TELSTRA GROUP LIMITED - Call Transcript 2009

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27 February 2009

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 Analyst briefing - Half year financial results

I attach a copy of the transcript from yesterday’s Analyst briefing – Half year financial results, 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 FIRST HALF 2009 FINANCIAL RESULTS

Analyst Briefing

Mr Sol Trujillo, Chief Executive Officer Telstra Mr John Stanhope, Chief Financial Officer Telstra

Thursday, 26 February 2009 at 9.30am

BEN SPINCER: Good morning everyone, my name is Ben Spincer. I am from Investor Relations. I would like to welcome you here today to the other event, the announcement of our half‐year results. We obviously have the briefing here in Sydney; I would also welcome the callers who are online as well.

I will now hand over to Sol Trujillo, who will run through the half‐year results, followed by John Stanhope, and then we will be able to take questions from both here in Sydney and also from the conference call this time around. I will hand over to Sol. Thank you.

SOL TRUJILLO: All right. Thank you, Ben, and good morning to everybody. I would like to welcome all of those here and everyone else tuning in via our live webcast and teleconference links.

Let me first start by saying, once again, Telstra has delivered a strong performance across the business, despite many of the economic pressures that I think we read about and hear about every day going on globally, and specifically here in Australia.

In spite of the headwinds, let me emphasise up front that we remain on track to achieve our 2010 objectives and have not been distracted by extraneous debates and speculation on other issues. The transformation remains our priority and we continue to be focused on that as the main event, as it has been for the last four years.

Our focus on customers, networks and services gives us a tangible competitive advantage, and I think that one of the most important things that I think about all the time, and I thought about when I first came, is the fact that building differentiation, sustainable differentiation, is key, and I think you will see that now in our numbers.

The results are clear. In our mobile services business, growth continues to exceed 12 per cent, with margins now 12 percentage points above the number two player in this market. So we are continuing to grow and growing ARPU and growing margins.

In broadband, we grew fixed retail broadband revenue by 20 per cent, with SIO growth three times our largest competitor, and in IP and data we grew IP data or access data revenues by 28 per cent.

In Sensis we grew sales revenue by 8 per cent compared to what you might see around the world ‐ negative growth ‐ and even in this market here in Australia, negative growth from some of our competitors, when you look at the media companies and other directory kinds of businesses.

At Foxtel, we grew revenues 13 per cent.

So Telstra continues to hold or gain revenue market share. In my eyes, this is an impressive performance, consistent with all the objectives that we laid out relative to our transformation.

Across our major segments we are seeing a flight to quality from business and enterprise customers, whilst in Consumer strategic investments in T[life] and the end‐to‐end customer experience is driving market share gains, in spite of, I guess, what I would describe as significant price‐driven competition.

While today is about results and the operating outlook, I am going to touch very briefly upon NBN. NBN is a long‐term issue. It has no impact on our guidance and our strategy is not dependent on it. I know you have heard me say that before, but it seems that it is worth repeating.

We have repeatedly said that we see major challenges to any potential alternative builder in terms of financing, timing, technology, logistics, and even all the way through legislation. And with world‐class high‐speed broadband networks already in place, that we own and operate, we are able to offer our customers what they want, where they want it, when they want it. NBN now sits with the Minister and the Cabinet.

I think there have always been win‐win outcomes for Telstra, Australia and the Government, and we have looked towards a solution since basically I first proposed it in August of 2005, but, as I have also said in the past, and I think those of you who were here in the room a little bit earlier would have heard Donald say it as well, we have moved on.

Let me now spend time on the important stuff. First, let me touch on some of the financial headlines that John is going to go into more detail on later. We have grown sales revenue 3.2 per cent to $12.6 billion. This is an improvement on the 3 per cent growth reported in the second half of fiscal 2008. Strong retail sales were again the driver of growth as we used market‐based management and differentiation with our quality products and services to win in the market.

Discipline was maintained on expenses and we held opex growth to 1.7 per cent on a reported basis. On an underlying basis, it grew just under 1 per cent. Reported EBIT declined 1.3 per cent in the first half. However, this figure includes a number of one‐off factors that John, again, will take you through, such as accelerated depreciation at CSL, costs of the marketing simplification redundancies and acceleration of some of our store roll‐outs and other initiatives in the business.

Adjusting for these factors, first‐half underlying EBIT and EBITDA growth was 4.8 per cent. In the face of the current macro climate, few major companies from our domestic and international peer group have been able to report such sustained momentum in the half.

And critically for shareholders in these difficult times, we have maintained our interim dividend payment at 14 cents per share as our free cash flow continues to grow aggressively, growing above 40 per cent, now leading into 2010.

So for those of you who have been listening to me since November 2005, cash flow and the $6‐7 billion target, the EBITDA margins that we talked about and the top line growth, along with a few other variables, still are at the top of mind, and we are well on path to hitting those numbers.

Let me move to guidance. Against the rapidly deteriorating economic climate, we are pleased to be able to reiterate all of our guidance for 2010, with continued growth in the business, expanding margins, and, as I like to say many times inside the business, and I will say it many times now to those of you who don't work inside the business, free cash flow is the critical metric and, again, we reiterate the targets of $6‐7 billion for next year.

The transformation remains very much on track. While we continue to expect revenue growth in the range of 3 to 4 per cent this year, we now expect EBITDA growth in the range of 5 to 6 per cent and EBIT growth in the range of 3 to 5 per cent.

Let me highlight that this still represents strong accelerating bottom line growth in H2, but it is a lower guidance, and I want to be clear on why the guidance is lower and, again, John will talk about it as well.

The lower guidance is due to a combination of essentially one‐off factors, but some pressure on the top line, as we see declining PSTN and mobile call volumes as customers in today's environment are managing usage down in this rapidly deteriorating macro environment.

If we look at PSTN ‐ and, again, I'm not going to steal John's thunder here ‐ PSTN is a very profitable part of our business and so it has disproportionate impact when you look at not only the decline or slow‐down at the top, but it has accelerating impact on the bottom.

As we look at the one‐off issues, there is going to be additional cost from the catastrophic Victorian fires and Queensland floods; further accelerated depreciation at Hong Kong CSL. We are accelerating our T[life] store

roll‐outs because what David Moffatt and the team are doing is exciting, the results are terrific, and so we are going to accelerate; we don't believe in slowing down. Again John will talk about an increase in bad debts, given, again, the current economic conditions.

Finally, as we noted in November, the cost benefits of the IT transformation will come slightly later as we focus on improving the customer experience during the transition phase. We talked back in November about when you migrate the six to seven million customers that we do, with new billing platforms, new bill call detail, all kinds of change for the customer, we have gone through a bubble period ‐ October, November, December and January ‐ of heavy call volumes into our offices.

But despite the current economic environment, shareholders can be confident that the overall business continues to perform well. We have reiterated our guidance for 2010 and are happy with the current consensus position on next year's outcomes. Again, John will get into more detail in his presentation.

I am going to move on to the business performance. Our retail revenue grew by 4.1 per cent as we continued to execute our market‐based management, driven strategy. Excluding handset sales which were uniquely inflated last year because of the CDMA migration, retail revenues grew 5.1 per cent.

There were many highlights. In Consumer we grew revenue at 3 per cent or 4.7 per cent excluding this handset phenomenon from last year. In Business, we grew revenue at 7.2 per cent and achieved revenue growth of 34 per cent in broadband and 15 per cent in mobile services. In the Enterprise & Government segment we had 20 per cent revenue growth in mobile services and our best ever growth in IP and data access revenues. Total growth for Enterprise & Government, half on half, was 3.9 per cent.

At Sensis, we maintained positive Yellow print revenue growth, while growing our digital media revenues by 37 per cent, and achieved sales revenue growth of 8.4 per cent, again, as we outgrow the market.

So when you look at the performance relative to competitors, relative to other peers around the world, you can see that our growth and our performance really is best in class.

We achieved total domestic growth of 2.8 per cent with the mobile IP and directories growth partially offset by a 5.1 per cent decline in PSTN. We plan to stem this decline by reinvigorating usage going forward and some other tactics that we have in the market.

There are certain things that we cannot change ‐ the fact that people love calling on their mobiles versus fixed line ‐ at least in the near term, but there is more coming; we cannot change the economic climate all by ourselves, and there are going to be some issues there relative to growth,

but we think there are other initiatives that you will see literally happening in the market shortly to, hopefully, stem some of these market conditions.

Part of what we have been focused on has been reinvigorating the retail experience, and, again, David Moffatt and Andy Ellis, who he recruited in a year or a year and a half ago, have really, with the T[life] stores, I think, hit, using an American term from baseball, a home run.

We have increased customer lifetime value with average revenue per post‐paid device commanding a 20 per cent premium over our non‐T[life] channels. So the returns, the growth, the ARPU, the customer satisfaction, are all there. So while our largest competitor is cutting back its retail network roll‐out, we recently opened our 35th T[life] store in Sydney and plan to have 80 nationally by June, as we accelerate our roll‐out, and, in addition to our T[life] expansion, we are in the process of opening 17 more dedicated business centres.

Deena Shiff and her team are looking again at this acceleration. Remember the growth rates that we are talking about that I referred to just a minute ago. Significant growth. We are now over 50 per cent penetration on our Next G/3G capabilities in the market, still growing ARPU. So what Deena and David and the rest of our team are looking to do is very important in the retail context. All Telstra Business products and services are going to now be experienced as well in these stores, much as we have seen in the consumer space.

Our retail performance again contrasts the 4.1 per cent decline in wholesale revenue, due to the continued impact of ULL and LSS and continued migration to retail broadband. Again, this is part of the plan, part of what we knew back when we talked in November of 2005, as the regulator was changing the structure on wholesale, as the regulator was de‐averaging, and as the regulator was essentially setting prices below cost.

So when we look at the performance now, obviously in the case of wholesale we are competing well, but we are going to continue to finish out the migration that we had and we understood would happen with the changes in the regulatory settings. The key here is that in the aggregate

the company is performing well, driving our retail business

while our wholesale goes through that readjustment period.

In terms of our Next G network it continues to set the global standard for both speed and coverage and to drive both top and bottom line growth. Recently we became the first telco anywhere to deliver 21Mbps peak network download speeds with compatible 3G devices.

If any of you happened to be in Barcelona or saw footage of it, it was actually pretty fun, if you were an Australian, to be standing there and having the rest of the world talking about what was happening in Australia and actually going to some of the stands, whether it be Ericsson or even the GSMA, and seeing this demo where through‐put speeds were actually running on their platforms at 16 to 19Mbps, on average.

So we are pushing the limits. We are driving it. Because this is about differentiation and it is about customer experience. So part of what we talked about was not only the 21MB, but also setting the stake in the ground for what this team will deliver by the end of this year of taking it to 42MB as well.

When we look at the Next G impacts, there were many mobile highlights: service revenue growth of 12.4 per cent ‐ and those of you who have covered other markets, where you look at 100 per cent penetrated markets, go to Europe, go to a few other places, you won't find anything close to this kind of growth, and that is in light of the challenging economic conditions that we have.

Growth was actually marginally better than we achieved in fiscal 2008. Blended mobile ARPUs grew nearly 10 per cent to $53 and, again, this is a countertrend to what everybody else is doing.

We passed another key milestone with more than five million 3G subscribers, while maintaining the postpaid 3G/2G ARPU premium in excess of $20, and as John and I continue to visit with our operating unit heads ‐ David Thodey and Deena and David Moffatt and Geoff Booth ‐ we kind of smile, because that $20 that people were sceptical of back when we first started about that differential between 3G and 2G is actually getting bigger, not declining.

Postpaid subscribers were up by 284,000, and our total mobile subscriber base climbed 371,000 to 9.7 million in the half. Prepaid wireless ARPU increased 21 per cent.

The biggest driver of growth was again data, as revenues grew 37 per cent to reach nearly $1 billion. Wireless broadband revenues continued to grow strongly, driven by an increase in SIOs to 828,000 in the half.

Wireless broadband ARPUs were diluted by the launch of prepaid and some tariff rebalancing, but remain well above average wireless ARPUs, at around $80 per month.

We had solid growth in the fixed retail broadband market with revenue up 20 per cent to $783 million. The slowing growth rate this half reflects SIO adds moderating as the market moves into its maturity phase, as penetration is increased from the point in time when I came here at about 15 per cent to a little less than 60 per cent penetration today. So a lot has happened in this period of time, but there are still significant opportunities from Telstra's 81 per cent ADSL2+ coverage and 92 per cent ADSL coverage. Part of our strong performance in fixed broadband comes from the 6 per cent ARPU growth achieved as customers continue to migrate to faster speeds and liberty plans and subscribe to new BigPond content and services.

For example, we have had strong double‐digit revenue growth in each of BigPond Music, Movies, Video, Advertising, Shopping and Games. So Mr Milne has been a busy man continuing to drive this continued differentiation as part of the brand positioning, part of how customers think about Telstra, versus the secondary choices in the market.

But we continue to face very strong headwinds as we are required by the regulator to sell ULL and LSS below cost and, indeed, at some of the lowest prices in the world. Wholesale broadband revenues declined as our competitors added another 88,000 ULL SIOs and 65,000 LSS SIOs, although this uptake is also slowing as the market matures and their on‐net or migration strategies evolve.

In IP we had our best half ever, driven by our investment in the Next IP network and applications and

services that utilise the network's capabilities. I guess I would say that David Thodey and Holly Kramer, in partnership with all the network partners, with Mick Rocca's team, have done some really, I think, cool things that are now allowing us to drive IP access revenue growth of 28 per cent, our IP MAN and IP WAN ports reached around 84,000 as customers switched to the cutting edge technology in the IP access capabilities. The IP access ARPU for Enterprise & Government customers is up 40 per cent from FY07 levels. You will note a consistent theme here about not only are we growing in terms of revenues or SIOs, but we're growing in ARPUs and that's critical as I think about a successful strategy.

I wanted to detail how we achieve this by revisiting the IP access ARPU escalator that we talked about last August. Strategy simple: target new customers with their standard IP network solution and then we up‐sell

value‐added products, leading to significantly higher ARPU.

As you can see from the penetration rates, we have already been successful increasing the penetration of advanced IP services, but our belief is that there are still huge opportunities remaining with clearly built competitive advantage and our continuing to invest to keep on driving the difference between us and those that we compete with.

Let me turn now to MediaComms where our revolution continues. Telstra Media's vision is to develop unique capabilities to deliver engaging content and services to customers. In Australia, we've built world‐class, integrated and intelligent networks. Customers are accessing our superior content and services across mobile and fixed platforms and again, in a similar integrated fashion.

MediaComms are growing portfolio sites keeping BigPond visitors engaged for longer. In October alone we had more than 100 million site visits. BigPond is number one in games downloads, movie downloads and sports reach and advertising and number two in music downloads.

We continue our innovation leadership with the recent launch of BigPond Health and BigPond Travel. As part of this strategy, the Trading Post, including its online and auction sites, we're going to now move over to the

Telstra Media portfolio. Again, we can create that continued integrated experience for our customers as they think about doing the themes of shopping, buying, in this online kind of context.

Our China strategy is about taking our core competencies from Australia and applying them to organically develop our businesses to leverage their traffic to add value and drive growth. We entered in the market on the back of our media businesses in the online and mobile content areas. In addition to the financial returns we generate, we're also going to develop strategic relationships with key players in China to continue to access further opportunities.

Again, part of the strategy is porting our competencies to other markets and in some cases, as we've seen with a few of these businesses, we can port back to Australia some of the technology platforms and capabilities to be able to deliver at even higher skill points what we do here in Australia, so a lot of synergy, and more of our strategy will continue to evolve over the coming months.

As we announced earlier this month, we acquired a controlling interest in two of China's leading mobile content and online music businesses. China M runs the WAP

portal for all of China Mobile's 600 million users and serves mobile content to 350,000 customers daily. Sharp Point operates China Mobile's rapidly growing mobile music platform. We are very pleased with the price we paid, less than seven times 2009 EBITDA, if all of our targets are met.

Our existing China businesses continue to perform very strongly. SouFun had another stand‐out half year highlighted by its expansion to 100 cities, which was part of the drive that we announced when we first made the acquisition, revenue growth of 54 per cent and EBITDA growth of 74 per cent and the integration of Norstar Media and Autohome/PCPop acquired eight months ago is on track and the business is performing strongly with, again, revenues up 71 per cent and EBITDA up 148 per cent.

Assuming we owned all our Chinese assets for the whole of 2008, the combined business would generate in excess of $AUD250 million with margins in excess of 40 per cent. On this basis, these businesses would have a bigger EBITDA,

clearly, than Telstra Clear and we believe these businesses could double in size in the next three years.

There is an extraordinary opportunity in China as penetration of mobile phones and personal computers rapidly increase. China is forecast to continue to grow substantially faster than the rest of the world, even taking into account the impact of GFC, and we are perfectly positioned with our strategic relationships and suite of new media assets, which includes leading online verticals in the real estate, auto and PC segments and a key position in the mobile value‐added services portion of the market. Remember that just in the month of December, the Chinese Government approved 3G licences. As a result of that, the Chinese Government has essentially authorised spend by the three companies of about $59 billion to build out these networks and once they're built out and once they migrate their customers, what they're going to do on 3G platforms will be no different than what we see here or in Japan or in Europe or in the US and that means usage.

In China we're on track to reach $1 billion of revenue and margins of 30 to 40 per cent within five years. To me the growth there is exciting. We are developing a reputation in China that I think is highly unique in our sector and we will continue to exploit it with the work that Bruce Akhurst and Justin Milne are doing literally as we speak.

At Sensis, Yellow continues to underpin the Sensis result with double digit online revenue growth and positive print revenue growth and significantly, Yellow online EBITDA margins are approaching Yellow's print strong margins. Again, we think about businesses in a very

dissected way and so as we look at this kind of performance where White Pages', Online's and Yellow Pages' margins are so rich and we can keep on growing those margins, obviously that's a perfect combination, especially if you're growing at the top line.

The digital media businesses' revenues also increased 37 per cent to $288 million or 28 per cent of Sensis revenues, which I think again is a tremendous achievement over the last three years. The strength of Sensis's performance is clear when compared with domestic and global peers. This is not an easy business. Just look at News Corp, just look at Fairfax, just look at the TV

stations and others. It is a tough business and in the online space Yellow's online margins are significantly higher than local peers, such as Fairfax Digital and major global online peers such as Google, Yahoo and eBay.

News Corp recently announced a 4 per cent decline in Australian advertising revenue in the past quarter, so again, when you look at it in a comparative sense, not only against direct re‐publishers around the world but those who we compete with for the dollars here in Australia, we're outperforming.

In the case of Foxtel, it also continues to deliver very strong financial performance. As I said earlier, revenues were up 13 per cent to $906 million and EBITDA was up 19 per cent. We continue to drive our key IT transformation objectives. The migration of Telstra mass market customers from legacy systems continues on track. We are operating at scale and the new systems are working really well.

By early February we had deployed 1,900 internal and external sites with the new system and trained 17,900 users. We have now migrated more than 7 .1 million customers and 13.1 million services. We have issued 27.2 million billing invoices, received 24.6 million payments, completed 3.5 million orders and we're processing 230 million records every day, so the system is working well.

However, as we said in November, we were challenged as we migrated millions of customers to new systems in monthly billing. During the half and as the migration peaked, our processes dealing with order provisioning, customer queries and complaints have been severely tested. During this time our customer experience metrics were not what we wanted them to be and what I mean by that is if you called into mostly David Moffatt's call centres, you would see that we had a high level of long‐hold times or not meeting the kinds of metrics that we would like in terms of speed of answer, but that has been part of what we expected would happen when you migrate your customers on to a new system:

new bills, monthly versus quarterly and then a whole new detailed bill scheme.

We are now basically past the peak of that, we are on the other side of that and now we're working it the other

way. I am very proud of what our IT team, Tom Lamming, John McInerney and the whole team have driven there, working with David Moffatt and his operating team, but this has primarily been centred on the consumer part of our business at this stage and parts of it now are into business and we will move into the next stages as we progress during the year. As I look at our customer experience, it's getting better and, as I said earlier, we're on the other side of the bubble.

As we think about extracting the benefits, the benefits of all that we've been doing are getting now reflected in our continued and sustained growth. We are a big company with a big revenue base that in order to sustain the revenue growth that we're talking about, it does require a lot of better customer experience, better consultation with customers as they do business with us. Whether it be in our stores or whether it be in the call centres, that's what we're working on and continuing to make it a better experience and that's where the partnership between our IT leadership and our market units is so important.

As we think about environmental, social and governance issues, on another topic, I just wanted to mention some of our ESG initiatives. These include the laying of fibre optic in Arnhem Land, working with the authorities to disperse community safety information and helping improve energy efficiency. Our corporate responsibility report from November 2008 contains a lot of the details of what we would call our ESG initiatives.

A lot has been going on. A lot has been done. We are very focused on sustaining growth. We are very focused, as you see, on our underlying operating expense numbers continuing to drive that and we're very focused on our EBITDA margins as we go forward.

Before I hand over to John, I want to emphasise, again, this focus. It's a focus on increasing shareholder returns and we will always try to act with shareholders' best interests as our number one priority. We are now at a point where everyone can rest assured that we have improved our customer experience, that we are capable of sustaining growth, that we now have clear competitive differentiation in the market, that our value‐base competitive strategy does work and our strategy of integrating services and products and capabilities does work.

Finally, as you will always hear me talk about, above

all else, we remain determined to achieve our long‐term management objective of $6 billion to $7 billion of free cash flow in FY10. Just as a footnote, it's not just about FY10. It is about beyond FY10 as well with all that we have underway. With that, I'm going to stop and turn it over to John. John.

JOHN STANHOPE: Thank you, Sol. Good morning everybody here in Sydney and elsewhere in the country and perhaps beyond. As you've already heard, it has been a challenging six months for our business, but we're reporting a good set of numbers here and I hope other events that have occurred earlier this morning don't detract from the good performance of the business.

The sales revenue grew by 3.2 per cent to $12.6 billion and the total revenue, which is what we guide on and includes the Foxtel distribution, increased by 2.7 per cent to $12.7 billion. Operating expenses increased by 1.7 per cent to $7.4 billion and for the second consecutive half, operating expense growth is less than sales revenue growth.

EBITDA was up 3.1 per cent to $5.3 billion and margins were steady at 42.2 per cent, despite some of the one‐offs in the half. On an underlying basis, our EBITDA margins increased by 70 basis points, half on half, and I will go into EBIT in a bit more detail shortly, but reported EBIT fell 1.3 per cent to $3.1 billion whilst underlying EBIT ‐ and I'll explain how we get to that ‐ grew 4.8 per cent. Despite the economic slowdown, we have maintained strong cash flows and our interim dividend at 14 cents per share fully franked.

Let me first look in detail at the EBIT decline in the first half and, by the way, I did foreshadow that we would be flat or negative some time ago. Although we flagged that issue back in November, it is probably worth repeating some things here because it may surprise a few of you.

What are the factors here and why is adjusted EBIT closer to 5 per cent? As you can see from this slide, we had a few one‐offs that are highlighted here that we booked in the first half of '09 that were not there in the

first half of '08 or vice versa. Those will not be there in the second half of '09. The waterfall shows some of the major drivers of the absolute change to EBIT and the contribution that each makes to the overall EBIT growth rate.

For example, in other income, proceeds from the sale of eBusiness of $37 million in the first half of 2008 compares with nil in this half, which took 1.2 per cent off the EBIT growth in the first half. I am trying to explain our graph here. In terms of labour, we have excluded the

$49 million one‐off impact of the 800 staff reduction we announced last September as part of our marketing simplification program, so we've pulled forward, if you like, some initiatives, and this took another 1.6 per cent off the growth rate of EBIT.

Finally, the $103 million of accelerated depreciation and amortisation at CSL New World booked this half, compared to none in the first half of the '08 fiscal, took 3.3 per cent off the EBIT growth. When you take those factors into account, it gets us to an underlying EBIT growth of 4.8 per cent for the first half of Fiscal '09.

Just as a reminder ‐ and to stop any unjust criticism from any quarters ‐ our EBIT guidance relates to reported, not these adjusted numbers. The only reason I have gone through this analysis is to prevent the half‐year outcome being extrapolated to a full‐year outcome because the first half was driven by some unusual occurrences, as I've gone through.

Let me talk a little bit more about the guidance. You have heard from Sol ‐ and I've already said it today ‐ that these are tough times. With the benefit of six weeks trading activity in this second half, we know that conditions are not getting any easier. Revenue remains strong, particularly in the key areas of mobile, data and broadband. However, the deteriorating macroeconomic environment is beginning to bite into fixed and mobile voice usage as people do manage down their usage more than we had expected. We now believe our current year revenue growth will be towards the low end of our guidance range which is, you can see there, 3 to 4 per cent.

That is even after taking into account the favourable currency impact of CSL New World revenues which, by the

way, at the EBIT line is close to a neutral outcome. I would like you to understand that with revenue growth moving towards the lower end of guidance, this impacts the EBITDA and EBIT growth disproportionately. For example, a negative $130 million on the revenue growth line or on the revenue line has a 0.5 per cent impact, but of course it impacts EBIT growth by about 2 per cent, so obviously it was a disproportionate impact, especially when you're talking about high‐margin voice usage revenues that have no cost of goods sold associated.

With respect to the expense in EBIT growth in the second half, we acknowledge that changes to our bills and billing has generated more customer calls and therefore higher costs, so in the interests of these customers we are handling these volumes and in doing so, we are incurring some additional costs.

In addition to this, we've incurred some out‐of‐plan

costs, which may run into the tens of millions of dollars, for the floods in Queensland and the bushfires in Victoria, plus the continuation of accelerated depreciation in CSL and the acceleration of the T[life] stores roll‐out that Sol referenced.

We have also seen a rise of about $20 million in our bad debt expense in the first half, particularly in the consumer and business segments, and that is largely driven by the impacts of the slowing economy on business insolvency and a deterioration in the delinquency of Consumer aged debt.

Taking these factors into account, we still expect robust bottom‐line growth for the full year, with EBITDA growing at 5 to 6 per cent and EBIT growing at 3 to 5 per cent. I know many would like to have numbers like that. It is still very strong growth, given the current climate, and certainly compared to what our global peers are predicting as witnessed by recent quarterly and half‐year results announcements. We have built sustainable growth and still expect to generate free cash flow of $6‐7 billion in 2010.

Many of these factors are a matter of timing. That is why we are not changing our fiscal year 2010 objectives, although, again, these may come in at the low end of the guidance range but within the consensus.

I will move on to something a little more simple, I guess, and that is the continued growth and momentum in our key products. This slide shows both the revenue growth in our key product areas and, importantly, the change in the contribution to total sales from each product. The size of the bubble indicates the actual dollar amount of revenue.

We have had another great half in mobiles, with mobile services revenue growing at 12.4 per cent to over $3 billion, and, as I said earlier, it is mostly driven by mobile data. Mobile continues to increase its contribution to our overall revenue pie, and it is now 27 per cent of total sales revenue. Mobile's EBITDA margins continue to improve. They went up 1.5 per cent from this time last year to now 38 per cent EBITDA margins.

Fixed retail broadband revenue grew by 20 per cent to $783 million, with customers up 9 per cent to 2.3 million, and ARPU continuing to grow. It was up 6 per cent to $57.

IP and data access and Sensis also had a good half. All these areas of the business are growing above the group average growth rate.

Contrast that to PSTN, where revenues declined by 5.1 per cent. PSTN now makes up only 25 per cent of our

sales revenue, which is down 2.2 percentage points from this time last year. The revenue decline was very much skewed to the wholesale business, in particular in terms of access, with retail PSTN revenues falling only 1.8 per cent, and we expect to reduce the rate of revenue decline in the second half of the year.

You can see here our success of growing revenue and market share is in the more lightly regulated parts of the business and in the parts of the business where we have actually made major investments.

I will go on to the retail segments now. I thought I would start with our Enterprise & Government business, as we are seeing many of our global peers reporting a decline in their enterprise segment as a result of a slowing economy. Well, I am happy to say that our Enterprise & Government business has had a great half, growing sales revenue by 3.9 per cent. It was another great half in the

Enterprise & Government mobile segment, with mobile services revenue growing 20 per cent in that segment. Data revenue now accounts for over 46 per cent of mobile services revenue in the Enterprise & Government sector. That's an increase of 8 percentage points from the prior corresponding half.

The Next IP network continues to offer our corporate and our government customers a premium solution and is the cornerstone behind accelerating IP and data access revenue growth of 9.3 per cent.

We are growing share in this category as we show customers how we can improve their productivity from employing our integrated product and solutions offerings. Despite the economic slowdown, the sales pipeline in TE&G looks very healthy.

Let me have a look at the Business segment. Just like Enterprise & Government segment, Telstra Business has delivered strong results and has shown a high level of resilience over the past six months, recording growth in sales revenue of 7.2 per cent. As you can see from this slide, growth rates across all products have remained relatively constant, indicating that Telstra Business has been able to increase market share across categories, despite the economic headwinds.

On top of fixed revenue growth in this segment, mobiles continues to power along, recording growth of 13.7 per cent in the half. ARPUs including voice ARPUs are growing, as is the subscriber base, with 72 per cent of small to medium enterprise customers' mobile base now being on 3G, or being 3G customers.

Impressive growth has been achieved from our business

broadband and IP data offering into the SME market. We are seeing a willingness from customers to invest in the productivity of their business, and they are choosing Telstra due to the reliability of our networks and the total service offering. And, pleasingly, expense growth has slowed to below that of revenue growth for the first time as the segment completes its transformation, or the business unit completes its transition from being a brand new business unit only a few years ago.

Finally to our largest segment, Consumer, where sales revenue grew at 3 per cent this half. Importantly our Consumer segment grew their bottom line faster than their top line, so good news. Whilst our competitors are going backwards in their commitment to channels, distribution and the overall customer experience, now, more than ever, we have continued to invest in all of these areas. We are still continuing to play hard in this space and it is certainly paying off and will put us in a great position.

The statistics coming out of our T[life] stores that Sol talked about earlier really tell a great story, and the improved customer experience is translated into value‐added services penetration. In the half, PSTN value‐added services grew 8 per cent, and that includes things like Easycall, Calling Number Display, Message Bank and so on. Broadband value‐added services grew 46 per cent. Postpaid value‐added services revenue was up 19 per cent and prepaid mobile value‐added services revenue was up 23 per cent, and that includes things like SMS and non‐SMS data, and so on.

Consumer have also demonstrated operational excellence through declining their subscriber acquisition and recontracting costs. In Consumer, the blended average cost of acquiring and retaining a customer declined by 18 per cent to $112 per customer.

I am going to look now at operating expenses. Operating expenses grew just 1.7 per cent to $7.4 billion ‐ that's before D&A. While labour and other expenses both rose, goods and services purchased fell by 1.6 per cent, and I will go into each of these categories, starting with labour.

Labour expense rose by 2.9 per cent to $2.2 billion, while we reduced head count by over 1300 in the half, taking our head count reduction to 10,143 against our fiscal year 2010 targets, which you will recall were between 10,000 and 12,000. The savings at the labour line are not expected until next half. The full redundancy impact of the reduction in FTEs was $131 million, all taken in this half.

One of the larger contributors to the increase in the labour line ‐ and this does need some explanation ‐ was due to a fall in the 10‐year Government Bond rate over the

period. You might say, "What has that got to do with labour?" It is used to calculate the present value of our non‐current long service leave obligations. As the discount rate reduces, the present value of our long service leave obligation increases, and that's represented on the slide there as an extra $67 million in costs.

If I was to factor that out ‐ it is a real expense, at least in an accounting sense ‐ the labour costs were actually flat in the half.

The increase in the other category includes the impact of FX movements in our offshore labour. We also had an increase as a result of higher payouts to Sensis staff as their results exceeded their sales targets.

So we move on to the directly variable costs. They did decline 1.6 per cent, which is an impressive productivity gain. Significantly driving the expenses down this half was the total cost of goods sold within this category, which declined by 14.9 per cent, or $161 million, to $918 million. This was offset by some higher costs totalling $110 million in service fees, and they are related to the increase in selling Pay TV bundles, network payments as more traffic lands on other networks, and they were predominantly due to some FX movements on our terminal outpayments for landing traffic offshore and, to a much lesser extent, we have had a bit of an increase in usage commissions.

The decline in the cost of goods sold mainly consists of postpaid handset subsidies, the cost of handsets and some BigPond‐related cost of goods sold.

The total cost of our postpaid handset subsidies declined from this time last year, almost entirely due to lower subsidised volumes. Just to give you an example, 713,000 handsets were subsidised in the first half last year, whereas only 538,000 handsets were subsidised in this half year. This is not that we are selling less, so much as we are managing subsidies much better and encouraging customers to take other options.

In terms of subscriber acquisitions and recontracting costs over the whole company ‐ so not just Consumer, as I spoke about before ‐ the average blended subscriber acquisition and recontracting costs decreased by $21 to $135 from the $156 in the first half in 2008.

We continue to improve our operating leverage of the mobile business, evidenced by that downward trend in the acquisition and recontracting costs of customers. Our blended mobile ARPU was $53, and you can see that in the slide.

Let me just address the other expense category, which

is a fairly broad category, and we list out some of the elements in it. It rose by 4.1 per cent. Service contracts and agreements represent almost half of that. These increased by 6.8 per cent in the half, primarily driven by our IT transformation‐related costs, and you might recall I did mention that as we did the migrations we would be spending the money to do the migrations, and that's exactly what has happened.

Within that category, the service contracts expense line grew 8 per cent to $833 million as we completed that migration of Consumer customers on to the new billing systems. Higher costs were incurred in the half as a result of also increasing inbound call volumes, which I mentioned earlier, associated with those customer migrations.

The movement in the exchange rates also had an impact on the "other expenses" category, as a result of the significant depreciation in the Aussie dollar, so that really is the unhedged part of some of the activity that we have with offshore companies.

Bad and doubtful debts also increased by 5.5 per cent to $124 million, and that's due to the deterioration I mentioned before in the overall debt portfolio as a result of the worsening economic environment.

You can see that I mentioned that it was about $20 million in Consumer and Business, so we have had some upside in other parts of the business, but, nevertheless, I do expect the trend to continue, particularly in Consumer and Business, in the second half. But we continue to manage our credit carefully and as tightly as possible in these tough times.

Depreciation and amortisation. As you saw last half, we did book some accelerated depreciation in CSL in Hong Kong as they build their new network, so the life of the old network has been shortened. It continued into this

fiscal year to the tune of $103 million. The increase from the previous half is predominantly due to FX movements. The accelerated D&A in CSL is expected to continue into the second half at a similar level to the second half of fiscal 2008, so I guess that is around $70 million or so. We are, however, still on track to meet our fiscal year 2009 guidance in depreciation and amortisation of around $4.5 billion of total D&A.

I want to show you, given revaluations and fair value and IFRS adjustments, on this slide the movement in our real interest expense versus the movement of finance costs.

Net interest expense increased by $55m ‐ that is the bottom line here ‐ or 9.5 per cent, to $632 million. This

was due to higher credit margins and a higher level of net interest bearing debt; consolidated debt actually increased. Our average borrowing costs increased 32 basis points since the first half 2008, however we expect a small reduction in average borrowing costs in the second half.

Of the other adjustments to net finance costs of $229 million, that is the fair value adjustment. It amounted to $248 million. More than half of this related to an unrealised gain on effective fair value hedges, primarily due to an increase in Telstra's borrowing margins.

So our overall net debt balance increased by $1.1 billion in the half to $16.4 billion, but $681 million of this was revaluation, so, in terms of new borrowings ‐ so new money, new cash ‐ this amounted to $465 million in the half. I am just trying to explain the fair value accounting here.

Our debt position. I have mentioned this before, but very quickly, to reiterate, our balance sheet really has become our strength. We have no long‐term debt refinancing needed until March 2010 and we sit comfortably, as you can see there, within our target financial parameters.

Just moving on to our next slide, this is probably the first time we have ever given you two balance sheet slides ‐ and I can see the excitement in the audience ‐ but there are some significant movements on the balance sheet that we need to explain. I am the CFO, give me a break here.

The largest movement that you will see is the swing in the defined benefit asset of $182 million positive at June 2008 to a defined benefit liability of $1.2 billion at 31 December 2008. The largest contributor to this is a fall in the discount rates used in determining the present value of the projected benefit obligation for the scheme, and the reduction of the rate was from 5.5% to 3.4%, and that has resulted in an increase in the future benefit liabilities.

Also contributing to the movement has been significant decrease in the market values of the plan, the scheme assets. You all know that the movement here due to the discount rate and fallen asset values we take to equity, so it doesn't fall into the P&L so there is no profit and loss impact. Obviously, I watch our level of retained earnings and our equity.

In terms of the contribution we made to the super fund, we told you people in the market last year that we would recommence superannuation contributions ‐ so this is real cash ‐ in late November, and we expected to pay $110 million via a series of payments through to February.

Up to 31 December we had contributed $43 million. The market deteriorated further in the December quarter, reducing the average vested benefits index further, and we now expect to contribute approximately $115 million during the quarter through to May. So these contributions have a balance sheet and cash flow impact of crediting our cash balance and the debit goes against our liability.

So whilst the calculation of the VBI and any associated liability is an issue for actuaries in Telstra Super, you need to know that we expect that top‐up payments will be necessary in the rest of fiscal 2009 and into the 2010 year.

But I do want to quickly add that in the 09/10 year in particular, in setting our $6‐7 billion free cash flow target, we have taken into account that we would need to pay or have a cash outflow for the pension fund.

Free cash flow. Whilst I am talking about the cash, you can see here that we generated close to $2 billion free cash flow in the half. That is a 44 per cent increase from the last year. Operating cash flows were $4.2 billion,

while investing cash outflows were $2.3 billion. The significant reduction in investing cash outflows from the previous half of $500 million, or half a billion dollars, comes as the capital intensity of our transformation has passed its spending peak and will continue to go down in the 09/10 year.

To conclude, let me reiterate a few points. We have a strong business with robust growth expected for the full year. We have maintained a strong balance sheet through these difficult times, and are paying a healthy, fully franked dividend of 14 cents per share this half. We have maintained our 2010 long‐term management objectives, importantly, our free cash flow target of between $6 billion and $7 billion in 2010. Thank you for listening to that and I will now ask Sol to come back to the stage and we will take your questions.

SOL TRUJILLO: John, we do love you and we do love that double balance‐sheet stuff and going through the detail and all that. Ian?

IAN MARTIN, ABN: Thank you, Sol. On the one hand, I want to congratulate you for where you've taken the company over three‐and‐a‐half years, but, on the other hand, you haven't actually got there yet. I notice that this is the first result in a long time where the guidance has actually gone down, but you won't be here in August to report on that. I wonder who has responsibility for it, who wears it if that new guidance isn't delivered and more importantly, next year's targets, what's the validity of those now with the change in CEO? What is the prospect

that in August or February next year we're standing here and the new CEO says, "They were Sol's targets. I'm taking the company in this new direction and here are my targets"?

SOL TRUJILLO: Let me take it in pieces here. In terms of delivering on the numbers, I own it, John owns it, the whole senior management team owns it between now and the end of June: period: end of story. As you heard ‐ I don't know if you were here earlier ‐ the Board has asked me to stay on and drive the results that we need. You're not going to see any lessening of intensity on the delivery here and I think that you'll have a management team that, minus one person, will be able to answer the same question that you'll ask in August.

In terms of the 2010 numbers, these are numbers that not just management have signed up for, it's the Board as well, and everybody is committed to making sure that we drive these numbers. The most important thing when we talk about free cash flow, when we talk about EBITDA margins, when we talk about the top‐line growth as kind of the front and centre objectives, we have all kinds of cost take‐out work that John covered a year ago in November, last November, in terms of cost take‐out initiatives that are part of our transformation, a whole series of initiatives around growth driven by our call centres, driven by our T[life] stores, and so I would just say to you, Ian, that because I leave doesn't mean that those things won't be done.

They're already identified, they're tagged, they've got people, they've got dates, they've got actual numbers of delivery and John and the whole senior leadership team that's here are very well aware of it and that's part of their set of targets, not only for this year but also for next year.

PHIL CAMPBELL: Phil Campbell from Citigroup. I was wanting to get some insights from you how you might change running the business over the next 12 months or so, even though you are leaving, just some of the plans you're going to put in place. With the slowing economic environment, I'm just interested to see how you might mitigate some of the accelerated decline in the fixed line business, whether or not you may look at possibly doing some brand segmentation, introducing a second or third brand at the lower levels, maybe some of the things you might be doing on costs and possibly also capex, just as we go into a tougher economic environment: that would be useful.

SOL TRUJILLO: Number one, I think you'll see in particular in consumer, because that's the biggest part of our revenue stream, you're going to actually see some acceleration in how we think about revenues second half versus first half, but you're going to see some initiatives specifically targeted around PSTN. When we talk about

PSTN, we always need to segment the two big drivers of PSTN. One is the access lines, the physical elements, and there we're doing fine. It's the call volumes that have dropped off and you can go to almost any country now and you'll see that kind of significant drop off.

We need to devise ways that we can stimulate more calling, ways that we can terminate more calls on the network, ways that we can encourage customers to take advantage of the capabilities both on our fixed and our mobile platforms. I think you'll start seeing some of that show up in some of our advertising. You'll see some of it show up in terms of what we're doing in our call centres and what we're doing at our retail stores as part of the experience that we're going to encourage customers in terms of their use. There are other things I'm not going to talk about because of competitive sensitivities, but we have a whole set of strategies around this as well that you'll see unfold as the year progresses. Again, whether I'm standing up on the stage or not, there's a lot of work going on behind the scenes, literally as we speak, that our team here is driving.

PHIL CAMPBELL: Would you consider a multi‐brand strategy going forward?

SOL TRUJILLO: My reaction to multi‐brands is that that is not part of the character of Telstra and part of the strategy that we have here. It's always about differentiation and not being what I call a low‐end price based competitor. I think we can grow it by adding value, by differentiating and by stimulating behaviour that we haven't done for a while and again, you're going to see some of this starting to play out literally within the next week or two.

JOHN STANHOPE: Just on the cost side, Phil, we are obviously locking down hard on areas of our costs, but as you've heard us today, we are not cutting back on investing where it generates revenue. We're still investing in the T[life] stores and front‐of‐house sales and so on. Yes, we're doing things that other companies are doing to make sure that we're very, very tight on costs, but not to the detriment of the revenue line.

MARK McDONNELL: Mark McDonnell from BBY. Two questions: firstly, Telstra Clear: performance continues to deteriorate. I realise there are some currency impacts in that, but no sign of any real turnaround. A couple of years ago, Sol, I asked you about this and the gap between rhetoric and reality around the maintenance of underperforming businesses, so I'm wondering if you could update us on your expectations for that business and

whether or not retaining a presence in New Zealand with a business that's perennially underperforming is in the best

interests of the company and the shareholders?

SOL TRUJILLO: I think the answer I'll give you today is similar to the one I gave you a couple of years ago. The strategic portion of trans‐Tasman capabilities for some of our major customers is still there. It's not any different today than it was before. Actually, it becomes more critical in terms of how customers are looking to integrate and simplify their platforms, not only in Australia but also in New Zealand and not only in New Zealand, but also in Australia.

That need is more imperative if you talk to some of our enterprise customers. That hasn't changed. Number two, in terms of the numbers, obviously, the New Zealand business has not been a growth engine for us, but it is not cash‐flow drag or an earnings drag. It has basically been a business that has not performed at a high ROI level, but it has performed adequately given the context of what we need to do for the strength of our core domestic business here.

Right now we're getting impacted in New Zealand just like we are in Australia and other places regarding the economy: the downturn, lower spending, slowdown in spending, et cetera. The focus continues and I can tell you that we do have our reviews, but I think there is a finite amount that you can do when you're a reseller and you don't have the broad‐based platform of asset ownership.

We have made some investments there where we have invested in infrastructure, the returns look better, but at the end of the day that has not been a priority of the company and the team. To divest at this stage still doesn't make sense for us just simply because of the trans‐Tasman requirements that we have.

MARK McDONNELL: Is it fair to assume from that answer that you don't believe the changes in industry structure and regulation in New Zealand significantly improve the prospects for Telstra Clear?

SOL TRUJILLO: To be quite frank, we still aren't clear on all the outcomes of regulatory settings and pricing and terms and conditions and some of the issues there. We keep

on waiting and I think it has now been at least a two‐year process of getting clarity. These things have to work themselves through. Some people think it is easy to just make a decision and do the paper maths, but building up an infrastructure, building up correlating policies, setting the right tariffs is a very difficult process. They're not there yet. We're not going to over‐invest in something that we're not clear on in terms of what the real settings are.

JOHN STANHOPE: I will just make one other comment about Telstra Clear. Our objective is to improve the bottom line so the EBITDA is quite positive, but the EBIT line is marginal. We are doing things like integrating some of the functions back here to Australia. For example, the payroll for the Telstra Clear people's pay, the administration is out of Australia. The audit function and some of the finance functions are all brought back to Australia. We're just trying to get that business as lean and mean in an operating sense as possible. That's what we're trying to do.

MARK McDONALD: My other question relates to capital management. I note that you have held the dividend constant at 14 cents: that's against 15.5 EPS. The cash outflow impact of the 14 cents is $1.7 billion and you've got a free cash flow of $1.9 billion. I am wondering, given the confident reaffirmation of the $6 billion to $7 billion forward looking projection and the additional capacity that exists in the results that you've just announced, what the attitude is to returning more cash to shareholders who have been held at these levels now for some years and more broadly, what the capital management policies are for Telstra, given the likelihood of very strong free cash flow in the year ahead.

JOHN STANHOPE: Could I just address the first point as a technical point: yes, a $1.7 billion dividend; yes, $1.9 billion free cash; but I've got a $632 million interest bill.

SOL TRUJILLO: The answer is that we're obviously very confident of the transformation plan and getting to those free cash flow levels and as we've said all along, when we reach that point in time, at the end of this fiscal year, again, the Board will be able to sit down and look at what's possible in terms of rewarding shareholders for their ownership of the stock.

I am not forecasting or predicting any behaviour at this stage, but our job has been to give the Board lots of options and flexibility and capacity and I think that's what's happening. As we've said all along during this, the Board has been very focused on shareholder returns and there will be a point in time, the right time, when the Board looks at this and says, "We think we can do X, Y or Z," and beyond that I won't say much more, but I think the calculation of lots of free cash gives boards lots of options.

SPEAKER FROM THE FLOOR: Laurent Horrut from JPMorgan. I understand from your comment that you're saying you're not engaged in conversation with the Government any more on NBN. Do you have any visibility at all in terms of what may be in the making in terms of where the Government is going to be thinking on the NBN model?

SOL TRUJILLO: Actually, I don't. Again, I don't spend a lot of time worrying about it, thinking about it, because as you've probably heard me say before, Laurent, customers decide who they do business with. Customers make the purchase decisions regardless of what governments or regulators say. As David Quilty said in a speech two days ago, we're open to a call, we're open to conversation. What we mean by that is this has been something we think we could do, we could do well, but again, we don't know the process. It has been a very protected, quiet process and we respect the process.

LAURENT HORRUT: Isn't that a worry just there in the sense that here is a $5 billion investment with the Government putting up a major investment, major money into it, that's going to define the economics of this business for the next 10 years and Telstra, the incumbent operator in Australia, has no visibility whatsoever in this process?

SOL TRUJILLO: Laurent, I'm sure you've lived around the world and looked at other places around the world. There are lots of examples of paper processes that never work out in reality. The degree of difficulty of building, the degree of difficulty of financing, the degree of difficulty of operating, those are variables that on paper get way underestimated.

It takes time to build, it takes time to engineer it, it takes time to construct, it takes time to turn out, it takes time to win customers and as you probably heard in a speech I gave in January, we estimated impacts and they're dramatically different than any impacts that you've estimated, because you've got what I'd call a very optimistic view of what people can do. All we do is we look at what the reality is and the degree of difficulty.

SPEAKER FROM THE FLOOR: Were you a bit surprised at the level of cycle in the business and the magnitude of the slowdown since the investor day? On the investor day you were confident. The message was reasonably optimistic, although you did flag there was some softness. Were you surprised by the magnitude of that slowdown since that point?

SOL TRUJILLO: Again, as you said, we flagged it pretty clearly back then that as at that point, it was the September reporting period, we had not seen a lot of impact, but as we have all seen now looking across all industries, whether it be banking, retail, construction, whatever, here in Australia, everybody has hit the wall in this last period of time, which is why we said we will always be prudent in terms of how we give guidance.

At that point of time we weren't changing. We didn't have enough data. Now we have ‐ as John pointed out and

I pointed out ‐ a pretty significant drop in PSTN calling and, as you know, that's a disproportionately profitable part of our business. Can we do things about it? I think we can and you'll see us executing around that, but it has hit us like it has hit every other company around the world. Ian, before we go to you, we have some calls on the line here, so I'm going to ask the operator to give me one of those calls.

CHRISTIAN GUERRA: Christian Guerra from Goldman Sachs. Good morning and thanks for your time and congratulations on the result. I have three questions for you this morning, Sol and John. Firstly, on the IT transformation, you made some comments during the presentation about some issues during the period, with call centre volumes and higher than usual customer queries, et cetera, et cetera. I am just wondering is there any change to the targets in terms of customer migration, cost savings, platform switch‐offs, et cetera?

My second question is on the guidance of Fiscal 10. Again, you've said in the presentation today that some things happened in the period that surprised you and clearly, the macro is one of those. I am just wondering if you could comment on how much conservatism or fat you've actually built into those targets.

My third question is a question for you, Sol, on your departure. I am just wondering how you've thought about that, in terms of the timing, given that you've basically done the hard work, I think, over the last three years and really the benefits start coming through in the next couple of years and it's a little bit surprising that you're not going to be there to deliver the Fiscal 10 numbers in August next year. Thanks.

SOL TRUJILLO: Okay, Christian, regarding the call centre volumes and all the associated questions on does this impact what we communicated back in November of this year and November of last year, the answer is no. Are there delays in terms of our systems? The answer is no.

Let me take a little bit of time to explain again what we are talking about with what has happened in the bubble of call volumes that affected our channels. It is not about systems. I talked about 200‐million‐plus records that we are processing every day and the tens of millions of bills and other things. Systems are working fine.

What happens is that if you are a customer and you are used to quarterly bills and you now get a monthly bill, it is different, and so what happens is that that stimulates calls and call volumes. I said this, I think, back in November. What happens, in my experience ‐ I have done this twice before ‐ is that you go through a cycle of two or three bill periods where customers are calling and you

get accelerated volumes into channels.

The second thing is that we changed our bill formats, and when you are migrating six million or seven million customers onto a new platform and there is a new bill format, a percentage of those customers then have questions. What happens then is that they call in to our call centres and they start filling up what you normally staff for in terms of the volumes. We anticipated some of that. It is not to say that we didn't forecast for some of that increased volume.

What happens is that if you have an acceleration of call volume and you, as a customer, call in at a certain point of time and the average speed of answer is low, and you are on hold for a while, you will generally hang up and call back again. And if you hit it at another peak period, you will generally hang up and call back again. So you go through this period of time when you have a lot of accelerated call volumes and you don't have, essentially, enough capacity to handle it until you work it through.

Unfortunately, I don't know of any other way. Like I said, I have done this twice before. You just work through it in two or three bill cycles. Customers get used to it; they get their bills explained; they understand it; and then you move on. That is the way it works.

So, as I said before, we are now on the other side of it. We have climbed the high end of it, and now we are working through the other way. We have other migrations, we have another major release that is coming in this half, and we have some other big releases in the latter part of the year, as we articulated back in November. So all that work continues. All the migration work continues, as we talked about back in November.

Regarding the retirement of systems, Christian ‐ part of your question ‐ that will continue. We have retired over 400 systems already, 450 or so. We have already retired a large number and we are going to continue to retire more. But not all the cost take‐out is just at the very end. We have cost take‐out as we reduce volumes, as we reduce some of the work and attention that goes onto these legacy systems. So that is all still in train and that is part of what I said where Tom Lamming and John McInerney have that tagged; they have a whole work plan around that, and you just have to work through that. None of that essentially changes.

In terms of your question about the 2010 objectives ‐ I won't use the word "fat", because we don't build fat into targets; it is the best view that we have ‐ we have been pretty optimistic about stimulating growth. Back in 2005, Christian, you may remember most people were sceptical about the growth rates that we said we were going to

generate, and what the consensus view was at that point of time, which was about negative 1 or negative 2 per cent growth over the period of time.

We have generated that. As we look at the cost side and the cost take‐out, we believe that we have plenty of opportunity to take out more costs. We have now achieved the 10,000; we have crossed over the 10,000 threshold in terms of FTE reduction that we talked about ‐ 10,000 to 12,000. It was a point of discussion at our investor day, some people asked the question, you know, "Are you backing off of your targets?", because we reminded everybody of 10,000 to 12,000. We have now crossed over 10,000. We have more to go. There will be more that will happen as part of a plan that is under way.

So, shortening the answer to your question, Christian, about FY10, the management team have very specific targets about how to get to these numbers. It is not to say that it won't be difficult, it is not to say that people won't be working hard to get there, but we think that they are achievable.

Can a horrible economy ‐ if we go into a true recession/depression kind of environment ‐ change some of the guidance and some of the views? The answer is absolutely. But that is not part of our view at this stage.

Then, in terms of the final part of your question, the departure ‐ "Wouldn't it be nice to stick around until all the fruits of all the labour are there?" ‐ the answer is yes, but that was never part of the plan, at least for me personally and my family, and I think the Board understood that. We reached a point yesterday where, as we talked and as we sat down and we visited about when is the right time, both I and the Board felt that now is the best time to make that transition. I want to give the Board enough time to find the right successor, to go through the right process, and also so that we don't lose any momentum while they are doing that. As I said earlier in one of my other answers, the Board is as committed to hitting the numbers as anybody. So continuity and focus ‐ none of that changes.

CHRISTIAN GUERRA: Just to clarify, on the fiscal targets, I think in the presentation on the fiscal 2010 targets, John mentioned that you are now expecting to come in at the lower end of the target. So should we interpret that as

being wholly and solely due to the softening macro environment as opposed to any reduction in your cost‐out targets?

SOL TRUJILLO: That's correct.

JOHN STANHOPE: That's exactly right, Christian. I had to

take into account the softening, so that's why I said they are at the low end.

CHRISTIAN: That's great, thank you for your time.

SOL TRUJILLO: We will take another question on the calls, then go back to Ian here.

SAMEER CHOPRA: Sameer Chopra, Deutsche Bank. Good morning gentlemen. I have two questions, if I may. The first one, is there any further room for head count, seeing as you have already hit your transformation targets for 2010 ‐ and congratulations on that ‐ and the second one is your guidance: are we still aiming for $500‐800 million of cost‐out in the opex lines.

SOL TRUJILLO: In terms of the head count, the answer is yes. That's why we set the target of 10,000 to 12,000. We think there are more that will come naturally. What I mean by "naturally" is that we talked in terms of full‐time equivalents, and we do a lot of contracting, we do a lot of other work that has been part of our transformation, and a lot of that work will go away as we turn up systems and as we shut down systems, and that will be part of the story.

Part of the story will be continued productivity increases and, again, the last time you would have heard us talk about our field force productivity improvements being nearly 50 per cent over the last three years, and I think you are going to see some pretty dramatic productivity improvements as we go forward in the front end of the business as well.

In terms of the cost‐out, the $500‐800 million, the answer is absolutely, because John, a year ago in November and then this past November, spent time trying to help everybody understand how we get to these EBITDA margins and the free cash flows or cost structure points that we want to get to. So the answer to that is simply yes.

SAMEER CHOPRA: One of the reasons for that question was the weaker Aussie dollar: I was wondering whether that was impacting input costs, particularly cost of goods sold.

SOL TRUJILLO: Not to a large extent. The big thing impacting our cost of goods ‐ and this has worked I think to our benefit ‐ this year, as you heard John go through the numbers, the volumes on handset sales are down dramatically, because we had the big migration from CDMA to Next G over the past year and a half or so, and we have gone past that peak and now ‐ going to back to these questions about driving voice, driving more ARPU, growth ‐ we are into another era of the migration where we are going to see a lot more smart phone sales, we are going to see a lot more usage that gets driven off of that. We have lots of great data. We talk a lot about iPhones; we talk a lot

about BlackBerry Bolds, but we can also talk about our HTC products and other products that are out there that are driving a lot of usage. So CoGs is affected to some extent, but not to a great extent so far.

SAMEER CHOPRA: Thank you.

SOL TRUJILLO: Ian?

SPEAKER FROM THE FLOOR: Two questions, Sol. First, is there any suggestion or perhaps indication that the growth in wireless broadband is having an effect on fixed broadband subscriber numbers or revenues? And, secondly, I want to explore the margin trend in Sensis and what its impact is on the overall group's long‐term margin trend. A couple of years ago Sensis EBITDA margins, about 50 per cent, were above the group level. They have fallen to 45 per cent ‐ fallen 330 basis points in the last year. That is still above the group level, but I think one of you said that online margins were trending up, which suggests the print margins are trending down, and perhaps the two meet somewhere in the middle around 40 per cent. That will be below the group margin next year then.

First of all, that's a bit of a drag, isn't it, on the long‐term margin trend if Sensis margins are heading down ‐ that's 7 or 8 per cent of revenue ‐ and, secondly, isn't it kind of symptomatic of what is happening generally, that we are moving more into this online world, where the cost structure is more complex, there is more content cost and complexity, and so on? Doesn't what is happening in Sensis

perhaps presage what is going to happen in the wider business in terms of the margin trend?

SOL TRUJILLO: Actually, Ian, I think it is important to look back a couple of years ago, as you did, but to understand why the margins have gone down. Part of what we went through was a period of time when our print business was in decline, and Bruce and the team and myself made a decision that we needed to regenerate and reinvigorate that business. So Bruce undertook what he called Project Morph, which is an IT transformation of the business which enables a different experience, but also enables cost take‐out. That's ahead of Bruce in terms of his operating plan ‐ and what I mean is time‐frame wise.

We also invested in some additional distribution of books and other capabilities out in the market, opening up local offices so that we can compete more effectively, given the kinds of margins that we generate. So, if anything, our margins are going to be going up. If you look at the aggregate numbers for Sensis, they really bias downward by a couple of businesses, whether it be Trading Post ‐ which we've talked about before ‐ or the mapping business. Then, obviously, there is the new addition on

the China businesses, which, as they grow, will get to scale.

But I think the interesting point to your question about online is that our online businesses are generating higher margins than what you see in the broader industry. A long answer.

The short answer is now I think that margins will continue to be healthy in the business. We are just going through, again, an investing period and changing the mix, where that has had some dilution for a point in time.

SPEAKER FROM THE FLOOR: And wireless broadband: is it having an effect on fixed broadband subscription?

SOL TRUJILLO: Ian, in terms of wireless broadband, I can't really stand here and say that there isn't some impact in terms of substitution, because there probably is with certain segments, but in terms of having a material change in terms of our view of the business, the answer is no.

If you look at fixed, we have now reached about a 60 per cent penetration point. We have had a lot of growth over the last three or four years in terms of that fixed portion of the market.

The wireless side is now new and it is exciting and we keep on making it more exciting with more speed, more through‐put and a better experience. So you are going to see growth rates on wireless broadband being much higher than on fixed, as the market continues to evolve.

Then, once penetration levels get much higher, probably in a year to two years, you are going see what I would call "How do you keep on growing ARPU on it?", much like you see with us and what we do on our fixed broadband, which is continuing to grow ARPU.

SPEAKER FROM THE FLOOR: Thank you.

SPEAKER FROM THE FLOOR: I have two questions, if I may. First, given that you may need to accelerate your broadband roll‐out and consequently the capital required, how tangible do you believe your 2010 cash flow projections will be, in light of what you have communicated to the government as being the required capital to invest?

SOL TRUJILLO: One of the points that we have made consistently from three years ago was that our free cash flow, our capex estimates or targets were always asterisked, you know, "subject to whatever happens with broadband" ‐ what we now call NBN. So, if, for example, the government called up and said, "Hey, we are interested in hearing your thoughts about how to broadband‐ise

Australia" et cetera, et cetera, and we said, "Okay, here are our thoughts, we would probably invest up to $5 billion" ‐ you know, you are talking about, let's say, plus or minus $1 billion a year of additional capex which would reduce the free cash flow and would increase whatever capex forecasts we have given to this point in time. We have said that now for three years, and that has not changed.

SPEAKER FROM THE FLOOR: So my point is, given that you are out and you need to maintain a competitive network moving forward, would that not necessitate you spending additional capex ahead of year 2010?

SOL TRUJILLO: We already have the best network in Australia. We already have the leading market position in Australia. So I am not as worried about that, because the degree of difficulty of what is being suggested by others we will deal with given our wireless platform, given our HFC platform, given the ADSL platform we already have in place ‐ plenty of options. And the good news is a big portion of the infrastructure is already there.

SPEAKER FROM THE FLOOR: My last question: are you indicating a significant change in your channel strategy by following a roadmap ‐ sorry to draw this analogy ‐ commander by rolling out your own stores on an expansive basis and, if so, what might be the downsides to your channel partners?

SOL TRUJILLO: I am not going to talk in any detail about what our strategy is, because, as you have hopefully seen over the last three or four years, we don't talk too much about what we are going to do; we just do it and then let everybody understand what we have done competitively.

However, we are very sensitive to our relationships with the partners that we have, and I think David Moffatt and his team are working hard at finding the right strategies that work both for Telstra and the partners, and you will see some of that play out during the year. Like I said, you will see it play out and then we will explain what we did.

SPEAKER FROM THE FLOOR: Thank you.

SOL TRUJILLO: Okay, another call, please?

MARK BLACKWELL: Mark Blackwell, Morgan Stanley. Further to your earlier comments about the slow‐down occurring really in the latter part of the half, I wonder if you could confirm that it was that latter part and what that implies for the second half.

Secondly, I note your guidance for revenue growth is retained, and, given your comments on the economic outlook,

I was surprised by that; I thought that there might be some softness in the top line as well as in the EBIT. If you could comment on those two issues, that would be great.

SOL TRUJILLO: I will let John take this one.

JOHN STANHOPE: Okay. What I said was, yes, in the latter part of the half, but I also said we have now six weeks trading, and that hasn't changed from the last part of the first half. So the latter part of the first half, the first six weeks of trading this year, suggest to us that there is a softening of the revenue, and where I said it is ‐ fixed voice and mobile voice.

To your other question ‐ and I tried to explain this also ‐ we expected revenues fundamentally in the top end of the growth range and now we expect them in the lower end of the growth range and when you're talking about a $26 billion business, 1 per cent is $260 million, so that's why we haven't changed the guidance on the top line.

SOL TRUJILLO: I would add one other thing, that this issue of volumes that I described a minute ago, we tied up a lot of our selling capacity by just simply answering calls. Now that we're on the other side of that, we're going to free up more capacity for outbound and inbound on the sales side, so the good news for our competitors was that there was some consumption of our capacity and the bad news is, "Look out, we're coming."

MARK BLACKWELL: I look forward to some sales from Telstra then. Thank you.

SOL TRUJILLO: Thank you.

SACHIN GUPTA: Sachin Gupta of Nomura. I have three questions. Firstly, John, I'm not sure if you talked about this, but can you quantify how much are you factoring in for one‐off costs for the bushfires and the floods? My second question is I think you mentioned, John, that there will some further accelerated depreciation for Hong Kong CSL in the second half. I am wondering if you can quantify that, please? As I recall, I think you said there would be no more accelerated depreciation after the first half. I am wondering why is that continuing?

My third question is if you look at PSTN retail revenue, that appears to be declining now, it's down 2 per cent, but it seems to be driven more from lower usage rather than lower access lines. I was wondering is that a risk going forward and what are you factoring in your guidance, please?

JOHN STANHOPE: Let me take the last one first because it is probably the easier one. It is usage that is impacting our view of the guidance and I think we saw that quite a

few times. When you're a Telstra customer in economic hard times what can you control? You can control how much you use the services as distinct from the cost of access and so on. That in fact is what's happening.

With respect to the costs of floods and fires and so on, what I did say was it's in the tens of millions, so it's not huge numbers. There will be some capital requirement and there will be some expense requirement: tens of millions of dollars with respect to that.

With CSL New World accelerated depreciation, yes, the network is taking a little longer to build in Hong Kong than we anticipated and so therefore the accelerated depreciation has been spread over a longer period of time. You might say, "Well, that means it should be lower," but we've also had the FX impact on top of that which has unfortunately taken the advantage of it being spread over a bit of a longer period. It now will go into the second half and with the impact of the FX difference that has been taken into account. The guidance ‐ what I said about the second half, it's about $70 million.

SACHIN GUPTA: Thanks. Can I just ask another question on guidance. If you look at past results, back in August we had capex increase, no extra EBITDA, growth slowing down, margins were still at 42 per cent, transformation still not complete, NBN is still pending. I was wondering against this backdrop and given what we are seeing in the macro environment as well, how confident can one be with the 2010 guidance?

SOL TRUJILLO: We are pretty confident in the sense that the things that we can control, which are costs, we've got basically everything tagged, everything binding, by date, by a lot of things internally, so that's the big part of what you're going to see on EBIT and margin improvement. We've communicated that and that's what management can control. We can't control some of the macroeconomic variables and issues there. That's why John said we're looking at the lower end of our revenue guidance, but on the cost out, we know where it is, we know how to find it, we know how to get it and I think that's where we stand

here today and say, "Yes, we're pretty confident about the $6 billion to $7 billion on free cash and EBITDA margins," and if it turns out that our guidance on EBITDA margins is 46 to 48 and we hit 45.7, right now at the margins that we're at today we are best in the world and very few companies in the world that are getting better EBITDA margins are going forward, so we think there is a relatively high degree of confidence here.

ALICE BENNETT: Alice Bennett here. Just following on from previous questions on guidance for FY10, I understand you've got planned cost‐out as part of the whole

restructuring program. I was wondering what capacity you have to cut discretionary costs, such as advertising or maybe even pulling back on handset subsidies, if we do have a more severe revenue downturn if the economy deteriorates faster. Could you talk a little bit about the discretionary costs that you could pull in order to maintain that guidance?

JOHN STANHOPE: We will look at every cost line. We look at initiatives in a macro sense, but we look at right down to every line item and, as I mentioned earlier, as you would expect, even in this '08‐09 year, due to the impact of the economic climate, we're bearing down on all those sort of discretionary costs. We will continue to do that into the Fiscal '09‐10 as well. Yes, we will and we're doing it this year right now and we will continue to do so in '09‐10.

SOL TRUJILLO: We don't have any more questions on line. We don't have any more questions here. Let me just close by, number one, reiterating the fact that the guidance that we're giving for 2010 we have a lot of confidence relative to the fact that the driver variable there is going to be cost‐out and that's what management controls. The whole management team ‐ not just Sol, not just Sol and John, but the whole management team ‐ is very focused on delivering that and everybody has got their assignments and they're all communicated and they're all very clear.

The second thing in terms of the growth, we're showing that this wireless business is a very strong business. We're showing that broadband continues to be part of the strength of this company. We're continuing to grow in terms of our Sensis advertising related portfolio businesses and that as we look at our enterprise side of

the business, we continue to grow there as well because of the differentiation that we built. There is no question ‐ no question ‐ whether it be on the consumer side, the enterprise side, the small‐medium business side, customers really do have a distinct choice and that's what competing and winning is really about.

Now it is about execution and to some of the questions between now and the end of the year, Ian, there's no question about focus. There's no question about delivering in terms of what we've said today and what we've said in the past and that will be part of the story that the management team reports in August of this year. Thank you all for coming and we will be talking to you. Thank you.

THE ANALYST'S BRIEFING CONCLUDED

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