening here, because it does affect value. Over the last few years, since probably the regulatory structure was put in place, there's been a lot of what I call value destruction that's occurred by regulators that want to see many competitors succeed.

So, as a principle, that's good, and I don't dispute that. I like competition, because I think competition makes you better, but I don't like to see competitors subsidised and, most importantly for those of you who are shareholders, I don't want you subsidising their shareholders, wherever they come from. In many cases our primary competitors are Singaporean companies. I don't like the notion of Australians being subsidising Singaporean investors. I don't know about you, but when I invest. I want to get the returns back to myself.

So we are fighting these principles about how we should think about cost recovery. Any time we do anything, it should be priced at cost or above. When you hear about issues like "unbundled-local-loops" - it costs us a lot of money to dig up streets, to put in conduit, then to put the cable or the fibre and ultimately turn up service to you, whether it be at your business, in a downtown area, or it be in your home, in a suburban area, or for those of you that have second and third homes in other places, all of that costs a lot of money.

We have about \$30 billion of invested capital in our plant that is still on the books. A lot of people say, "Well, all the stuff you put in has already depreciated." If it was already depreciated it wouldn't be on the books, right. So we have about \$30 billion of capital that we want to recover. It's your money, those of you that have invested, and we are holding true to that principle of protecting your interest.

In terms of new investments - we've been having an argument that says if we put in fibre to the node, and we make it available to our competitors, we want to price it at levels that allow us to earn competitive returns on it, and not below cost because again, it's not right for our shareholders, for us, to do that, and then turn around and give it away to other shareholders, so they don't risk their capital.

Finally, this notion of operational separation - we think we do all the things that are necessary to enforce the access that people should get to our copper network. No arguments there. We want to do that.

So that's the regulation story, trying to make it simple, to say it's all about the shareholder, and it's all about our shareholders getting fair play and fair gain for the risks that they take.

So, maybe in closing, just to summarise here, after transformation, the new Telstra will have a new high speed national wireless network; will provide more of these integrated products and services. We are going to provide a new customer experience, and just remember what I call this power of one - one click, one screen, one touch, one call, one step, one visit - in terms of how we operate our business.

We'll have the biggest networks, in terms of mobile and our IP services and our broadband services. We'll have simpler pricing. You see that this past week we are introducing some new pricing packages for those of you that like doing a lot of calling. We are going to make it simpler and easier for you to know what our prices. and what it means to you in terms of minutes and potential use. We are going to take advantage of our scale position, and we are going to keep on working to drive more economic advantage off of our scale position.

And I think that if you watch what we just did also with our CSL business in Hong Kong, we just did a cashless transaction, actually cashless to us. We received cash in order to continue to expand our position in Hong Kong. It's a very important market if you think about China, and taking advantage of what might be happening there, over the coming years.

There's a company called China Mobile, that now has 250 million, quickly moving to 300 million, mobile subscribers in China. Think about that. 300 million subscribers and they've only penetrated a small portion of that market.

Now, think about broadband's coming, think about other services in Asia, China in particular, but you have India and some other markets that are there. Let me not confuse anyone here. Australia is our first priority, but I have to think out three to five years in terms of what are other opportunities that we have to create value, and to grow, and I am not a big M&A guy, I am not talking about doing a lot of big transaction kind of things, it's about doing smart investments and joint ventures in other things.

Strong balance sheet - I'm going to keep that strong. Best cost position, and obviously becoming the most innovative company that you will see here in Australia, but also competitive with anywhere in the world, and the only question that I have. I am confident about our ability to do all those things because I've done them before, I've been involved in doing them in the US, in Europe, in other parts of the world, and the only question mark we still have hanging is this regulatory issue.

I'm just going to put up the last chart, and this last chart is the stakes in the ground that we communicated back in November when we announced our strategic direction for Telstra. The growth objectives that we have on revenue; our new product revenues - how we think about those; our cost structure - EBITDA growth, EBITDA margins, in terms of sustaining and holding margins; workforce - obviously in order to take costs out we are going to have to reduce the number of people we have in the businesses, the full-time equivalent.

We said in the first three years we'll take out somewhere between 6,000 and 8,000,

and in the five years we'll probably take somewhere between 10 and 12,000 people out of the business; CAPEX - I think when we are done with this, we are going to see a different kind of CAPEX, revenues to CAPEX kind of relationship that will grow into the high single digits; and free cash flow - you'll see significant free cash flow being generated out of this business and obviously the other question that often gets asked is the dividend, what about the dividend?

Well, clearly the board has set a policy in terms of dividends that we've communicated, and the only overhang that we have relative to dividend and sustaining dividends going forward, is that regulatory set of instructions. Obviously if we can get a positive outcome there, dividend policy should not be any different to what we think about today.

But obviously it's important for us to understand, as John Stanhope, our CFO's communicated with some of his prior comments, is that we always have to consider. or reconsider investment levels and any other policy decision based upon some of these regulatory outcomes, so as a board we are clear on that, we've communicated that, and we will continue to communicate that as we go forward.

So that is the Telstra story. It may not be quite what you've read in the newspapers, and I know you probably haven't read much since we are not in the news that often. But these are the facts, as they would say. With that I will stop and open it up for a few questions.

(Applause)

TERRY: You might also be interested to know that Sol flew in from America this morning, especially after he said, "Look, I can't get there for the early sessions, but I'll be back in time for lunch", so he's made the special effort to speak to us today, having arrived this morning, literally. That was a pretty impressive sort of effort.

So we'll try and finish pretty close to half past two, but do people have any questions?

UNIDENTIFIED SPEAKER: Sol, would you mind going back to the part on regulation, because there were three things.

MR TRUJILLO: Can we go back to the regulation slide?

UNIDENTIFIED SPEAKER: I didn't get that one.

MR TRUJILLO: Can we go back on the slides? I can't go back on what I have

there. They want to make sure I finish on time, so I can only go forward. Do we have it up? Regulation. Okay.

Let me just tick through it really quickly. The Government here in Australia has made a policy decision that they would like to see common pricing, average pricing, at retail; meaning if you are in downtown Sydney, or you are out in the bush, you pay the same amount. Okay?

Now, what we are arguing is, on the structure issue, is that okay, if you do that, then at wholesale, you should do the same thing, in terms of averaging.

The second bullet says "\$30 average undertaking". That's what our cost is. That's what we are saying on average our cost is to provide dial tone essentially, on average, throughout Australia. And there are some, ACCC, that has submitted studies, and they came out with a study last June or July, where they said that they thought in the CBDs, our costs are probably \$7 or \$8, and in what they call "band" 2", which is kind of like the suburbs, it might be \$13, and on so forth, and then out in the bush it might be \$140.

Now, my reaction to that sort of thing is, "I'm a business person, and I think most of you, as investors, are good business-thinking people. If it was that cheap to be able to do those things, you would see a lot of people doing it, right?" Because we charge a lot more than \$8, so if the cost is \$8, you would see a lot of competitors out there building it, given what we charge, let's say, at \$25 or \$30.

The answer is nobody is because those are not the real costs, and I can tell you those are not the real costs, and that's what we are arguing.

Did I answer your question? Thank you.

TERRY: Perhaps one last question.

MR TRUJILLO: All right, I don't see any more questions. As Terry said, I really do appreciate your inviting me to be here. I love talking about Telstra. I think Telstra is a great company, and it's going to do great things as long as we are allowed to do them, as the market would dictate.

TERRY: Thank you, very much, Sol. I'm just sorry we don't have a T3 prospectus, you could sell a few shares as you go out the door.

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