TELSTRA GROUP LIMITED — Call Transcript 2006

Feb 8, 2006

9 February 2006

The Manager

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

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ELECTRONIC LODGEMENT

Dear Sir or Madam

Transcript from Telstra's Analyst briefing - Half year results

Attached is a copy of the transcript from today's Telstra Analyst briefing on the half year results, for release to the market.

Yours sincerely

North brake

Douglas Gration Company Secretary

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

TELSTRA ANALYSTS BRIEFING

THURSDAY 9 FEBRUARY 2006

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DAVID ANDERSON: Good morning ladies and gentlemen, and welcome to Telstra's half year results analysts briefing. For those who haven't met me before, my name is David Anderson. I'm the general manager of the investor relations unit. I would also like to welcome those who are viewing this briefing via the webcast and also listening via conferlink. I'd also welcome those of you in Melbourne. Good morning, Anthony.

Sol will commence the presentation followed by a presentation of John Stanhope. After the presentation there will be an opportunity for you to ask questions of Sol and John. If you do have a question, we would ask you to come forward to the microphone in the middle of the aisles here and provide your name and name of the company you represent before asking your question. This will assist those watching the webcast and listening via conferlink. With a view to our allowing everyone the opportunity to ask questions, please just ask one question. If you have any further questions, you are of course welcome to rejoin the queue.

We'd appreciate it if you could turn off your mobile phones whilst you are in the presentation and we would like to advise that transcripts of this analysts briefing will be lodged with the ASX later today. Without further ado. I'll hand over to Sol.

SOL TRUJILLO: Thank you, David, and good morning ladies and gentlemen. I would like to welcome all of you to Telstra's results briefing for the first half of fiscal 2006. What I would like to do is first begin by summarising the first half and then update you on progress on our strategy and what I'm calling internally the tough medicine that we are taking to create long-term shareholder value. Then John will elaborate on the first half results in his presentation.

When you look at the chart here and the results that we have already lodged, the result shows that we are on track with the guidance that we provided to the market in September and November. Top line growth of 1.9 per cent is in line with our full year guidance and cost growth of 6.3 per cent is in line with our full year guidance of 5 to 7 per cent. But it is not satisfactory and we are taking additional steps to reduce costs aggressively in our retail business as the cost of servicing our customers has been growing at 6 per cent while revenue growth has been flat.

In wholesale, our costs have grown 15 per cent but revenue growth has been stronger so margins have expanded. To put that in context, when we talked back in August with the full year results from the prior fiscal year, we talked about retail expenses growing at about 10 per cent and we talked about wholesale expenses growing in the range of 13 or 14 per cent. So you can see that on the retail side, we are reducing some of the expense growth. On the wholesale side volumes continue so we are

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continuing to grow and expand margins in that part of the business.

As we think about EBIT, the decline of 7 per cent is in line with our full year guidance of minus 7 to 10 per cent before any items associated with transformation. The major concern for us remains the decline in PSTN, plain and simply. That negative decline of 7.6 per cent which is faster than our previous guidance is obviously problematic for this business and again it's something that in our August announcements of results, we highlighted and we upped the guidance indicating the kind of trends that we have now experienced. Both volume and price pressures are intense as customers migrate to new communications platforms. Over time we will substitute these revenue streams with other services offsetting the decline in PSTN.

Mobile revenue growth of 4.6 per cent was what I would call just okay. You will see this, accelerators are 3G HSDPA network comes on line and in the meantime we are focussed on the prepaid and post-paid businesses and we have several initiatives in the market that John will talk about a little later. Sensis, whereas I think of it as our information services search and transaction business, will deliver on guidance of 6 to 7 per cent revenue growth in the current fiscal year.

A positive aspect of this result is the strong growth in broadband subscribers with retail SIOs up over 300,000 since June and retail broadband revenue up 63 per cent. BigPond is increasing its market share and at the same time churn is decreasing. Clearly we are the market leader in broadband growth and as you heard me talk in November, that is at the centre of our strategy when we think about broadband, whether it be in fixed or in wireless.

On November 15th, we outlined our strategy and the tough medicine we have to take along the way. Our transformation process and progress is on track albeit it's still early. It's only a month and a half essentially in terms of these results versus what we talked about back in November. Our strategy platform revolves 3G HSDPA broadband, IP in the corporate space and fully integrated services in Sensis. We are reinvesting for growth which will allow us to handle a changing revenue mix, stem cost increases and stimulate growth, and again all of that was detailed back in November.

For our shareholders we have declared a 14 cents per share fully franked interim dividend and a 6 cents per share special dividend bringing the total pay out to 20 cents per share this half. While our results are on track with previous guidance, the reality is that the financial trends at Telstra are not good. They have continued from the last fiscal year. Telstra's top line growth rate has decelerated down to 1.9 per cent down in this half while in line with guidance what is concerning again is that notion of PSTN revenues declining at such a rate in that the revenue base associated with our growth avenues, whether it be broadband or mobiles, Sensis etc. are not yet big enough to offset them and that's why you are going to see acceleration in some of these additional areas.

Declining usage and price pressure is the main reason for the decline in PSTN revenues. While the number of access lines and service declined only 1.7 per cent, the volume of local calls was off 12 and revenue was off 20 per cent due to a combination of volume and price erosion as customers migrate to other communication platforms such as mobiles and broadband. Our Telecom related revenue mix is shifting towards lower margin products with PSTN revenues now 33 per cent of sales compared to 40 per cent just two years ago. However, the profitability of our broadband revenue will improve as we build scale and reduce our operating costs.

Wholesale revenue growth of 17 per cent remains strong, mainly due to accelerating broadband penetration. Performance of this business is subject to regulatory decisions and our competitors' willingness to assume infrastructure investment risks. Wireless has seen fiercely competitive activity as those players with low market shares chase volume in an attempt to gain scale in a largely fixed cost business. We are competing vigorously in this market but we believe we have probably lost about 1 per cent revenue market share recently which I can tell you won't occur going forward.

It is essential Telstra maximises its market share in newer revenue streams to capture as much of the migration trends as possible. In wireless we are competing vigorously. In broadband our retail market share has increased to 43 per cent which is a pleasing trend as broadband represents a major part of the future of this company. Ultimately the real key to reinvigorating our top-line growth is knowing our customers intimately and delivering value that they are willing to pay for.

We continue to focus on integrated voice, video and data services to truly differentiate what we can do for our customers. You will see some of that playing out during the coming six to 12 months. Cost growth has accelerated to 6.3 per cent in this half versus 3.1 per cent in the prior corresponding period. In dollar terms total operating expenses before interest have risen \$480 million in 12 months. While this is in line with our guidance from the strategy day of 5 to 7 per cent operating costs growth for FY06, clearly cost growth of this magnitude cannot be sustained.

With multiplicity of network elements and rapidly rising volumes the cost of running all of this is growing rapidly. Multiple evolutions of mobile technology mean we are currently running three wireless networks, multiple evolutions of data services most of which are still in the network, and as we said in November and I'll say again today, it's clearly inefficient.

Labour costs are rising although a fair proportion of the 9 per cent increase in the first half was redundancy expense from which we expect to save labour dollars in the future. John will talk in more detail about how we are slowing the increases in costs given the fact that we are not yet where we want to be.

I'll recap the strategic priorities of our new strategy and then update you on the progress to date. This is very important because when I say I'm not satisfied, when I say the numbers are not good enough. this is why we are going to take the actions that we are taking; plain and simple. And we are well on our path to launching all the initiatives that we have talked about because our objective is to create long-term shareholder value. to providing the kinds of service experience and the integrated communications services and delivering those that we know our customers want. We are investing again to take complexity and cost out of the business.

As I mentioned, when you have three of this and eight of that, all trying to do all do the same things, you just have a cost structure that we cannot afford going forward and we are going to change that. At the same time as we think about change, the key advantage that we talked about back in November and we continue to talk about inside the company every day is about knowing our customers better than any of our competitors and knowing them better than we have known them at any point of time in our history.

That's all about market-based management and the techniques that will help us deliver the kind of information we need to offer the best value per dollar spent to our customers. We must win in broadband and wireless by doing it smart around value added and integrated services. So again as I pointed out back in November, this is not about being a price player in the market, it's about being value add in terms of what we do. Again, over the coming year, two years, three years you are going to see some fundamental change in the way Telstra goes to market.

We will invest in new services and applications to differentiate ourselves in the market and Telstra with its breadth of product range is uniquely placed to do this. We are going to accelerate our growth opportunities at Sensis, our information services search and transaction business, in addition to how we think classically about Yellow Pages and White Pages.

We will target investment where we can create value in limited investment that lacks shareholder safeguards. I want to be clear about that because we are very value creation focussed. Those things that help create value we do and those things that don't, we don't. That's kind of the simple decision rule as we look at what we invest in in the business.

Now, in terms of the results, these results include only six weeks of operating performance since our new strategy was announced on November 15th. So it's very early days but let me cover some of the initiatives that have been launched or are under way. Within the COO's office a number strategic portfolios have been established. A range of activities have gained traction within what we call the benefits now portfolio including the commencement of our head count reduction with 1,000 full-time equivalents including contractors leaving the company since June 30th.

We have also commenced a number of cost reduction programs

including a CAPEX review identifying savings of about \$300 million in FY06 available to be redirected to projects aligned to the core strategy that we have outlined. A comprehensive review of opex projects stopped in excess of 400 million which again were low value creation initiatives going on within the business.

We have exited leases on 15 office buildings. We have had a 48 per cent reduction in unsatisfied ADSL orders from August to below 10,000 orders today. So fundamentally we are focussed on service. It's kind of below the surface, doesn't get looked at every day by people external to the business but we're very focussed on it and it's showing up in the numbers.

In the case of other savings, obviously we are creating partnerships and other relationships to take costs out of the business. One of them was Brightstar; their contract has been signed. We have already experienced some savings in terms of the agreement there and within the year here, we expect an additional \$10 million of savings out of that contract.

Turning to our network transformation, wireless transformation, our wireless transformation team have achieved significant progress. A contract with Ericsson was signed in December to roll out 3G 850 to over 5,000 sites. Construction teams have been mobilised in each state with in excess of 1500 audits and 250 site designs already completed. Now. remember, we made a decision as a board on the 14th November. We communicated on the 15th of November and now we are actioning everything that we said.

Design requirements have also been completed to identify which sites require additional transmission to support the 3G 850 spectrum. Voice and video calls have been successfully tested between the 2100 and 850 networks reducing technology risk with 850 and CDMA operating smoothly from the same site.

Wireline transformation, the scope of our wireline transformation is significantly dependent upon regulatory outcomes with fibre to the node on hold in the current environment. However, work is continuing on our IP Core and IP DSLAM initiatives. We've signed an IP Core contract with Cisco and Multi-Service Edge contract with Tellabs which allows our SDN replacement. The installation of a new core network for Sydney and Melbourne for Telstra Internet Direct services is underway and progressing well.

Alcatel have been contracted to deliver these IP DSLAMs and the first 20 are due to arrive by the end of the month. The first Alcatel softswitches arrived in the country and is currently undergoing testing. Under our OSS transformation which is again part of what I call the customer experience layer of what we are going to change, the OSS transformation team have finalised the detailed scoping of all 26 OSS domains completing conceptual architectures, capability statements and requirements documentation. And OSS, just as a remainder, is operational

support systems.

Site visits have been completed and vendors have been formally engaged to evaluate all of our product offerings. In terms of our BSS, which are our business support systems, the BSS teams are focussing on fit assessments to determine any gaps that exist in the out-of-the-box functionality we will be deploying. Remember Greg talked about in November the fact that we are not doing a lot of one off kinds of things. There's a lot of capabilities out in the marketplace today from a lot of vendors that are working well in other parts of the world that we are just going to take here and plug in. So when he talks about out-of-the-box. we are going to do it fast and we are going to do it well and we are going to do it right.

In the case of this a licensing agreement with Siebel has been signed and work is progressing on finalising the Accenture/Siebel/Comverse consortium contract and software licensing deals. Terms of complexity reduction, rationalisation work comprises three elements, platform rationalisation, product simplification and customer migration. Almost 200 platform exits have been identified. So remember, we talked about the contraction of over 1200 systems, platforms and other things, down to 200 to 300. There's a material change that we have to go through in this business and a lot of work, detailed work, that goes with it.

There's a number of other initiatives underway including our IP products simplification, our pricing simplification and planning as we think about migrating customers from old platforms to new platforms. In terms of network fixes, five major areas of work have been identified within the network fixes portfolio with progress on the phone. Almost 100 sites have been approved for our Sydney GSM expansion. Work to scope, the technical training academy that Greg talked about is underway. In terms of market-based management, the goal of market-based management is for us to know our customers like never before.

We have undertaken some very significant research under the leadership of Bill Stewart. We have completed over 22,000 interviews across our consumer and small and medium enterprise base. We now have a much greater depth of customer research from which we have identified seven needs-based segments, 18 product segments and 126 micro segments. Now, that just sounds like a lot of numbers, but let me tell you, no segmentation work like this has ever been done in the industry that we compete and the purpose of it is that today when you think about the vast array of services, it's no longer just voice calling or it's no longer just voice and mobile calling, it's a whole array we want to understand our customers' needs not only at the needs-base segment in terms of our lifestyle, but also at their product use in terms of how they choose to make decisions around each of those. And what Bill Stewart and his team have created is a segmentation model that is very complex but it's going to enable us to be very, very targeted in terms of how we interact with our customers, how we sell to our customers, how we define a customer experience for our customers and then ultimately how we operate our business. That is the

purpose of all of that work and it is about to be turned on in parts over the coming year with our business.

In terms of the changes to the management team in recent months, a decision that I made was to create a singular focus around our small/medium enterprise segment of the marketplace which is very important. It's an important part of business here in Australia but it's an also a very important opportunity for us in getting singular focus to me was critical and putting one of our best leaders in the business in charge of that, Deena Shiff, also was important so that everybody in our business and hopefully all of you that track our business, know how important we see it. Today, I'd also like to announce an addition to our team and that is a new CIO for the business that will be reporting to Greg Winn. The person's name is Fiona Balfour; some of you may know her as the former CIO of the famous airline here in Australia called Qantas. She joins Telstra in early April and will be part of the team that we have helping us transform our business. She will be responsible for leading Telstra's centralised IT organisation, core IT programs and overseeing the company's OSS and BSS transformational programs.

So let me go back now and reiterate the longer term financial outcomes we expect from the transformation of Telstra and that we enunciated at the strategy day. We are committing to two to two and a half per cent revenue growth over the next five years with 20 to 30 per cent of revenue from new services. Our 2010 cost structure will be no higher than the annualised number of the first half FY06 that we are reporting today so we are going to be very disciplined about the kind of cost structure that we carry into the future.

We will have 6,000 to 8,000 fewer employees/contractors on our payroll in three years' time and by FY10, we will expect EBITDA margins will have recovered to between 50 and 52 per cent. Now, clearly, our margins today as we report are declining. They will continue to decline until we get some of the major cost take-out out of the business. We are going to spend 2 and a half to 3 and a half billion in capital over and above our original plan in the next four years to transform the business, and after transforming the business, we expect CAPEX as a percentage of revenue to fall to around the 12 per cent range and obviously its absolute amount will be a function of the revenue growth that we have in the business.

We expect to generate free cash in the order of 6 billion to 7 billion by 2010. So, the final point that I'd just like to make, as you think about Telstra and as you think about tracking management going forward, keep in mind that broadband to me is at the centre of our strategy, whether it be on fixed, whether it be on wireless. We have to be good and we have to clearly be better than anybody that we compete with in that space.

Mobiles is the second core growth category as we think about expanding our opportunities over the coming years. Our IP services as we think about it in our business, in particular business space, as we think about integrated services and the new customer experience that's going to

come unique from Telstra, we will be talking about that going forward, and obviously as we think about what we have lumped together as Sensis, but the strategy that Bruce has laid out relative to growing our online information services, our search and our transaction business will also be critical in addition to running well the print business that we have had hefore.

So we will talk about all of that going forward and when we meet again in another six months or so, when we announce our full year results, we will keep on focussing on obviously our current results, the kind of core transformation issues and then a focus on these categories as to how we are either succeeding or not succeeding in terms of these spaces.

It is our intent to create value and it's our intent to win as we go forward. So with that, I'm going to turn it over to John to give you a lot more detail relative to our results. John.

JOHN STANHOPE: Thanks Sol, and good morning ladies and gentlemen here in Sydney and Melbourne and watching in on the webcast.

My presentation is really set out in four parts, each expanding really on Sol's themes: Firstly, the recent trends to help set the scene: secondly, a more detailed look at the results; thirdly the '05/'06 guidance in particular - sol set out our longer term guidance - and finally, a recap on the many targets we set in the strategic review, perhaps not all of them, but the major strategic targets.

But before I get into all of that, I'd like to run through the key The underlying product revenue trends continue as the messages. migration to broadband and mobiles continues apace. Competition in mobiles remains very aggressive. The key take-out is that the results are in line with the underlying business performance guidance. There are no surprises or one-offs in the numbers, and I know there were some expectations of a lower earnings performance. The half is clean and the second half as we indicated on the strategic day will have elements of the strategic review impacts.

Work has begun on transforming the company and we are leaving no stone unturned to successfully execute the new strategy. So on a full year basis, we have altered our '05/'06 guidance as a result as you know of announcing it in December, us putting the fibre to the node access on hold.

So let's set the scene. As we know, broadband growth was slow in Australia until we offered affordable entry level prices in early 2004. The explosion in the broadband growth shows no sign of abating. As a leading player and by further differentiating ourselves from the pack, we believe BigPond is in a very strong position to benefit from that growth ahead. The turnaround in BigPond's performance is reflected in the latest estimate of

retail broadband share which is now at 43 per cent and that's up 6 per cent since December 2003. So in two years we have increased the share by 6 per cent to 43 per cent.

The mobile space is very competitive with penetration rates rising now to 96 per cent and yields under pressure from the proliferation of capped plans. We now have 225,000 SIOs on capped plans. 12 months ago that was 12,000. Growth rates in that period have been particularly affected by the changing market dynamics as our competition attempts to gain scale by offering very competitive deals which has seen our revenue market share slip by about 1 per cent to around 45 per cent today.

The flow-through impacts on costs of retaining and acquiring customers is impacting EBITDA margins in mobile and we think they are down about 0.5 per cent from 12 months ago. The growth in broadband and capped mobile offers is placing extreme pressure on PSTN and you can see from this graph that sort of pressure. It is declining, consistent with overseas experience as all incumbent operators come under attack from mobile and ISP players.

It's the triple impact of churn, volume, migration and yield pressures which have been building for some time are now being fully felt as you can see on that graph.

The decline in the PSTN and change in the product mix which has quite a bit to do with our cost line as well, has resulted in a 2.3 per cent EBITDA margin decline over the 12 months from December '04 to December $05.$

With that brief overview, let's turn to the results for the first half. Overall, the result for the first half was in line with our 5th of September guidance and consistent with the trends we talked about at the strategy day. Modest sales revenue growth was more than offset by cost growth leading to the decline I've mentioned in earnings performance and margins. The 6.8 per cent increase in expense that is before depreciation and amortisation does include, as Sol mentioned, a \$78 million increase in redundancy and associated costs.

Without the increase in redundancy, the growth would have been around 5.6 per cent; still high relative to the revenue growth. The cash operating CAPEX increase was driven by the latest 3G joint venture payment to Hutchinson. You will recall we had a schedule of payments for that 50 per cent beneficial interest. The free cashflow declined due to all of these factors plus a softer working capital position driven by inventories and the December timing of debtors and creditor payments and a highly tax payment on a year on year basis.

A fully franked dividend as Sol mentioned of 20 cents per share has been declared which includes a 14 cents per share ordinary dividend and a 6 cents per share special dividend.

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The key drivers of our sales revenue growth continue to be internet/broadband, mobiles and Sensis, offset of course by the decline in PSTN and legacy data revenue. I'll go through the major products in a minute in more detail but vou can see here pay TV revenues continue to grow driven by higher volumes from various promotions and pay TV being incorporated as part of our four play, if you like, bundled offers aimed at customer retention.

Our legacy specialised data as you can see from this slide and ISDN revenue has continued to decline as customers migrate to the newer technologies available. So let's have a look at broadband. Retail broadband revenues continue to surge. Retail broadband is up 63 per cent and the combined retail and wholesale broadband revenues grew 73 per cent.

Our recent marketing offers have gained traction as we added 41,000 more retail subscribers than wholesale in the past six months. The last six months saw retail services and operation grow 317,000 with 149,000 added in the last quarter and I know you have seen the Optus announcement of yesterday, and in the last quarter that's almost a four to one better performance in retail broadband.

On the strength of this result we believe we have increased our retail market share to 43 per cent, as I said up 6 per cent over the past year - two years sorry. A new ADSL platform has markedly improved connection cycle times and customer satisfaction will continue to improve as we connect and migrate more customers over to that new platform.

Let's have a look at mobiles. Total mobiles growth has slowed to 4.6 per cent. Within that, mobile services revenue grew 3.2 per cent including wholesale but excluding the termination revenues. Retail mobile services grew 2.9 per cent. As expected and as I mentioned earlier, capped plans have impacted vields and ARPUs. Calling revenues are flat with mobile services growth driven by value added services, particularly mobile data which was up 14 per cent. That's a combination of SMS and other data.

Mobile data was once dominated by SMS but high speed data revenues are now emerging with 45,000 wireless broadband SIOs and 40,000 blackberry SIOs. Mobile data revenues now represent 16 per cent of mobile services revenue.

Let's just take a look now at Sensis. Our information services search and transaction business, Sensis, delivered 5.3 per cent revenue growth over the first half and is on track to meet its 2006 financial year advisory of 6 to 7 per cent organic revenue growth. Yellow Pages revenue grew 3 per cent driven by continuing modest print performance but excellent online growth of 64 per cent.

White Pages again impressed with 13 per cent revenue growth driven by both the print product and the White Pages Online growth.

Trading Post classifieds decreased by 4 million due to an increasingly competitive landscape in print classifieds while the online classifieds in the Trading Post arena delivered high growth off a fairly low base at this stage.

Sensis EBIT grew 1 per cent but it was impacted in the half because of some increased software amortisation and Bruce's announced redundancy program which incurred costs in the first half of this fiscal as Sensis did its own strategic review late in '05. As a result of opportunities identified in the Sensis recent strategic review, it will not only deliver a strong full year financial performance but will also launch a range of innovative new services to grow and extend its core advertising business.

So let's have a look at the PSTN. The PSTN accelerated slightly faster than expected at 7.6 per cent. The drivers of this decline are consistent though with recent trends. Total lines declined by 1.7 per cent vear on year, a loss of 170,000 access lines. We lost 340,000 retail access lines of which 170,000 churned to wholesale with the remainder being cancelled second lines and a move to mobile-only households.

Migration to mobiles and Internet accelerated local call volume declines to 12 per cent while fixed to mobile volumes grew marginally. This in turn put pressure on yields with mid single digit declines on average. These trends will be addressed when we implement our market based management approach particularly integrated services. However, we are seeing good retention from our latest broadband offer which is a bundle of various products.

Let's turn to expenses. As I mentioned operating expenses were up 6.8 per cent with the major driver being labour up 9 per cent. I just want to explain labour a little bit. Redundancy costs, as I said earlier, increased by 78 per cent as we begin the staff reduction program. As I said earlier without that increase in redundancy, the expense growth would have been about 5.6 per cent.

Our total head count including contractors now stands at 51,000 down 1,000 from the 52,000 detailed on the strategy day. Salary increases, inside that growth of 9.1 per cent, were 45 million as award employees received two pay rises, two and two and a half per cent and individual contract staff salaries increased 3.8 per cent on average. Rounding out the labour growth was a 59 million increase from controlled entities owing to a full six months of costs being incurred from some recent acquisitions earlier in the first half and of course there were some higher salary rates and employee number increases in some of the controlled entities. For example, KAZ where some major contracts were won and needed to be supported by staff of course. So to be clear, redundancy was 4 per cent inside the 9 and labour expense and labour expense growth was 3 per cent from within the controlled entities being added and some staff increases in those controlled entities.

Turning to the goods and services, the increase of 3 per cent in goods and services purchase was driven mostly by higher network payments, again from a full six months of the offshore acquisitions incurring network out-payments and some increase in domestic network payments. Service fees were up in line with the pay TV revenues whilst handset subsidies increased due to higher take up of subsidised handset plans. Handset subsidies were \$211 million in the half.

Other expenses as you can see from the slide increased by 8.4 per cent or 156 million mostly related to increase in service contract expenses. That was contractors, not contractor, staff but contractors focussed on That was about 54 million of the increase. network rehabilitation. Maintaining the new 3G network, the 2100 network, about 18 million and there was about \$38 million related to activity in the broadband growth and now the new strategy.

Currency costs are higher as hedge gains in the prior year related to the Reach capacity pre-payment are not available to us of course in this vear.

Capex, let's have a look at capital expenditure. Operating capital expenditure increased 8 per cent largely due to the \$312 million instalment payment made to Hutchinson as I described earlier. The other main driver is the increased international cable capacity that we required to support the increasing demands for data and high bandwidth driven by the broadband penetration, and of course a lot of internet traffic goes to the US and we needed to purchase that capacity.

The remaining CAPEX categories were well controlled with declines in customer access and software as we redirect as we said we would on the strategy day, CAPEX to our knew strategic priorities. Depreciation and amortisation was up 4 and a half per cent as the asset base expands to support broadband and mobiles. Partly offsetting the overall increase was a review of service lives which did reduce depreciation on switching and other equipment. For example, our GSM - 2GSM life was increased a year as some of our earlier GSM equipment was reaching end of life but still in use, for example.

But let me remind you that the new strategy will impact depreciation and amortisation in the second half as we have signalled to you. As we take elements, old elements out of the network, depreciation will accelerate.

Our guidance for full year '06 cash operational CAPEX including offshore so domestic and offshore is in the range 4.8 billion to 5.1 billion which is consistent with what Sol put up there earlier. It does include spend in this fiscal on strategic initiatives.

The board has declared an interim dividend of 14 cents per share and a special dividend of 6 cents per share as I guess was expected. While we are not continuing with our capital management program, we have signalled our intention to pay a 20 cent fully franked dividend per annum over the next three years, of course, being subject to the normal board considerations of performance and cashflows etc.

When looking I guess at the broker forecasts our relative dividend vield still look attractive versus our competitors. You will recall we reset our target financial parameters on the right-hand side of this slide at our strategy day session. We are currently well within or below the target bands and have the required capacity as we progress through the transformation and strategy implementation.

Free cashflow; let's take a look at that. The free cashflow has declined 4 per cent as a result of a number of factors. The graph shows declines in the operational categories of EBITDA. Increases in working capital, tax and operating CAPEX as I've mentioned the increasing CAPEX earlier. It has been partly offset though by improved invest in CAPEX position. We have haven't been making as many acquisitions this half just gone as we did in the prior corresponding period.

The key working capital position was driven mainly by higher debtor and lower credit balances that really are timing related and an increase in inventories of handsets and construction equipment. We did take some advantage of some price bulk pricing on handsets and built up our inventories as well as preparing for the Christmas period, and we are starting to get equipment in warehouses to begin a fairly large construction program. The increase in tax pages relates to a final payment for the $04/05$ tax.

Our international subsidiaries, our key international subsidiaries continue to operate in fairly difficult conditions. In Hong Kong, CSL is pursuing its 3G strategy in an environment of intense competition, for local voice revenues in particular. At the EBITDA level the result was flat with margins being maintained. The recently announced merger with New World will generate improved returns as we get some synergistic benefits and may be the start of more consolidation within a very crowded market.

Telstra Clear in New Zealand continues to grow its top line at the retail level. Recent activity has seen increase in consumer and SME revenues. However, this has also led to increased costs at the labour line which has resulted in a decline in earnings and margins. Recent developments on the regulatory front in New Zealand could assist in providing more certainty for Telstra Clear and of course we are active in that market on the regulatory front.

Let me just quickly turn to the outlook and specifically on '06. Our guidance for the full year is unchanged from our December update after our decision to put fibre to the node access on hold. We expect EBIT to decline still 7 to 10 per cent. That's the underlying business performance EBIT, so before the strategic overlay. And then including the strategic impacts, we expect EBIT to decline 15 to 20 per cent, and as I mentioned before if we do take a redundancy provision we satisfy all the appropriate rules. That will see an EBIT decline between 21 and 26 per cent.

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As Sol discussed earlier, the transformation is underway. The initiatives are on track and while there is an enormous amount of work ahead there is a real sense of urgency in the work and around the work to be undertaken. The regulatory caveat I guess remains and there are still some key ACCC and/or government decisions outstanding, and as I say, fibre to the node access remains on hold in the current environment. Notwithstanding this, we remain committed to improving long-term shareholder value.

Let me recap now on some strategic targets. As you know there was a lot covered back on 15 November and the next slide is an aim at sort. of summarising our goals. While fibre to the node is on hold, elements of the next generation network continue in order to modernise our core network. We have set some aggressive technology transformation targets, but there's a real sense of excitement in the operations group, the technology group as they set about their task of ridding Telstra of the complexity that Sol earlier described.

The principles of do it once, do it right for the customer, do it in an integrated way and do it at the lowest unit cost are now ingrained in every technology decision. Our strategic market initiatives, the key plank in changing Telstra into a customer driven organisation, there has been an incredible amount of work done and Sol went through some of that work in gaining an intimate understanding of our customer needs. We are putting the customer at the centre of everything we do and this will be reflected through improved market shares, higher ARPUs and reduced churn.

There's no doubt our targets are aggressive. We will provide our customers with much more, much more, than they have today. We will grow the business on four fronts, migrate customers to higher value platforms, shift the customer mix towards higher value customer base and deliver true integrated services and adopt new value added services.

The next slide shows the major targets in the business and government segment. That is moving from a pure carriage player to an integrated services and solutions provider, and they have made significant inroads there. The B&G segment is already delivering on some of these targets you see before you. In December we extended our successful strategic partnership with Westpac for another five years. So our aim towards longer term contracts you see in the middle of that slide with Westpac as an example has occurred. It's worth $produced$ significant approximately \$400 million and has already innovation particularly in areas such as voiceover IP where Westpac now has the number 1 capability of any Australian corporation.

We recently also won a new five year contract through KAZ to provide an estimated \$200 million worth of IT services to the Department of Defence, again, looking through that relationship to provide IP services and so on.

We had big plans for Sensis and BigPond as you've heard several times now. Sensis is aiming to almost double its revenues in five years. We have set BigPond aggressive market share targets as we get our marketing and integration of services and unique differentiators rights. As I've said, we have increased our share over the last two years of 6 per cent. Finally, of course, our wholesale business will continue to improve service levels to our important wholesale customers.

So with that, let me leave you with our key messages; product revenue trends continue, half one business performance is in line with our guidance. '05/'06 EBIT guidance has been adjusted for the fibre to the node on hold decision but we are setting the foundations to successfully execute the strategy.

Thank you for listening and Sol and I will now take questions. We will just move across here and open the floor up for questions. Thank you very much.

SOL TRUJILLO: Okay. Why don't we go ahead and get started. Tim.

TIM SMEALLIE (Citigroup): Good morning Sol, good morning John. I guess a fairly straightforward result that we have just seen. It only incorporates I guess effectively six weeks of the new strategy so it's effectively old news but the trends remain the same. Looking forward, you touched on the segmentation analysis and the market based management. You outlined you have done the segmentation. When do you think you will be in a position to implement that analysis within the system? So to deal with the offensive from your competitors is my first question and when you'll have that up and running.

Secondly, looking at the 3G strategy, obviously going down the 850 path has some implications for iMode. If iMode was shelved, what sort of investment would you have to make in Telstra Active to provide I guess a fully functioning service platform for content? And thirdly, probably a question for John, just looking at the finance costs continue or appear to continue to grow if we could get some colour on that.

SOL TRUJILLO: Okay, let me take the first two and John will take the third. In terms of market based management, the way I think about the implementation because we are about to begin implementing, it's in two pieces, two steps. The first one is about all the research has been done now. We have identified our segments and now we have to equip our sales channels and our marketing teams with that knowledge, that information and that that kind of set of strategies that are happening.

I can tell you that David Moffatt is passionate and is as engaged as you would ever want in terms of that step now working with Bill Stewart and the team that's been doing that. So it's imbedding all of that capability but also reorganising how we go to market. And I can tell you that David in the next few months is going to be working that very hard. I mean, he is -I'm pleased with the progress that they are already launching. Literally the

day that Bill finalised some of the work, David is already wanting to get started so that's terrific.

The second piece of it though is we have to go in with our IT systems and literally tag our database. Right, all through all the legacy systems and all the process, so that is going to be a 18-24 month kind of thought in terms of kind of really enabling. Every time that any customer interacts with Telstra, there is all this knowledge, all this data available in addition to our knowledge in terms of their positioning with the segment.

That's a bit away, but that doesn't stop us from beginning implementation given how we would segment, knowing value propositions for each segment and every micro segment as we go forward. And then packaging some of our innovations and applications around that. So that's relative to MBM. We literally, next time we meet, we will have talked about some of the implementation both in the consumer and the SME portions of our business.

In terms of iMode and its relevance, clearly it's a relevant part of our business today and it has been relatively successful now that we have got kind of the handset manufacturers aligning with some of the strategies that David and the team have had in place. It will continue to be part of our strategy but it's not going to be the only part of our value add services strategy going forward.

TIM SMEALLIE (Citigroup): Looking at the providers of the handsets if you are going with Ericsson and Motorola, they're not effectively supporters of iMode so if they are the ones that are providing you with the quadband handsets iModes are effectively are not going to be offered on the 850 platform?

SOL TRUJILLO: Well, I think in terms of what people are showing on their shelves today, it may be a little bit different than what others are looking to go going forward. I have been engaged, David has been engaged, Holly Kramer has been engaged over the last few months in terms of some conversations with a lot of the handset manufacturers and I don't want to disclose anything yet because it's competitive information in terms of how we intend to deal with that. But let me just say that we will continue in terms of our iMode path. We are continuing to work with handset manufacturers in terms of making what I would call the interoperability work appropriately, but I would also say that as we look medium term, long-term, we are also going to be aggressive about some integrated services applications, capabilities, when we think about the kind of seamlessness between our BigPond platform and our mobile platform and I think you will see some, pardon the expression, cool stuff.

TIM SMEALLIE (Citigroup): Are they going to be off-the-shelf platforms or are you going to have to invest in Telstra Active to deliver that?

SOL TRUJILLO: No, we are not, you know, as Greg has made clear back in November, we are not doing one-off things. We are looking to leverage what we have and as we are re-architecting we designing in, we are designing in what we want so we don't have to do all these bolt ons that have historically happened not only in Telstra but in a lot of telephone companies around the world. John.

JOHN STANHOPE: Tim, to answer your question about finance costs, finance costs increased in the half. They will continue to increase. You may notice from our balance sheet that the net debt position went up about a billion dollars and as a result our finance costs will continue to increase. We are moving towards the financial parameters that we set out on the strategy day as we invest in this transformation. So yes, finance costs will be part of the operating expense or the cost line.

TIM SMEALLIE (Citigroup): I guess I'm looking at the rate you're paying as opposed to the actual cash amount. It seems to be accelerating quite drastically.

JOHN STANHOPE: Well, it fluctuates. As credit ratings are given and so on, currently it's averaging around 7 per cent over our whole portfolio.

TIM SMEALLIE (Citigroup): Okay, thanks.

SOL TRUJILLO: We are going to alternate between here and Sydney and Melbourne so we will take a question from Melbourne.

RICHARD LONG (Deutsche Bank): Good morning. Just a question on Sensis. That was billed as being a major growth platform. Sales perhaps in some of the traditional products are a little weaker than we had thought, so were margins. Going forward, how do you see some of that mix changing? Are we going to see a continuation of margin erosion in that business overall as the product mix changes or will there be some stability in margins; and secondly, in terms of growth and solutions, at 3.7 per cent, that's perhaps a little lower than the industry overall, what steps do you see being taken to get that back to perhaps industry growth?

SOL TRUJILLO: In terms of Sensis and some of the traditional products and margins in growth rates, I think that going forward you will see that our growth rates will hold, if not increase. And secondly, in terms of margins, you will see them improve. Part of the certainty or confidence that I have in terms of the numbers is I know what Bruce Akhurst has already put in place. Some of the strategies in terms of some of our campaigns on the Yellow Page side as well as the White Page side. Some of the product innovation that's continuing to come in those product lines as well as some of the restructuring that he has been doing in terms of the business so he has been aggressive in terms of driving costs out, whether it be in terms of just pure head count or in terms of some of the partnering and contract agreements and relationships that he has in place.

So, Richard, you will see I think going forward, continued growth in terms of those product lines and perhaps some increase in growth as well as equal to, if not, better margins and then relative to the solutions.

JOHN STANHOPE: Richard, I will just make a comment on solutions management. Yes, it was 3.7 per cent. You will see that improve as we have been quite successful in the business and government space recently. I only mentioned two large contracts. Westpac is an extension but the Department of Defence is new and there are other new contracts that we have just won. I just didn't go through a comprehensive list, but that will add to the solutions management revenue growth over the next half and therefore the full year.

SOL TRUJILLO: Just to supplement with one other comment on that, Richard, that is a core part of our strategy going forward. We are working on the enablement. We have clarified our whole product management structure recently by appointing Holly Kramer as an individual in charge of our product management, and now I think you will see in addition to what John covered with what David Thodey has been doing on the large customer side of the equation, you will see that become more pervasive throughout the business. Okay.

JUSTIN CAMERON (Credit Suisse): Just two questions, one for Sol and one for John. Sol, at the start of the presentation you made comment in relation to the mobile market, in particular, your expectations of Telstra to accelerate growth again. Obviously that's in the face of results you have seen out at Optus yesterday and the commentary in relation to the impacts of bucket plans and the like. Can you provide just a little bit of colour on where you expect to see the growth coming back through for Telstra and why?

Secondly, just for John, can you provide a little bit more colour on the cost out strategy? I suppose in the first half we saw a little bit of opportunity coming through on the labour side of obviously 1,000 employees coming out over the 12 month period or the six month period, what kind of colour can you provide over the next 12 months, redundancies, direct costs, just a little bit more flavour on that obviously because we are just sitting out there at the moment just trying to work out where we are going with those numbers.

SOL TRUJILLO: Okav. Justin. I'll start and then turn it over to John. Relative to mobiles. I think you are going to see with our segmentation work, we are not going to share our segmentation because we are not going to share competitive advantaged information here, but you will see that in the consumer side and in the SME side we are going to have much more precise knowledge of who to target with what offers and how much. Because as you think about the big bucket plans, you know, it's kind of throw it out there and hope, you know, see who comes and see who buys and if you are a person that spends a lot more than what that bucket is, you generally tend to go buy it. Well, that's one way to do it but it's highly dilutive in a lot of cases, and for some that's a low market share player it might be helping them grow to some extent. In our case, we have to be much more selective by segment in terms of what is the driving value proposition. Sometimes it is priced, sometimes it's more than priced in

terms of integrated features, some of the simplicity of experience and other capabilities.

Now, that's not to say that we won't have some pricing packages but they will be more targeted in terms of some of the segments. Finally, in terms of when we think about the long-term or even medium term relative to our mobile strategy, the reason why we decided on the 3G HSDPA play is to advantage ourselves. We are going to advantage ourselves by having the first and best and most complete, most ubiquitous broadband wireless capability in the country.

Secondly, with the 850 spectrum, we are going to have better indoor coverage than anyone else in the country and we are going to market those advantages. Now, those are common knowledge, they should be common knowledge in terms of capabilities. But as I now have lived here for, you know, a little bit longer than six months, there are some opportunities for us in terms of marketing better our advantages and actually building out some of the advantages that we are looking to deliver in the market.

On top of that, we have some other initiatives that you will see us play out in the coming months and I won't say anything more than that.

JUSTIN CAMERON (Credit Suisse): If I just look at trying to translate the revenue growth going forward though for the business, I mean, are we looking to expect 3 and a half per cent growth, 4 per cent growth or when you are saying acceleration, are you anticipating 5 to 6 per cent growth over the 12 to 18 months? Is that how I should read it or ...

SOL TRUJILLO: I think you will see in a relative sense, I'm not going to give you a number per se, but in a relative sense, you will see that our relative market share should get better.

JOHN STANHOPE: And, Justin, colour about costs. Let me just focus on labour for a moment. 1,000 reduction over the first half as you would understand takes a while to flow through in your salary line and so on. So that will take some time. I'll just add again around labour that we have given an indication of 6,000 to 8,000 staff reduction over three years. Obviously we are trying to bring as much of that as far forward as we can. I'm not going to give you a number or a number for this fiscal year but obviously the sooner you can sort of rationalise and become more efficient and productive, the better because you get that translated into your labour costs.

A lot of it, however, does depend on IT transformation and having fewer screens out in the front office and so on. So there is a sequential well-planned program to take the costs out of the business. But there are those dependencies, there's no doubt about those dependencies. In the other sort of cost areas, I mean, network payments for example are now in this half, a billion dollars of our costs, a large number. So, you know, we are doing things within our marketing initiatives to get more on-net traffic

and so on. So there is a whole range of costs programs. In fact, you know, there are hundreds of cost programs that we monitor all the time as to the achievement of these programs so - - -

JUSTIN CAMERON (Credit Suisse): Maybe just on other costs then, and Sol made mention of it at the start was - I can't remember the number of leases that were cancelled over the last 12 months - 15 leases. I mean, the property lines is what, 800 million odd a year, what kind of opportunity is there over the next 12, 24 months for that to reduce?

JOHN STANHOPE: There is still further opportunity. I mean, we are consolidating our commercial properties. We have just completed a megasite in Broadmeadows that has combined a number of depots for our field force. We will continue to take those sort of actions so there's plenty of scope.

JUSTIN CAMERON (Credit Suisse): Thank you.

SOL TRUJILLO: We have some people lined up in Melbourne as well so we will go - we will alternate here as I said and we'll move over to Melbourne.

PATRICK RUSSELL (Merrill Lynch): Look, just three questions, firstly, in relation to PSTN, I just wanted to get a little bit more feel for the second half in light of the wholesale price increase. Would we expect second half PSTN revenue to improve or do you still think the underlying trend will be the same including that price increase? Secondly, in mobile, I don't know whether you can provide some detail in terms of what share cap plans are taking in terms of the net subscriber additions so the market average seems to be ranging between 30 and 50 per cent. In light of that, is it fair to assume that the voice revenues which were flat in the half will actually start declining as a consequence of caps becoming a bigger percentage of the base; and the third question just relates to Sensis. The revenue target to double over five years is a big plank in the total revenue growth on a sort of a five year strategic plan basis, and given that's a high margin business it's going to be important in terms of driving the additional profit, just trying to get a question that or get some more detail on the issue of acquisitions because that was mentioned at the strategic plan that there may be some acquisitions in that to bulk that number up, and given the enterprise revenue multiples of publishing and Internet assets which are high, you could be looking at spending potentially quite a bit of capital in acquisitions in that space in order to meet that revenue target which may or may not be encompassed in your overall CAPEX envelope?

JOHN STANHOPE: I'll take the PSTN question first, Justin. I guess everybody will recall that on 11 August I said when asked the question where did I think PSTN revenues were going that I said the decline of about minus 3.4 per cent in the full year last year may at least double and at the half minus 7.6 per cent is a little more than that. But to your point, I would expect it would be somewhere around where it is for the half given what you've just described, the wholesale access increase, so really, I'm not changing much the guidance that I gave back on 11 August with respect to

PSTN decline even though there's been a - in the first half - a 7.6 decline.

With respect to mobile voice pressures, and will it now decline given it has been flat in the first half, there is no question that the increased take up of capped plans does put pressure because of the amounts of free minutes within those caps. So, look, I wouldn't want to predict any level of decline just to say voice continues to be under pressure. Having said that, I mean, we are very, very focussed on wireless data and wireless cards in particular and blackberries and we are pushing hard on that, what was a 14 per cent growth in the mobile data area. So the value added areas of mobiles to compensate or even improve our mobile position is where we are focussed. Sensis, did you want to take the Sensis question?

SOL TRUJILLO: In terms of Sensis, as we outlined back in November, we did talk about some acquisition activity for growth but it's all within the capital plan that John outlined there so there's nothing out of plan that is anticipated and nothing out of plan assuming whatever the multiples are for any acquisition that would change our guidance that we gave. Here in Sydney.

LIANNE LIM (Westpac): Sol and John, just two questions. Number 1 John mentioned earlier about the ACCC decision. When do you expect the ACCC to make its decision regarding your latest unbundled local loop undertaking, and in the more general terms of what do you expect would be the regulatory outcome and the impact on your financial parameters? Number 2, in terms of a public debt rating, John had mentioned earlier I think back in November about how your financial parameters are in line with a single A level, what is your commitment to a single A level and under what circumstances would you allow a move to a triple B rating?

JOHN STANHOPE: Okay. Firstly, the ULL decision. We have launched an undertaking but there is another process in place. The government has asked for the ACCC to review and consider Telstra's position on ULL. They have until the end of March and we hope that it happens earlier than this to give their considered view to the government. So there are two elements going on.

I suspect that the undertaking decision won't happen until the whole review takes place but I may be wrong. I mean, there may be some posturing take place, but there is a process that is going through to hopefully rationally consider our position that ULL prices, wholesale prices should be averaged at \$30 which is our cost.

To your other point about debt, yes, we are well within the parameters of the single A band. We have deliberately set those financial parameters where we are and we intend to manage the business, given the performance and so on within the A band. There is no suggestion that this company wishes to go outside the single A band.

LIANNE LIM (Westpac): Thank you, John.

SOL TRUJILLO: We will take a question in Melbourne.

CHRISTIAN GUERRA (Goldman Sachs JB Were): Good morning, I've just got three questions this morning. Firstly John, just on DNA, do you mind just outlining please the benefit that you received from the increase in the service lives? Secondly, just on the fibre to the curb rollout, you are saying it's on hold but I'd just like to understand how realistic that is as a strategy going forward given that we are looking at a situation where your broadband network may be capped at speeds of right now it's 1 and a half meg but maybe up to 5 or 6 meg and that to me appears to suggest that Telstra will be at a competitive disadvantage going forward versus your competitors.

And thirdly just a question on margins. You've got a great chart in the pack, I think it's page 20, where you outline the growth in the new generation services versus the declines in the traditional services like PSTN and data and ISDN. I'm just wondering whether it's time now to start perhaps lifting the veil on the company and start giving us margins by product line because with the sorts of declines we are seeing in big parts of your business, I think that's the sort of information that we need to analyse the company going forward. Thanks.

JOHN STANHOPE: Okay. Let me, at the risk of boring the room, let me go through the depreciation amortisation impacts. In the impact in December half we did extend the switching asset life by a year and that had a 50 million impact. We did extend the life of SDH three vears. That will come under review as we look at NGN. That had an impact of 26 million. Pair gains we increased one year, and again that will be reviewed in the second half. Network management we extended a year and that had an impact of 5.

Now, this is a year on year comparison, so GSM last year was decreased 29 million. CDMA \$4 million impact and so on and there are other minor items. The net impact, so December '04 to December '05 of all these changes is 67 million.

Now, the other question about margins, now, it's not normally our practice as you know, to give a lot of margin information out. We have today talked about mobile decline in margin. The margins for the whole business we have mentioned, the decline. But it's probably worth mentioning a couple of things because there is a focus on PSTN.

PSTN over the last two years as a percentage revenue of our - as a percentage of our total revenue has dropped from 40 per cent to 33 per cent. So a 7 per cent reduction over two years in revenue terms. PSTN margins over that same time have dropped about 3 per cent and we all know that they are fairly high margins. In fact, EBITDA margins in PSTN I've told you before is north of 50 per cent, somewhere between 50 and 60 per cent. But I guess that's about as much margin information that we would want to talk about.

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SOL TRUJILLO: Let me take on the question, Christian, about the fibre you said fibre to the curb - I think you might have meant fibre to the node question, and maybe you did mean curb. We have not had any plans to do a fibre to the curb build. What we described in November was a fibre to the node build that we thought would enable us as an element, enable us to move on to what we would call the next generation network. That's all covered. That's all, you know, we have talked about that so I won't get into that.

The question that we talked about back in November was the economics of doing it. Clearly under the proposed economics that we saw at the time from the regulator, the economics did not work and that's where we basically said under proposed unbundled local loop the average prices of as low as \$8 or \$9, you know, in zone 1 and \$13 or whatever it might have been in zone 2 just doesn't work so it's not a good use of shareholder money so we put it on hold.

In terms of the competitive portion of your question, I guess I don't think we will be disadvantaged in any way because last time I checked nobody else was building fibre to the node capabilities in this country. Nobody else was building fibre to the curb capabilities in this country. So in terms of the supplemental investments on DSLAMs and technologies associated with it, you know, nobody will be doing anything that we aren't doing and as a matter of fact if you look at our results which you know in this space are dramatically better than perhaps anybody that you want to compare us to, I think we are on the right path. We have got the right strategy. By the way, it's not just about the speed, it's also about the services and the experience that we are going to deliver as well as part of our differentiation. Okay. Go here to Sydney.

DAVID WILSON (JP Morgan): John, if you could give us a feel for the increase in wholesale subs during the December quarter because obviously that was a particularly strong part of the result. You gave us retail subscriber increase during the quarter and I was wondering if you could give us a wholesale number as well.

JOHN STANHOPE: For broadband you mean?

DAVID WILSON (JP Morgan): For broadband, yes. Obviously probably a bit nervous over at Optus this morning given your numbers. The second point is if you could give us a feel across the different sectors from sort of corporate SME and the consumer market, just what the revenue trends were like and finally to Sol, when you joined you remarked on the fact that wholesale revenues were growing by 11 per cent and I think retail revenues at that time were growing at 1 per cent. Since then, if anything, wholesale revenues have actually accelerated, so just if you give us some insight on how you feel about that, whether it fills you with joy.

SOL TRUJILLO: Okay. Let me start with the latter part of the question and then John will get into the numbers piece. In terms of the revenue mix between retail and wholesale, obviously I'd think we have a much healthier company going forward if we had a much better balance in terms of retail and wholesale growth. I am a believer in wholesale growth and I believe that if we are the best underlying infrastructure network provider, people will stay on our network and use our network and we can have healthy margins in terms of that part of the business. So I think I've said that all along. I believe that in my prior life. I still believe it in this life in terms of this business called Telstra.

However, do we need to be better at competing at the retail level? Absolutely. Having flat growth to negative growth is not a good thing. It's not a healthy sign and most of that is driven by this PSTN phenomena and we uniquely carry that PSTN phenomena as the local incumbent telco. You put that aside then and you look at how healthy are we when we look at mobile growth, when we look at broadband growth, when we look at our enterprise growth versus our competitors. When you look at all the elements of the business. I'd say we are healthy but we need to get healthier because I don't like being in the business of what I call going after empty calories, stuff that just doesn't create margins and isn't good just because you count it as growth.

The growth you are seeing in BigPond today is good healthy growth because it creates a platform for other services. When you look at our mobiles growth which I say is kind of okay but not great, we are going to be building more supplemental capability to muscle up in terms of how we are going to go to market, and that also then gets to some of the other products and features that Holly Kramer and her team are now working on in a very focussed way. And then finally, it gets back to market-based management in terms of how we differentiate on services and integrating the way customers want us to integrate. And everything that we are going to be doing now isn't just about product centric view, it's really a customer centric view. And my experience wherever I have been and you can pick any great company in the world in other industry sectors, those who know their customers better than anyone else always have better margins and generally have better growth. So we are going to be working on that, not happy about the mix day. Can it be better? The answer is yes.

JOHN STANHOPE: David. I just don't have at hand the quarter numbers. but $611,000$ was the increase on prior corresponding periods. So in the $12$ months, 611,000. I am trying to recall, I think it was about 120,000 in the quarter for wholesale. If that's not accurate I'll let you know.

DAVID WILSON (JP Morgan): Okay, thanks. And the mix across the different industry sort of - sorry, customer segments in terms of corporate consumers and SME, just revenue growth?

JOHN STANHOPE: In terms of revenue growth, across the fixed network it's sort of fairly evenly spread negative but in the mobile sector SME is still fairly strong. Consumers - they are all positive businesses, slightly positive.

DAVID WILSON (JP Morgan): Thank you.

SOL TRUJILLO: Okay, we are going to go back to Melbourne.

TONY WILSON (UBS): Just a question on guidance. Given that you came in at the low end of the minus 7 to minus 10 per cent range in terms of operating performance, I'm just wondering why you didn't actually narrow the guidance for the full year. It actually leaves a lot of scope for the second half, and I would hate to think that we are going to end up with a minus 12 or minus 13 per cent figure in that second half, and related to that question is there an underlying concern that perhaps consumer VOIP might start having a bigger impact on those PSTN revenues in terms of consumer VOIP. hardware costs, quality of services and just savings for the consumer now being at a point where it's a lot easier to justify making that investment?

SOL TRUJILLO: Well, I think John was - I thought he was clear in terms of the guidance for the vear relative to PSTN which is the guidance hasn't changed from what he said in November in this 7 plus per cent range on the decline in PSTN. That's number 1. Number 2, in terms of are we concerned about perhaps further acceleration associated with VOIP and service providers in that space, obviously we are concerned but concern doesn't make, you know, it's an interesting statement, but does it change our guidance for the second half? The answer is no. We will have our own alternatives. We will have our own competitive strategies and we also acknowledge the reality of some of the players moving into the market with perhaps some improvements in some of the technology and obviously the attractiveness of prices.

But that does not change our guidance or change us in terms of the track that we are on with our competitive plans that you will see play out again over the coming months and the next couple of years.

TONY WILSON (UBS): Given that the PSTN guidance is largely unchanged, I'm just not sure why you haven't narrowed the overall operating performance guidance?

JOHN STANHOPE: I think it's reasonable and this is why we have kept the range 7 to 10. I mean, there are some regulatory decisions still pending and if we were to get, say, an unfavourable ULL, there may be some impact in the remainder of the fiscal year. So, 7 to 10 per cent range is where we are and we are at the bottom end of it now and you could expect, given what we have said about PSTN and so on, that without any external interferences that we might remain near the bottom end of that guidance but it's ranged because there could be unforeseen external factors.

TONY WILSON (UBS): Thank you.

SOL TRUJILLO: Next question here in Sydney.

MARK McDONNELL (BBY): I have two questions. The first is that there appears to be a discrepancy between the stated 1,000 departures in the redundancies in the presentation and the information contained in the

statistical data summary where the reduction in full-time staff and equivalents is shown as 302 so there appear to be 698 missing persons, and I'm wondering firstly if you can clarify what that is.

The second question is in relation to non-performing assets. I appreciate that with CSL you've brought some money home out of the merger but you have talked about continuing deterioration in Telstra Clear. It's a non-core business, its performance historically has been poor; it's deteriorating. At what point within the strategic plan does the rubber hit the road on the rhetoric about we are only in businesses that make money with respect to non-core, non-performing assets?

SOL TRUJILLO: Do you want to take the first part?

JOHN STANHOPE: I shall, yes. Okay, let me be clear about the head count. The 302 number in the material is a December to December so this is a half year announcement, it is half year on half year. The 1,000 people reduction including contractors I referenced today and Sol referenced is since 30 June. Let me be even more specific so you can reconcile back to published data in our financial highlights, the full - and this is from the 30th of June through to 31 December. Our full-time staff reduced from 42,523 to 42,034 which is a reduction of 489. And you will be able to reconcile these numbers.

The full-time equivalent staff reduced from 46,336 from 30 June '05 to 45,876 on 31 December '05 which is minus 460 and with the inclusion of contractors, our numbers have gone from 51.764 which is sort of - we round it up to 52,000 at the strategic announcement, to 50,704 which is a change of 1,060 and we call that 1,000 today.

SOL TRUJILLO: Okay, relative to the question about designated non-core businesses, I think the real starting point is whether they are non-core or not. If you think about Telstra today and we have kind of the country, the geographic physical element of Australia, we have over here, we have New Zealand as part of the extension of our relationship with business customers, and it is important in terms of what we are doing there in extending services for some of our major businesses there.

So is that core? It is. If you think about the undersea cable business and the partnership that we are part of there, if you look now and I don't know if you were at our presentation in November, and you think back to one of the charts that Greg Winn showed in terms of the amount of traffic that is growing and it's (inaudible) the ability to, one, have a network here domestically and also a network that enables us to send the traffic wherever people are sending their traffic to in a cost effective way, is very important so part of the definition of that business is no longer about doesn't make money per se in a commercial sense but it's also part of how do we keep our costs low or at best in class points as we think about the total cost of operating our Australian business.

So as we think about each of those two, it's about how do we

continue to improve our performance because they are relevant to our core In the case of CSL, that is a business where there was a business. transaction at a single point in time that people could have said, you know, that perhaps was - there was an overpayment of money for the assets received. That has passed. There have been write-offs, there have been The question now is going forward, how do we other actions taken. optimise the value of the asset that we hold? And can we do that and get, if there was a future point in time where there was a sale, can we optimise that point or is there a leverage there in terms of an expansion strategy for a lot of the capabilities that are part of this business.

My belief is that that's part of what is still on the table as we strategically continue to look at CSL and improve the relative value position of that business. And that's the way we are managing at this point and it will continue to evolve.

MARK McDONNELL (BBY): So is the short take-out of that, no planned divestments?

SOL TRUJILLO: No planned divestments in the near term.

MARK McDONNELL (BBY): Thank you.

SOL TRUJILLO: Thank you. Okay, we will take one more question in Melbourne, we'll take one more question in Sydney. So over to Melbourne.

IAN MARTIN (ABN Amro): Thank you. Just on your decision to put fibre to the node element of the NGN on hold, a moment ago I think you were saying that that's because you didn't like the prices, price structures that apply to access. I don't know if that debate has moved on because previously it was a decision that you wanted a complete access holiday in order to make that kind of investment. But more generally, wouldn't there be a set access prices and access price structure under which it still made sense to go ahead with that investment, and wouldn't be it worth having a conversation with the ACCC about what those prices might be? - In particular since August they have had to take into account the risk of investments, it might be some kind of risk sharing structure in access prices that made sense?

SOL TRUJILLO: Ian, I think the logic of your question is appropriate in the sense of should we always been mindful of changes in position? I think that's the take-away from your question. The answer is yes. But now let me be clear about our position to date given the knowledge that we have in hand to date.

The statement about putting fibre to the node on hold is associated with what we know on two things that are in play. One is the current philosophy around pricing for access when you look at unbundled local loop pricing. Now, the proposed prices by the ACCC in their recommendations of the document that was prepared last June or May or whenever they prepared it, does not indicate a favourable pricing environment and cost recovery environment for Telstra.

So that is a philosophical approach, but it is a factual approach on their part. We do not believe it is in our shareholders' best interests to invest in kind of core plant capabilities where we can't recover our costs. That is a philosophy that's in place with the ACCC's proposal today. Now, as you state, there has been some direction given to take into account the full costs across the whole country etc. etc, and we are yet to see what the ACCC will come back with in terms of their recommendation.

So I would say no decision is permanent. However, the principle that I outlined earlier today of protecting our shareholders' interests of not investing in things that we lose money in going forward is a principle that we will continue and so we have yet to see what the recommendations are. We have yet to see what the outcomes are, and obviously we will always be hopeful and we will engage in whatever constructive dialogue we can engage in to make sure that as we like to think, putting in place the kind of infrastructure that all of Australia deserves, that's Telstra's position.

Our position at the same time is we are not in business to take our shareholders' money to subsidise shareholders in Singapore, Hong Kong, London and other places. Our job is to project our shareholders' interest. Okay, thank you. Sydney.

TIM SMEALLIE (Citigroup): Sol, I guess we haven't really touched on today the biggest risk that both Telstra and the industry faces in terms of what the ACCC's proposing. Could you give us a bit of colour, like Sunday you launched a \$14.95 broadband deal, effectively \$22.50 over a two year contract. 22 bucks is what your wholesale customers are paying. Are you envisaging an onslaught of competition notices on the back of that and, you know, how do you intend to deal with that?

SOL TRUJILLO: Well, Tim, first of all, everything that we do is as I just said as an operating principle, everything that we price and offer in the market is value creating for our shareholders. We go through a very rigorous review both from a product management standpoint as well as from a legal standpoint, regulatory standpoint in terms of does it meet all the tests and all the standards and all the requirements that we know of within the regulatory context here in Australia? And so when we are aggressive in the marketplace, do our competitors whinge - I guess that's the right term? The answer is yes. Is that to be expected? Yes. Is that unique to Australia? No. You know, that's part of the marketplace.

Now, will the ACCC issue competition notices? I have no idea. It's not my job to figure out what they choose to do or not to do other than it is our job to ensure that we comply. We comply with the laws, we comply with all regulations within Australia and that's what we do with whatever pricing plan that we go to market with.

TIM SMEALLIE (Citigroup): So you are comfortable the \$22.50, isn't going to raise any issues, given that's effectively what you are charging your competitors at the wholesale level?

SOL TRUJILLO: I am comfortable with the pricing plans that we have in the market today.

TIM SMEALLIE (Citigroup): Okay. Thank you.

SOL TRUJILLO: Thank you. With that, we are going to wrap up here. We have other people waiting to hear the story and to ask questions and to do other things. I want to thank all of you. I just want to remind everybody that we are a business that's going through the transformation over the next couple, two or three or four years, and we are very focussed now on creating value and driving performance and we look forward to talking to you again with our full year results. Thank you.

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