TELSTRA GROUP LIMITED — Call Transcript 2008

Aug 13, 2008

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14 August 2008

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 2008 Financial Results – Media Briefing

In accordance with the listing rules, I attach a copy of the transcript from yesterday’s Full Year 2008 Financial Results media briefing, for release to the market.

Yours sincerely

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Carmel Mulhern Company Secretary

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

TELSTRA - END OF YEAR RESULTS –MEDIA Q & A

ANDREW BUTCHER: Good morning, everyone. I'm Andrew Butcher, head of media relations at Telstra. Welcome, today, to your full year results. We have about 45 minutes for Q & A, so I hope we get through all the questions. We'll also get questions from Melbourne. We have mainly media here today. We also have a couple of industry analysts, so let's get moving. Sol.

SOL TRUJILLO: Well, I'd like to first of all thank all of you for coming. Most of you, hopefully, have listened to our analysts briefing, and hopefully all of you had a chance to see the numbers, so I'll try to be brief.

Let me just start by saying, first of all, that the results are further evidence of the success of the strategy that I set for this company three years ago. Back then we essentially had no retail growth, slowing wireless receive you growth, market share losses an owl fronts with fixed line in free fall, virtually no differentiation from our competitors in the marketplace, ageing networks, too much complexity and duplication in our IT systems, and weak customer service. So the question is, what did we do about it.

The we set about transforming this well-known Australian business and set about setting targets and objectives for the business that were about being not only better than those that we compete with in Australia but being able to perform at what I would call world-class and maybe world-leading levels. The results today essentially demonstrate that. In your packs, you have data that shows what our results actually are - 13.5 per cent at the bottom line in terms of our earnings growth, but also how we compare against those that we compete with in Australia and those that we compete with in the financial markets outside of Australia. You will see that we lead in all cases.

If you look specifically at our business, we are beating the rest of the world on a lot of categories - wireless services revenue growth, 12-plus per cent. To contrast that, again, most of the world in developed markets where you have 100 per cent penetration, you will find the growth in the very slow single digits. If you look at our nearest competitor here in Australia, we outgrew them on revenues, which is the important metric, by four times on that growth rate. If you look at broadband, we are probably the only company in the world that is growing market share and growing ARPU as we grow that market share now to 49 per cent as we look at broadband. Again, about four times our nearest competitor here in Australia

If you look at the PSTN business or a fixed line business, we obviously, for the full year, had about a 3 per cent decline. Comparing that to our peers around the world, they are probably in the range of 8 per cent to 10 per cent. Again, best-in-the-world kinds of coverage.

Those of you who have a chance to go down to a store here today, you can see the launch of BigPond's MP3 capabilities, meaning that you can now download music to any device from essentially any of the music studios, the owners of the content, and not be limited to a single platform, a single set of capabilities from a single device. So, again, expanding choices, adding value in the market is what we are doing.

I also said that today that, by the end of this year, we will, in fact, be launching the 21Mb per second capability on our wireless network, which will travel through the network as we process the traffic going through the business, which will be a world's first, world's best, as we already stand today.

So, our transformation has been about differentiation; it has been about delivering value, and, ultimately translating it at the bottom line, which is what our results show today. With that, I will just stop there and open it up for questions.

ANDREW BUTCHER: When you ask a question, can you come to the microphone at the front and just give your name and your organisation. If there are no questions, we will just wrap it up for the day.

QUESTION: Hi, Sol, Matt O'Sullivan from the Sydney Morning Herald. You talked earlier during the analyst's presentation about Telstra being able to generally withstand any economic slow down. I am just wondering, are there any sort of parts of the business where you believe that Telstra could be a little bit exposed?

SOL TRUJILLO: Matt, I will never say that we are not exposed in any part of the business, because there is always that risk. But, as I said this morning in the analyst meeting, most people, they view their mobiles now as part of their daily life, and its part of what they take with them as they go to work. Most people as they think about their fixed line business and now attaching our BigPond broadband service or our business broadband services. It is a daily part of either their children's lives; it's the new library, it's the new way that they do about everything. In the context of business, everything that we are doing now is very focused on productivity and cost takeout. For example, in our own business, Greg and Mick and the team have been improving our field force work force productivity in the last three years by about 40 per cent by leveraging the technologies that we sell to our customers. It is all real; it is all part of how you would fight recession, how you would fight inflation and how you would fight budget crunch in terms of what we do. So we are less susceptible than others, but I will not say that we are not susceptible in terms of an economic slow down.

QUESTION: But where exactly are you susceptible?

SOL TRUJILLO: I would say it is across the board that we will always have risk. Again, I am not going to highlight anything at this stage, because we are not seeing those signals at this stage.

QUESTION: I am also interested in the fact that I noticed Telstra has reduced the number of staff it expects to shed by 2010. Could you tell us the reasons for that?

SOL TRUJILLO: We have in our guidance that we will reduce the total number of full-time equivalents to the tune of 10,000 to 12,000. That is what we said in November of '05, and that is what we said today.

QUESTION: Finally, given the success of the transformation plan, you are three years in, are you considering leave any time soon?

SOL TRUJILLO: I am considering leaving this room as soon as we are done here. Matt, that question has happened over and over again, and, obviously, the answer is the same. I am here; I am here to do a job. The job is defined by the challenge and defined by the fun. I will continue doing that as long as I feel that way.

ANDREW BUTCHER: We also have a question in Melbourne. Could we go to Melbourne.

QUESTION: Sol, hi, it's Jesse Harrigan here from the Age. You were asked earlier about whether the board had considered raising the dividend because of the increased cash flow. Have you considered reducing it at all to cover any expected costs, if you did win the NBN tender?

SOL TRUJILLO: The answer to that is a simple no.

QUESTION: On Telstra Clear, in the basic numbers in there, there does not seem to be any improvement despite capex being down 16.5 per cent for the year. How much personal influence are you having in the way the business is going?

SOL TRUJILLO: I am sorry, could you repeat that; I didn't quite follow the question.

QUESTION: Telstra Clear, it was down for the year, even though the capex was also down. How much influence are you having in the running of the company, or how much of a personal interest are you taking in the overview about how it is being run?

SOL TRUJILLO: I take a personal interest in everything inside Telstra. In terms of the amount of time I spend on Telstra Clear, it is less proportionate than other parts of the business. I think if you look underneath on Telstra Clear, we made significant improvements on our consumer portion of the business. We are still a little bit soft on the business side, but I would say that as you watch us travel through the year, you will see continued improvement. This year improved on last year, and we will continue to make further improvements as we go forward. We are going to get more competitive, and I think you saw from the results announced by the major player in New Zealand, it is having its impact. Thank you.

QUESTION: So it is not the situation like for CSL that if there is nothing substantial in the next 12 months or so that you might re-evaluate whether it is needed?

SOL TRUJILLO: I did not say that about CSL, but the answer to New Zealand is that I have always said the trans-Tasman business is important to us. That does not change.

ANDREW BUTCHER: Back here in Sydney there is a long line now, so if you could just limit to one question each and we will get through them, thanks.

QUESTION: Good morning, Mr Trujillo, it is Luke Coleman from Communications Day. We know that several projects have been put on hold in the run-up to the national broadband network. Can you elaborate for us what effect that has had on the financial results?

SOL TRUJILLO: Basically, in this year, very little. It is mostly a deferral to some extent on capex, where we talked about soft switches that we have not deployed, so there would be some capex spend this year that we did not do. But in terms of our income statement the earnings results did not have a lot of impact.

QUESTION: I have so many good questions, but I guess I have to choose one. What I wanted to know was earlier in the analyst presentation there was a bit of talk that free cash flow was up again. Does that mean that the dividend payment will either in this financial year - or perhaps it already has been - stop being funded out of debt?

SOL TRUJILLO: Yes. What we have said is that now we have passed the point where we now generate more free cash than we pay out in terms of dividends. So that is a good threshold point to be at. Next year, we will get even stronger as we look at the relationship of free cash flow to dividend payout.

QUESTION: So, the answer is you are still funding it out of debt, but you probably will not be later?

SOL TRUJILLO: No, we funded it out of debt during the last fiscal year, and as we go into next year, we will generate more free cash than we do dividend payout.

QUESTION: Andrew Robertson from the ABC. Your revenue growth was only slightly ahead of inflation. I am wondering, how long can you keep driving profit growth through cost cutting, and when would you like to be driving profit growth through revenue growth?

SOL TRUJILLO: That is an important question, so let me break the revenue growth a little bit for you. If you look at our revenue growth at retail, our retail revenue growth was above 6 per cent or so, close to 6 per cent. The net of our wholesale revenue loss, which is part of about a two, two and a half year migration of our wholesale customers from old resell platform to what they call on-net platform, that has been part of the negative. That will end in the next year or so. So, we are doing very well, and we have got higher growth rates at retail in our business. Our retail growth far exceeds the cost cut out or takeout in terms of the business. We have the right formula to continue to grow value, to continue grow earnings and to continue to grow cash in terms of the business.

QUESTION: So you are saying that revenue growth will pick up in, say, the next 12 months, overall revenue growth?

SOL TRUJILLO: What I am saying is that the negative forces of revenue loss will get smaller as we go forward, which is positive thing.

QUESTION: Jennifer Hewitt from The Australian. Just on that point, I was just a little curious about your sales revenue growth in the retail market in the first half compared to the second half. It just says in mobile it is down from 13 to 10, and internet 47 to 35. Is there any reason for that? I know you said that you are not seeing any signals of economic slow down, but is there anything in that?

SOL TRUJILLO: There is a series of one-time events that occurred disproportionately in one half versus the other. The first one is what they call mobile terminating rate charges. We treat those mobile terminating rates the same as an operates would or a 3 or a Vodaphone, and all of us, I think you saw it in their announcement yesterday where they talked about the impact of that, reflect that in our numbers. So that was part of it. The other was handset revenues just in terms of the actual volumes themselves, one period versus the other. So, it is not about core volumes; it is not about the core of the business. It was more one-time differentials.

QUESTION: One last question, and that is, of course, the elephant in the room, as usual, NBN. Are you very disappointed that the whole process is taking so long, and what impact does that have in terms of Telstra's ability to deliver.

SOL TRUJILLO: You know, Jennifer, I have been talking about sense August of '05, so this is a long process. It is unfortunate for the Australian public that it takes so long, because our economists just completed an economic impact on the benefits of a broadband build. We have estimated that the benefits are about $2.4 billion, $2.5 billion of GDP benefit per year. So, the simple math for me is divide by 12, you get about $200 million of lost GDP benefit for every month of delay. So, to me, that is pretty powerful. Beyond that, it does not include job creation; it does not include the multiplier effects; it does not include some other things that will be part of the story, as it ultimately happens.

So, am I disappointed? I think so. Is it good for Australia? No. Should we get on with it? The answer is absolutely yes. Should the pretenders start being forced to put up their money or shut up? I guess that is part of the story as well.

QUESTION: Ben Woodhad from the Financial Review. It was almost a throw away line, but I believe John said that Telstra is now going to keep the Kaz business, so I just wanted to find out a little bit more about why you have decided to keep the business, how you are going to address the revenue declines in that operation, and whether or not there is anything in the Commander carcas that Telstra sees as worth picking over, either for Kaz or any other part of the operation?

SOL TRUJILLO: The decision on Kaz was obviously we have to refocus the business and reshape it. The question always as a business, as you have seen us, we have divested certain assets in the last couple of years, things that we view as not strategic or that might fit somebody else's portfolio better. So we had that up for conversation. It was something we have talked about. But we ultimately made the decision that we would keep it because we felt that we could create more value managing it, running it, reshaping it, refocusing it and integrating it tighter than we have in the past. That is what David Thoady(?) and the rest of the team have now been charged with and are focused on and are working on. So, that is part of the storyline essentially behind, as you say, John's throw away line.

In terms of Commander, obviously we have talked about the debtor side of it and the minimised risk that we have, the way that we manage credit, et cetera. But on the opportunity side, obviously, if there are customers there that need high quality, high value, great service, we are here, and we will make sure between Dina Schiff(?) and David Thoady that those customers know that Telstra is here and would like their

business.

QUESTION: With the integrating of Kaz more closely to the rest of the business, does that involve further job cuts or divestures, or have you got basically what you want in the Kaz group, it's just making it work better with Telstra?

SOL TRUJILLO: Everything is about the details of the plan, and I am not going to get into details of a plan right now. There are pieces of Kaz that can be tighter with what our core business has been. Sometimes in the past there has been a philosophy about standalone businesses and how they need to be run separately, et cetera, et cetera, and, therefore, they have standalone economics that sometimes are not so good. You integrate better, you integrate tighter, you leverage channels, you leverage a lot of other things, and you can make something that does not look so attractive much more attractive, and it is better for the customer when they see that integration. That is part of the story of what you will see coming.

QUESTION: Meya Scharmer(?) from The Australian. In the report it says that over the year your IT professional services cost grew 35 per cent or $580 million. Do you see a similar rise in these costs over the next 12 months?

SOL TRUJILLO: Part of the story of our transformation plan was that years 1 and 2 were primarily about building networks, so we upped our capex, we built out a Next G network, we built out our Next IP network, we put in a lot of physical infrastructure. Then we moved last year into the beginning of the major investment associated with our IT. We started some of it from the beginning, but the big ramp up was last year, and this year is the continuation of that. As we have said all along, the second half of '09 fiscal year and 2010 is when you start seeing then the ramp down of the spend with IT. That story is still the same and really has not changed.

QUESTION: So, that is a yes, it will be similar to 35 per cent this year?

SOL TRUJILLO: The second half of the year you will start seeing a bit of a diminution, but it will be close.

QUESTION: Around that 35 per cent mark?

SOL TRUJILLO: I am not going to give you a number, but the directional guidance that we have given is essentially that.

QUESTION: Kath Hart from The Australian. I just wanted to get you to talk about some of your acquisitions in China. They seem to have come with some staff. I was wondering if you would be maintaining staff levels at their current levels over the next 12 months?

SOL TRUJILLO: The answer is essentially yes. We have a lot of staff there now. We have a big presence in China, and we have very attractive businesses that are doing well. I am not quite sure I understand your question.

QUESTION: In terms of your reduction of staff to the figure of 12,000 here. I was wondering how that fits in that context?

SOL TRUJILLO: Those are very high growth businesses. In terms of our SouFun business, it grew 60-plus per cent at the top line and grew almost 100 per cent at the bottom line. I do not want to mislead you; it only grew 99 per cent at the bottom line. So, these are very strong growth businesses, and, as you expand market to market to market, you need presence with people in those markets. So we have actually been adding people over the time frame that we acquired the business. As we continue to expand, we will need more people.

QUESTION: I was also wondering if you could shed some light on why the dividend reinvestment program would not be offered for the final dividend this year?

SOL TRUJILLO: That was a decision essentially made by the Future Fund where they are the partnering entity in that process. They have decided that they would prefer not to participate. I will not get into the details.

QUESTION: One of the other big things around at the moment is the government's proposed carbon pollution reduction scheme. I was wondering if you would (a) be responding to their green paper, and if Telstra had done much modelling about the impact of increased price of energy?

SOL TRUJILLO: Yes, we have looked at it. We are obviously, like everybody else, concerned about the costs and impacts on the business. Beyond that, I will not say much.

QUESTION. Will you be responding to the green paper?

SOL TRUJILLO: We will respond as we see fit.

QUESTION: just another one. In the first half, Optus signed a bit over 200,000 mobile subscriptions, Vodaphone a bit under that. How did you go compared to that?

SOL TRUJILLO: I do not know how long you have been covering, us, Jesse, but about two years ago I made the point that we were going to focus on winning the 3G game; we were going to focus on postpaid as the core of the business, because that is where most of us make our money. We outgrew everybody in terms of postpaid customers during the period. The more important metric that I said this morning is what I would call the services revenue, which is what everybody around the world measures. That is what shareholders should be focused on. We outgrew Optus, given what they announced yesterday, by about four times. That is the metric we pay attention to, and other miscellaneous nits and nats, we do not really prioritise.

QUESTION: The dilution of market share will be the lower value customers?

SOL TRUJILLO: Apparently, because we outgrew them at the revenue line, at the margin line and at every single line that an investor would care about.

QUESTION: About a fortnight ago, you introduced more generous data plans for your mobile handsets. Is that going to be extended to your Next G data cards and wireless dongles?

SOL TRUJILLO: I will not comment on things that we might or might not do in the future until we are ready to announce whatever we do. Clearly, we think we provide the best value in the market, and we will always continue to be the best value in the market.

QUESTION: Susan Tindall from ZD Net(?). You were talking before about not meeting your ambitious target of 5 million customers migrated over to the system, but then talking about being cautious, and appropriately cautious. Normally you would also give us a deadline which you would meet or exceed or get better. So I am wondering what happened here behind the lines? Where was the catch? What was wrong with the planning forecasting?

SOL TRUJILLO: I said this this morning, if you have covered IT, which I presume that you have, the most important thing when you are doing a migration from legacy platforms to new platforms is that the code works. That is the most important thing. Once it works, then you migrate the customers, and as you are migrating customers, you are continuing to ensure that all the variables, the permutations that are associated with what I talked about in terms of numbers of products, numbers of systems, numbers of pricing packages, numbers of discount plans, literally, the permutations, when you do the math, they measure in the quadrillion kind of range. So, we have done 90,000 tests to make sure that what we are doing as we migrate has worked well. So now we are at 3.3 million customers that have migrated. I sit here or I stand here - Greg sits there, Tom Lemming sits there, David Moffat, who is most affected on the mass market side - we all sit here very confident that now we can really get done what we want to get done.

In terms of the target of 5 million customers migrated by 30 June, that is a milestone. I set aggressive milestones. We missed it, but the punchline is that it does not change the outcome, and that is really the more important point.

QUESTION: Also expense wise, which you said you would still meet.

SOL TRUJILLO: Correct.

QUESTION: Although you will be on two different systems, that will not change it at all?

SOL TRUJILLO: We actually are on three different systems. We have what you would call legacy systems; we have built now the new system, and we had to have what we call a mediator or a system that enables the talk between the two systems until we finally shut down the old legacy stuff. So, we have actually those three systems. We really will not take those out until we finish TR2, which we believe the combination of TR1 and TR2 will still be on track with all the targets and the metrics that we have.

That is why it is important to keep in mind that EBITDA margin guidance that we gave in November of '05. That has not changed. We are standing here in August of '08, and that is why the free cash flow target that we gave in November of '05 of $6 billion to $7 billion has not changed as we stand here in August of '08. If we had a

problem, if there were any issues, they would be reflected that we could not hit the EBITDA margin, that we could not hit the free cash flow.

QUESTION: Stuart Kennedy from The Australian. Just a very quick question: 3.3 million in last year. How many do you expect to migrate this year?

SOL TRUJILLO: We will finish our migration this calendar year, so, as I said, we will probably get to 5 million by the end of September, plus or minus a couple of weeks. Then we will get the full 7 million, which is our whole consumer base, by the end of the year. Then we will have migrated our customers on to the new platforms. I do not know if you saw the meeting earlier, but one of the questions I had was "I haven't been migrated, because I still get two bills". Everybody is going to be migrated, which will be a nice experience - single bill - and also the nice experience in terms of when you call up or we call you, we are going to have full line of sight, full visibility to you as a customer for basically any interaction that you have with Telstra.

QUESTION: Just so I have got it clear, it will be 7 million by 30 June next year, would that be right?

SOL TRUJILLO: No, by the end of this calendar year.

QUESTION: 7 million by this calendar year, and that's that?

SOL TRUJILLO: Yes.

QUESTION: Cheryl Bagwell from ABC Radio National. I am going to raise something that has not seemed to be raised so far, and excuse me if it is not completely bottom line, but really, it is - that is workplace relations. Now, I guess you need another battle with the federal government like you need a hole in the head. When you talk about the lost economic benefits, not just to the economy but, presumably, to your own operating revenues in terms of the delays on NBN, yet it would appear that your kind of willing to take them on again, exploit the sort of delays in the new legislation in terms of getting rid of Workchoices and such by going against the spirit of what the new government is seeming to say by saying you are going to start new workplace agreements with your staff and not negotiate with unions. From an investment point of view, why are you taking on that extra risk?

SOL TRUJILLO: Actually, just to be clear, we sat down and tried negotiating, starting in the middle of May up until a couple of weeks ago. All we found at the bargaining table were people worried about union issues and not our employees’ issues. We are about bargaining on behalf of our employees, or with our employees, because we are the ones who employ them. Our employees want to have a good relationship with those that actually write the cheque in terms of their payroll when they get paid.

Rather than wasting our time on what we would call non-employee-centric issues, we walked away from the table because we had too many things proposed, including illegal proposals that we would not sign or nor would we agree to. Everything that we are doing at bargaining, and bargaining with your employees is consistent with labour

policy, consistent with the laws of Australia, and we will not do anything to violate that. But there is a principle that is very important to me, the whole management team - that is, we want to maintain our relationships with our employees, we want to treat them well. We want an environment where they can, as they perform more, they can earn more, and that is part of what we talk about. The good news is, as you look at our employment engagement surveys inside the company, they keep on improving, because the employees of Telstra like the changes that are happening, and they like the environment, and so we are going to work with them on making proposals at the right stage. You have already seen in the wholesale business where we have initiated that. Kate McKenzie is engaging literally as we speak over the next couple of weeks with our employees about what they are looking for. They are the ones who work here. They are the ones who understand the issues. They are the ones who know what they want, so we are open to listening, engaging and, ultimately, working whatever is necessary to keep our employees with us, knowing that this is the best place to work.

QUESTION: I just wanted to ask, just following up, Julia Gillard, the Deputy Prime Minister, issued a fairly strong warning to Telstra over the weekend, warning you not to exploit this sort of gap before legislation can get up by entering into workplace agreements and reminding you that Workchoices was thrown out. Have you been in dialogue with her about that or the government about that? Are you trying to appease them by the sort of things you are saying right now?

SOL TRUJILLO: I have not had a conversation her directly. My understanding is of what she said was she mentioned Telstra and other companies that were in bargaining processes. I do not know that she singled out Telstra, but the point is that our policies are consistent with labour policies, as they have been articulated. They are consistent with the laws in Australia. Equally important, they are consistent with what our people are looking for. They are not looking for somebody to worry about other issues that they do not care about. They want Telstra, the management here, to focus on their issues. That is what we care about.

QUESTION: Stuart Connor from ITY(?). You said that your projections going forward are exclusion of any expenditure by Telstra's involvement in NBN. I just wondered if they were based on somebody else building an NBN, or are you really basing those on the status quo being maintained - we have got DSL and HFC and wireless for broadband. You have said that there is going to be significant impact on the economy if we do not get a high speed broadband network. So are you projections then, just assuming basically the status quo is maintained in terms of broadband over the next three or four years?

SOL TRUJILLO: That is correct. It is a new scenario, meaning structure as is kind of scenario.

ANDREW BUTCHER: Do we have any questions from our industry analysts as well who are here?

QUESTION: I will just ask another one. You missed the deadline for migrating your business customers on to the new systems. What is the time frame for that and the numbers there?

SOL TRUJILLO: I think I have covered it two or three times. The important deadline for us is to make sure that the code works. If you have watched any migration of anybody's systems that have not worked, it is because their code does not work, so they have to back off. What the primary objective for us is make sure that we do not sacrifice customer service - primary objective. We set up a milestone, a stretch milestone, that said we would have 5 million customers migrated by the end of 30 June. We missed that milestone. But the important one is getting the code right, and getting it done in the time frames that I articulated, which then means the commitments on the cost takeout are not affected, and which means, then, that customers are going to get the benefits of the service experience that we know will continue to differentiate us. That is what I have said.

QUESTION: But you have said today that you will start migrating business customers later this year. When do you expect that process to finish.

SOL TRUJILLO: That process is going to begin now in the month of August, and it will be part of both TR1 and TR2, as we think about the systems. So that will continue, the business side will continue, into the next calendar year, as we not only work the systems, but also migrate those customers.

QUESTION: How many customers is that, just a clarification, please?

SOL TRUJILLO: I cannot give you a number off the top of my head, because you will quote me on it, and then next year you will say, "Sol, you said there were X".

ANDREW BUTCHER: It looks as though there are no further questions in Melbourne and no more questions here, so, thank you everyone. Feel free to ask me or one of the other members of the media team any further questions.

[MEDIA Q & A CONCLUDED]