THOMSON REUTERS STREETEVENTS
EDITED TRANSCRIPT MCY.NZ - Interim 2017 Mercury NZ Ltd Earnings Call EVENT DATE/TIME: FEBRUARY 20, 2017 / 10:00PM GMT
1 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us © 2017 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
FEBRUARY 20, 2017 / 10:00PM GMT, MCY.NZ - Interim 2017 Mercury NZ Ltd Earnings Call CORPORATE PARTICIPANTS Fraser Whineray Mercury NZ Limited - CEO William Meek Mercury NZ Limited - CFO
CONFERENCE CALL PARTICIPANTS Grant Swanepoel Craig Investment Partners - Analyst Andrew Harvey-Green Forsyth Barr - Analyst
PRESENTATION
Fraser Whineray - Mercury NZ Limited - CEO (Spoken in Maori) and welcome to the investor presentation for the six months ended December 31, 2016 for Mercury. I'm here with William Meek alongside me, and it's our pleasure to report the half-year results reflecting a lot of hard work by the entire team here at Mercury and with our partners. There was a bunch of material posted to the NZX this morning and hopefully that is very clear in terms of the half-year result and the variances to prior periods and possibly expectation and the update to our full-year guidance as well explained. Having said that it's only the half year though, this has been a very significant half year for the Company and activity has crystallized that was planned well before the half year itself and we're very pleased with it. So we'll just turn now to slide 4. I'll take you through a few highlights before handing over to William and we will chop and change between various slides. Slide 4 just summarizes what was in our annual report and also -- and other materials since we rebranded which reflects our purpose, goal and our high-level strategy. And underneath the banner, which isn't shown there, of our mission, which is energy freedom for both the customer and the country. This set -- I'm not sure if we explained this last time -- set of material summarized on this page was put together well before you get into designing your brand. This is far more important than a logo; this is actually what aligns the entire business and all of our staff towards real, long-term customer propositions and those that should support progressive earnings to our owners. The tagline, which you would have seen on advertising, is Energy Made Wonderful, and all of this has a lot to do with creating a positive narrative for the sector, for the product, and also that customers enjoy the energy. And you'll see that word deliberately in the purpose. It doesn't say that customers use energy, it's that they enjoy it. And that's quite a different approach and one which we're certainly enjoying working with internally and by the results that are in the deck you can see that some of our customers are responding well to that as well. This isn't just also about a strategy around -- or a purpose around technology for technology's sake. There's technology that will do practically everything possible these days in a home, or almost in a car, when we'll one day get to autonomy, but technology for technology's sake is a dangerous way, in my view, to allocate capital. I think consumer relevance and guidance from them is essential and that is why a very customer-centric purpose and strategy is laid out on this page, which anchors a lot of our decisions. Turning now to slide 5, which covers some of the execution. And this touches on the three things on the prior page around customer advocacy, leveraging our core strength and delivering sustainable growth. And what we've sought to do here is highlight qualitatively and where possible quantitatively some of the key outcomes in the half. So for customer advocacy, we've been actually showing clear leadership and focusing on loyalty of existing customers rather than having people only being rewarded when they switch, which was a -- is a longstanding market construct. This has been -- well, the focus of this has been a lot around the Airpoints partnership with more than 100,000 having joined that; Free Power Days, more than 100,000 having redeemed them. And also other campaigns and value to customers beyond talking about price of electricity through e-bike campaigns where households can get as many discounted electric bikes as they want from our bike partners, and that's up to a discount of NZD500, and that has been very successful. It's certainly raising the awareness of ebikes but also putting yet another positive now to beyond these then to the sector of what electricity can do. And as our tagline says, Energy Made Wonderful.
2 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2017 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
FEBRUARY 20, 2017 / 10:00PM GMT, MCY.NZ - Interim 2017 Mercury NZ Ltd Earnings Call We also made it easy, on a slightly more -- less exciting topic, by fixing or improving a new customer bill. This was done in partnership with customers to actually deliberately try to take away a lot of inquiry and possibly even anxiety when customers receive their bill because they didn't understand it. And the electricity market, as you will know, can be horrendously complex at times but there's no need for that complexity to be thrust on our customers. So that's worked well and we've switched that through and looking at less inquiry around obvious questions coming into our call centre. So reflected quantitatively, the churn has a clear churn differential on the market of some 3% and in the slides later we'll refer to which back that up further. The customer satisfaction is lifted on the average for the period it was 63%, it's slightly higher than that on the most recent month and so that trajectory is positive and that's a clear benefit on the market. Customer effort, which isn't shown there, is also improving, or it's customer lack of effort, I think is actually what you're looking to have, and that has improved. And our FPVV sales VWAP which is across all commercial and industrial FPVV sales as well as mass market is down by some NZD3 there, NZD2.50 of which is related to the commercial and industrial roll-off of contracts as those are signed at lower prices, largely benchmarked off the ASX curve. Leveraging the core strengths, our LWAP we're focused on safety there. Portfolio management, we've had relatively high inflows, relatively muted wholesale market volatility but within that have actually done pretty well around GWAP on our hydro scheme and also where possible taking advantage of price separation that exists between the North and South Islands from time to time. And you can see our GWAP factor there and also our commercial -- our geothermal capacity factor, we've been running at 95%, that's consistent with last year and compares with what we can derive from publicly-disclosed benchmarks on geothermal in New Zealand at around 85%. On the sustainable growth front, we have done a significant review, a global sweep to look at what is available out there around home and transport and looking clearly at how that fits into the New Zealand landscape. We are -- we have invested, as you're well aware, in solar and we launched our Mercury solar package in November. That also has distributed storage, and we have an R&D centre going at Southdown which is the old thermal power station which we closed in 2015. So that is about investing in those technologies. Now, they are very small revenue lines but actually they are going to be part of the landscape of solar, EVs, e-bikes and battery storage. We're not up to the stage of trialling them. They're actually revenue streams certainly in solar and distributed storage. They are part of our business. The last thing that isn't on strategy execution but I think is pretty important to note is actually what changes with the employee brand, because you need a very highquality team to satisfy customers and thereby satisfy owners. And it's fair to say our engagement but more particularly our ability to attract staff to roles that we currently don't have skills for is going very well. That is certainly one benefit I didn't anticipate going through the rebranding to be as strong as it is. On slide 6, talking about safety, we did have a woman unfortunately who is an IT contractor working in the marketing team, fell down some stairs at Greenlane. Our stats would show that the Greenlane is the most dangerous at the moment place to work in Mercury, but -- and I say that somewhat tongue-in-cheek because what it says is that the focus on the highly risky sites of generation and geothermal and hydro are going well. It's not where it needs to be yet but the focus has to be maintained on low probability, high consequence events which typically happen in the field. I will just touch on though, because it does relate to safety, the tragic loss on Waitangi Day of Rachel De Jong. The Chair and I have been in touch with the family and we've completed a full review in conjunction with the Department of Conservation across whose land access to the live spillway known as the Aratiatia Rapids is made. We've also worked with the harbor master for the Waikato region, Taupo District Council and Swim Safe New Zealand and we have resume tourist spills down there which number over 1,200 per year and have been a feature of the power station since its construction in 1964. So it's a very tragic situation there. And we'll do our best to educate people that it is actually a live spillway and is not to be entered. I'll just hand over to William now to cover off financial highlights and guidance. William Meek - Mercury NZ Limited - CFO Thank you, Fraser, and welcome everyone to the call. We're on slide 7 now, just touching on some of our key financial metrics. Again, when you survey the chart, it's generally positive movements across most of these financial metrics. Certainly, energy margin up slightly on the year before by NZD4 million to NZD348 million, driven by favourable inflow conditions to the Waikato-Taupo catchment, and also higher sales to our end user customers, partially offset by falls in commercial and industrial sales prices, given where those prices are currently trading relative to history.
3 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2017 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
FEBRUARY 20, 2017 / 10:00PM GMT, MCY.NZ - Interim 2017 Mercury NZ Ltd Earnings Call EBITDAF showing quite strong growth again, assisted by those favourable inflow conditions but also through a NZD5 million gain on sale relating to a carbon credit sale which we'll talk in more detail shortly. Certainly very pleased to see OpEx well contained, NZD6 million lower than the PCP at NZD102 million, again leading to a net favourable EBITDAF mostly occurring in maintenance as we focus on some major capital refurbishments. Net profit after tax stepping up quite strongly to NZD113 million for the period, again driven by nil impairments recognized in this current period and also positive movements in the mark-to-market value of our interest rate book. So that's flowing through P&L as a positive movement in financial instruments. Underlying earnings up by NZD5 million to NZD94 million. Free cash flow relatively stable in the year before, despite a reasonable increase in operating cash flow to NZD194 million on the back of lower cash taxes but offset by the higher capital expenditure, which is really being reflected in a four well drilling program and major refurbishments taking place at Whakamaru and Aratiatia. Ordinary dividend, interim dividend, up 1.8% for the period to NZD0.058 per share. Turning to slide 8, just touching on guidance. It's a very simple bridge between our guidance given at our ASM back in November and the guidance we see here today of NZD500 million for the full year. Given that our full-year hydro output remains unchanged at 4,250 gigawatt hours, the customer business continues to track well under the new and revitalized Mercury brand, and operating costs again contained and expected to remain in line with previous years and the NZD5 million gain on sale relating to carbon credits essentially explains the bridge from NZD495 million to NZD500 million for the financial year 2017. Again, just noting we are in the process of exiting our Chile interests. That is a reasonably bureaucratic process in Chile and so we do note the guidance does not include any loss relating to the translation reserve on foreign exchange. Again touching on CapEx guidance, down NZD10 million to NZD115 million for the full year. On an expectation basis again largely a product of a very well-advanced and well-executed drilling program at Kawerau and Rotokawa seeing that guidance reduced to NZD115 million for the full year. And again, our full-year ordinary dividend guidance remains at NZD0.146 per share. I'll hand back to Fraser. Fraser Whineray - Mercury NZ Limited - CEO Thanks, William. Now turning to slide 10 to talk about market dynamics. For those of you that have been following our investor decks for a while, this will be a relatively familiar chart. And we're all being exceptionally patient because our expected market response isn't necessarily flowing into the observed market response for the reasons noted there as a result of both thermal closures, which reduce capacity, but also the amount of take-or-pay gas and goal being forced into the energy -electricity system. And so on the right hand side of that chart -- the left hand side is unchanged but on the right hand side of that chart 10 there, the futures prices have come off, customer churns at high levels but we've noted earlier Mercury is outperforming. And there is the new entrant market share increasing and that's the net-net basis largely picking up what would be market growth in the sector of ICP count. What's still mitigating the fact that we're not seeing the expect market response on the left hand side, we've had warmer and wetter conditions impacting demand, and we'll go to demand in more detail on subsequent slides. Above average inflows and storage into national hydro catchments and there is a little bit of still NZAS closure uncertainty, though notice of termination wasn't given on January 1. So just turning now to demand, what we've tried to do on this slide also should be familiar as breakdown for the period and also going back a few years in the right hand chart, some trends. And so the demand was down 2.4% in the half compared to PCP and 1.6% after normalizing for temperature. And some of the key drivers there were in dairy -- or agricultural use as well as dairy processing and industrial decline. And on the industrial side you've seen goldmine, coalmine and also steel mill in Auckland which have contributed to that. Irrigation's load is off because of wetter conditions, which also have flowed into the hydro catchments, as we mentioned, and dairy is down as well. So the whole dairy curve, processing curve is down about 7% I understand season to date, and Fonterra recently said that it will be down 5% year-to-date. All of those things need chilling and processing on-farm and in-factory as well so that has tapered demand slightly there, and we've got a table which explains that. The economic background though for New Zealand and certainly relative to the rest of the world is a positive one, as is net migration.
4 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2017 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
FEBRUARY 20, 2017 / 10:00PM GMT, MCY.NZ - Interim 2017 Mercury NZ Ltd Earnings Call On the supply side, this helps to explain on the left hand side table there you can see the white bars. That helps to explain the previous slide. And the above-average hydrology that's gone into the system is noted in those white bars for cal 2016 and the white dotted bars in 2017 reflect above-average hydro storage coming into the period. So you can see there it's still well above what would be a normal balance of supply and demand but that's not driven by what's happened in contracts for non-renewable fuel and thermal capacity. It's because of the water. It will come back to average, and in fact go below average, over time for periods. And I think it's really important that we don't lose sight of that after celebrating 20 years of a functioning wholesale market when that does happen, because there will be some instances where there's going to be some challenges with the outcomes that happen when we go below average on hydrology. The right hand side isn't too bad in terms of where the prices have come out relative to national storage, and you can see them in the white dots there. But I think it's really important that everyone keeps a good close eye on security of supply; that is the fundamental pillar on which the licence to operate for the sector rests. In terms of wholesale electricity price, this is a very rich chart here on the left-hand side, and so does take a little bit of interpretation. But what we're trying to just show is how wholesale prices and wholesale price volatility have become muted and correlate that with hydrology, which is an inverted axis on the right-hand side. So as you can see, we've had above average storage for a while now, and that means that we see that correlated with both the wholesale price spot outcomes and the range of those outcomes intraday as well. We've explained the reasons for that on the previous chart. So the futures price has eased over the half, and that's all just a function of the conditions we've mentioned. In terms of the customer activity -- and this is focused on mass market customers, which make up about 35% of volume in the market, and this also focuses on our performance in that. You can see on the left-hand side our focus of rewarding loyalty. So whereas our acquisitions -- which are above the X axis -- have been relatively similar over the half to where we were last year for Mercury, the losses -- which are below the X axis -- have been reduced. That is the driver of net gains. So we're very -- you can also see that and the switches withdrawn chart below there as well. So those are really positive trends. It represents a lot of focus around the loyalty initiatives. It's not because of a logo, it's because of the initiatives that sit around the brand change, and we've been very focused on that. So we're delighted to see those customer numbers improving, but not because we've necessarily acquired more. The main focus is on losing less. You can see this also reflected against the national annualised churn rates on the right-hand side. We rebranded in July and had a bunch of initiatives roll out shortly thereafter. You can see that now on trader switches we're running -- the Mercury brand itself -- is running at about half the market average, which I think is a great standout for all the things that we're doing around customer loyalty. On slide 15 now, again a reflection of all the things around loyalty which are captured there on the text, and also some of the partnerships and enabling customer choices, there in the text. You can see our customer satisfaction has grown relative to the average of the largest four brands, and that spread has improved. That's consistent with the data you've seen prior. We also have introduced what we'd see as the best solar proposition with respect to buy-back, customer experience, guarantee, panels and battery if you're into distributed storage in the market under Mercury Solar as we transition the acquisition of What Power Crisis last March into a Mercury product, which has clear differentiation in the solar market. Again we mention the partnership there for the electric highway in New Zealand in partnership with PlugShare out of Oregon, USA. Why do that? Well, it's actually about the customer. A customer doesn't want 10 apps or 20 apps to tell them where everyone's infrastructure is, they want one app to tell them where it is. We just felt for the purposes of uptake in New Zealand -- and feedback we've had from customers, and because we have the largest experience with electric vehicles in the country with our fleet numbering 40, our chair and half the exec also driving their own personal electric vehicles -- we had a good idea what customers what needed. That was a single port point for the information. PlugShare already had the largest market share for that information in New Zealand. They're the best at that in the world, and that's why we partnered with them. In terms of Tiwai, which still is in the room, you will be very familiar with all the decisions that have or haven't been taken and timelines that have passed, and they're expressed on that chart. I think I just want to -- and just as well they didn't give notice on January 1, it would have interrupted a lot of your holidays writing research reports very quickly on the back of that announcement. But on a more serious note, I think there's two things I just want to emphasise. The first one is that the industry has already dealt with supply and demand changes of this magnitude. And we think that the industry will again resolve this and work it out over time. The second thing is Mercury's relative positioning, and this isn't necessarily to say we do better out of a Tiwai closure, but our relative positioning, fundamentally, is a result of the location of our generation portfolio, and its position 5 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2017 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
FEBRUARY 20, 2017 / 10:00PM GMT, MCY.NZ - Interim 2017 Mercury NZ Ltd Earnings Call relative to its load at Mercury. So that puts us in a very strong fundamental position with respect to other constraints and losses and price impacts which may arise interisland. In terms of regulation, on slide 17, this compresses a range of things here, but under three key banners. On the industry, we welcomed the new energy minister Judith Collins. Energy is pertinent to many portfolios, it's not just about energy, it's actually about trade, emissions, the environment or climate change. It's also relevant to transport, tourism and other sectors as well. We look forward to the energy minister's influence across a broad range of those portfolios, because that is important to recognise electricity and energy as being a fundamental in a society. The tourism angle on electricity as being an opportunity is just starting to be cracked. You've seen Air New Zealand being very positive around that, and you've also seen Tourism Holdings Limited recently in talking about bringing in plug-in hybrid campervans and the like. So this needs to embed the New Zealand electricity story and its opportunity needs to embed into tourism over the course of the next couple of years. I think that will create an even more positive narrative for this remarkable sector. I also note there though under industry the EA’s stress test results, which they aggregate for all participants that need to submit them. Some of those stress test results show that participants lose all of their equity under either and/or capacity scenario which the EA stipulates. I think we just need to all remember, the wholesale market dynamics can change, the hydrology in the country can change, and we do have a 20 year old wholesale market -- which is energy only market -- which is effectively work to date. And that security of supply, as I mentioned, is a very important construct but with some people, some people clearly aren't hedging that risk out. It's not to say you need to hedge every risk for all scenarios, but you need to certainly be aware that it has been a benign environment of late. On the TPM, there were some further modifications to make it more pragmatic, but is it still in the benefit to the consumer? We'll just have to continue to wait and see how that process rolls out. There is a risk that it gets politicised this year, being election year. The big brands in New Zealand are doing a lot of things to normalise that. You've seen a lot of big companies -- and branded companies -- get involved with the EECA’s allocation of EV funds for some quite public activity around electric vehicles and infrastructure and things. We think that's tremendous. Of course during the half, Chris Luxon and I -- with our respective teams -- convinced 30 other businesses to convert 30% of their fleet by 2019 to electric. That just shows it's getting well normalised and mainstreamed as the right thing to be doing. So now I'll just hand over to William to talk about the financial summary. William Meek - Mercury NZ Limited - CFO Thank you Fraser. All right, back to the good stuff and the numbers. So we're on slide 19, dealing with the EBITDAF bridge for this half year. Again just a slightly deeper dive, you can see there in energy margin a net positive movement of NZD4 million. Really a lower spot price environment impacting our generation revenues, with prices down on hydro GWAP by 6, though GWAP that improved on the prior period for hydro, down NZD9 -- circa NZD9/NZD10 for geothermal. So really that's giving us a NZD27 million decrement in generation energy margin. Energy costs it works the opposite way, so the purchase cost from the market obviously responding well to lower wholesale prices, and so seeing a NZD29 million positive movement there for purchase cost to supply customers. With CFDs and customer sales, despite increasing volumes giving us a net positive NZD2 million, to explain the NZD4 million balance there in energy margin on a PCP basis. Other revenue up NZD3 million, again we've touched on this -- a NZD5 million gain from the sale of carbon credits against the PCP where we reflected NZD3 million of gains from land sales. So a net NZD3 million up there in other income. Operating expenditure, again the company has not early adopted IFRS15 around the revenue recognition standard, so there's no accounting trickery around our costs, particularly around expenditures or customers. So we are continuing to recognise customer costs as they are incurred. The NZD6 million improvement to NZD102 million -- versus NZD108 million in the prior period -- largely relating to reductions in maintenance expenditure. Again reflecting the major mostly capital refurbishments taking place at Whakamaru and Aratiatia, which are key focus for this year and in the years to come. So we're NZD30 million into a NZD76 million project there at Whakamaru, which will see basically generators, governors, turbines and balance of plant replaced there. So a first-time birthday for that station which has had a good tour of almost 50 years.
6 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2017 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
FEBRUARY 20, 2017 / 10:00PM GMT, MCY.NZ - Interim 2017 Mercury NZ Ltd Earnings Call Aratiatia also seeing new generators through the three units, plus a new turbine with the two other turbines being refurbished with a couple of spares and an overhaul the balance of plant. So again, just mix change there between CapEx and OpEx in the P&L. So the net movement giving us a NZD270 million EBITDAF for the half year ending December 31, 2017. Just a deeper dive into carbon credits. So certainly the ETS was mended in May 2016, which sees a progressive change from a two-for-one to a one-for-one surrender of carbon by calendar year 2019. So 2017 will see all emitters needing to surrender a 67% carbon credit for one unit of emissions. The company -- you can see a chart there -- really seeing a significant recovery in carbon prices from levels around NZD6 in the start of 2015 to above NZD18 later in the last calendar year. The company with the closure of Southdown certainly has a significantly lower emission profile from its geothermal plants. We're looking at it around circa 350,000 tonnes of carbon on an annual basis. So a decision was made to sell some of the carbon credits that were currently held as inventory. So 1.1 million credits were divested by December 31, giving us cash proceeds of NZD19 million. You will see that as a reduction in investing cash flows in the cash flow statement. Again on sale of NZD5 million reflecting the difference between what they were purchased for and what they were ultimately sold for. The company contends to have a number of long-term agreements with forestry owners and so has sufficient carbon credits through those contracts to see it through for the next 10 years or so, including some zero cost PREs which will see us through to the end of financial year 2018. I'll also just touch on Chile, again knowing that circa NZD10 million of foreign currency translation reserve which is not currently included in guidance, and those will crystallise when we finally exit. Just moving to slide 21 on dividends. Again the Board and Management are very focused around appropriate capital management, we've touched on a half year dividend of 5.8 cents, that will be fully imputed, that will be paid on April 3 and guidance around ordinaries for the full year remains at 14.6 cents per share. We do note a minor change to the payment policy, where we were paying in April rather than in March, which we have done in past periods. Capital expenditure, so CapEx is up to NZD54 million for the period versus NZD30 million on the prior, of which only NZD18 million was same business. Again reflecting completion of two wells at Kawerau, we have completed a third well at Rotokawa post balance date. So we're on to the fourth well now. So that process is going very very well, and again as stated, the hydro life-cycle refurbishment, well in train at both Whakamaru and Aratiatia. So very pleased to see those major projects executing very very well across the business. The guidance again reiterating that, now down at NZD115 million for stay-in-business for the year, relatively minimal growth capital expenditure contemplated for the remainder of 2017. We are again with the focus around customer, we are investing in terms of expanding Mercury's digital experience, so continue to offer new products and services and insights for our customers. So that will be an ongoing theme as we move forward in years to come. Again levelised CapEx of the last 4 years is tracking at around NZD80 million. Just quickly on to debt and our funding profile. Again this moves relatively slowly given our makeup of predominantly bonds, capital -- of which a capital bonds sits there in 2045, at NZD300 million. We did have some bonds mature in October, NZD120 million, they were partially refinanced with a new bank line of NZD50 million. The debt profile remains very long at nine years, again just reiterating that we expect a significant decline in interest costs from particularly FY19, which should see a cash benefit of NZD20 million also from that time. Again capital structure, S&P has reaffirmed our rating as BBB+, that includes a one notch uplift because of majority crown ownership. Again, capital management is a theme we'll continue to review, and our debt EBITDA ratios are 2 times remain very constant, with net debt currently just below NZD1.1 billion. I'll hand back to Fraser for concluding remarks. Fraser Whineray - Mercury NZ Limited - CEO Thank you very much everybody for joining us on this call. We're pleased with the half year and the performances we're tracking for the full year and the update to guidance, and look forward to taking any questions now and other conversations that may follow this directly with several of you. So, happy to take questions.
QUESTION AND ANSWER
Operator (Operator instructions) Your first question comes from Grant Swanepoel, with Craig Investment Partners. Please go ahead. 7 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2017 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
FEBRUARY 20, 2017 / 10:00PM GMT, MCY.NZ - Interim 2017 Mercury NZ Ltd Earnings Call
Grant Swanepoel - Craig Investment Partners - Analyst Morning Mercury team. First question is around retail. Can you give some colour on, there was a very successful first half of the year in terms of customer gains. Can you give some sort of colour on how your cost of service has gone over the half. Then on mass market pricing, can I assume that's down a few base points, because you're saying they're only NZD2.50 of a NZD3.20 drop in retail price, is it due to the CNI roll off. Has the trust power TV offer disrupted the market any further since their launch a couple of weeks ago. Finally on broadband, are you partnering with anybody to defend your territory in Auckland. Thanks. William Meek - Mercury NZ Limited - CFO Thanks Grant, there's a lot of questions there. On a first question which is cost of serve -Grant Swanepoel - Craig Investment Partners - Analyst All retail. William Meek - Mercury NZ Limited - CFO In terms of you can see the office envelope for the company at a high level hasn't changed significantly , the reductions were just due to maintenance. What we have seen, in terms of the rebranding exercise and the focus on customer is a shift in expenditures from GLOBUG to Mercury, so you've seen some move there. GLOBUG volumes at 30,000 remain pretty constant. But you have seen some reallocation in to the Mercury brand. But cost to serve generally, relatively consistent with where we've been in the prior year. Again I think just reinforcing Fraser's earlier comments that the big gains haven't been on acquisitions, which are broadly in line with where we were a year ago. They've been around retention and certainly the spend on retention is actually slightly lower than it was a year ago. We're very pleased to see the inertia from the rebrand, refocusing around how we operate and how we provide value to our customers, bearing fruit through this half year. Fraser Whineray - Mercury NZ Limited - CEO In terms of the Trustpower TV offer, haven't -- well aware of it, haven't seen any impact of that yet, and still trying to determine exactly what segment of the market is being targeted there. We'll see also how that flows through in their cost of acquisition for those customers. Again it's not about loyalty, it's about switching in. In terms of broadband, and we've said this previously, a number of arrangements with providers to see whether or not we can work together to win back customers that might have been lost a year ago, with respect to very heavily discounted broadband offers. Or through which we try to save customers if they're switching out and the reason for that is a strong broadband discount. Yes we do have a range with some other customers. They're not that substantial in terms of volume, but we certainly have those in place and have used them tactically from time to time. Grant Swanepoel - Craig Investment Partners - Analyst And mass market pricing. Fraser Whineray - Mercury NZ Limited - CEO Oh the pricing.
8 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2017 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
FEBRUARY 20, 2017 / 10:00PM GMT, MCY.NZ - Interim 2017 Mercury NZ Ltd Earnings Call Grant Swanepoel - Craig Investment Partners - Analyst Mass market pricing sorry. Fraser Whineray - Mercury NZ Limited - CEO (Inaudible - microphone inaccessible) William Meek - Mercury NZ Limited - CFO We gave a market update in our operational update in January. We did make a comment there around C&I, in terms of mass market pricing, in terms of yields. Those are broadly flat period-on-period. But the key issues, that C&I renewal, so increasing C&I yield under soft wholesale and futures market, you're just seeing prices coming in, which is dragging down our WAP for our overall retail book. Grant Swanepoel - Craig Investment Partners - Analyst Thanks Will. Operator Thank you. Your next question comes from Andrew Harvey-Green with Forsyth Barr, please go ahead. Andrew Harvey-Green - Forsyth Barr - Analyst Hi guys, just a couple of questions from me. First one just around the OpEx and the timing of that, so your guidance is that full year OpEx is going to be fairly similar to FY16. Is most of the list in the second half coming through in the maintenance line? William Meek - Mercury NZ Limited - CFO Yes. Andrew Harvey-Green - Forsyth Barr - Analyst Yes okay, and second question is just around CapEx -William Meek - Mercury NZ Limited - CFO One example would be a repair. So we've got a well repair scheduled in the second half, that's circa NZD5 million, that's going to turn up in the second half. Andrew Harvey-Green - Forsyth Barr - Analyst Okay, I just sort of wondering whether it was deferred permanently just because of the CapEx that you've been doing on those sites. The second question I guess was just around the CapEx guidance going forward. You talk about investing more in the digital experience, and I assume that's on top of the NZD80 million underlying maintenance CapEx number? Fraser Whineray - Mercury NZ Limited - CEO
9 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2017 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
FEBRUARY 20, 2017 / 10:00PM GMT, MCY.NZ - Interim 2017 Mercury NZ Ltd Earnings Call Well stay-in-business CapEx, yes, we're still pitching that around NZD80 million over the long term on average. But yes, depending on IT spend, we're obviously spending a fair bit on stay-in-business CapEx, and IT and some new things as well. That will continue and there may be some lumps in there depending on what we do around customer relevant engagement. But quite often as we've done with GEM, we didn't spend a whole heap of CapEx on that, we actually just partnered with Opower out of Silicon Valley and things like that. We've also just recently upgraded the operating systems, data base software for our entire SAP platform two weekends ago which was successful, and we've got some other things to do around transferring things in to the Cloud. Part of our stuff's in the Cloud, part of it is yet to be migrated and we're working through that as well. There's also CapEx that goes on in Metrix as we continue to upgrade the systems there. But we'd like to think that it's kind of within the NZD80 million, but as with IT there can be some lumps from time to time. Andrew Harvey-Green - Forsyth Barr - Analyst Okay. Just last question from me, was just whether you had any particular thoughts about special dividends, just given particular just the gain on sale or the proceeds coming from the carbon credit sale and also your benign debt levels continuing? Fraser Whineray - Mercury NZ Limited - CEO We'll consider capital management at the -- close to the year end. As you know we don't intend to get a debt to EBITDAF ratio that keeps going lower than 2, that's at the good end of a 2 to 2.8 band for the BBB+ that we enjoy from Standard and Poor's. If we don't invest that capital, then yes it gets returned through capital management to shareholders, and one of those possibilities is a special dividend. But we don't need to pay down debt is what I'm saying. So if there's surplus cash, then it will be returned. Andrew Harvey-Green - Forsyth Barr - Analyst Right that's all from me thanks. Operator (Operator instructions) We are showing no further questions at this time. I'll now hand back to Mr Whineray for closing remarks. Fraser Whineray - Mercury NZ Limited - CEO Thank you, well thanks again for joining us for this discussion and presentation of the half year results. We appreciate your time and look forward to catching up with you shortly. Thank you.
DISCLAIMER Thomson Reuters reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forwardlooking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. © 2017 Thomson Reuters. All Rights Reserved.
10 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us © 2017 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.