TELSTRA GROUP LIMITED — Call Transcript 2010

Aug 12, 2010

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13 August 2010

The Manager

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

Office of the Company Secretary

Level 41 242 Exhibition Street MELBOURNE VIC 3000 AUSTRALIA General Enquiries 08 8308 1721 Facsimile 03 9632 3215

ELECTRONIC LODGEMENT

Dear Sir or Madam

Transcript from Full Year 2010 Financial Results – Analyst Briefing

In accordance with the listing rules, I attach a copy of the transcript from yesterday’s Full Year 2010 Financial Results Analyst briefing, for release to the market.

Regards

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Carmel Mulhern

Company Secretary

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

TELSTRA 2010 FULL YEAR RESULTS Thursday, 12 August 2010

MR BEN SPINCER:  I welcome you to this our 2010
financial results presentation.  I should also welcome
all those people on the phone and also watching the web
cast this morning.  I will hand over now to the CEO,
David Thodey, who will give a brief introduction, and
then we will run through the results with David and
John.  Thank you.

MR DAVID THODEY:  Thanks Ben, and let me also just add
my welcome.  Great to have you here and I also welcome
everyone who is on the phone, right around the world I
dare say.  Now let me begin.

2010 definitely was a tough year and we faced many
significant challenges.  The NBN negotiations were long
and protracted; we have seen quite a significant change
in consumer behaviour, which we have seen happening for
a while but which now has accelerated, and of course we
have seen much tougher price competition.  But despite
those challenges, the company has emerged stronger.

We have seen renewed momentum in the last couple of
months of the last half; we've seen improving customer
service and of course we have the preliminary agreement
on the NBN.  In addition, and we will be talking about
this in a moment, we have achieved our February
operating guidance, including the key target of $6
billion of free cash flow, and we have seen really
strong cost management right throughout the year.  Of
course, these challenges haven't gone away, and the
whole industry faces many challenges that we are going
to have to confront.

As Ben said, we are going to change the format a little
bit this year.  I am going to ask John to come up and go
through all the financial results.  I am going to come
back later on and talk about the future.  We think this
might be a better structure for the morning.

Before we begin, I do want to address a very important
strategic decision that we need to make for this
company.  Today, the greatest asset that Telstra has is
our customer base, and we have been losing too many
customers.  We cannot allow it.  In fact, I am not going
to allow it to continue.

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We have two strategic options in front of us.  Firstly,
we could maximise our cash returns in the short-term,
cut costs and continue to lose market share, or we could
take a longer term view by investing, and that's
investing in customer service, simplifying the business
and competing aggressively to retain and acquire
customers, and of course to prepare for future
opportunities.

We have looked at this in detail and we believe that it
is in the best interests of shareholders to manage this
business for the sustainable future growth of this
company.  Not for the short-term.  So today we are going
to announce some bold but necessary steps to drive
profitable growth over the longer term.  But I am going
to come back and talk about that later on.  Let me now
pass across to John who is going to take you through the
results for last year.

MR JOHN STANHOPE:  Thank you and good morning to
everyone here, and everyone wherever you may be.

Let me start by saying that back in November 2005 we set
a target of achieving $6 billion free cash flow by 2010.
This was obviously an extremely important target for us
and our shareholders. How we achieved this target has
evolved with the business and market over the last five
years but I am pleased to say that five years down the
track we are there.

Now let me move on to the rest of the results because
that certainly is a highlight.

As David mentioned, I am pleased to report this morning
that we met our February guidance for the Fiscal Year
2010, and as I just said we grew free cash flow by $1.9
billion to $6.2 billion this year.

We maintained or 28 cents per share dividend for the
full year, and that is fully franked, all this despite
the challenging market conditions we faced over the past
year.

On our February guidance basis, so excluding the CSL
impairment, we reported:

A sales revenue decline of 2.2 percent to $24.8 billion

Operating expenses continue to be tightly managed and
fell by 4.5 percent. With this tight cost control,
EBITDA grew by 0.6 percent with margins growing 1.2

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percentage points to 44.4 percent. EBIT grew by 1.7
percent, in line with our guidance of low single digit
growth.

Including the impairment of CSL, EBITDA declined by 0.9
percent, and EBIT also declined by 0.9 percent and
profit after tax declined by 4.7 percent.

As always, there are some adjustments that need to be
made to our reported financial results to get a better
representation of the underlying business performance.

These adjustments are consistent with the adjustments we
made at the half year so they take into account the sale
of KAZ in the prior year, the significant strengthening
of the Australian dollar through the year, fair value
adjustments included in the finance costs plus of
course, the CSL impairment.  For the rest of this
presentation therefore I will be discussing the adjusted
numbers.

On an adjusted basis therefore the sales revenue
declined by 0.2 percent,  EBITDA grew by 1.3 percent and
EBIT was up 2.4 percent and profit after tax  up 7.6
percent.

You can also see the improved performance in the second
half which was a key commitment we made at the half
year, with sales revenue growing 0.3 percent, EBITDA 2.4
percent and EBIT up 2.7 percent.

While I am talking about high level numbers, I would
just like to cover off the impairment charge at CSL.

Telstra’s investment in CSL is recorded in our financial
statements in Australian dollars and a test of the
investment’s carrying value is undertaken each half year
using Australian dollars forecast cash flows for the
business. The forecast cash flows of CSL have been
lowered to reflect the softer margins the business is
likely to experience, given the intensely competitive
wireless market in Hong Kong and the lower ‘09-10 base
given the recent performance of the business. As such,
we booked a non-cash impairment against the goodwill on
this investment of $168 million.

Looking forward, we remain upbeat about the Fiscal Year
11 performance of CSL and we expect the top line in
local currency to return to growth as the Hong Kong
economy improves and CSL takes advantage of the
opportunity presented by the iPhone 4 and leveraging its

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network advantage. This will be the first time CSL has
sold the iPhone and should assist the business to
recapture the revenue market share.

In terms of performance from our products, it has been a
challenging year. The PSTN revenue loss was significant.
However, we are still seeing strong growth in the key
areas of mobiles and IP products.

For this fiscal year, PSTN revenue declined by 8 percent
to $5.8 billion and fixed internet declined by 0.7
percent to $2.1 billion.

Mobiles was again strong, with total mobile revenue
increasing 6.4 percent, an increase of $439 million.

IP and data access was up 1.7 percent to $1.8 billion.
However, within this category, IP access revenue grew 24
percent to $835 million, leveraging off our wireline
transformation.

Of course the changing product mix means that margins
also change, so before I discuss the product performance
in more detail, I would like to look at the
profitability of these products.

PSTN is clearly impacting our profitability given the
decline in revenue from that product.  What is
encouraging is that fixed broadband margins have
improved as the broadband market has slowed and we
achieve lower network unit costs from economies of
scale.

Mobiles, IP and data, fixed broadband and Sensis have
driven the greatest value in absolute EBITDA terms
however the contribution from these products has been
offset by the dilution in PSTN where the revenue decline
is faster than the decline in costs.

These pie charts provide a summary of how Telstra’s
revenue and EBITDA mix has changed over the past year as
well as highlighting just how diversified our portfolio
of products is.

Of particular note is a continued relative shift in the
importance of mobiles and PSTN.  PSTN’s contribution to
EBITDA has declined by 3 percentage points in the year,
symptomatic of the structured decline in that product,
while mobiles has increased by 2 percentage points. It
is also worth noting the importance of Sensis to the

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business, which contributes 9 percent of revenue and 11
percent of total EBITDA.

Back to the performance of our products.

Fixed retail broadband revenue grew by 0.9 percent to
$1.5 billion. However what is more pleasing is that our
new pricing plans and bundles has seen the negative SIO
trend experienced over the past two halves reverse in
the second half of this fiscal year. 11,000 customers
were added and we only saw a very minor reduction in
ARPU in the six months to 30 June.

In terms of IP access, the growth in IP access revenue
of 23.5 percent offsets the decline in legacy
specialised data and global products such as leased
lines. Furthermore, as the penetration of IP
applications grow, customer value also increases.

Sensis also achieved a solid improvement during the
second half.  This was achieved as Sensis continued to
use next generation digital media products such as the
T-Hub and iPhone to complement the more standard
directories channels of print and online. In terms of
financial performance, Sensis domestic sales revenue
declined by 2.3 percent in the second half, an
improvement on the 3.6 percent decline in the first
half.

In terms of mobiles, total mobile revenue grew by 6.4
percent to $7.3 billion with service revenue increasing
5.9 percent to $6.5 billion.  Again, second half
momentum has improved with mobile service revenue
growing by 7.1 percent compared to 4.7 percent growth in
the first half.

Where this growth is coming from is data - data really
is the mobile growth story. Telstra now has over 1.6
million wireless broadband customers and revenue
generated in this area increased by 34 percent to $787
million for the full year.  The largest component of
data revenue is still messaging, which grew by 14
percent.

You can also see here how we have provided additional
reporting of prepaid unique users. We believe unique
users is a more representative and less volatile measure
of our revenue-generating prepaid customers.

Moving on to PSTN, on this chart we have attempted to
deconstruct the half a billion dollar absolute decline

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in PSTN revenues in the past year, and look at the
drivers of that decline.  I would urge you to treat some
of these numbers as indicative because we have made
assumptions around average users and the
retail/wholesale split to keep this on a single page,
but there are some obvious conclusions.

The PSTN decline is driven by a combination of line loss
and a usage decline.  In terms of the line loss, about a
third of the revenue has shifted to ULL with the rest
lost to more than 200,000 net cancellations in the year.

On usage there has been a decline in all call categories
in the last year. Overall PSTN customers made nearly six
fewer calls a month in 2010 than in 2009, with the
decline in fixed-to-mobile revenue being the biggest
driver, but we probably claw back around a third of the
ULL revenue decline in our wholesale division with ULL
booked in our intercarrier access revenue line.  That’s
where it appears in our financial statements that you
have.  We are also seeing strong growth in our IP
telephony products with some revenue shifting from PSTN
to IP access.  Finally, there is clearly significant
mobile substitution occurring, both in terms of traffic
moving to mobile and also an increase in mobile-only
households, which we now estimate to be around 12 per
cent.

If we look at this in terms of PSTN and PSTN
substitution there is still a decline, but it is perhaps
overall when you take all of those movements into
account, around 5-6 percent

Before I move on to expenses, I would like to discuss
the performance of our retail business units.

Telstra Consumer faced a very challenging year due to
the intensely competitive landscape.  Sales revenue
declined by 0.5  percent, however significant
initiatives such as the T-Hub, new bundles and pricing
were implemented in the second half to address this
performance.  Around 41 percent of our consumer

customers have two or more Telstra products and around
300,000 customers have signed up for our new bundled
offer.

Business returned to growth in the second half with
sales revenue growing 2.3 percent after declining by 0.4
percent in the first half.  In the second half, Telstra
Business launched “mobile plus” pricing plans, which
incorporated both voice and data, and as a result we

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have seen increased Smart phone penetration and higher
data ARPUs.

In the enterprise and government segment, revenue growth
accelerated in the second half to 2.9 percent, with 0.3
percent growth in the first half.  For the full year, on
an underlying basis, so excluding the sale of KAZ, sales
revenue grew by 1.6 percent. Significant contract wins
during the year including Suncorp and Komatsu all
contributed to that outcome.

Now moving on to expenses which is a real positive to
come out of these results. Excluding the CSL impairment,
operating expenses declined by $653 million or 4.5
percent this fiscal year.

Variable costs as a percentage of sales has increased
this year but this is an important trend as it does
reflect the product mix shift that I spoke about
earlier.  Later you will hear more about how that is
continuing

However we continue to maintain a very tight control
over our fixed costs which declined by 7.5 percent this
year. This excludes the CSL impairment.

Looking more closely at where the cost savings were
realised this year, labour expense, adjusted for KAZ and
FX movements declined by 6.2 percent.  The decline has
been driven by fewer headcount thus a lower salary and
associated cost expense. Redundancy costs also declined
due to the absence of a lot of redundancies which we had
the prior year, redundancies associated with the
marketing simplification program.

Subscriber acquisition and retention costs, or SARCs
have increased but as I flagged at the half year, this
has been a managed increase to support the popularity of
Smart phones.  While SARCs have increased, SARC as a
percentage of mobile services revenue has increased by
less than 1 percent.

One area of disappointment in our cost base has been our
bad debts expense. Bad debts increased 44 percent to
$364 million. Admittedly, much of the increase was self
inflicted with what we call bad volumes.  Bad volumes
include misalignment between a customer’s choice of plan
and the plan they are initially billed for. The
difficult economic conditions this year also contributed
to larger write offs.  So we had two elements, confusion
by customers of plans and charges on their bills, et

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cetera, but we also did experience some bad debts due to
the economic conditions.

Pleasingly, we now have a detailed remediation plan in
place to make sure we have lower bad debts moving
forward.

On a positive note, there were large decreases in many
categories of discretionary costs including travel and
legal expenses.

Now let’s have a quick look at depreciation and finance
and tax.  D&A came in at $4.3 billion.  Adjusting for
KAZ and the impacts of FX again, D&A declined by 0.3
percent. While the depreciation charge was lower due to
the absence of accelerated depreciation at CSL,
amortisation expense increased due to a full year of
amortisation of the Trading Post masthead, which we
signalled we would do last time and that was $67
million.

Borrowing costs also reduced this year by 11.7 percent
to just over $1 billion as the average volume of debt
and the cost of servicing the debt is lower. Over the
past 12 months net debt has reduced to $13.9 billion
while our average borrowing costs on average debt was
6.4 percent.

Moving on to tax and the all important franking credit
balance, at the full year, our franking account balance
was in deficit to the tune of $138 million. However it
is important to note that the tax payments we have made
subsequent to 30 June will allow us to have sufficient
franking credits to enable us to fully frank the final
dividend of 14 cents per share

Looking forward, we expect the franking credit balance
to remain tight for a number of years. While we do not
believe this will constrain our ability to fully frank a
dividend at current levels, it will constrain our
ability to increase fully franked dividends should the
Board resolve to increase returns to shareholders.

Moving on to capital expenditure, operating capital
expenditure declined by $1.1 billion to $3.5 billion.
This represents 14 percent of sales so right in line
with our guidance.

What is on the slide here is how we look at capex
internally, so on an activity view, rather than a
technology view which is how we have disclosed capex in

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the past. You will find both views though in the
documents that we have lodged and handed out today.

As you can see, the largest component of our capex spend
this year was customer demand and customer experience,
accounting for 45 percent of our total capex program.
Customer demand and experience capex, which reduced by
$404 million to $1.6 billion, is focused on meeting
customer demand for existing products and services, such
as mobile base stations and spending on our fixed access
networks.

Whilst I am talking about fixed access capex,
expenditure we would not have to bear with a fully
rolled out NBN would be around $300 million per annum.

Moving on to free cash flow, as I said earlier we
exceeded our target, generating $6.2 billion of free
cash flow this fiscal year. The increase in free cash
over the year came from reduced capital expenditure of
$1.3 billion but also a one-off R&D tax refund of almost
$250 million.

As you can see from the slide, free cash flow has more
than doubled over the last three years, which has given
us the headroom to make some investments to ensure
future growth.

Before moving onto the last slide which is about
guidance, I want to explain why we need to make an
investment in the business in 2011 which results in the
guidance that we are giving today.

The pressures on the business are quite different from
five years ago.  While margins increased in fiscal 2010,
it is because we delivered on our fixed cost reductions
from the transformation, as I went through earlier.

In 2005 the transformation was an enabler for ongoing
product and service differentiation and improvements in
operations.

Five years on the industry is at an inflection point,
and Telstra in particular, with price competition being
intense, fixed services being substituted by mobile
services and product mix changes putting pressure on
margins.

We must prepare for this by structurally changing the
company which will require some investment, mainly in
directly variable costs and an investment to deliver a

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lower cost operation and revenue growth in the longer-
term.

David will tell you in his presentation what we are
doing and how we are going about it.

So this leads me to guidance. We view 2011 as a
transition year as we invest in operational excellence
to prepare the company to compete in the future. We have
made this decision to improve customer service and
satisfaction, simplify our business and core processes
and prepare the business for an NBN world by investing
to grow new revenue streams that compensate for
reductions in traditional fixed revenues.

For 2011, we expect an increase in the customer base
with flattish revenue but because of our investments and
the changing product mix the company expects a high
single digit percentage decline in EBITDA. We also
expect free cash flow of somewhere between $4.5 and $5
billion.

I do want to point out that at the half year, the first
half of the year we will have some variation to it
because we are expecting one of our Yellow Pages books,
in fact the Melbourne book, which is around about $100
million, to be in the second half of this fiscal year,
not the first half as it was last year, so I just want
to alert you to that so as you try to figure out the
half results or the expectations you need to know that.

The bottom line here is we must invest to grow, win
customers and lower our cost base to make room for a
lower margin product mix world and to grow our EBITDA
going forward.  The benefits of this necessary
investment will become obvious from 2012.

Excluding any possible spectrum acquisition costs, we
foresee capex to sales of 14 percent over the medium-
term.  It is important to note that the fiscal year 11
guidance is off our reported numbers, so sales revenue
of $24.8 bilion and  EBITDA of $10.8 billion.  Our
guidance also assumes wholesale product price stability,
over which we don’t have a lot of control, no additional
impairments to investments and excludes any proceeds
from sale of businesses.  You are aware we are in the
middle of looking at the sale of Soufun for example.

I would like to thank you for listening to that and I
would now like to hand back to David who will go through
our future directions.

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MR DAVID THODEY:  Thanks, John.  I think it was a very
good summary.

Okay, as I said at the beginning, the industry and
Telstra are really going through some significant
changes, but what I want to try and focus on now is it
creates this unique opportunity for Telstra to really
invest for the future and I want to try and give you
some colour about that this morning.

What we have got to do is put customers right at the
centre of what this company does every day.  Very
importantly, John mentioned simplifying this business,
taking all the complexity out of it, so we truly can get
a lower cost base going forward, we need to continue to
focus on retaining and acquiring new customers.  Growing
our customer base is very important, and, of course, we
have got to find new revenue streams as we go forward.

You see, this company has got to move transform.  It has
got to move from being an engineering and a technology
led company to being a truly sales and marketing led
company.  We need to keep our technology leadership but
we must become truly sales and marketing led.

So I am going to touch on about four areas this morning.
Firstly, just touch again on some of the key
achievements from 2010; say a little bit more about the
inflection point we see in the industry, what is
happening and why we are responding the way we are here;
a little bit about how we are going to respond; and then
talk a little bit more about the guidance.

I am only going to have a few moments to touch on each
area.  We do have an investor day scheduled for late
September where we will go into more detail.  A number
of the senior executives will be able to talk at that
time exactly about some of the detail under each of
these initiatives.

Okay, let me start by just mentioning some of the
significant achievements that are quite remarkable
really when you look at what the Telstra team has
performed over the last six months.

When I gave the half year results, I said how
disappointed I was that we weren't able to bring a
number of initiatives to market quickly enough.  Well,
the second half was different.  We really lifted the
pace and we brought a large number of offers to market

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and we are seeing some of the early signs of momentum
resulting from those initiatives.

On an adjusted basis, we returned to modest growth in
the second half, and that was really driven by the
mobile performance and of course IP performance, which
offset this enormous deterioration in PSTN.

Our sales results are improving and interest in our new
products is high.  So let's just go through a few of the
strong results.  Obviously, Sensis, strong EBITDA
growth; we sold more than 300,000 bundles; 300,000 new
wireless broadband customers; mobile services revenue
growth increased from 4.7 percent in the first half to
7.1 percent in the second half; and we are delighted
that the new T-Hub and T-Box are experiencing strong
interest and we have already sold 60,000 units - ahead
of our plan, and that was as of last weekend; and of
course we saw great sales results from the introduction
of the iPhone 4 and we have also put new prepaid cap
plans into the market just last week.

These results are encouraging. On top of this, the steps
we began taking 15 months ago to improve customer
satisfaction are starting to bite in the market.

When I began as CEO, I described myself as an agent of
the customer and I said it would not be quick or simple
to re-orient this company around our customers.
However, I am pleased to report that throughout the year
we began implementing a wide range of initiatives that
are really starting to make a difference.  Some of these
included a new case management process for when people
move home, a critical time when they make a decision on
their telecommunication needs.  We have introduced
weekend appointments for our technicians.  We have also
put in new internal standards around responsiveness to
queries, sales queries and complaints, which is starting
to make this company more responsive, and of course, as
I mentioned, we have put in new bundles and pricing
plans across a large range of products over the last six
months.

These changes are starting to make a difference.  We are
seeing TIO complaints come down by one-third.  Although
that is still too high, we have a very active program to
manage all complaints, and I am pleased to say in the
monthly customer satisfaction survey we run, which is
the customers giving us feedback about how we are going,
we have seen an increase of five percent in the last 12
months, which is very encouraging.

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While we know there is still a lot more to do, we have
started this journey and we are heading in the right
direction.

Another significant achievement was the NBN financial
heads of agreement that we signed last year.  I do want
to stress, as you would expect, we are non-partisan when
it comes to politics and we will constructively work
with either side of government.  So we are making no
comment about the policies of each party or the outcome
of the federal election today.  However, the non-binding
financial head of agreement was a very important
milestone.  It really was a tremendous amount of work
the team did to get to that point, and it delivers a
post tax net present value of approximately $11 billion,
which includes around $9 billion consideration from NBN
for copper decommissioning and infrastructure leasing,
and of course the $2 billion from the government in the
form of other initiatives and avoided costs.

It is very important to understand, which we have said
before, the board will only take a proposal to
shareholders that they believe will be in the best
interests of our shareholders.

I do want to clarify a few elements of this $9 billion.
Between 40 and 50 percent will be for leasing our duct,
exchange space, dark fibre and managed back haul.  The
arrangement will be for 30 years or possibly more.  So
it provides for long-term certainty, and we anticipate
that the final decommissioning of copper will occur
within 18 months of fibre being rolled out in any area.

We are currently working on all the details, financial,
legal and regulatory, as we move forward towards
definitive agreements.  For instance, we have agreed to
supply and install optic fibre network infrastructure in
Brunswick in Victoria, which is a first release site for
NBN Co.  I do want to stress there is still a lot of
work ahead of us to get the agreement finalised.  We
still need to get legislation passed.  The ACCC approval
must also be obtained.  Once these things have been
achieved, we will be submitting this to our shareholders
for a vote, which we expect to do in the first half of
next calendar year.

So we are pleased with the progress on NBN negotiations,
but as the last point around NBN, whatever happens with
NBN is irrelevant to what we need to do as a company.
There are fundamental changes occurring in this industry

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which make it essential for Telstra to undergo
significant change.

So what I would like to talk about now is a little bit
about some of this change we are seeing in the market,
what we call the inflection point and give you some
colour on some of the comments John has already made.

We mentioned the accelerating decline in PSTN revenues.
We have seen reduction of fixed calls due to mobile
substitution and of course that has been driven by
capped plans primarily.  We have seen a significant
change in our product mix.  We have seen growth in
mobile internet, growing faster than fixed internet.
Also we have seen this explosive use of data and video,
with little incremental revenue, and, of course,
increasing price competition right across all the
product categories, but especially fixed broadband, and
then lastly we are seeing growing infrastructure based
competition, partly due to government subsidised
backhaul.  All of these forces are shifting our revenue
mix towards lower margin products.  So we need to take
action.

We have this strategic choice: Do we maximise short-term
cash returns by reducing costs and losing market share
or do we bite the bullet and invest for longer term
growth?  We have decided that we must invest to retain
and acquire customers and to grow the business.  We
cannot continue to lose market share.

So we are going to take some bold steps.  All of our
actions will be consistent with the strategy that we
outlined last October, to satisfy our customers, invest
in innovation and differentiation and of course find and
realise new growth opportunities.  So this next year,
2011 will be a transition year and we are going to focus
on four key initiatives.

Firstly, it is all going to be around customer
satisfaction, serving our customers.  We are going to
simplify our business to reduce costs and of course to
improve the customer experience.  Also, we are going to
compete fairly but very aggressively to retain and
acquire customers, leveraging our significant
investments in network leadership that began five years
ago; and of course invest in the long-term business
opportunities that we see.

Let me talk about each of these just a little bit
briefly now to give you some colour on some of the

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things we are going to be investing in.

Firstly, customer satisfaction.  We are going to
continue to invest to improve customer service and
satisfaction to our customers.  This must become a key
differentiator for Telstra.  Over the next year we are
going to do a number of things, and I am just going to
mention a few quickly.

Firstly, we are going to choose 24 by 7 contact centre
support.  This is a new initiative that will commence on
14 September, making Telstra the first full service
telco to offer such a service.  We are going to build an
improved on-line capability, so customers can deal with
Telstra on-line more often.  We are also going to remove
process bottlenecks that lead to complaints, so we
improve our responsiveness to customer inquiries, issues
and sales opportunities.  We will also increase the
customer satisfaction component in management
performance bonuses, so that we get the whole company
focused on that.

Customer service is now a fundamental and unifying theme
for every part of Telstra, every part of Telstra, and it
will be the cornerstone of our strategy going forward.

Secondly, and very importantly, we are going to simplify
this business.  We are going to drive savings that will
improve customer service and satisfaction.  We have
begun on a three year journey to simplify our business
and to deliver a lower sustainable cost base.  This is
rather than an indiscriminate, short-term, cost cutting
program.  This was considered but we must drive
simplification into this business.

As well as improving customer service, we will also
improve productivity, change our channel mix and create
a lower cost operating model.  This program is going to
touch every part of this business and we have already
started with the appointment of Robert Nason and we have
our teams working right across the business now.

For example, you would have seen that we have reduced
the Telstra executive ranks by more than 300 people.
This will simplify our business, improve accountability,
reduce management layers and make life simpler and
faster for the front line staff to serve customers.

You also would have seen another initiative.  We have
brought together Telstra Countrywide and Telstra
Consumer to make a more streamlined organisation.

15

Simplifying our business will be a huge project and will
redefine all the key processes in the company, and we
will have much more to say about this at the investor
day.

Thirdly, as I said in February, we must do what is
necessary to stem market share decline and grow our
base.  This means competing more effectively and
leveraging the incredible strengths we have in the Next
G and Next IP networks.  We need to acquire and retain
customers, which will lead to growth in our customer
base and overall revenue.

We are going to do this in a number of different ways.
We must invest in sales and marketing capability in
2011.  We need to continue innovative and segmented base
pricing.  Of course, you have seen over the last six
months that we revised our prices on fixed and in mobile
and broadband and post paid and prepaid.  This will
continue, and we will do what is necessary to acquire
and retain the best customers.

This will require a significant investment in sales and
marketing this year.  So this is going to be a
transition year.  This is about competing and we are
going to sell and market our differentiated products and
services more aggressively.  It is about leveraging the
billions of dollars that we have invested for the
benefit of our customers and our shareholders.

Let me give you a couple of examples.  Our investment in
Next G has delivered $787 million in wireless broadband
over just four years.  Wireless broadband penetration is
approximately 17 percent and our customer base is now
1.65 million people, up 58 percent only a year ago.

Smart phones also represent a huge opportunity for us.
For example, over the past year the number of Smart
phone subscribers grew by 30 percent to 1.6 million and
usage and ARPU grew as well.  Thanks to our Next G
network, Telstra is well positioned to take advantage of
the accelerating migration to wireless communications.

In the next 12 months we will continue to drive our
leadership and wireless speed and coverage.  This will
include introducing 42Mbps, network download speeds
peak, which will be a world first, and we are already
trialling LTE.  We believe that mobile can continue to
grow at mid single digit levels for the next few years.
That means in just two more years the mobile business
may generate around $8 billion.

16

Let me give you another example, our Next IP network,
which we will continue to invest in for market
leadership.  Our Next IP network has enabled us to
double our IP access revenues in just three years, and,
as one of John's slides showed, the IP ARPU escalator,
highlighting that about two thirds of our IP customers
now buy managed WAN product from us and about 12 percent
use IP telephony.

Next IP has also given us a large growth opportunity in
markets adjacent to our traditional carriage business.
One such market is network application services, which
we are going to invest in as we go forward and we are
very excited about Cloud Computing, both in terms of
infrastructure as a service, but also software as a
service, and this applies both to the business market
and to the enterprise and government market.  So we are
moving up the value stack.

Let me now talk to the fourth initiative.  We must make
some significant investments to ensure our long-term
growth.  A good example is how the digital future will
impact a number of our key market segments, and we need
to make the right investments.  Let me just briefly
mention a few of them.

Firstly, the digital home, which will offer consumers a
way of integrating entertainment, information and
communication services with their broadband connection.
The very successful T-Box and T-Hub, IP TV are positive
steps towards the digital home.  Media, content and
advertising also present exciting opportunities for us
in the future.

Secondly, the digital business will integrate all data,
video, voice and computing requirements for our small
business customers, boosting productivity and improving
services.  Prices are going to be simple, easy to
understand and services will be charged on a per seat
basis.  We are very excited about this offer.

In the enterprise market we are going to continue to
build on our strategic offers, offers around application
services, all at a lower cost, to improve productivity
for those large customers.

Then in the digital media space, Sensis is already
undergoing significant investment in an exciting new set
of on-line products for our Yellow Pages customers,
which we think will really take us to a new level.  You

17

are going to hear more about this at investor day,
including the digital media opportunity at Sensis and we
will take you through it then.

Let me turn to guidance and the investments necessary to
achieve our strategic objectives.

As John and I have already discussed, these investments
will increase our cost base in 2011, because we are
investing to grow our customer base.  This will be a
transition year, but these investments will be
selective, they will be carefully targeted and they are
going to be rigorously monitored to ensure they serve
the long-term interests of customers and shareholders.
Let me remind you once more why these investments are so
essential at this time.

The challenges we face are real.  Either we ignore those
challenges, and, as I said, maximise cash in the
short-term and continue to lose market share, or we make
this investment now to allow us to return to revenue and
profit growth in the future.

So in terms of guidance, as John went through, we expect
an increase in the customer base, with flattish revenues
in 2011, our investments will lead to a high single
digit percentage decline in EBITDA, free cash flow of
between $4.5 and $5 billion and from 2012 the benefits
of our investments will become obvious.

Let me now conclude.  There is no question that Telstra
faces a unique set of challenges but as I introduced
this session, it is also will a tremendous opportunity
to do something that is required for this business.  We
have got to take some bold and concerted action now to
ensure that Telstra continues to grow profitably and
lead in the market.  We must focus on retaining and
acquiring customers, because this is our greatest asset.
At the heart of this strategy as a commitment to improve
customer service and satisfaction, we must simplify this
business.  We must compete more effectively, both in the
market and as we build our new products for future
growth.

We have a lot of work to do, but we are confident we
have got the right team, we are confident we are going
to deliver real sustainable value for our shareholders.

Thanks very much.  I am sure you have got a number of
questions.  John and I will come up here and we will be
happy to take your questions now.  Thank you.

18

BEN SPINCER:  We will be taking questions both from here
in Sydney and from the phones.  There might be 14 of 15
of you trying to ask questions so could you limit
yourselves to just a couple of questions and maybe come
back later.  We will take the first three questions from
here in Sydney and then go to the phone lines.

QUESTION: (Richard Eary UBS)  In terms of the guidance
you have given of high single EBITDA declines, if you
look at a five to 10 percent range it is $1.1 billion to
$550 million increase in your cost base.  Can you
outline how much of that is attributable to the mix in
terms of revenue to margin as you pointed out and if you
can give us a bit more detail as to what the remaining
portion will be spent on.  That's the first one.  The
second question is if you look at that new guidance, the
back of the envelope suggests maybe an EPS range of 25
to 28 cents for the 11 year, which obviously puts a
question about the ability to pay the 28 cents of
dividend for 11.  John, you made a comment about the
ability to pay.  Can you add to that comment first?

MR DAVID THODEY:  Why don't I take the first one and
John you take the second one.  The increase in operating
expense is very targeted at acquiring customers.  We are
going to be taking a lot of what we call the fixed cost
out of the business and that is what project simplify is
and Rob and the team are working on that.  That is very
important to allow us to compete more aggressively in
the market and we must do that to maintain our customers
and to grow share.  As you know, that pulled through a
lot of DVCs, especially in the mobiles where you have
the product mix as well.  A large proportion of that
will be in terms of growing and competing in the market.
That's where that is going, but we also have to invest
to get this simplification into the business.  You can't
throw money at it.  You have to rework things and drive
significant change in all of our processes.  That's
really where that increase is going.  John, do you want
to handle the EPS side?

QUESTION:  Can I ask a follow up question before John
answers?  You talked about project simplify.  Can you
elaborate in terms of what costs you expect to save in
terms of project simplify and what happens to any of the
transformation costs that were supposed to flow into 11
because clearly if you add those cost savings on the
gross band is obviously higher than the reported number.

MR DAVID THODEY:  The transformation has delivered some
significant savings, as John went through.  This is a
different time to what we had five years ago.  It is a
product mix change.  Your whole structure of the

19

business changes, so we have to invest more in DVCs as
we go forward.  In terms of project simplify, it is a
three year program.  We are very clear about what
savings we are going to get.  There is 27-odd projects
that we are working through now and we will be able to
take you through more of that at investor day.  John, do
you want to go through the EPS.

MR JOHN STANHOPE:  Yes, sure, simply to say Richard
there is sufficient cash in that number to pay a
dividend at the current level and yes, it is a lot finer
than this year that has just gone by, but we wouldn't
have to borrow to pay dividend on these free cash
outcomes at the current level.

QUESTION:  So the franking and the 28 cents is safe for
FY11?

MR JOHN STANHOPE:  If the board so decides to have that
level of dividend, yes.

QUESTION:  You talked about reinvesting for growth in
the future.  I know that you probably don't want to be
dragged in terms of outlook statements beyond FY11 but
what sort of pay back are you looking at?  Is this a 24
or 36 month payback or are we expecting a big reflection
in 12 13 or it is going to be delayed depending on what
happens with regulation and NBN?

MR DAVID THODEY:  Why don't I take that one and then we
need to move to the next question.  We have very
specific product development plans which all have to
meet the normal criteria we set in terms of returns
budget wise.  Even without NBN as it goes to an IP based
world we have to build a large new range of products to
allow us to compete aggressively in the market.  They
will all be rigorously tested against normal investment
criteria.  For example, we talked about what we are
doing in Sensis and digital media.  That is a very
important program in terms of moving on line.  We talked
about digital business with Deena.  She is doing a
tremendous amount of work in building a new product
portfolio.  All must meet the normal investment
criteria.

It is a new world as you move from PSTN to an IP based
world.  That is the criteria we are using.

QUESTION: (Sameer Chopra Merrill Lynch) I had one
question on clarification.  In terms of your guidance,
is that off reported numbers the EBITDA for 10, which
was $10.85bn?  I wanted to make sure of the guidance you
are giving for next year of reported numbers.

MR JOHN STANHOPE:  Yes it is.

20

QUESTION:  The second question is on the NBN deal
itself, do you get paid regardless of whether a line is
active or not?  We have in Australia 10 percent of homes
wireless.  In the NBN implementation study they think it
can rise to 20.  Do you still get paid the one off
compensation regardless of whether there is an active
line?

MR JOHN STANHOPE:  That is a very good question and it
is part of continuing discussion.

QUESTION:  My third question is you now have 300,000
customers on the new bundled plans.  Can you talk about
what you are seeing in terms of absolute revenue for
those 300,000 customers.  You are probably retaining
customers and prices are coming down.  What does it mean
for absolute revenues for those customers?

MR DAVID THODEY:  Of course that is a good question
because we look at whether the ARPU goes up, down or
sideways.  We are very pleased with the early results in
terms of bundles.  We are seeing ARPU staying pretty
much flat and we are also seeing an uptake the extra
product as well, so early signs are very encouraging and
we are trying to monitor that because the first 300,000,
whether they are early adopters and what the next lot
will be like, but so far very encouraging and of course
you get the longer term contracts you alluded to.

QUESTION:  ARPUs are holding up?

MR DAVID THODEY:  Yes.

MR JOHN STANHOPE:  We are seeing there are some
discounts involved with bundles of course but we are
seeing new services taken by a customer in the bundle
offsetting.

QUESTION:  (Daniel Blair, Southern Cross Equities) I
have two questions, firstly on operating performance by
the business unit.  If you look at the consumer business
it is still at the top line tracking backward in the
second half whereas I think Telstra business and E&G had
turned that corner.  Can you give us a sense of what is
happening there?  It obviously leads into the some of
the plans in FY11 and also what you are seeing perhaps
through July as you brought some of new price plans out.

The second question is a follow up to Richard's.  If 11
is a transition year, can you give us a sense of beyond
that in terms of revenue growth, margins, perhaps free
cash, what is the prize we should expect?

MR DAVID THODEY:  Let me answer the consumer one.  Where

21

is Gordon Ballantyne?  Can you please stand up, Gordon?
We have a new head of consumer, so Gordon who has just
arrived, that's great.  The team are all coming
together.  Consumer is a challenging segment of the
three at the moment.  We continue to see revenue
decline.  However, as you mentioned, the June and July,
we are seeing some early improvement in physicals but it
is a challenging market with such strong price movement.
We have seen enormous price movement of fixed broadband,
mobiles, prepaid and we need to continue to be
competitive.

We have got bundles, T-Box, T-Hub, so good products and
they have some early momentum going through.  It is
going to be a tough year.  PSTN is still declining so
quickly and you have calling rates coming off, six calls
per month, it is significant.  We have aggressive mobile
plans in the market which offsets but also encourages
people to move from fixed to mobile.  We are encouraged
by our competitiveness but we think it is going to be a
tough year and we have hit this inflection point around
PSTN revenues so we have a product mix change, we have
to invest, we have to compete and that is what Gordon is
here to do.

QUESTION:  Just a follow-up to that, June-July
improving, does that mean this PCP you have seen revenue
growth?

MR DAVID THODEY:  We are talking about just physicals at
the moment and because we had such big price movements
we are still waiting to see how the revenues flow
through.  They are very considered in that.  The second
one was forecasts.  Do you want to do forecasts?  No,
let me handle that.  We are making these investments and
we know that it is a bit of a surprise but we have
really gone through this.  We must hold our customer
base and increase it.  We are doing this for future
growth.  The market is very volatile but we are saying
it is future growth but we are not giving you any
specific numbers at this time, but it is a very much a
growth strategy.

MR JOHN STANHOPE:  It is a volatile market.  We have got
NBN coming so there is a fair bit of uncertainty and so
we are deliberately not giving any guidance beyond 2011
for that reason, but this is a reset of the business and
obviously you can work out from the numbers, and Richard
has done the $500 million to $1 billion sum, it is
resetting our EBITDA margins as the product mix changes
and we do expect, as we said, improvement from 2012.

The simplification and how we service the customer will
save us costs and, as I said in my presentation, we have
to make room for this different product mix and that's

22

what this transition year is all about.  We do expect,
as I said, improvement from 2012 and 2013 but we are
just not quantifying it at this stage.

QUESTION:  (Christian Guerra J B Were)  Good morning and
thanks for your time this morning.  Firstly,
congratulations for biting the bullet.  I think it
certainly is the right strategy for the company going
forward.

I would just like to talk about the guidance for FY 11.
You are saying that EBITDA is going to be down because
of higher costs in terms of sales and marketing and
retention and acquisition and that sort of thing, but to
me the flat sales number looks pretty optimistic given
the price reset you flowed through over the last six
months across your three big sort of product areas, your
fixed line, mobiles and wireless broadband.  So if you
could talk about that please.

Secondly, just on the strategy, you have talked about
the challenges facing the company in terms of the PSTN
decline, the fixed to mobile migration, the product
exchange, et cetera.  I remember that we pretty much
heard the same thing back in September 2005.  Since
then, you have invested over $20 billion of capital in
the business, EBITDA has gone from 10.6 billion in 05 to
10.8 in FY10, dividends have declined.  I am just
wondering if you could talk about what message you have
for shareholders there in terms of was the investment
misdirected or is it just basically the tough industry
dynamics which are facing you as the incumbent.

Thirdly, just a question on July trading, which I think
you've touched on briefly, but in terms of subscriber
performance, if you could talk about maybe the
improvement in particular in mobiles and wireless
broadband and what you are seeing on the physical side,
thanks.

MR DAVID THODEY:  Okay.  The first question was around
the guidance on revenue for the full year 11 being
flattish.  We have been trying to take a pretty
considered view on revenue.  Yes, the PSTN decline, if
you look at the numbers for full year 10 PSTN declines
were higher in the second half, but we did see some SIO
reduction in decline in the latter part of the second
half.

Mobiles for the year, firstly post paid stronger,
wireless broadband was strong.  We still have a lot of

23

work to do in prepaid, and if you look at our numbers,
our prepaid mobile performance is not where we need to
do it, and that is why we have put new product into the
market.  The first time we have put cap plans into the
market.

So yes, we are not overly, we are not being too
optimistic in terms of top line growth, we are saying
flattish but we think that is about right at the moment.
So we think that is a fair assessment we are at and we
have done a lot of work to try to get that right.

The second thing about the strategy and past
investments, it is important to understand is we have
got to respond to the market as we see it.  You look
back and you can say - I personally look at the
investments we have made.  They positioned us incredibly
well, with a great IP network and a great wireless
network.  Now, we have got to take advantage of that,
but prices have moved enormously, behaviours have moved
far faster than we expected.  You are right, these
trends are not new but they have accelerated in the last
12 months.  That is why we had to reset things through
the year.

These things happen.  You have got to face them, take
decisions and that is what we are doing.  It is not
always easy, but if you don't do it, you can get to a
worse position.  So we are very clear on this strategy:
We must go after new customers and an improvement in the
business.

In terms of July, John - do you want to handle this?

MR JOHN STANHOPE:  In July we have seen the continuation
of May/June.  May/June has seen increasing fixed
broadband customers, the continuation of strong wireless
broadband, better performance in mobile, PSTN sort of
about the same trajectory, just slightly better with a
small impact of T-Hub and so on.  So that is May/June,
and July is similar to the May/June era.

I might just say something about the flattish as well.
When you have got the continuation of the product
exchange, and we are not assuming a huge turn around in
PSTN here, that does continue to put pressure on your
top line and it is the reason that I said before we need
to take other costs out of the company through the
simplification program that Robert is leading.

So the mix change will continue and it does put the

24

pressure on the top line, and we are not assuming that
there won't be a response from the competition during
the year.  So if we are going out after market share, we
don't expect the competition to sit there and say, "Go
ahead, its fine".  So there will be some more price
pressure.  That is also built into the go forward plan.

Last year we lost share.  This is about stemming the
loss and winning some share.  It is an investment in
that.  It is an investment in variable costs in
particular and it's the dominant part of the cost
increase.

QUESTION:  (Ian Martin RBS) I also have a question on
the guidance in the sense that you have described this
additional cost coming through next year as an
investment, perhaps in the order of $800 million, taking
EBITDA margin down to 40 percent, but you don't seem to
be willing to share that if there's an investment there
has got to be a return there and what the substance of
that return might be.

John, you at least said that you expect an improvement
from 2012.  Can we take that that if the EBITDA margin
resets at say 40 percent, that you will be able to grow
that margin again from then, or, again, is it an
improvement against what an unspecified case might be if
we are in this IP environment where margins keep
sliding?  That is my first question.

Secondly, David, going to the heads of agreement with
NBN Co, you have mentioned the leasing payments comprise
40 to 50 percent of the $9 billion consideration from
NBN, but two of the three components you have mentioned
there, the exchange space and the back haul aren't
access network items.  Are they a substantial part of
that 40 to 50 percent or is it predominantly the duct
space?

MR JOHN STANHOPE:  I will take the attempt to get us to
say more about guidance.  Ian, I have said, as you
played back to me, we expect improvement from 2012.
Improvement means across the board, including EBITDA
margins.

MR DAVID THODEY:  Ian, let me just add a little bit on
guidance.

MR JOHN STANHOPE:  I should say from the reset base.

MR DAVID THODEY:  Ian, we are very conscious about

25

driving improved results and we think that if you can
drive customer acquisition share, that that is going to
flow through, but you have got to spend to get that
increase and we would expect that to improve.  But those
costs, those variable costs are based on us being
successful in the market anyway.  That is the balance we
have got at the moment.

I am just trying to think of the split between the
ducts, exchanges and back haul.  John, do you roughly -
it is primarily ducts.

MR JOHN STANHOPE:  I just can't remember off the top of
my head.

MR DAVID THODEY:  We can get that and give you a rough
indication on that.

MR JOHN STANHOPE:  I will get back to you in a minute.
I will consult with a colleague here.

MR DAVID THODEY:  I will take the seat for the moment,
John.  We will come back to you in a moment.

QUESTION:  (Fraser McLeish RBS). Just a couple of
questions.  First one on mobile margins.  I am just
wondering within your guidance whether you are seeing
mobile margins being able to be maintained, given
everything that has gone on in that space?  That is the
first one.

The second one is just on Sensis.  If you can just give
us a bit of idea of how you are looking in terms of
sales on the book for next year and maybe an update on
how much of Sensis revenues are now on line versus the
print.

MR DAVID THODEY:  I am going to ask Bruce to respond to
the second one because he is here and it is always good
to get him to talk.

On mobile margins, we have been pretty pleased with the
margins, but, yes, we think there is going to be
increased price competition there and of course with the
capped plans.  You may see some slight abatement of
margins, but the first thing is we have got to get the
customers.  I don't want to leave you with the
impression that - we are not going to continue to
differentiate.  We are going to continue to be investing
in faster, greater coverage, so we can differentiate our
product, but we are going to be competitive in terms of

26

pricing.  So there might be some slight abatement of
margins.

MR JOHN STANHOPE:  The mobile margins have gone 30, 34,
35 over the last three years, so it is slowing, but we
will still work on the cost base.

MR DAVID THODEY:  Absolutely.

MR JOHN STANHOPE:  Of mobile services and the unit cost
of wireless broadband and data over mobiles is very
important.  Again, going back to the earlier question
about what the transformation gave us, Next G is a far
more efficient, lower unit cost delivery mechanism than
we had before and it was worth the investment.

MR DAVID THODEY:  42Mbps we will be fourth quarter this
year.  We are increasing coverage.  We are now 2.1
million square kilometres.  It is a very compelling
product.

I do want to just stress on cost as well, we are really
focused on cost.  Robert, John and I and the whole team,
we are going through every bit, because we have got to
get the cost base down, but we have got to change the
way we do it, run the business, because if you don't, it
just comes back in another way.  So we have got to
re-engineer every process to get that cost out so we can
invest in the market and growing.

We are in this transition as we go through the next year
to get that, but I don't know how stronger to say it:
We are looking at every bit; there is no stone will be
left unturned in this company.  So that is a big focus.

Bruce on Sensis.

MR BRUCE AKHURST: On Sensis we had about a five percent
decline in the print product last year.  Our print
market declined by about 18 percent.  We get about 25
million uses of our print products every week.  It is a
very well used product and we have kept our customer
base in tact there.  So we are looking, as the market
improves for the print product and we sell that value
proposition to our customers, to refer recover somewhat.

Our digital product, we get about 20 million users a
month.  25 a week for print; 20 million a month for
digital.  And the mobile print has been an amazing area.
We are getting about three million a month and that is
growing at about 80 percent.  So the mobile side is

27

really taking off.

So we are seeing obviously a transition or proportion
from print to digital increase.  It is about 20 percent
at the moment.

QUESTION:  Digital 20 percent of revenues?

MR BRUCE AKHURST:  Print is about 80.

QUESTION:  You say it can grow next year?

BRUCE:  The market conditions are still pretty choppy
out there in the small business area so I am not
expecting any dramatic changes from what we have seen,
no, not at this stage.

MR DAVID THODEY:  We can answer Ian's question.

MR JOHN STANHOPE:  About two thirds is from duct use and
the other third is from backhaul and exchange access.

QUESTION:  (Bradley Clibborn Credit Suisse) I have three
questions this morning.  Firstly you have talked about
investing for growth but when we look at all of your
product lines across entire business and what is
happening in the industry as a whole revenue growth is
generally slowing so you are spending $500 million to $1
billion to invest in what is a more slowly growing pie.
Can you give us an indication of how you expect to get
the return on the investment?  You have given us product
margins which is good to see.  You pointed out before
you really didn't expect mobile to change that much.  In
which of those divisions can we expect to see margin
decline in FY 11 in line with the guidance reduction?
Thirdly, implicit in those increasing costs for FY 11
what head count reduction and redundancy costs are in
there?

MR DAVID THODEY:  I will take industry growth and John
can take margins so we can give you a bit more colour
and we will talk about productivity initiatives as we go
forward.

Firstly, I have been very specific in saying we are
about customer growth, customer growth, customer growth,
because that is the futures of this business.  We did
see a pick up in mobiles revenue growth in the second
half.  Fixed broadband was back.  PSTN obviously
declined.  IP is growing.  It is a mixed story across
all products.

Our focus is on retaining and growing customers because
that gives us an opportunity in the future to do other

28

things.  That's the growth we are talking about, that's
the improvement we must do now.  If you lose them the
cost of acquisition is too high.  That's the fundamental
strategic issue that we have.  Remember we have been
losing market share.  We have to get it back up to
retain and then we are going to get some more.  That's
what we are doing.  You can see the numbers there.  You
look at Optus's results.  They are still picking up
share in mobiles and I don't like it.  I don't like it.
That's the action we are taking.

Do you want to talk to margins?

MR JOHN STANHOPE:  Obviously PSTN margins will be under
pressure as the revenue comes down and it doesn't have a
lot of associated directly variable costs with it.  As
you see margins and PSTN come down from in the high
sixties over time down to now 58 percent, so they will
continue because there is not a lot of variable costs in
PSTN.

In terms of the DVCs that we will spend next year, a lot
of it is in the mobile space.  You just heard David say
we are not travelling all that well against our
competition in mobiles so that's where we have to focus
a lot of attention and a lot of variable costs will be
associated with that and with the price pressure there
will be some pressure on mobile margins.  IP and data
there will not too much change.  Fixed broadband we will
continue to leverage unit cost decreases and again I
will repeat simplification of the business is about
making room for that sort of margin decrease.

MR DAVID THODEY:  The third one was around productivity,
head count reductions.  We are not talking about head
count numbers but we are working through every part of
the business, as we have done, we have started to look
at spans and layers and Andrea and the team went through
that to simplify the management structure.  We are now
working through every part of the business to see how we
can simplify the process to do it more productively.  We
are going to work through this systematically.
Everything is going to be looked at.  We are not making
head count numbers because it is artificial.  We will do
what is necessary to get this cost base down to make us
competitive faster to market, supporting the people who
really look after customers.  That's what we have to do.
We are on a journey and we are not to stop until it is
done.

QUESTION:  There is an allowance for redundancy costs?

MR DAVID THODEY:  Yes, redundancy costs are specific.

JOHN STANHOPE:  It will be higher than this year.  I

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won't say how much.  Across our labour lines redundancy
will go up.  There will be some volume reduction.  We
are not saying how much.

QUESTION:  (Mark McDonnell BBY)  It is quite right that
you are taking some costs out but overall this guidance
is about an increased cost base and I would like to try
to get a little bit more clarity around that.  The
overarching question is what proportion of the cost
increase that we will see in FY 11 is one off and will
disappear in FY 12 onwards, but then more specifically,
there are a couple of things that you have identified
this morning that are new initiatives.  One is the 24/7
call centre.  I am wondering if any of those call
centres will be offshore and what sort of cost impacts
you are looking at associated with that considerable
expansion in personnel and whether you are paying any
penalty rates associated with the additional hours of
operation, and particularly in respect of that last
point, the other initiative that you have highlighted
this morning, which is weekend callout by technicians,
whether there are any agreements in place with the
employees or their representatives relating to
additional payments associated with those out of normal
business hour working?

MR DAVID THODEY:  John, do you want to take the mix of
one time next year and recurring?  Once you do that I
will come back and talk about call centres.

MR JOHN STANHOPE:  I have just done a quick sum.  I can
say you need to take it for what it is.  About 30 to 35
percent of it is one-off and the rest will be ongoing
DVCs provided we actually win that market share.  The
good news is if we don't then those costs won't be
incurred but that's not really good news because we want
to win the market share.

MR DAVID THODEY:  Do you want to talk about the labour
market change year to year because that is quite an
important point.

MR JOHN STANHOPE:  You mean in the coming year?

MR DAVID THODEY:  Yes.

MR JOHN STANHOPE:  The labour increase has got a couple
of elements to it next year.  One is redundancy increase
but there is a wage increase built in that is 4 percent.
That is approaching $200 million for this company.
There are a couple of elements that will drive the
labour costs in our increase for the year but, as I
said, if you were to say it was a $1 billion increase,
the DVCs element of it is close to 60 percent.

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MR DAVID THODEY:  Mark, both those things you talked
about are very important to us.  Firstly, the weekend
callout rate is pretty much we have covered off over all
our contract negotiations, so that's pretty much in
place.  There is no penalty rates there at all and that
has been built into our plan for that part of the
business.  The 24/7 is quite significant.  In that
situation we continue to look at a mixture of on and
offshore, mainly with our partners but, as you know, or
some of you may not know, if you have a mobile technical
problem you ring us today and we say ring us back on
Monday morning.  I don't think that is very
customer-centric. We are going to invest in that.

Obviously you have to look at how many people you need
at any time of the day and we know pretty much what
those call rates are and we are going to direct the
traffic accordingly.  It is some tens of million of
dollars to do this and it is very important in terms of
serving our customers.

QUESTION:  (Digby Gilmour CLSA) I will keep it to one
question on basic access.  Compensation under the heads
of agreement with the NBN Co rests on the number of
access lines you have connected.  I am trying to get a
handle on whether this NBN Co heads of agreement is
connected, to what extent will you consider cutting
access pricing and/or call charges to try to hang on to
those lines?  Will the extent of the pricing cuts
accelerate from here to maximise the compensation from
NBN Co?

MR JOHN STANHOPE:  It is not something that we are
actively considering.  Obviously we get paid for each
decommissioned line.  There are considerations of the
relativity of ULL and all those sorts of things and
wholesale line rental prices and so we have to consider
all of that in the basic access pricing regime.  It is
not something we are actively considering.  Obviously we
want to keep as many as possible.

MR DAVID THODEY:  A lot of our strategy on the PSTN is
bundling and you will see in our bundles we have
included local calls, national calls and very attractive
packages on international dialling.  That's where we are
going and creating more value for customers.  That's the
best way, with broadband, with the T-Hub, with the T-Box
and that gives customers certainty around their spend
too.  That is a very important part of our strategy.  We
will just keep moving that as we go forward.

QUESTION (Laurent Horrut JP Morgan):  On the
sustainability of the 28 cents, you referred to free
cash flow but obviously your free cash flow is pre
interest costs so the net distributable cash flow in FY

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11 is going to be anything between 3.5 and 4 assuming an
interest cost, so basically you are distributing
everything you are generating.  Is that a safe
distribution policy?

MR JOHN STANHOPE:  I don't know about safe.  By the way,
let's not be pre-emptive of the board's decision on
dividends, but I will repeat what I said.  If it was at
its current level we can do it within franking credit
and so it would be fully franked and within our cash
flows.  Safety, look, you know, if you look at our
financial parameters in any event, so if you mean safety
does it allow you to make other investments, we are well
below our financial parameters criteria, the 55 to 75
net debt and greater than seven times interest cover and
the 1.7 to 2.1 debt servicing parameters, we are below
the low end, so to borrow to invest wouldn't create a
problem for us.

If that's what you mean by safety and being able to take
an acquisitive direction if that was what was necessary
for the company, it wouldn't be an issue.

MR DAVID THODEY:  I think it is fair to say the board,
it is obviously a board decision, but they are very
conscious of our dividend policy.  I think that says it
all.

QUESTION (Sachin Gupta Nomura):  You talked a lot of
about customer growth.  Why aren't you more optimistic
on the revenue outlook for 2011?  The reason I ask is
because back in '06, '07, '08 when Telstra was going
after customers, you did get 4 percent or 5 percent
revenue growth and you did find ways to slow down PSTN
declines as well.

MR DAVID THODEY:  Just the one question?

QUESTION:  I will ask another one if that's okay.

MR DAVID THODEY:  I shouldn't have given you that
opportunity should I?

QUESTION:  I thought we were running out of time.
David, on this transformation once again, given we have
just completed a five year process, isn't there going to
be a period of one to two years where you can actually
extract some benefits of the previous transformation or
are we going to come back to 2012 again and start
rolling another transformation?

DAVID THODEY:  Let me see if I can answer the customer
growth one.  Yes, we want more customers.  It is purely
around cost of acquisition as well as when does the
revenue flow and at what price.  You have to offset

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against your base, seeing you are retaining customers at
a possibly lower yield.  It is the balance there.  If we
could drive faster revenue growth we would be delighted.
At the moment we are saying flatish makes sense for now.

The second one about the transformation and are we going
to be back in two years, the five year transformation
has been great.  It has given us a great platform from
which to go forward.  There are different issues we are
facing now.  From what we can see over the next two or
three years we think we have pretty much characterised
what we need to do.  I think we have a good feel for
what costs we need to take out, how to drive the
productivity and how to compete.  You can never say
never but we think this is a pretty well considered set
of plans and outlook at the moment.

MR JOHN STANHOPE:  Tranformations never end really, and
one thing we haven't talked about, we have talked about
an investment that you will see in an expense line that
is EBITDA impacting.  Part of what Robert is doing in
the simplification of the company is actually some
capital investment too.  It just so happens that we are
doing a similar thing that we did in 2005, we are
prioritising capital.  Simplifying the business requires
some capital but it is still within the 14 percent capex
to sales range.

QUESTION: (Chris Vagg from Citigroup).  Good morning.  A
question around the mobile market dynamics, both
wireless broadband and the rest of the market then.
Obviously in wireless broadband you are doing very well.
I just wondered if you had any comments about any
capacity, what are customers doing in terms of average
download, has anything changed there?

And just in looking at in the remainder of the market
you've lost probably about 150,000 in the half.  You
have made comments about prepaid.  Has that all been
driven by prepaid or would you just comment on some of
the dynamics of your kind of traditional voice mobile
market at the moment?

MR DAVID THODEY:  Let me give you the numbers.  Firstly,
total mobiles up 175,000 in the half; prepaid was
negative, 103,000 there, but as John said, we have a
very strict policy about disconnecting or not counting
prepaid, as he said, so we are negative 103,000; post
paid was up 278,000; wireless broadband total was
329,000 up; wireless broadband prepaid up 106,000;
wireless broadband up 223,000.

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We actually think that it is improving from where it was
in the first half and definitely a lot of that flowed in
the fourth quarter of the financial year.  So that's
pretty encouraging.

What are we seeing in the mobiles market?  Obviously
iPhone 4 came in; supply constrained; lots went.  We
were there; midnight Thursday we were all out there
selling them and cleaned out straight away.

In terms of user behaviour, definitely strong movement
in terms of movement to mobiles.

Minutes of use were up what, John?  Okay, sorry.  I
thought you might have that off the top of your head.

MR JOHN STANHOPE:  I will tell you in a minute.

MR DAVID THODEY:  So we are seeing strong growth there.
In terms of wireless data usage, interestingly, the
average use on an iPhone is around 200 to 400 megabytes
per month, nowhere near what people are actually
acquiring on their cap.  That is an iPhone.

Also we have got very good efficiencies in the network.
Remember we've got the back haul.  When you are looking
at wireless performance, it is the base stations, it is
the spectrum, it is the back haul and how your RANs are
performing and of course speed, but in terms of cost and
how much head room, we are pretty comfortable about the
Next G network we have got good efficiencies, we look at
unit cost on the network a lot and the guys are
engineering it very well.  So at the moment we are
feeling comfortable that we have got plenty of head
room.

MR JOHN STANHOPE:  Voice minutes went up or 4.7 percent
or 519 million.

MR DAVID THODEY:  Okay, so quite a big minutes use.
Remember, when you look at the wireless network, 10
percent of the traffic is or actually less than 10
percent now is voice, 90 percent is all IP packets of
data.  So that is where the growth is, and if you are
profiling any network, it is definitely around the data.

Hope that gives you a bit of colour.

QUESTION:  (Alice Bennett from CBA).  I just have a
question around the T-Hub.  You mentioned that you have

34

60,000 subscribers on that.  When you are looking at
investing into the digital home, I am just wondering if
one of the options you are look at is more heavily
subsidising those boxes and the T-Box to get them into
as many homes as possible.  I just wonder how you are
looking at that strategy.  Is it at all for any revenue
enhancement or is it pure churn reduction?

Following on from that, the PSTN revenue decline of nine
percent in the second half, I am first of all wondering
what you are assuming in your guidance for FY11, whether
we assume that that run rate is maintained, and also how
much of the critical mass do you think you need to see
with products like the T-Hub before you can see that
churn reduction have an effect on your PSTN revenues?

MR DAVID THODEY:  Let me just take you through.  The
60,000 was T-Hub and T-Box units sold and it is roughly
42,000 T-Hub, 17,000 T-Box.  Why are we doing it?  It is
definitely about customer retention; it is definitely
also about acquisition of new customers.  Would we use
subsidy?  Well, I think you have seen from our
willingness to invest in DVCs, we will be considering
anything that is going to drive a good return for us.
We are not announcing that but we will look at all
options as we go forward.

In terms of the PSTN decline, second half negative nine
percent, we can't give you the exact numbers, but we are
assuming similar-ish.  John, what would you--

MR JOHN STANHOPE:  Over a whole year we are expecting
some improvement, but not a huge improvement.

MR DAVID THODEY:  Remember, a lot of this, as John
showed you, it is a mixture of the changing access SIOs
and usage, and that is the big one.  Usage has been
high, but I think we have got some good strategies there
as we bundle up the plans and just early signs of
improvement, but it is just too early to declare too
much on that.

QUESTION:  (Sameer Chopra Merrill Lynch)  Two questions.
One on dividends.  So the franking credit balance is
running at about minus 138 million.  I wanted to
understand what is more important for the company, a
fully franked dividend or would you be happy to cut the
dividend because the franking credit balance is running
negative and likely to accelerate into next year?  That
is kind of one.

35

The second one is capex and D and A, capex now appears
to have stabilised at about 14 percent of sales.  D and
A is higher.  I am wondering at what stage do you expect
the D and A to match with capex?

MR JOHN STANHOPE:  On the dividend, the 28 cents, we are
all making assumptions about 28 cents, again I want to
not be pre-emptive about the board.  The franking
credit, to answer your question, we would prefer to
fully frank dividend, and this is a board that is not
inclined to drop dividends, right, but sometimes you
have to make those decisions.  I am trying not to be too
pre-emptive here, but fundamentally, what David said
before is the board is very focused on that return to
shareholders and it is not quite right to assume that
the franking credit will get worse.  The facts of life
is we are balancing it at a level where we don't incur
any taxation penalties and we pay sufficient tax to
fully frank.  That is the balancing act that occurs and
so that really reflects in my first statement:  Our
objective is to fully frank.

The second question was about capex to sales and the 14
percent.  I said in the medium term and excluding any
spectrum payments.  Spectrum can come up at any time,
depending when governments decide to go for auctions and
so on.  Depreciation will go up in this year again
slightly.  So in the medium term we are expecting capex
to sales to remain about 14 percent.  We are expecting
some growth in the future years.  So the absolute capex
will go up a bit.

D and A is going to stay pretty close to where it is
over the next few years.  Capex is what, three and a
half.  It will be a fair while before there is a
cross-over of capex and D and A.

QUESTION:  (Andrew Levy Macquarie) There is a lot in the
structure of the business now that revolves around
customer service.  Obviously the executive level is
getting measured quite critically by it and it looks
like it is going to run a lot deeper through the
company.

MR DAVID THODEY:  All the way through the company.

QUESTION:  I was just wondering if you could talk to (a)
how it is being measured at Telstra, but (b) how the
company is looking at what has happened historically
perhaps has linked that to performance going forward for
shareholders obviously.

36

MR DAVID THODEY:  Yes, and a really good question,
because does improved customer service really deliver
bottom line results?  We have looked at it and we are
absolutely convinced that there is a very strong
correlation, especially for an incumbent.  If you are an
attacker, a challenger, there would be a different set
of parameters.

It is very interesting what happens.  If you give better
customer service, besides you get less complaints and
driving costs and a whole lot of things into the
business, so that is one side of it, customers
propensity to change does drop, and that is a very
important thing.

The second thing is if you have a good customer
experience with a provider, your propensity to buy other
products goes up enormously, because if you are happy
with the service you get, you say, well, look if they
are offering an IP TV or they are offer other products,
your propensity to take three and four products is
enormously high.  They are the things that we are
driving through and very important.

So we see a direct correlation between customer
satisfaction and improved results.  It is not just to
make us feel good, okay.  That is number one.

Number two, in terms of how we measure customer
satisfaction, unlike the financial services industry
where there is external surveys, we run a very strict
survey internally, independent of the business units, so
it is run within corporate, and it is a survey that
covers consumer, business and enterprise, including
wholesale customers and we run it every month and it is
an overall customer satisfaction score for the service
you received from Telstra in the prior three months and
we measure this.

It is in the short-term incentive for every executive.
I have just got to say except me, but that doesn't
change because I am very passionate about it, and every
person who is full-time staff across the business.  Of
course, the staff don't get it as part of their
incentive.  It is actually just an accelerator for them.

It is run every month.  The guys look at every customer
that comes in who we follow-up.  It is a very rigorous
process.

37

We do also look at net promoter score, but that is early
days on that.  We are just slowly starting to move
through that.  The enterprise market is probably more
sophisticated in that area and we are just starting to
move that through the consumer business, but it is a
very rigorous program.

QUESTION:  So the reason that it is if the STIs is
because it is a leading indicator to performance--

MR DAVID THODEY:  Absolutely, and it is a very big
strategic decision.  It is a significant part of the
STI, not a small part.  It is not just 10 percent or so.
It is a big part, and that is because we have said this
is our number one objective and we are really going to
go after it and our success will be dependent on how
well we do it and then hopefully the business revenue
and profit flows from there.

QUESTION:  (Mark McDonnell BBY)   Thank you.  I would
like to come back to the carve-out on your capex
guidance relating to the non-inclusion of future radio
frequency acquisitions.  I shouldn't just say future;
actually a lot of it is rollover, and given that on past
experience the magnitude of those outlays can be an
upfront cash consideration of $1 to $2 billion and that
that can then recur, the different tranches of spectrum
over different years, its implications for your dividend
policy and your free cash flow position are of course
quite material.

Given all that, I am wondering if you could outline your
attitude to the funding of that very considerable carve-
out from your capex guidance and in particular whether
you would debt fund the payment to the government for
additional spectrum and if you did debt fund it, would
you repay that debt within the term of the licence?

MR JOHN STANHOPE:  Some of those licences are per annum
payments.  So new spectrum, for example, which may come
on the market will likely be, I am not sure yet, but
likely be option.  Some of it we pay per annum now.  It
is embedded in the expense base of the company to pay an
annual fee for spectrum licences.

Depending on how much it is, of course, we would more
than likely debt fund it if we didn't have sufficient
cash flow.  It depends a little bit on when it occurs,
so you see our cash guidance for this year but, as I
have said, we expect all parameters to improve from 2012
onwards, so it depends on how much it is.  If it
requires some debt funding it is unlikely we would put

38

the dividend at risk to fund spectrum, so we would debt
fund it.

The period of time would depend on the whole debt
maturity profile.  I aim for a four to six year average
maturity profile, so I would fit it into that maturity
profile target.

MR BEN SPINCER:  We will bring this briefing to a close
now.  I will hand back to David for any final words.

MR DAVID THODEY:  Thanks Ben.  Thank you for your time
this morning.  As you can see, we have tidied up 2010
but we are going forward in terms of looking at how we
can move this business forward in terms of growth, in
terms of improving response, but 2011 is going to be an
investment year, a transition year.  I want to stress
the importance of the cost focus.  We have a lot of work
to do there.  It is off and running and we feel
comfortable about that.  We are about customer growth,
acquiring customers and retaining customers and we are
off and doing it.  Thanks very much for your time and we
look forward to catching up with some of you.

END OF BRIEFING

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