TELSTRA GROUP LIMITED — Call Transcript 2007

Aug 9, 2007

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10 August 2007

The Manager

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

Office of the Company Secretary

Level 41 242 Exhibition Street MELBOURNE VIC 3000 AUSTRALIA

Telephone 03 9634 6400 Facsimile 03 9632 3215

ELECTRONIC LODGEMENT

Dear Sir or Madam

Transcript from Full Year 2007 Results – Chairman’s Briefing

In accordance with the listing rules, I attach a copy of the transcript from today’s Full Year 2007 Results analysts briefing for release to the market.

Yours sincerely

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Douglas Gration Company Secretary

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

TELSTRA CORPORATION LIMITED

2006/2007 FULL-YEAR RESULTS

Heritage Room Westin Hotel 1 Martin Place Sydney NSW 2000

9 August 2007 at 9am

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MR MAIDEN: Ladies and gentlemen, welcome to our guests in Sydney and those in Melbourne and those also watching via today's webcast. I would also like to welcome to the stage Donald McGauchie, the Chairman of Telstra, and Charles Macek, who is the Chair of the Telstra Board's Remuneration Committee.

We will have some opening comments from Donald McGauchie and Charles Macek, and then we will take questions from Sydney and, if there are any from Melbourne, then from Melbourne. A transcript of today's proceedings will be disclosed to the ASX late this afternoon. I will hand over to Donald.

MR McGAUCHIE: Thank you all for being here. I know it has been a long morning and it is a busy day for you, so I do appreciate the fact that you have stayed to join us.

This morning's announcements of the LTI and remuneration plans are of critical importance to Telstra and to our shareholders. Having finalised the plan, we wanted to present it to you and to do so in detail.

I would also like, at this stage, to recognise the quite extraordinary job that management and staff have delivered for the '06/'07 results that were announced this morning that Sol and John Stanhope have gone through in such detail with you earlier in the morning.

It is a very pleasing result to be on or ahead of guidance on all our key financials and to be on or ahead of guidance and plan in all phases of our transformation, because it is a very significant transformation program that we are engaged in; to have revenue up by 4.2 per cent, which has been better than guidance, and with some truly world class performance across the business, a very strong second half result, our underlying EBIT being up by 7.1 per cent - again, better than guidance - and a very strong free cash flow at 2.9 billion despite what has been, again, a very significant capex requirement.

As Sol has said, and said many times, and I support it: we mean what we say. We are building a solid track record of delivering on what we said we would do.

As you are well aware, Telstra is undertaking one of

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the most significant and challenging transformations of any telecommunications company anywhere in the world. We are transforming Telstra, which is what we said we would do when we went into this program. We are making it into a global media-comms company, and while we are well on the way through that transformation, we do have a very significant amount of work yet to do over the next few years.

Our people, of course, are the key to the success of that transformation program. I will directly address the arrangements for the executive leadership teams - CEO Sol Trujillo and the Chief Operating Officer Greg Winn - during these remarks, but first I would like to discuss the principles that are the platform of the plan for the executive leadership team and the members of the senior management team right across the corporation.

The Board and its Remuneration Committee have been working with three internationally recognised remuneration advisory firms and have understandably invested a very significant amount of time and effort in developing what is a sophisticated remuneration and incentive scheme to ensure that there are three key outcomes for our shareholders: to align the financial interests of shareholders and executives, giving us the ability to attract and retain top talent in a global talent pool and to drive a high performance culture right across the company.

Charles Macek, who is the Chair of the Board's Remuneration Committee, will take you through the structure and detail of the plan shortly. The plan means that, as the global telecommunications industry evolves and other companies begin to follow the transformation lead that we have taken here, our key executives, with a significant stake in the company's future success, will, we believe, be more likely to stay with Telstra over those next crucial years of that transformation. The global industry is now well aware of our extraordinary achievements to date and are looking at the people within this company that are making that happen.

Telstra is a training ground for telco executives in this country, and the next step for many could well be the international marketplace. Where we have international executives that we want to keep for that transformation program and when we are recruiting, it is

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essential that we offer a compelling employment opportunity in what is a highly competitive global market for talent.

But it is about more than retention. Remuneration LTI plans must unambiguously work in the direct interest of our shareholders. This scheme includes the toughest performance hurdles ever set in the history of this company, but they do offer the potential for very significant reward if people achieve high performance.

No participant in the senior executive plan will receive a dollar unless they collectively add at least $25 billion to the long-term wealth of Telstra shareholders over the period of the plan, that is total shareholder return by 30 June in the year 2010. They must achieve key milestones in the company's financial performance and the transformation plan or they won't get anything out of it.

We have set targets that many of you in this room and on the phones believed when we put those targets out were unachievable. We have deliberately set top-end hurdles that are substantially higher than our guidance to the market, and they are deliberately high because the Board wants a high-performance culture and for people to be aiming at the very highest that they can achieve.

Senior managers must also own a significant number of Telstra shares. We believe this is critical in aligning shareholder and executive interests. Make no mistake about this: if Telstra executives and senior managers accrue the highest possible payment under this scheme, around 99 cents in every dollar added to shareholder wealth will accrue to the ordinary shareholders for Telstra in the form of dividends and a higher share price.

Let me now make some comments on the revised arrangements for the chief executive and the chief operating officer. The CEO, Sol Trujillo, will receive $3 million in fixed remuneration, which is unchanged from year 1, that is the amount in the year we have just concluded, and it will remain unchanged for the next two years. The fundamental change is that we have increased his at-risk short- and long-term incentives to align his potential reward to the success of this transformation project.

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As with the senior managers across the corporation, these incentives are dependent upon exceptional performance and shareholder returns. Under the terms of the revised contract, Sol is eligible for $3 million in short-term cash incentives and a matching $3 million worth of deferred shares, which are exercisable only after he leaves the employment of the company. Sol's long-term incentive will include a grant of 20.7 million options over three years based on meeting tough earnings and shareholder return targets.

I am also very pleased to be able to confirm that our Chief Operating Officer, Greg Winn, has extended his contract and will continue to drive the transformation program of the company, which he has done so ably over the last two years.

I will now hand over to Charles, who will take you through more of the detail of our plan.

MR MACEK: Thank you, Donald. As the chairman has already indicated, over the last year the Board has undertaken a very extensive review of the long-term incentive arrangements for senior executives at Telstra, and that review was undertaken with very significant input from three internationally recognised remuneration advisory firms. It should be noted that those three organisations were appointed by the Board and they worked directly with the Board.

The focus of the review was to understand current and emerging trends in Australia and globally in terms of practices adopted by companies that were undergoing major turnarounds or in a transformation scenario such as the one that Telstra has embarked upon.

The outcome of that review was the introduction of the 2006-2010 long-term incentive plan. This is a plan that focuses executives on the delivery of the transformation strategy. It provides a strong and direct alignment between executive reward and shareholders' value creation, and, finally, motivates executives to focus on the delivery of very significant stretch results through the alignment of performance and their potential rewards.

The key objective of the LTIP is to motivate our

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executives to deliver outstanding total shareholder returns by June 2010. This objective is driven by, firstly, incorporating a TSR gateway measured in 2010 to guarantee a minimum level of shareholder value that must be achieved before executives obtain any financial benefit from this plan; secondly, by calibrating performance hurdles to the delivery of transformational outcomes in line with the time frames of the transformation strategy; thirdly, we are using options to leverage reward outcomes where executives share in the upside movement of share price resulting from the successful delivery of the strategy; and, finally, through that process, we acknowledge extraordinary performance by providing significant reward outcomes where this level of performance is achieved.

So, to summarise, the LTIP is based on demanding performance targets, targets which are substantially higher than long-term management objectives and market expectations; the payout is dependent upon the achievement of transformational milestones and the resulting financial performance; and, most importantly, there is no payout - no payout - unless the compound total shareholder return over the four years of this plan is 11.5 per cent per annum. This would equate to an increase in shareholder value over this period of $25 billion.

Telstra's transformation strategy involves delivering value to shareholders through enhancing the customer experience by building new capabilities and then getting customers to use those capabilities. This slide depicts the framework. Firstly comes the IT and network transformation in order to build new capability which will enhance the customer experience and, in that way, drive revenue. Secondly, value is created for shareholders, as reflected by EBITDA, TSR and the return on invested capital.

The emphasis of the LTIP will evolve over four years as Telstra progresses through its transformation journey. This diagram illustrates the change. In particular, emphasis will move from transformation activity in the early years to traditional financial and shareholder value measures. The focus on company-wide performance, reflected in the "one factory" model, the collapse of silos and the delivery of integrated services to customers, will require teamwork for success. This is

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reflected in the LTIP framework.

Moving on, this slide further demonstrates the alignment between management and shareholders. If only the target objectives which are set for management are achieved, which would be regarded as good performance, only one-third of management's potential maximum can be earned. Great performance requires achieving demanding stretch targets, and even then only two-thirds of the potential maximum would vest.

Just to illustrate, the target and stretch measures for the TSR component of management's option allocation are 18 per cent and 20.5 per cent per annum respectively. To earn the maximum potential under the LTIP, management would need to meet every goal for the transformation, meet all long-term stretch objectives and also sustain multi-year stretch performance for EBITDA. In this event, more than $50 billion of shareholders' value will have been created.

The LTIP has progressive vesting based on performance testing at June 2008, June 2009 and June 2010. However, vested options can only be exercised after June 2010 subject to meeting the gateway TSR hurdle.

The benefit of using options is that they do not provide a free benefit to management. Performance hurdles have to be met and a price has to be paid for the exercise of the options. The exercise price for the 2006-2010 LTIP options is based on the volume weighted average price for the five trading days after the release of the annual results in August 2006. This was advised to the AGM in November last.

This practice is consistent with our past practices over the last decade, so there is no change in the way in which we are valuing LTIP benefits. However, the value to executives will only be the difference between $3.67, which they have to pay, and the share price at the time of exercise.

To further demonstrate our commitment to growth in shareholder value and aligning management's rewards with company success, Telstra is introducing a compulsory share ownership plan. Under this plan, senior executives, depending on their level of responsibility,

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will be required to achieve a minimum holding of shares within five years, and the percentages are shown on this slide.

Finally, I turn to the details of the CEO's contract. Sol Trujillo is a globally experienced and internationally qualified telco executive. His contract reflects the value that he and his team can deliver to shareholders through the successful transformation of this company. As has already been mentioned, his fixed remuneration is unchanged at $3 million and will remain so for the next two years.

The remainder of his compensation is entirely at risk. Both his STI and his LTI potential have changed. As the Chairman has already mentioned, his STI potential has been doubled, but all of this increase will be in the form of deferred shares.

Whilst these will vest upon the achievement of annual short-term targets, the CEO cannot access this value before the earlier of June 2009 or six months after he retires from Telstra. The allocation of deferred shares is and will be based on the volume weighted average price over the five days following the release of annual results.

With respect to his LTI, the CEO will be allocated three tranches of options. The first tranche of 10.3 million has the same exercise price as applicable to the executives' 2006-2010 LTIP. The second tranche of 5.17 million will have an exercise price set by the volume weighted average price over the next five trading days. And the third tranche, also of 5.17 million, will have an exercise price determined in 12 months' time following the release of next year's results.

Performance hurdles which apply to the CEO's long-term incentive are exactly the same as apply to other executives, with one exception: the executives' 2006-2010 LTIP maximises performance by incorporating the achievement of multi-year stretch EBITDA targets over the four years.

In the CEO's case, there is a more significant value potential that is determined by EBITDA built into his STI. The first tranche of options cannot be exercised

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before January 2009, whilst the second and third tranches, when they have vested, can be exercised at the earlier of January 2010 or six months after his retirement from Telstra. Thus, 86 per cent of the CEO's potential maximum reward is at risk and subject to the same demanding hurdles which apply to his team.

In conclusion, even if he earns a substantial part of this reward for performance, his total remuneration will not be out of alignment with the CEOs of other large Australian companies in areas such as financial services and the mining industry and will remain somewhat below his counterpart at global telcos.

I now hand back to the Chairman.

MR McGAUCHIE: Thank you, Charles. The Board believes that our new LTI and remuneration plan is in the best interests of our shareholders. We have aligned the financial interests of shareholders and executives. We believe that we will be able to attract and retain top talent out of the global talent pool that we're working from, and we are in every way in this company seeking to drive a very high performance culture.

Thank you for listening to that. We will now open it to questions.

MR MAIDEN: We will begin with questions from any analysts who are in the room in Sydney who wish to ask questions.

MR SMEALLIE: Good afternoon, everyone. Mr Chairman, in relation to the trigger point of the 25 billion of shareholder value assessment, that takes into account the dividends over the next four-year period and the valuation uplift in the share price. So if we assume that a 28 cent dividend is maintained for the next four years, and looking at the vesting price at $3.67, if that were maintained, or if the price were maintained at its current level, in addition to four years of 28 cents, they're already at that trigger point. Would that be a fair assessment?

MR MACEK: At the moment, that is correct, but as you well know, Tim, share prices can fluctuate and we have been entirely consistent in determining the framework for the LTIP in terms of the price or the starting point,

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consistent with our practice over the past 10 years. This plan applies to the four years commencing 1 July 2006. It just so happens that it's being announced in August 2007.

MR SMEALLIE: Just one further question, Charles. In terms of disclosure, will we get visibility of the annual targets that are set for management?

MR MACEK: Obviously, a number of the targets are very sensitive in terms of competitors would love to know some of our transformation objectives with regard to performance and timing, so they obviously will not be disclosed. The TSR we have disclosed, because we think that is the single most relevant measure of interest to shareholders. But I can assure you that even the target hurdles that are built into this plan are beyond the guidance that has been given to the marketplace.

MR MAIDEN: We will now open it up to questions in Sydney from any media who would like to ask questions. If you could begin, as usual, with your name and publication.

MS NICHOLAS: It's Katrina Nicholas from the Financial Review. I am wondering who were the three firms that you used, and can you give the names of any other companies around the world that have a similar compulsory share ownership scheme?

MR McGAUCHIE: No, I won't give you the names of the firms, but let me assure you that they are right at the top end of the international group of companies that are involved in this sort of advice. These sorts of share ownership arrangements that we have are becoming increasingly common here, but they are certainly much more common in other parts of the world, particularly in the United States.

MR SAINSBURY: Michael Sainsbury from the Australian. I have a couple of questions on Sol's contract extension. I thought that he had a contract until July next year, originally a three-year contract?

MR McGAUCHIE: No, it's an open contract. It's a contract that effectively goes on.

MR SAINSBURY: But his first contract was three years,

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wasn't it?

MR McGAUCHIE: No, no, this contract is only a variation of that contract, and it wasn't a fixed-term contract. It's effectively an ongoing contract; from time to time, we would adjust parts of it according to circumstances. It was never a fixed contract and it's still not a fixed contract.

MR SAINSBURY: So is it a rolling contract for whenever he wants to leave?

MR McGAUCHIE: That's right, exactly.

MR SAINSBURY: So the variation is effectively a $3 million pay rise, I think?

MR McGAUCHIE: Well, no, it's not effectively a $3 million pay rise. It's effectively whatever is able to be achieved set against the targets that are set. But what we have done is that we have lifted the stretch targets. We have lifted the cap and we have lifted the stretch targets. So by achieving beyond the sorts of targets we had previously towards these much more difficult stretch targets, we have increased the opportunity for earning into that bracket.

MR SAINSBURY: If you could just give us rough numbers, I think originally $10 million a year was about the cap?

MR McGAUCHIE: It was.

MR SAINSBURY: So what would be the new cap?

MR McGAUCHIE: Essentially, because so much of this is in the form of options, it will depend on the share price as to what the cap will be.

MR SAINSBURY: What is the potential? What you have done here is incredibly complicated.

MR McGAUCHIE: It is.

MR SAINSBURY: I don't understand why it's so complicated. To confuse us, I would suggest.

MR McGAUCHIE: No, certainly not. You would be the last person I would want to confuse, Michael, and we certainly

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don't want to confuse our shareholders or anybody else.

We have attempted to come up with - and it is complicated and it has taken us an enormous amount of work to get to the point where we have got, but it is designed to provide an opportunity, which is significant; but to achieve that, it requires significant performance across both financial and transformation measures over the periods that these things are involved.

So, no, I will not do any wild calculations as to what might happen. We could have a very high share price if everything went very well. If we don't have a high share price, there's not much in this for people. So it is significantly at risk depending on performance. If I take you back to where the share price was this time last year and the view that a lot in the market took that we were going to struggle to get the sale away, and in fact the share price dropped from this time last year until the sale took place, no-one knows where these things will go.

So the fact that the sale was successfully executed, the plan has been successfully executed over the past 12 months has seen a movement that, if it is sustained, there is value in these options for the executives. But it has to be sustained, so we will wait and see. By doing it in options, you give the opportunity for significant reward, but there has to be significant total shareholder return for the executives to get that.

MR SAINSBURY: Why wouldn't you reset the strike price, then, to where the business is now, because what you've effectively done is to set almost the lowest level Telstra shares have been ever?

MR McGAUCHIE: We've set it on the formula we have always set it on. We set these things every year with the weighted average of the price in the four or five days post the results announcement. So the number is a number that was known a few days after this last year. We announced that number at the AGM, and we will do another one of those at the end of this next week, and we will do another one of those this time next year and another one the following year.

MR SAINSBURY: The number keeps moving each year, then?

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MR McGAUCHIE: Absolutely. It is set according to the weighted average price in the five trading days after the results announcement, so it moves. These are all moving targets, which is why to try to answer any theoretical or hypothetical question might be interesting but has zero value.

MS HEWITT: Jennifer Hewitt from the Australian. Could you tell us when you decided to do this and did you think that that was necessary to prevent either Greg Wynn or Sol Trujillo from departing? I was also interested in Tim's point about the trigger point. Could you explain that a little bit more, that given where we are and the dividend policy over the next few years, it will effectively be reached without any further improvement?

MR McGAUCHIE: When we decided to do this, in fact, was more than a year ago. We announced at the AGM last year that we were reviewing our remuneration strategy and that we would bring forward a new plan. I must say, Charles and I expected that we would get this done a lot sooner. It turned into a much more difficult and complicated exercise. Indeed, in fairness to everybody, the executives and the shareholders, we wanted to make sure that we got this as right as we could get it, so it did take a significant amount of time to complete the task. I, for one, would love to have had this done much sooner, but it is what it is.

The basic drivers of it, Jennifer, were really set. The primary number off which at least the first part of this is driven, the year that has just been completed, was effectively set 12 months ago. So whilst we worked the details around it and some of the complexity around it, those fundamentals were there. That number hasn't changed.

The fact that we have had a very successful year, the sale was successful and the performance of the company has been very successful, has been reflected in the share price over that time, but that did not change the base or the starting point for this plan. Whilst it hasn't been announced to you until now, the reality is that it has all been in train.

Now, why did we do did? It was not just for Sol and Greg but for the entire team. We've already seen some poaching going on and some attempted poaching going on of

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senior people. We've already lost not many, but we have had some losses to the international marketplace of people who have left, to salaries very significantly higher than the ones that were in place. One of those in particular, I think, was to a fixed amount, so it wasn't even as though it was at risk.

This is significantly at risk for the executives. They have to perform and they have to keep performing for this to be worth a significant amount of money to them.

MR MACEK: With respect to the point that Tim was making about the current share price, it is true that based on the current share price, the 11.5 per cent gateway TSR hurdle for the first couple of years is achieved. But, of course, built into the plan are a whole range of other performance metrics which incorporate transformation initiatives, and they evolve. For example, last year the build of the Next G mobile network was part of the targets. Obviously, that is now behind us, so this year there are other transformation or investment metrics that are built into the plan.

For the four-year gateway hurdle, the 11.5 per cent has to be sustained on a compound basis over that full four-year period, so that hurdle has not yet been met even at the current share price.

MS HEWITT: Given the Government sensitivity both with regard to Telstra and with regard to executive pay in general, do you expect any political flak over these latest announcements?

MR McGAUCHIE: Oh, look, I'm not sure who will comment about what. I am sure that people will comment from their particular perspectives. I think the really important issue from our point of view is that we are competitive in the global market for talent. As I said, we've already seen the pressures from the global marketplace. We have people being looked at from outside, and, of course, we want to attract people from outside into this business, so we have to compete.

I mean, I don't like paying $75 a barrel for oil, but it's the market. One of the reasons that we went into this exercise as carefully as we did and with as much advice as we did was to make sure that we were within the marketplace.

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MS HEWITT: You said that you would confirm that Greg Wynn would be staying. There have been quite a few rumours around that that would not be the case. Were they always misplaced, or was there ever any doubt about it?

MR McGAUCHIE: You would have to ask Greg about that. We were always hopeful that Greg would stay. This is an enormous challenge. He has done a magnificent job. We are certainly very happy to have him continuing to do that job into the foreseeable future.

I think one of the important things is that for the team that we've brought in as part of the transformation team, a very big part of their challenge, from our point of view, from the Board's point of view, is to make sure that we develop within the company the next level of succession planning. It was something that I think we did not do well in the past. People will move on when all of us feel comfortable that we are ready for them to move on and, indeed, the right people are in place to carry the company forward.

We have a very long-term plan. We haven't invested all this money in the networks and the business for the short term. We have invested it there for the long term. People have different objectives and different time spans, and we have tried to reflect those in some of the differences in the various arrangements.

All I can say is that I am absolutely delighted that Greg will be continuing to drive this transformation program from his level, and Sol from his, and all the other team that are around us here today and the other many executives and staff of the company, the 40,000-odd people that we have in the company, will all be driving this company forward in the future. It's a great feeling to see the cultural change that has occurred within Telstra over the past couple of years, because it is quite profound.

MR O'SULLIVAN: Matt O'Sullivan from the Sydney Morning Herald. Mr McGauchie, I need to clarify Greg Wynn's contract; is it a set contract or can he leave tomorrow?

MR McGAUCHIE: We don't practise slavery here, so people can leave whenever they like. I think trying to practise

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slavery on Greg would have probably the exact negative effect that you would want it to have.

Look, I will not disclose the terms of Greg's contract, frankly. It's not something that we have done before, and I am not going to do it now. I don't want to expose us to people who are out there headhunting. The arrangements between Greg and ourselves will remain between Greg and ourselves.

MR ROBERTSON: Mr McGauchie, Andrew Robertson from the ABC. You have told us how wonderfully things are going in Telstra and how wonderful the outlook is, and so did Mr Trujillo, and you've talked a lot about share price today. But last time I looked, Telstra shares were down 3 per cent today. I wonder what your thoughts are on that. Has the market not bought this wonderful story?

MR McGAUCHIE: I don't comment on share prices, certainly not on a daily or an hourly basis. The market does what it does for all sorts of reasons. We watched the share price move dramatically over the past 12 months through various cycles, and we didn't comment on those, so I am not going to comment on those today.

Let me tell you that the transformation within the company is going very well. We set a whole lot of targets for ourselves over a year ago, and we've met all of those targets and exceeded some.

MR MAIDEN: There are no questions in Melbourne, I believe, and it looks like we have exhausted questions also in Sydney. Thank you all for your time. A transcript will be on the ASX website later this afternoon.

PRESENTATION CONCLUDED

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