TELSTRA GROUP LIMITED — Call Transcript 2010

Jun 21, 2010

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22 June 2010

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Telstra NBN conference call - transcript

I attach a copy of the Telstra NBN conference call transcript for release to the market.

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Carmel Mulhern Company Secretary

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

Telstra Conference Call 21 June 2010

Start of Transcript

Ben Spincer: Good morning everyone. This is Ben Spincer from Telstra Investor Relations. I would like to welcome you this morning to this call on yesterday’s announcement regarding NBN. I have with me John Stanhope and David Thodey. I will hand over to David now who will give some brief opening comments. We will then take some questions from the analysts on the call before I will hand over to Andrew Butcher who will take some questions from the media. Over to David.

David Thodey: Yes good morning. As you know yesterday we signed a non-binding financial heads agreement with NBN Co to participate in the National Broadband Network.

The value of this transaction is a post-tax net present value of approximately $11 billion. Now I want to stress, over the last year of the very complex negotiations we have really had two objectives in mind. One has been the best interests of our shareholders and secondly, which is a related issue, is to get regulatory certainty for this company to allow us to compete in a more unfettered way and allow this company to grow the way we want to do it.

We believe that this is an important milestone towards getting to that position. But I want to stress it’s only a milestone because it’s a non-binding financial heads agreement that sets us on a road to get to a definitive agreement over the next period.

I can’t stress enough just how complex this set of negotiations has been, because we’ve had to look at commercial issues, what the future of the business would be, what the structure of the industry would be and what would create value for our shareholders.

But we have got to this position and we’re pleased to have done so because it does give us clarity and that’s what this company needs.

It is a step closer to this mutually acceptable outcome and we, after working with the Board all last week, we believe that it definitely is going to give us something that’s in the best interests of our shareholders.

We’re going to continue to work through, working all of the regulatory and operating environment issues we need to do and of course you know that this is subject to shareholder approval, but now we’ve got to get through all the detail to be able to take something to our shareholders so they can then make the decision. We have, so the team will stay in place as we work through that.

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I’m going to pass to John in a moment because John’s got to leave at about five past nine and I’m going to give him an opportunity to just take you through some of the more specifics of the transaction and we can take questions.

But before I do so, I want to stress what we are doing as a company. Obviously the NBN environment changes the competitive landscape in which we’re going to be operating over the next, you know, eight to 10 years. We are absolutely focused on a few things.

Firstly, we’ve got to grow our share in the market. We’ve got to simplify this business to take out the unnecessary complexity and we’re going to continue now to build and invest in building new products and services to work in an NBN world and this is critically important. We have already started on that process and looking at new revenue streams to allow this company to grow in the way that we’ve always wanted it to do.

Let me hand over to John now to just take you through some of the details of the transaction; then we can take Q&A.

John Stanhope: Okay, thank you David and as David has said a lot of work has been done to get to a position where we believe, or that we believe is in the best interests of this company and its shareholders and as David said, we still have some work to do and we’ll ultimately take this to the shareholders.

I won’t keep you long. I know you’ve probably got lots of questions, but I just elaborate a little bit. Certainty over NBN, the regulation and legislation is obviously the crucial component of any final deal that we do take to shareholders.

We’ve always recognised how important that is to you as investors, so let me summarise the five key commitments we have made that will lead to the consideration payments we will receive.

In high-level terms, in return for payment we have agreed to progressively migrate our voice and broadband services from the copper and cable networks to the NBN as it is rolled out. We have agreed to progressively decommission our copper network and our cable broadband service as that migration occurs. And we have agreed to provide NBN Co with the right to use Telstra’s infrastructure such as ducts, pits and exchange space and backhaul transmission.

Clearly this migration is a process that will take many years as the NBN is rolled out, so the headline number in the financial heads of agreement is a post-tax NPV we have calculated over that progressive period.

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For the most part, payment will be received as our copper network is decommissioned over the next say five to 10 years, and then as NBN accesses our passive infrastructure, over a more extended period. So as long as they use that infrastructure they will continue to pay for its use.

I also want to reiterate what I have said to many of you before, that there really are four limbs to this deal. The first limb is conditions precedent - so that’s things like having some of the things that are in the legislation that aren’t good for Telstra removed. So that’s the sort of things that are contained in the condition precedent.

The second limb is the fair consideration for cooperating with NBN Co and as I said, we believe we have calculated a fair value consideration for the company and our shareholders and of course we will give details of that to our shareholders as we go forward.

The third limb is the infrastructure, so that was negotiating the volumes of infrastructure, what NBN Co would pay for it, and a part of that negotiation is the certainty around us making it available and them buying it. So that’s the third leg of the negotiation. And those two - two and three are together what adds to the post-tax fair value of around $11 billion.

And the fourth limb of the negotiation is conditions subsequent and I have mentioned to you before that that’s primarily that the ACCC signs up on the deal as well; and there’s still work to do there.

What this financial heads of agreement fundamentally has done has given us the foundation for the definitive agreements going forward and so we have in-principle agreements to, well we have agreements to principles that will enable us to do that.

Hopefully that makes it clear to you that while we’ve taken one very significant step today there is still much work to be done over the coming months before we have a final agreement. It also highlights why we will not be able to actually answer many of the detailed questions I’m sure you have on financial specifics, but we have some certainty around the total consideration and we will unfortunately not be able to provide dollar for dollar today as some of them, in specific terms, are dependent on definitive discussions. Ben Spincer: Thanks John and David as well. We’re now ready to take some questions from the analysts. Can I ask you out of respect for your peers to try and limit yourself to one question and then rejoin the queue. I’m sure there are a lot of you to get through.

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I understand the first question will be from Sameer Chopra. Welcome back Sameer.

Sameer Chopra: (Merrill Lynch, Analyst) Thanks guys. Sameer Chopra from Merrill Lynch. My first question I suppose is, are there any tax benefits from the copper asset write-down which is a part of the $11 billion figure? John?

John Stanhope: Well there’s likely - no we have not included those in the calculation, but there will likely be accelerated depreciation of copper. The total taxation arrangements are still being discussed.

Brad Clibborn: (Credit Suisse, Analyst) Thank you. Question is for John. Can you just give us some indication as to your 11 million NPV. Is that purely a discounted evaluation of the payments you will receive or does that include costs that you would incur in receiving those payments, for example upgrades that might be needed to some of the passive infrastructure?

John Stanhope: It’s a calculation of the total consideration. The total consideration involves some cash payments but it also involves some cost [inaudible] and the NPV calculation is at our WACC, not theirs.

Fraser McLeish: (RBS, Analyst) Thanks. I was just wondering can you give us a rough idea of how the $9 billion splits between sort of the competition for migrating the customers and for the access to your infrastructure. Just because there’s obviously going to be different timings of those two cash flows.

John Stanhope: That’s the sort of detail we’re not going to go into. NBN has said that their portion of the nine, of the 11 is nine, but we’re not going into the detail of the breakdown of that nine.

Christian Guerra: (Goldman Sachs JBWere, Analyst) Good morning and congratulations on reaching an agreement, even though it’s preliminary. John and David, my question is just on the use of the proceeds, I mean you have talked in your announcement, you said that payments will be made progressively to Telstra over time. Can you maybe talk about how you’re thinking about the use of the proceeds in terms of sort of market share, war chest versus returns to shareholders? And could you also talk about what this means for your $6 billion free cash flow target for 2010? I know that you have said numerous times in the past that you really needed regulatory certainty before you made the decision to pass that onto shareholders. Does this give you that certainty that you’ve been looking for?

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John Stanhope: Christian I would say we’re not quite there yet. We haven’t got definitive agreements and so the level of certainty around what we do with the $6 billion is not there yet. And with respect, so you know, capital management decisions really can’t be made with NBN certainty until we do get to the end point really where we’ve got shareholder approval to the agreement. With respect to the payments that are progressive, obviously our cash positions would be, will be far better than if we were competing.

David Thodey: And maybe I could just add one thing to that Christian - it was a key consideration as we have worked this process, is having enough cash to do the things we need to do and give us options. And this milestone has really given us the optionality we need to be able to move whichever way we need to.

Sachin Gupta: (Nomura, Analyst) Yes, thanks very much. David, in your opening remarks you mentioned that you were seeking regulatory certainty. Can you just talk about what are some of the issues that have been addressed?

David Thodey: Well as you know with regulatory certainty for us it’s been getting just an environment where we can have absolute certainty or as much certainty that we’re not going to have things imposed on us.

Now, you know, the USO has obviously been a big one for us and you have already seen a policy statement from the government around USO where they are setting up a USO company, and that’s very important to us.

In terms of pricing stability is a critical important area for us and we’ve got some comfort level about that in the future but still more work to be done. And of course spectrum is the one that we are, we’re very concerned about and we have got some strong level of comfort on that one as well. So they are the three key things that we have been working on.

Mark McDonnell: (BBY, Analyst) Gentlemen I’m just wondering in your NPV of $11 billion if you have included the costs to Telstra of using the NBN and in that regard whether the prices for using it have been settled?

John Stanhope: Mark, John Stanhope here, certainly we have factored in the cost of access to the NBN and we have assumed a price - which I am not going to tell you what that is - but we have a level of confidence around that price. Of course NBN’s price is subject to ACCC approval, which I don’t think they have yet.

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Richard Eary: (UBS, Analyst) Morning John, David. Congratulations. Just in terms of actually, you’ve talked obviously about cash inflows, could you give us a feel in terms of when you would expect inflows to peak and any sort of magnitude in terms of range?

John Stanhope: Well all I will say is it’s going to be some time. I mean, next fiscal year there’s not going to be a huge activity in the P&L or the balance sheet, so yes, it’s going to take them at least three years to get to a position of substance with their fibre rollout, so it will really start to be significant in three years time.

David Thodey: Yes, I mean they have got the eight year rollout and cash flows as they roll out and we migrate, so it’s, I think their peak must be, you know, years four and five, six probably.

John Stanhope: They will peak at year eight I guess.

David Thodey: Yes, well depending how quick they are. Yes.

Laurent Horrut: (JPMorgan, Analyst) Good morning David and good morning John. Follow up for me actually on accelerated D&A, John you mentioned that you probably will have to accelerate the write-down of [unclear]. And first of all, have you agreed to set that line in terms of when you have to shutdown copper by? And secondly, if you could give any sort of ideas to whether you’re going to start accelerating the D&A as early as FY11 and some idea of quantum if possible, that would be great.

John Stanhope: Yes, look, the decommissioning of copper will be progressive and so it’s going to happen over, as they build out and you know it’s a take eight, 10 years to build out that will be the progressive decommissioning and in fact when NBN Co is in a fibre service area, even then there will be a period of time where the customers have to decide what they want to do. So, you know, so there is, so it’s stretched out over a period of time is what I’m saying to you.

Our copper in our books is not a large number anyway. It’s been written down a fair way, so if we have to accelerate it will, it won’t have a large impact on the P&L in any event.

Mark Blackwell: (Morgan Stanley, Analyst) Hi guys. There was some talk of NBN being a retailer of certain products potentially to large scale customers like government. Has that been taken off the table or is that still on the table?

David Thodey: Yes we have got a degree of comfort that we, they will not be in the retail side.

John Stanhope: And the Prime Minister again yesterday, in his announcement…

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David Thodey: Yes.

John Stanhope: …reconfirmed NBN as a wholesale provider.

David Thodey: He did didn’t he.

Andrew Levy: (Macquarie, Analyst) Thanks. Congratulations guys. I was just wondering if you could give some clarity on any CAPEX or OPEX avoidance that would come in the context of shutting down the copper network over time. And also just maybe if you could talk to the sensitivity of how the rollout would proceed in terms of how that affects Telstra as an inside out rollout and outside in and if that changed from the NBN’s perspective whether that would change your requirements.

David Thodey: John, handle that one.

John Stanhope: Andrew, yes we have factored in some lower CAPEX on the CAN, but as you probably know, we’re not spending a lot of money on the copper network now. Of course we’re repairing or replacing and making sure we’re providing service to our customers, but nevertheless there will be some savings and it is factored into our financial modelling.

I wasn’t too sure about what you meant by inside out and outside in and I don’t know whether you are able to come back on and ask me again.

Ben Spincer: Operator, can we open Andrew’s line up again please, for clarification? Operator: If I can ask Andrew to press star one again to re-register.

Ben Spincer: Andrew we will come back to that question as soon as we can.

Sameer Chopra: (Merrill Lynch, Analyst) Hi, just had, just going back to those conditions precedent that you spoke about John - is operational separation now off the table, and what aspects of the deal need to be approved by the ACCC?

John Stanhope: Well, we already have operational separation. I think you mean functional separation Sameer, but that’s okay.

It’s not entirely off the table. It may be a condition necessary later on, but in this current financial heads of agreement it is not one of the principle points. So I will just leave it at that I think.

Brad Clibborn: (Credit Suisse, Analyst) What are the key risks that would actually prevent you getting to a financial heads of agreement, you know, outside of the ACCC approvals, but in terms of actually just getting the deal done?

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David Thodey: It is primarily around these clarity on the ACCC regulatory things. We’ve just got to go through it, they’ve got to go through the process. We know very clearly what we have asked for and what we need but because the government was unable to confirm that the ACCC have got to go through their own process to get that.

There is just, it’s just the detailed work of working up the long form agreements that just take time, in about how the transition will go, how the remuneration will flow, et cetera. They are the big ones. John, is there anything else? Yes, they are the two biggies, but we have - I should probably say, I mean, this is not a, it’s not a two-page financial heads of agreement. There is a lot of detail in it because we wanted to make sure that it was something substantial that allowed us to move forward.

And so in one way just a heads of agreement, it’s probably not a good description of it, but the non-binding is very important, but there is a lot of detail that sets up well to get into the detail, you know, long form agreement.

Tony Wilson: (Evans & Partners, Analyst) Yes, good morning. John, you mentioned that the $11 billion includes an assumed price for use of NBN. Can you just explain the building blocks of how you got to that assumed price and was there a negotiation with the NBN in getting to that figure?

John Stanhope: There wasn't a negotiation. We have had to accept what NBN thinks might be a price range and we've had to also calculate on the range. A mid-point of that range is actually how you get to a - it is part of why we say approximately $11 billion posttax. That is an element that could move but we have some commitments about a price not outside the range, provided the ACCC agree with NBN's undertaking on price.

Christian Guerra: (Goldman Sachs JBWere, Analyst) Good morning. I have just got a question on the point you made earlier around customers. I think you said, John, customers will have a choice as to whether or not they choose NBN. So are you saying that effectively the NBN will be rolled out across different geographies and jurisdictions, but the copper won't be actually decommissioned until the actual household or premise actually makes the choice to move from copper or HFC across to the NBN?

John Stanhope: Christian, practically what will happen is the fibre will be put into an area and it will be switched on and then customers will be able to choose their retail service provider. They can choose Telstra or somebody else will knock on the door and they can choose a number of retail service providers. That's the concept of a structural wholesale separation that's open access and that's what it will be. There will be a period of time

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when customers can make that choice before we have to decommission the copper or for that matter the cable broadband customers.

Alice Bennett: (CBA, Analyst) I am just wondering if you could give us an idea of how long the lease timeframe is for the infrastructure component of the deal? Also just is there any clarification on the build profile of the NBN, whether they'll be starting off in regional areas or metro and the likes? Very lastly if I can, are there are any volume discounts factored into your pricing assumptions within your deal numbers?

John Stanhope: Well first of all, let me deal with the last. We will get access to the NBN on the same equivalent basis as everybody else and whatever that price is, that price will be. With respect to regional or whatever, that's not a question we can answer. NBN Co will decide their rollout plan.

Ben Spincer: The first one was how long is the lease timeframe?

John Stanhope: Oh, how long is the lease timeframe? That will be finally settled in the definitive agreements, but as you can imagine infrastructure will all be quite a length - a long time.

Mark Blackwell: (Morgan Stanley, Analyst) Yes, just on this migration question again. As customers are connected will they - I mean, did you go into some detail about how that process will - how customers will be informed of that and how they'll be informed of their variability to choose? Or is it just simply that they'll be connected and Telstra will send them a letter saying look, you're our customer, you've been connected, congratulations, you've got the highest speeds? Will customers be for example presented with a web page saying here are all your retail service providers, please choose one or will it be something more…?

John Stanhope: You're really getting into some marketing details here and be assured we'll have some smart marketing going on as I'm sure a lot of retail service providers, so I wouldn't want to go into that level of detail. But I think we can say that the process of how the decommissioning or the transition of customers from a technical perspective has been gone through in significant detail, but the actual how the retail service providers compete as the people - as the fibre's rolled out, that's a separate issue.

Mark McDonald: (BBY, Analyst) Yes, just regarding the construction. I'm wondering if Telstra has agreed to provide linesman technician or other personnel. NBN Co currently is a few hundred people who are mostly head office types. I'm just wondering whether Telstra's able to assist and receive payment for the construction part?

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John Stanhope: Mark, within this financial heads of agreement there is no such

arrangement but of course we have told NBN Co that we remain available to construct if they so desire. I'm sure NBN Co has obligations to tender and so on and if they tender out construction we will be an interested party.

Mark McDonald: (BBY, Analyst) Right, and that's not included in the $11b?

John Stanhope: No, it's not included. We have not assumed that we will win any construction work in the financial modelling.

Ben Spincer: Operator, we'll make this the last question from the analysts before John has to leave. Thank you.

Richard Eary: (UBS, Analyst) Thanks. Just so I can get clarity on this, in terms of actually the payment you receive from NBN Co for the subscribers, is this just a payment for the disconnection? So regardless of whether you sign up a new customer, you get a payment from NBN from disconnecting it regardless of whether you resign to the network?

John Stanhope: Correct, absolutely. So as the customer is switched off and goes across to fibre, we get a payment. Thank you everyone. Obviously there will be further opportunities to answer your questions in coming weeks, months. I will now hand over to Andrew Butcher to manage some questions from the media.

Andrew Butcher: We only have David here now to answer questions - I shouldn't say only - please try and limit your question to one reasonably brief question and we'll get through as many as we can in the time we've got. Operator, let's get started.

Operator: The question from the media comes from the ABC, Peter Ryan. Go ahead.

Peter Ryan: (ABC, Journalist) Good morning David. Earlier this year the Government and Senator Conroy had held at the threat that Telstra might be blocked from bidding from the Next Generation Wireless Spectrum. Could you speak a little bit about that and whether you are satisfied with the agreement that Telstra will be able to participate, in getting hold of some of that spectrum?

David Thodey: Peter, in going through the consideration we've considered every factor and what is in the best interests of the company and the shareholder. Yes, we do feel at this time for a non-binding financial heads of agreement that we have enough confidence that we will not be constrained in the future.

Lucy Battersby: (The Age, Journalist) Good morning. I was wondering what happens to the IPND in this agreement and will Sensis still be able to get the phone numbers that it

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needs from the IPND? Also, has Telstra looked into whether or not it will recycle the copper in the network as it is decommissioned and how much money it could make from that?

David Thodey: Firstly, in the IPND, there is still more work to be done to work through the details but we feel reasonably comfortable that we can meet our requirements for Sensis. On the copper decommissioning and value that has not been included in any of our value calculations at the moment.

Ben Grubb: (ZDNet, Journalist) Hi David. When do you expect a definitive deal to be done? Obviously the opposition says they're going to scrap it. So I guess is it going to happen before or after the election?

David Thodey: There's still a significant amount of work to be done. We have indicated that we should be in a position by early 2011 to take something formally to shareholders, so that's the period we're talking to at the moment. I'm not privy to when the elections will be held.

John Durie: (The Australian, Journalist) David, for the last 18 years we've been hearing from Telstra chief executives that structural separation would be the end of the world as we know it. You seem remarkably calm about the prospect and indeed excited about it. Could you explain what the difference is please?

David Thodey: John, look, I can only look at the business in light of the current environment in which I'm faced and that's what the board and I have done and to try to maximise the interest of our shareholders. I have really no more comment to say other than that. I think that this is a fair outcome that allows us to go forward to look at all the details now before we could take something to shareholders. That's my responsibility and that's what I am doing.

Brett Winterford: (iTNews, Journalist) Hi David, would Telstra retain the right under this agreement to lease its pits [unclear] to other private companies other than NBN Co? David Thodey: In effect yes if there's space.

Andrew Butcher: Next thanks operator.

Ben Butler: (Herald Sun, Journalist) The question is - I'm surprised analysts didn't answer this one actually. A couple of sort of things around costs. The money you're getting [is set to] net present value of $9 billion in the two parts there. Is that front loaded or is that going to be indexed the [unclear] you get and what is that in nominal dollars?

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Secondly, how much have you sunk into this process already? Do you have a message for the Opposition in terms of that?

David Thodey: Okay Ben, I'll see if I can get through all those. Firstly, it's a post tax NPV value of $11 billion. There's $2 billion from the Government and $9 billion from NBN Co. This, as we said, is a progressive payment over the first bit which was the decommissioning of the network and the customers and then the leasing of infrastructure over a longer period for NBN Co.

The third one, do I have a message for the Opposition? Look we deal with the government of the day. We deal with what's in front of us. We're pragmatic, we're business people, I have no comment for any political party.

Tony Boyd: (Australian Financial Review, Journalist) Thank you David. Could you just tell us what was the circuit breaker to getting this deal done? I believe the Telstra board was in Canberra most of last week and I saw that obviously Catherine Livingston is cited by the Prime Minister as being a key participant. Can you just give us some clarity about that?

David Thodey: Look there isn't a lot of colour to give. We're scheduled to have the board meeting in Canberra for, gee, nine months and it was set a year ago. Yes, I think it gave us an opportunity to have further discussions, but I mean we've been with them for a year. We were, as always, we said we're working to the Government's agenda. Our position has not changed for six or seven months and what we required to get fair consideration for our shareholders, that's the only thing that I can talk to and we were driven by the Government's schedule.

Mitchell Bingemann: (The Australian, Journalist) Morning David. Can you please outline the specific amendments that Telstra will seek to be added to the Telstra Reform Bill and can you also give us an idea of how many staff are likely to leave the business as a result of the $100 million payment to retrain and redeploy staff?

David Thodey: Well first thing is $100 million; the $100 million is the intention of retraining staff so we don't lose them. But that is obviously dependent on the future structure of the business and it's difficult to speculate on that at the time. The first question was around - well look, actually it's part A, part B. Part B is the one that now will become probably less of a necessity, but there are a number of amendments that we think would be advisable in part A and look we'll be happy to take you through that, Mitchell, separately and I can get someone to give you a call. But we've been quite open about that.

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Ari Sharp: (The Age, Journalist) Good morning David, good morning Andrew. Two quick questions: firstly I think John mentioned earlier that you'd received some assurance from the Government on the issue of whether NBN Co would be entering into the retail space, I'd be curious to hear a little bit more about that.

Secondly, the financial heads agreement obviously allows Telstra to break off the deal if its shareholders vote against it. Does the Government under the deal have the right to walk away as well unilaterally?

David Thodey: Right, well look in any non binding financial heads of agreement either side can determine not to proceed if something significant changes. But look I think for both - for two I'll say institutions like Telstra and the Government to enter into a financial heads agreement, we do not do that lightly and we do this with all the responsibilities we have upon us in running a publically listed company. So it is our intent to move to finality on this, but based on a number of things that need to be worked through that we had agreed comfort on.

Now in terms of the comfort on wholesale versus resale, yes, we have got comfort that it is not the intent of NBN Co to go in at the retail level and that is a condition precedent and if that was to change, we would not, in all likelihood proceed, but that would depend on all the other factors that would be together. But that is a condition precedent and we have enough comfort at this time to believe that's the direction of the Government.

Ry Crozier: (iTNews, Journalist) Good morning David and Andrew, I just wondered what happened to the USO? NBN Co's obviously been named as the provider of last resort into greenfield estates, but under the Heads of Agreement, it is talked about whether Telstra will potentially reverse its copper pull out of new housing estates as a new interim measure, or I wondered how it was provided USO will work as an interim.

David Thodey: Okay, well look, there's many different aspects to the USO, you've just gone for greenfield sites, but yes, the USO was a very important aspect of the regulatory certainly we needed going forward because as you would understand, emergency services, 000 et cetera is included in that. Also our requirement to provide services to homes throughout Australia, so there's a lot of consideration about that.

In terms of greenfields, it was important to get clarity on the greenfields at this time. As you know in the interim it's been very unclear about who was doing what and of course us putting copper into greenfield sites at the moment didn't seem like a good investment. So they have declared under USO that NBN will be the provider of last resort for the fibre and

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we're now working through with them just what that will mean in the interim as we determine how that will happen, where new greenfields development is undertaken, there may be some opportunity for us to do some things, but we'll be working in collusion with NBN Co.

James Hutchinson: (Computer World Australia, Journalist) Hi David, just in regards to decommissioning copper, you said that it'll happen as the customer transitions over to the fibre, but will you decommission the copper on a house-by-house basis, or once an area becomes completely under the NBN?

David Thodey: Yeah, look there's a lot of detail there. Obviously it's got to be at the exchange level but we'll work through - we'll be driven by NBN Co, but you work at a district, you then have got to get pretty much every across and then you can really start the decommissioning process, because there's so much tied up in the actual exchange itself and that's been part of the [unclear] working through [unclear] can practically do these things and make sure that the customer gets a good experience. So that's the way it will work and it's quite an involved process.

David Richards: (4Square Media, Journalist) Morning David. If we go to your opening statement and you spoke about new services and new revenue streams for Telstra. One of those is obviously turning Telstra into being a major media company selling Bigpond movies, your 50% share holding in Foxtel. Do you see the ACCC taking a look at the services and the market penetration of those services in Australia at the combination of your existing wireless network and your new fibre network?

David Thodey: Well look I'm sure the ACCC will continue to look at having a competitive market. I don’t - I think they're concern's always been the vertical integration and any competitive advantage a company may have by bringing media and infrastructure. I'm comfortable that we will have a way ahead. We will be doing a lot of work in a number of different areas. We're pleased to see the T-Box is in the market as of last week and seems to have gone pretty well over the weekend, so we're looking forward to being involved in a number of different parts of content, video, et cetera.

John Durie: (The Australian, Journalist) Hi David, another question if I could. Firstly, as a customer, is it going to cost me - as an existing Telstra customer - is it going to cost me more when you get on to the - when you connect, wire connected through to NBN? Just if I could ask that first please?

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David Thodey: Okay, look the answer to that is subject to the NBN pricing structure and until they disclose that, I'm really unable to answer that question John. You can ask Ben. Renai LeMay: (Delimiter, Journalist) Hi David. How do you characterise the risks that Telstra customers will take advantage of the move to NBN just [to other providers]?

David Thodey: How do I characterise the risk of customers taking advantage of NBN? Well look that's - I'm not sure I'm able to answer that. I think that one of the key things in our negotiations has been that Telstra's not dependent on the success or otherwise of NBN Co. We're a commercial operation working in a competitive market and so as we work through this, we needed to make sure that we have the flexibility to do what we need to do as a company. So I wouldn’t - that risk I think resides with NBN Co, not with Telstra.

John Durie: (The Australian, Journalist) Okay, well I'll ask my two questions. Firstly, I just wondered David for my second question from my last question, based on your assumption, I just wondered how the customer looks. Secondly, can you tell me how much the USO costs Telstra right now please?

David Thodey: As I said, to answer that first one John, because until that information is made public, it's just difficult. USO costs today are, oh gee, you may have caught me there John. We'll give you a call back. I just don’t know that off the top of my head and it depends what your [unclear] 000, or the emergency services as well as just the USO obligation, I just haven't got that number in front of me. But can I ring you - we'll give you a call on that one?

John Durie: (The Australian, Journalist) Sure, thank you.

Stuart Corner: (iTWire, Journalist) Good morning David. Can you tell us a bit more as to how the transition of customers to the NBN will take place? I mean on the old copper there's Telstra customers, there's service providers who are reselling services on the copper and there's people who have got [unclear] exchanges. They're all [inaudible] going to have to be cut over. Now wouldn't it be simply that the end user will be told, well your service is moving onto the fibre, by this service provider and unless they say I want to change my service provider, then that end user would simply move over with their current provider onto the NBN fibre. Is that the way it would work?

David Thodey: This one is actually quite a long discussion and NBN Co is really the one who has to determine that. How they deal with the customer and how that process will work is really their decision. What I can tell you once they’ve agreed that process we’ve

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worked, you know, diligently to know the technical consideration of how we switch the numbers over and back end into their system.

However, the actual way that the process will go when - remember it’s NBN Co who are initiating the transition from copper to fibre not us. At that point they need to talk to the customer about how that physical process will take place. So if you’ve got a copper connection today, there’s quite a long process you’ve got to go through to actually migrate to fibre.

Because one they’ve got to bring fibre down the street and they’ve got to put that through our ducts or whichever way they’re going to do it. They’ve got to get the lead into a home and then there’s the OTC on the side of the home. Get the electrician in and then do that flick.

So that’s that part. We support that by allowing the numbering to move across the fibre network and the broadband service. Now, in terms of the retail aspect of that. The customer will have to choose which retail service provider they would like to do that. That’ll be subject to what contract they have in place, with who, at that time.

So if they’ve got a two year contract say with Optus then they’ve got to work through what the implications of that retail contract is. So there’s quite a bit of work as you can imagine to work through this. I know NBN Co are thinking about it. But we will be led by NBN Co and then depending on how that is determined, we will do the technical support.

Then obviously have a marketing campaign to make sure that we are retaining and winning new customers through that process.

Karen Maley: (Business Spectator, journalist) Hi, look I just have one query, which is why didn’t Telstra just become a pure retail service provider? Why have you retained ownership of the infrastructure, the ducts and the exchanges? Why didn’t that transfer to NBN as part of this deal?

David Thodey: We find those assets are incredibly valuable. And that is all about due consideration and compensated consideration for our shareholders. It’s as simple as that. They are very important assets and we are getting value for our shareholders.

Peter Ryan (ABC, Journalist): Yes, just following up from my earlier question, David, about the wireless spectrum. Was that a deal breaker?

David Thodey: It was a significant part of the consideration as there are many other significant parts. But yes it was a key consideration in terms of our future.

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Peter Ryan (ABC, Journalist): How did you feel about being threatened in that manner by the Government?

David Thodey: Look, we’ve been very open about our position on this since day one. We appreciate the vision of the government, but we are just trying to deal within the hand that’s been dealt with us. So I don’t really have anything else to say on that.

Petroc Wilton: (Communications Day, journalist) Good morning, David. Obviously this gives you more spectrum certainty and maybe also eases pressure on the fixed line performance. Will your timeframe for say applying LTE or maybe extending the next G network perhaps change as a result?

David Thodey: We have always been and will continue to be very aggressive in terms of driving technology leadership. We’ve been, Next G has really given us some tremendous competitive advantage and we’re already trialling LTE today. We did the first LTE voice call just last week.

I think one of the first in the world, at least definitely in the Top 10. So we’re going to drive our leadership in that area.

Ben Butler: (The Herald Sun, journalist) Oh, g’day guys. just following up on my earlier question. Do you have a figure for what you’ve sunk into this NBN negotiation process getting ready for it so far?

David Thodey: No. No, we don’t. But I think it’s fair to say we’ve had a group of aroundabout, you know, ten people working full time on this for the last year. So it’s always an investment. But in the bigger scheme of Telstra in terms of driving value for shareholders, it’s not significant.

Tony Boyd (Australian Financial Review, journalist): Oh look, thanks. Just one other quick question, David. The net present value, I think of the rental aspect of this deal, you know, is apparently supposed to be half a billion dollars. Now would that need you to revisit the valuations you have in your balance sheet for your plant and equipment, which I assume includes all the ducts, pits, exchanges and other things that have been written down to accommodate a business that’s in decline?

David Thodey: Tony, look I don’t recognise that number at all that you mentioned. But I don’t think - there is no necessity to relook at the valuation of any of our assets. But I know that the number you just referenced is not correct.

Andrew Butcher: What’s that number, Tony?

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David Thodey: We can come back to Tony, I think he’s cut off. We can come back to you, Tony. Give Andrew a ring, but that number is not - I don’t recognise it.

Jordan Chong (AAP, Journalist): Oh good morning. Mr Thodey I was just wondering whether you’ve had any response from your larger institutional shareholders? And sort of how that consultation process with them will go sort of heading up to, you know, a decision by your shareholders on this?

David Thodey: Look no we’ve not spoken to any of our investors. Because, I mean that’s a very important aspect that we treat all investors the same. But obviously now as we finalise the details we’ll be, you know, in discussion. Because it is subject to approval by our shareholders.

But no, we would not and would never consider speaking to any of our institutional shareholders prior to a contract. That would be not in keeping with our responsibilities. Richard Chirgwin: (Market Clarity, journalist) Yes, David. The announcement mentions access, mentioned access to Telstra backhaul. Has this heads of agreement set any price on backhaul or is that subject to further negotiations.

David Thodey: There is a assumed pricing for backhaul access in the draft, well the non-binding financial heads of agreement, yes there is.

Paul Smith (Australian Financial Review, Journalist): Hi there, obviously the final stages of this negotiations came in the political context of the mining super profits tax. Do you have any thoughts on what impact that had on the Government’s willingness to cut a deal?

David Thodey: Absolutely none. We had, as I’ve said before. We’ve been very consistent with what we required to give due consideration to our shareholders and the timing has been driven by the Government and I am but a commercial operator.

Ben Grubb: (ZDNet, journalist) Oh hi, David, again. Just a question on the leasing aspect. I guess the question really is, is how long is the lease? Do you expect to, you know, is it 99 years or is it, you know, that you’d get a [unclear] every so often, if you now what I mean. I know it’s a one sign at the moment, but if you could speak on that level yes.

David Thodey: Look I can assure you it’s way outside any terms that you or I or any of our businesses would consider. You know it’s a long term contract. But all that detail will come out. But it’s, you know, for anyone who’s looking at our company now, it’s outside of any of those horizons they’d normally look at. So it’s a long term.

Andrew Butcher: Operator, we’ve only got time for one more question. So who is it from.

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James Hutchinson: (Computer World Australia, Journalist) Hi, David, again. just a quick question. I understand the agreement isn’t in concrete and it hasn’t been finalised. But if it were to be finalised and something were to happen to NBN or NBN Co, what measures are in place to ensure that Telstra doesn’t lose any money?

That copper isn’t decommissioned where it shouldn’t be before a full ubiquitous NBN is rolled out?

David Thodey: Okay, let me just restate. This is non-binding financial heads of agreement subject to long form agreement. It is a significant milestone. To characterise it as not concrete and not finalised is correct. But it is a significant milestone. However we will not be proceeding with anything until we have shareholder approval. And any decommissioning we will work collaboratively with NBN Co. To work through the definitive agreement.

But we would not start decommissioning copper until we have a firm contract and shareholder approval, which will be early next year. So there’s still a significant amount of work to be done, but a significant milestone.

So I think, with that, Andrew.

Andrew Butcher: If you have any further questions, feel free to call me or Andrew Maiden and as we go forward, Andrew Maiden will be the person to call on this.

End of Transcript

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