Spark New Zealand Limited (OTCPK:SPKKY) Q4 2022 Earnings Conference Call August 23, 2022 6:00 PM ET
Company Participants
Jolie Hodson – Chief Executive Officer
Stefan Knight – Finance Director
Conference Call Participants
Arie Dekker – Jarden
Kane Hannan – Goldman
Entcho Raykovski – Credit Suisse
Wade Gardiner – Craigs Investment Partners
Aaron Ibbotson – Forsyth Barr
Brian Han – Morningstar
Phil Campbell – UBS
Lance Reynolds – Aspiring
Jolie Hodson
Kia ora koutou and thanks for joining us this morning as we share Spark’s Full Year Results for the Year Ended 30 June, 2022. I’m joined today by Spark’s Finance Director Director, Stef Knight and as always, we’ll leave time at the end of the presentation for some questions.
As we’re really pleased to deliver an excellent result for our shareholders today, while we saw continued COVID-19 disruption and increasing economic volatility during the year, with focused execution of our strategy, we’ve returned to revenue growth and delivered EBITDAI at the top end of our guidance range. The Board has declared a total flat FY ’22 dividend of NZD0.25 per share, 100% imputed, and I’m really happy to share that we’re guiding for a higher dividend of NZD0.27 per share in FY ’23. That will be funded through earnings and free cash flow. This will be the first increase in Spark’s total dividend since 2016 and reflects the confidence we have and the confidence the Board has in our strategy and our ability to grow earnings and free cash flow into the future. As we delivered what we said we would and our second year of our strategy, we were also focused on maximizing shareholder value and setting ourselves up to invest in future growth through the establishment of TowerCo.
As we announced in July, we’ve come to an agreement to sell a 70% stake in TowerCo to Ontario Teachers Pension Plan. And when that transaction completes, we’ll receive around NZD900 million in net proceeds. We intend to return up to NZD350 million to shareholders through an on-market share buyback. This is subject to market conditions at the time and we may explore other return options. We will then retain another NZD350 million to invest in future growth. This will include digital infrastructure investments, for example, 5G acceleration, edge computing, data centers, accelerating our growth in Spark IoT and Health and investing in emerging technologies. The remaining proceeds will be used to offset increased lease liabilities resulting from our long-term lease agreements with TowerCo. These investment decisions we made in line with our new capital management framework and Stefan will add to that more shortly.
So, let’s now turn to the detail of our FY ’22 results. The revenue increased 3.5% to NZD3.72 billion. That was driven by standout performance in mobile, new business wins in Spark Health and ongoing growth in our IoT business. Mobile service revenue grew 5.5% with Spark outperforming the market. Data and AI-driven marketing drove a 13% increase in customers on Endless plans, while pay-monthly, pre-paid and business connections grew steadily as we delivered what customers desired. Following a successful redesign of our broadband plans, we stabilized our base of 704,000, in line with our strategy to maintain market leadership. While this drove a 4.6% revenue decline to NZD639 million in a highly competitive market, wireless broadband connection growth of 16,000 helped to offset this impact through avoided input costs. We’re on track to deliver our FY ’23 target of 30% of our base on wireless, reaching around 28% by the end of the FY.
Cloud, security and service management revenue grew modestly at 0.7% to NZD446 million, as well short of our aspirations. Our performance was impacted by COVID-19 lockdowns in the first half, which restricted our access to customer sites. We just see some delays in transformation projects, supply chain disruptions and there is some execution challenges in parts of the business. We are focused on product enhancement and pricing refresh and further boosting of our specialist skills in the year ahead, which will support our higher forecast growth of 2% to 5% for cloud, security and service management in FY ’23.
Spark IoT and Spark Health made a strong contribution to revenue growth during the year. Spark IoT revenue increased 22% as connections climbed 75% to 832,000, whilst Spark Health revenue increased 46%, supported by new national business. In Sport, we delivered a successful second season of cricket, to remain focused on strategic partnerships to improve returns. So when we combine our top line momentum with ongoing cost discipline, we delivered a 2.8% increase in our EBITDAI to NZD1.15 billion, and that was at the top end of our guidance range.
NPAT increased 7.6% to NZD410 million and that was as a result of the EBITDAI growth I just touched on with net financing, depreciation and amortization and taxes stable. Capital investment of NZD410 million was in line with guidance and our target envelope of approximately 10% to 11% of revenue. Free cash flow was lower than aspiration at NZD296 million. That was impacted by advanced purchasing of inventory and network equipment to mitigate supply chain disruption risks and then they had related impact on working capital. We remain confident in achieving our FY ’23 cash flow aspiration of approximately NZD460 million to NZD500 million and Stef is going to provide more detail on this shortly.
Move to Slide 7. The results we’ve delivered across our established and future markets have been supported by the core capabilities we’re embedding in the business, which we identified as drivers of market differentiation in our 3-year strategy. We are a simpler and more digital organization than we were a year ago with 102 legacy mobile and broadband plans retired. Digital journeys increased by 23%, which has in turn delivered a 17.5% reduction in customer care calls and an 18% growth in online revenue.
Our data and AI-driven marketing capability continues to mature and to now better predict the needs of around 90% of customer households and make recommendations for more than half of SME customer base as well. This has increased our campaign conversion by 19% and has delivered a 16% improvement in market efficiency. We’re now extending this capability into business segments. So, as we deliver a simpler, more digital and more data-driven customer experiences, we are improving engagement with our customer interaction and net promoter score up 9 points to plus 29.
The aspiration we set back in 2020 was to create Aotearoa smart automated network and we are on track to deliver through our substantial digital infrastructure investments. We’ve made solid progress with our 5G rollout despite the delays we experienced over several months due to COVID-19 lockdowns. We extended or launched 5G coverage across 12 locations during the year, bringing us to a total of 21 locations across the country by the end of FY ’22. We remain focused on our 2023 calendar target of circa 90% population coverage. However, this remains, is reliant on timely resolution of the New Zealand government’s spectrum option or allocation for both C band and 600 megahertz spectrum, more so from rural.
So, in addition to the immediate benefits 5G delivers through increased speed and network scarcity, it also has the potential to underpin new B2B use cases that will support productivity, efficiency, safety and sustainability improvements across a range of sectors. We are accelerating our understanding of these opportunities and commercialization of new cases.
We built Aotearoa’s first 5G stand-alone core network with a number of Multi-Access Edge Compute trials underway. Our Takanini data center pension is now over 85% contracted and is on track for completion in 2023, while our Mayoral Drive upgrade was completed this month. We have significantly boosted capacity and resilience through the build of our Optical Transport Network 2.0. We’re pleased to see the Southern Cross NEXT fiber cable launched almost doubling international capacity to New Zealand. All of these achievements are underpinned by our sustained focus on building a high-performance inclusive culture where all of our people can thrive.
We’re pleased to maintain high levels of engagement despite COVID-19 disruptions with our employee engagement score at plus 70. We’ve achieved 40/40/20 gender representation at the Board, leadership squad and senior leadership level, and we’re pleased to see our female representation increase from 42% to 47% in senior leadership roles. We also made significant progress in closing our median pay gap, which reduced from 28% to 24%. Our focus on diversity extends well beyond gender, and we’re also pleased to increase our understanding of Spark’s ethnic diversity during the year. With the percentage of Spark people sharing their data with us increasing 30 percentage point to around 50%, the key enabler of targeted action to improve representation in the future.
We shift to Slide 8, we’ve continued to mature our sustainability practices to support New Zealand’s transition to a low-carbon economy. We know that window to take meaningful action on climate change is closing fast and that every business has a role to play. We’ve established emissions reduction in energy efficiency program, which helps drive action against our science-based target of 56% reduction in Scope 1 and 2 emissions by 2030, and that’s from an FY ‘20 baseline. So over the past year, we saw a 15% reduction in emissions through a combination of grid decarbonization and energy efficiency agreements within stock. While positive, emissions remain higher than our FY ‘20 baseline and to meet our target, we must continue to pursue efficiency gains, while decoupling our growth from emissions by linking our energy procurement to new sources of renewable electricity, which is a focus for the years ahead.
We know technology will play critical enabling role across the economy as businesses seek efficiencies and adapt to climate change. We can already see this through our Spark IoT business with over 50% of its FY ‘22 revenue linked to sustainability solutions. We are acutely aware that as digitization accelerates further, it will widen our already unacceptable digital divide in Aotearoa. Our long-term focus on listing digital equity remains a priority and we’re really pleased to grow our not-for-profit broadband service Skinny Jump by around 33% during the year, supporting over 23,000 households that would otherwise have been excluded from the digital world.
If I turn now to our FY ‘22 indicators of success, we are pleased to have met or exceeded the majority, building the capabilities that are delivering improved customer experiences and market differentiation, outperforming the market in mobile, accelerating future market growth and maintaining our cost discipline, while building a sustainable future. While we saw positive wireless broadband connection growth overall, when we remove the Skinny Jump based increase and our commercial connections fell short of our aspirations, it’s delayed to our 5G rollout. During COVID lockdown, slowed some of our momentum. We picked up speed quickly in the second half and expect our progress to continue to accelerate across FY ‘23. As noted earlier, our cloud, security and service management revenues were also impacted by a range of factors and with a clear path forward to return to high levels of growth in FY ‘23.
Finally, our aspirations to have 5 customers onboard the Spark Health digital platform, Kete Waiora is on track, but slightly behind schedule with customers being onboarded now. So as we look ahead, we’re firmly focused on delivering what we said we would in the final year of our strategy. We’re well placed to adapt to an inflatory environment with resilient products and services well positioned in the market. We’re seeing acceleration in technology convergence as 5G, Multi-Access Edge Compute, better in AI, IoT and cloud computing combined to deliver powerful solutions to business problems. This is opening up new commercialization opportunities that Spark is already exploring in the market. Our investments in subsidiary MATTR, which specializes in digital identity and verifiable data reached the stage of commercialization during the year, with MATTR supporting a creation of the government’s COVID-19 vaccination certificate and securing additional contracts in offshore markets, with Swiftpost and the Association of Registrars of the Universities and Colleges of Canada around educational credentials.
To summarize, it’s been a big year. Really proud of what the Spark has delivered, we got strong market momentum and we’re on track to deliver our FY ‘23 strategy ambitions. We are maximizing shareholder value, which is to grow earnings and free cash flow and as we better realize the value of our passive mobile assets through the TowerCo transaction. We’re very happy to close out F ‘22 ranked #2 against international peers for total shareholder returns with a compound annual growth rate of around 12% for 3 years. And as we look ahead, we’re excited about the opportunity. We now have to harness the power of technology to help our customers transform to help Aotearoa transform to a low-carbon economy and to keep delivering great experiences to our customers and grow returns for our shareholders.
So, I’m now going to hand over to Stefan to talk you through our updated capital management policy and the financials. Thank you, Stef.
Stefan Knight
Thanks, Jolie and Mueller [ph] notably. So, I’m going to step through the updated capital management policy and framework and how we’ll apply that framework to the cash flow we’re generating and to the proceeds from our recent Tower deal. I’ll then move on to the financial summaries of what’s been a really good year. So — so, let’s get started.
So, the Board has reviewed Spark’s capital management policy and implemented a new framework that aims to grow long-term shareholder value through disciplined investment or returning excess capital to shareholders and maintaining financial strength and flexibility. In order to maximize shareholder value, the policy focus on growing dividends via growth in earnings and sustainable free cash flow. The Board has introduced its new policy to provide investors with greater clarity around the long-term approach to dividends, while noting that we’ll continue to provide annual dividend guidance on a cents per share basis as we do today. So, the new dividend policy will be to pay out 80% to 100% of free cash flow on a long-run basis and we’ve revised the definition of free cash flow to reduce the volatility associated with the current definition. Excess capital will be returned to shareholders using capital management options, such as on-market buybacks and special dividends.
The new policy, also focuses on investing for growth, both organically and via M&A that is earnings per share accretive over time. The policy outlines principles through investment to ensure that any funds invested are aligned to strategy, are NPV positive, deliver an ROI greater than Spark’s hurdle rate in year 3 to 5 and operate within a CapEx-to-sales ratio of 10% to 11% in the long run, while noting there will be times that we’ll exceed this ratio. Lastly, the new policy will now start to maintain financial strength and flexibility with a commitment to an investment-grade credit rating. Our current credit rating is an A-, but the policy provides the flexibility to move to a BBB+ shouldn’t be required to support growth in line with the investment principles.
Slide 14 outlines how the framework will be applied in FY ’23. So, Spark’s free cash flow growth and TowerCo proceeds will be used in accordance with this new policy. As we look to FY ’23, we have confidence in our ability to grow free cash flow to NZD460 million to NZD500 million, which funds our ordinary dividend. As such, and in line with any framework, we are guiding to a total FY ’23 dividend of NZD0.27 per share, 100% computed. In addition, following the completion of the TowerCo transaction, we intend to return up to NZD350 million to our shareholders through an on-market share buyback. However, that will be subject to market conditions at the time when we may investigate alternative return options. We currently anticipate completion of the TowerCo transaction in the first half of FY ’23 once OIO approval is received and we’ll look to begin shareholder returns after that.
In addition, we intend to retain another NZD350 million from investing in future growth opportunities, such as digital infrastructure, scaling our Spark Internet of Things and Spark Health businesses and new commercialization opportunities from emerging technologies. The remaining funds will be used to offset bit headroom resulting from the increased lease liability associated with our long-term agreement with TowerCo. So, following the completion of the TowerCo transaction, we expect our net debt-to-EBITDAI ratio to reduce before increasing again as we return funds to shareholders and investments are made. We think this approach strikes the right balance between returning capital to shareholders while also retaining funds to invest in growth and maintaining financial flexibility for future opportunities.
So, moving now to the results for the year and the summary for key financials as set out on Page 16 of the results presentation. Spark generated revenue of NZD3.72 billion, EBITDAI of NZD1.15 billion and net profit after tax of NZD410 million. Free cash flow was NZD296 million, and I’ll talk to this in more detail shortly. We’ve confirmed the H2 FY ’22 dividend of NZD0.125 per share fully imputed and in line with guidance. So, let’s now go through the key elements of those in a bit more detail, I can provide a bit more color on them.
So, starting with an overview of the key movements in revenue as outlined on Page 18. We’re really pleased with the return to top line revenue growth in a challenging environment. Mobile performance was once again a standout and we secured the highest revenue and connection growth in markets. Service revenues grew at 5.5% and was driven by growth in pay-monthly connections which were up 51,000 and pre-paid connections, which were up 30,000. It was particularly pleasing to see ARPU lift across the board with pay-monthly up NZD0.46 or just over 1% and pre-paid up NZD1.48 to around 10%.
Procurement revenues were the largest driver of revenue growth with significant Spark Health wins and ongoing demand for hardware and software to support working from home. Cloud, security and service management revenues grew 0.7%, which was well below our aspiration for 5% to 8%. Cloud revenues grew 1.7% as we saw strong demand for public cloud, however, this was offset by private cloud where we continue to see competitive pricing pressure. And while we had expected service management revenues to bounce back more quickly post the H1 lockdowns, the rate of growth was slower than expected and further restrained by delays to transformation projects and ongoing supply chain disruption.
Our broadband revenues were down NZD31 million or 4.6%, reflecting the impact of redesigning our plan line to be more competitive. Our future markets of Health and IoT grew strongly and now a material driver of growth. And it’s worth noting, our voice revenue declines included a cycle of nonrecurring wire maintenance charges as we fully accounted for these refunds in FY ’21. Stripping out the impact of these changes or these charges, our underlying voice revenue decline of around 12% is in line with previous trends.
So, if we shift focus to look at the operating expenses, they grew 3.9%, and that was primarily driven by increased procurement costs and in line with the associated revenue increases. Product costs, excluding procurement, were broadly flat, which is a really pleasing outcome in a high inflation environment. Labor costs were also broadly flat and actually slightly down if we have removed the impact of the acquisition of Connect8, which completed during the year. And the decrease in operating expenses was driven by lower network support costs and improved marketing efficiency. We continue to manage the impacts of inflation through the use of our multi-brand strategy, which ensures we’ve got compelling brands and offers for all of the segments of the market in price conscious times and we’ve refreshed pricing where appropriate and continue to take opportunities to automate our processes to drive cost efficiency while also running our usual targeted cost reduction programs.
So, with revenues up NZD127 million and costs up NZD96 million, we saw EBITDAI grow by NZD31 million, which is at the top end of our guidance range and a very pleasing outcome. The growth in EBITDAI mostly flowed through to NPAT, which was up NZD29 million or 7.6%. Depreciation and amortization remained broadly flat while finance income was down, so too is finance expense [indiscernible] interest was broadly flat too. There were no Southern Cross dividends received during the period, but with the Southern Cross NEXT cable now live, we expect to see a return to dividends from FY ’24.
Looking ahead to FY ’23, we remain on track to deliver the revenue and cost aspirations that we outlined as part of our 3-year strategy. In mobile, we expect the market to continue to grow and we’re well placed to capitalize on that growth. As borders reopen, we expect to see roaming revenues return to around 60% to 65% of pre-COVID levels and have built data assumption into our FY ’23 aspiration for mobile service revenue growth of 5% to 8%. The broadband market is expected to grow modestly as borders open and we see immigration return. And our ambition is to maintain our connection base and share in a highly competitive market. We’re on track to achieve our ambition for 30% of our customer base to be served by via wireless technologies and this continues to deliver significant input cost savings.
When we look at cloud, security and service management, we expect public and private cloud markets to continue to grow. And our focus will be on adding additional functionality to private cloud to differentiate from public cloud more effectively, we’re also refreshing our pricing to ensure it’s market competitive. We expect growth of 2% to 5% in FY ’23 as we lay the foundations for a return to high growth that is more in line with market trends in future years, particularly as our new data center comes online and starts to generate incremental revenues. The outlook for future markets of Health and IoT are strong. In Health, we expect to see growth of 10% to 15%. And while this is lower than FY ’22 growth, it remains a significant opportunity and takes into account the material reforms being undertaken across the sector over the next year. IoT connections are expected to grow to 1.2 million during the year, and that in turn, will support strong revenue growth in this space.
So, moving now to CapEx and free cash flow. FY ’22 CapEx was NZD410 million, up NZD10 million compared to the prior year’s end of NZD400 million, which included NZD51 million of spectrum. This was in line with guidance and the key drivers of investment are highlighted on the slides. In FY ’23, we expect to spend around NZD410 million in CapEx again with NZD50 million to NZD60 million of this focused on growth CapEx. Free cash flow for FY ’22 was NZD296 million, which was down NZD137 million on the prior year. This is below our aspiration of NZD420 million to NZD460 million and reflects NZD129 million of supply chain and temporary working capital impacts.
Supply chain impacts of NZD53 million were primarily across CapEx and inventory. We repurchased equipment early and in greater volumes to ensure greater holdings were available onshore. And also impacting free cash flow was NZD76 million of temporary accounts payable and accounts receivable impact where we saw late receipts from some large wholesale customers and some significant invoices were paid early as we migrated to a new ERP. These timing impacts have mostly unwound in July.
So, looking here to FY ’23 and in line with the new capital management framework accepted by the Board, we continued to focus on funding the dividend from free cash flow and aspire NZD460 million to NZD500 million, supported by ongoing EBITDAI growth. Accordingly, we have increased our dividend guidance for FY ’23 to NZD0.27 per share. It is with note and we made some adjustments to the way we define free cash flow, removing the impacts of working capital to provide greater stability while also separating out growth CapEx, which will be funded in the near term from the proceeds of the TowerCo transaction. Further details are included in the appendix of the investor presentation. End of 30 June, the net debt-to-EBITDAI ratio was 1.3x and consistent with S&P A- credit rating. And as we enter into a higher interest rate environment, we’re well protected and expect the rising interest rates to have a modest impact in the near term with only 35% of our debt portfolio subject to variable rates and only 1 maturity during the period.
Moving on to our FY ’23 indicators of success. So, to help investors monitor our progress, we’ve laid out the critical factors that will influence business performance over the coming year and we’ll report on our progress against these measures at the half and at the full year. The majority is self-explanatory and consistent with success factors we’ve laid out in the past.
So, moving on to guidance, for FY ’23, we have set guidance subject to mandatory change in operating outlook, is EBITDAI of NZD1.185 billion to NZD1.225 billion, and excluding the gain on sale from the TowerCo transaction. CapEx of around NZD410 million and a total FY ’23 dividend of NZD0.27 per share fully imputed. So lastly, we’re in the final year of our 3-year strategy. We’re very pleased with the strong financial returns and shareholder value created over the last 2 years. It’s been underpinned by the core capabilities and high performance culture we’ve been building, which continue to differentiate Spark in the market. We continue to see strong momentum in our future markets and investments we’re making in digital infrastructure will create new opportunities for growth. We’ll be developing a refreshed strategic plan and will share our next 3-year strategy at an Investor Day towards the end of this financial year.
So, that concludes the formal component of our presentation. And let’s move to questions. So operator, can you please introduce the first question.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Arie Dekker with Jarden.
Arie Dekker
First one, just on the EBITDAI guidance, which is in terms of growth is stronger than what we’ve seen in recent years. I just wanted to sort of explore a few of the drivers of that. In terms of the EBITDAI growth, how much would you put down to the reversal of some of the COVID impact you’ve had over the last couple of years, thinking in particular, roaming and some of the pent-up cloud work that sort of growth there slower in FY ‘22, in particular?
Jolie Hodson
When you look at that sort of guidance to hit, I think roaming and some of those — and factors we just talked about would be a reasonable component of that. As we said on the — earlier, there’s around about 65% — we’re anticipating 65% return of roaming into the results. We’re obviously only a month in, but we have seen sort of more than a month into year, but we have seen that through the July period. So for us, that’s a reasonable component of that shift.
Arie Dekker
In terms of overhead savings, do you expect them to contribute meaningfully in the growth in EBITDAI this year, something particularly around labor? Or do you think it’s more likely in the inflationary environment and with some of the stuff that you’re going on that you’ll be working hard to keep that sort of flat again?
Stefan Knight
Arie, Stef here. So look, if you look at our cost base, basically, the way we think about it is you’ve got about 20% of the cost base that is associated with regulatory inputs or regulated price inputs and we are able to manage that as we have already by passing some of that cost through in city for broadband plans. Another 35% of the cost base is tied up with long-term supply contracts. So, while there will be inflationary pressure, it’s phased in over multiple years as those contracts come up for renewal.
So, where we see the main potential impacts from inflation will be around labor and discretionary costs. And we have programs that work underway there, mainly around doing things like automation of some of our processes to help drive greater levels of efficiency. And then I think one of the things we would notice that we’ve got a pretty strong record of managing cost reduction programs. And obviously, we’ll be managing that pretty tightly this year in a higher inflation environment. So, I think that will kind of help offset the inflationary pressure and therefore, a guide to cost being more flat, and that’s the way we’re thinking about it.
Arie Dekker
And then just then in terms of broadband, which might be a little bit of a net offset. Obviously, you called out the reset and plans, which part of stabilizing the base, how much more of the impact we sort of saw in FY ’22, do you think will flow through FY ’23 in terms of negative pressure on revenue and margins?
Jolie Hodson
So, you’ll still see that flow through in terms of that shift because of having partly through the year. At the same time, we’ve obviously also lifted our price based on the higher input costs as well. So, you’ve got a combination of factors there.
Stefan Knight
There was a more stable base as well. Yes.
Arie Dekker
Just moving to the dividend and I guess, in particular, just how you’re going to be approaching this new concept of the growth CapEx going forward and sort of separating out for maintenance. So I mean, perhaps if we sort of particularly sort of looking at ‘22 and ‘23 as an examples, you’ve called out NZD25 million, which was related to accelerated 5G investment, I think. I mean when I look at your mobile network CapEx in ‘22, the reality is if you look at the average over the last 4 years, it wasn’t substantially greater in ‘22 than the average over the last 4 years, they’re not NZD25 million higher. So, how do you sort of — how are you going to sort of separate out what is growth investment, particularly also given the top line and EBITDAI has tended to be reasonably low single-digit sort of growth?
Stefan Knight
So, the way we think about — if you look at FY ’22, as you note, NZD25 million of it was related to what we call 5G acceleration. If you look back over the last 4 years, there have been various other times we’ve hit peaks, one of the local ones will be investing for Rugby World Cup. So, I think what we tend to think of mobile being more on a long-run basis, spending around that NZD100 million would be a kind of more common place for us. And so hence why we called out the NZD25 million as acceleration.
The other component of it was around NZD30 million of investment in data centers being both the upgraded Mayoral Drive and the extension of Takanini. We now look forward to FY ’23, that would also be — the majority of the NZD50 million to NZD60 million as indicated there is focused on data center spend. So, the way we kind of think about it is that what we call maintenance CapEx is more what would be kind of our more traditional BAU type activity and then those large lumpier investments or accelerations, other things that we’ll put in typically with CapEx on. And we will provide further detail and share that each period as we update.
Arie Dekker
And then, just on — I actually just also in terms of that change in approach beyond FY ‘23, do you think it will impact your ability to fully impute the dividends?
Stefan Knight
No, because when you look forward there also, what we’re trying to do is driving free cash flow growth and that’s driven by earnings growth. So, provided earnings are growing, then you’re generating taxable earnings, which in turn provided the imputation credits to support the dividend.
Jolie Hodson
Notably guiding beyond FY…
Stefan Knight
FY ’23, really.
Arie Dekker
I guess the only problem you sort of foresee is that if you’re still going to have some of the depreciation that you’ll be depreciating for tax purposes, but excluding the CapEx, it’s not going to sort of create issues?
Stefan Knight
No. Not that we believe.
Arie Dekker
So, the other thing, then I guess you’re sort of also indicating is that the portion of the CapEx spend sort of attributable as sort of growth, you would not expect that to be meaningfully higher than sort of the amount you’ve kind of called out for ‘22-‘23 at sort of 10% to 15% of the total envelope?
Stefan Knight
So, what we have said is that we’ve got NZD350 million that we’ve retained for investment and we have been working through opportunities in line with our investment criteria. And at that point, if we just — when we identify opportunities for that and we have provided further updates to the market, but what we’ve got line of sight to today is kind of that NZD410 million, which we have guided it. So Arie, probably at this point, just in fairness to some of the others on the call, we might move on to the next sort of questions, just so we make sure we give everyone a chance to ask.
Operator
Your next question comes from Kane Hannan with Goldman.
Kane Hannan
Maybe just the free cash flow guidance, I suppose, in ‘23 on your old definition, sort of NZD400 million to NZD450 million. Can you talk about how that compares to the NZD500 million target, you’re saying you’re on track for in February? So, should we be thinking about a working capital tailwind into FY ‘23?
Stefan Knight
Under the old methodology, yes, there would have been a working capital tailwind, but also that working capital is driving quite a level of volatility, which is a big part of the reason why we changed the definition because as I called out earlier, a portion of that hit in the last month of the year and then unwound in July, and that doesn’t actually represent the long run free cash flow of the business, which is why we moved to set in more in line with peers and to take out that volatility.
Kane Hannan
And then, just the divi policies. Well, just, also how to think about long-run basis, are you thinking where your free cash flow will be 2 or 3 years out? And I appreciate the comments around franking and imputation. But just trying to understand how you’re riding on those numbers.
Stefan Knight
So, when we refer to that kind of 80% to 100% on a long-run basis, what we’re trying to signal that is what we believe is a sustainable position that we can support. What we’ve noted that every year, we will give actual dividend guidance on a cents per share basis that will reflect the current cash and debt positions and everything else that we take into account when discussing with the Board who will give an annual position on that. But that’s why we think about it over that longer run period because we think that’s a sustainable position.
Kane Hannan
And maybe just one last one. Just I mean, how far away do you think we are before the net debt-to-EBITDA ratio stabilizes?
Stefan Knight
Probably, that’s a good question, obviously, it’s going to come down in the near term because of the proceeds. And it will ultimately depend on our ability to return those proceeds through the on-market buyback and then the investments we make, which will probably be over a few years before it will be expect to a more normalized level, I would say.
Operator
Your next question comes from Entcho Raykovski with Credit Suisse.
Entcho Raykovski
My first question is, hopefully, a pretty straightforward one. Just interested in how much of that NZD129 million of supply chain and temporary impacts you’re likely to see reversing in FY ‘23?
Stefan Knight
So, we’d expect the majority of the working capital. And I think a chunk of the supply chain impacts but not necessarily all. It’s very hard to read global supply chain issues a year in advance and so at the stage and to ensure be to make sure that we have adequate supply of both network equipment and inventories like [indiscernible] and modems and things onshore. So, we’d probably run slightly higher [indiscernible].
Entcho Raykovski
And then secondly, just the thinking behind putting in place on buyback as opposed to special dividends, sort of what are the factors with between the decision making?
Stefan Knight
So ultimately, we looked at what is the most effective way to return those proceeds to shareholders. At the moment, our intention is to do that buy, an on-market buyback, but clearly, it’s subject to market conditions at the time. And obviously, we have to make sure we have completion first. We’ll continue to assist against those market conditions. And we always reserve that right to invest at alternate options if the market conditions aren’t suitable.
Entcho Raykovski
And sorry, if I missed this, but what’s the exact quantum of the lease liability that you expect to crystallize as part of the TowerCo sale?
Stefan Knight
Look, we think that will be around about NZD350 million net change to the balance sheet. The actual lease liability will be a bit more than that, but we already have lease liability on there, which will disappear because some of those assets is transferring out to TowerCo. So, the new transaction is around NZD350 million. And then when you align that with some other adjustments with S&P, we believe we’ll make and other changes to headroom, we’ve retained around NZD200 million of the proceeds to offset that increase in the net liability.
Entcho Raykovski
And just a final one. Do you envisage having to contribute any further capital to TowerCo? I guess there’s a fairly aggressive build commitment of 670 additional sites. So, just wondering whether that will be internally funded or where you might be to chip in.
Stefan Knight
No, it will be internally funded. We won’t need to provide any additional funding.
Operator
Your next question comes from Wade Gardiner with Craigs Investment Partners.
Wade Gardiner
Just a couple from me. Your comments on the buyback versus a special and retaining the right to change the approach. Can you give a bit of color on what you mean by market conditions and sort of what price you think a buyback is less attractive or less special is more appropriate?
Stefan Knight
Look, we’re not going to go into a little bit of detail on that. I think we’ll just stick with the statements we’ve made today, which is that we’ll see it relative to the market conditions at the time.
Wade Gardiner
Just a couple of things around — you talked about this NZD350 million to accelerate CapEx and in particular, the 5G rollout, what would that sort of look like on a, say, a 2-year to 3-year view in terms of sort of the population targets or et cetera?
Jolie Hodson
So, if you stand back and think about the population targets, we put out a 90% population coverage by the end of calendar 2023. Obviously, in this last year, we’ve had the implications of some of the COVID restrictions in which there were several months for which you couldn’t actually do product roll out. So, we’re looking to accelerate through this mix, I guess, 18 months to the end of the calendar year. So, that would require investment there. When we look holistically at the digital infrastructure that we’re talking around 5G, but also around data centers that we’re doing in IoT and then we would see emerging technologies as a combination of all of those factors we consider in terms of investment levels.
Wade Gardiner
Can you just clarify the — your guidance and the impact of the TowerCo sale? My understanding it’s essentially because most of that set there is leased assets, it was sort of already below the line anyway. And so the TowerCo sale doesn’t really impact your EBITDA number in relation to the guidance that you’ve given. There’s not a like-for-like adjustment we should be making.
Stefan Knight
Correct. And if you look at the appendix to the…
Jolie Hodson
Slide 30 of the of the presentation has a comparison of, shows you what FY ‘23 and ‘24 would look like, the implication on, the ongoing operations at TowerCo, it shows it’s pretty [indiscernible]. Obviously, there will be a one-off gain on the sale, which is obviously outside the guidance that we talked about here.
Operator
Your next question comes from Aaron Ibbotson with Forsyth Barr.
Aaron Ibbotson
I’ve got a few questions. My first one was just you sort of kept your long run CapEx guidance of 10%, 11% of revenues. I assume this includes growth CapEx, at least I couldn’t see anything that suggested the contrary. So I just wondered, is there any chance you can share with us.
Stefan Knight
Yes.
Aaron Ibbotson
So, my question basically then is, what would it be for maintenance CapEx and particularly considering lack of tower investments? Would you be willing to give a slightly lower target as an idea?
Jolie Hodson
Like one clarification here. So, yes that is correct importance but there may be the whole point of the growth CapEx is sometimes it could be lumpy. So, there may be an individual year that has a higher percentage, but an average, we tend to limit it at the long-run capital.
Aaron Ibbotson
That has been crystal clear this morning. But I just was hoping that you might be willing to share a maintenance CapEx number or excluding growth that you see as a steady state.
Stefan Knight
So, you can see that in FY ’23, it’s around the NZD350 million mark. And then, I think a better way to think about it is that while we’ve got those additional proceeds, the overall CapEx envelope will increase but on a low run basis, 10% to 11%, the total CapEx to sales is kind of still a good long-run assumption to work towards.
Aaron Ibbotson
And then, just to clarify your answer to Wade’s question on the TowerCo. So these numbers we see on Page 30, have they been included in your guidance for half of the year or something like that?
Stefan Knight
Yes, they have.
Aaron Ibbotson
Finally, just a question on your cloud, security and service revenue growth of 2% to 5%. I mean, considering the comments you’re making about COVID having had an impact and general lockdowns in sort of this FY ‘22 just reported, it does seem a little bit low, considering we’re sort of lapping a quite difficult year. Is it conservative? Or is there some continued headwinds that you’re sort of taking into consideration?
Stefan Knight
Aaron, I think it’s worth kind of giving a bit of context. So, if you look at FY ’22, as you note, there has been a number of factors, so lockdown and some supply chain issues, but also there is still price pressure in this market, again, particularly in the private cloud space. And when we look ahead, part of the driver or the change we need to make is to continue to refresh that pricing. And so we’re pretty clear to reassess or to get the growth that we want, we need to refresh the pricing, add some functionality to the policies and also drive some — bring on the right skill capability in a tight labor market. Those other factors, which mean that the — that growth rate is slightly lower than you’ve seen in other years as we allow time for that to rebuild.
Operator
Your next question comes from Brian Han with Morningstar.
Brian Han
Just a couple of questions. Firstly, can you please talk a bit more about the increase in mobile gross margins, the sustainability or the fall in those product costs? And what do you think your underlying mobile EBITDA margins are?
Jolie Hodson
Maybe if you could just break them into the different components. If you think about the mobile margins effectively, what we’ve seen is the use of both data and AI to get to target and understand the products and propositions our customers are looking for. Certainly, in consumer space has worked well. And that means that we’re only offering those services that customers want and therefore, there’s a lower cost there. We continue always to be looking at how we create efficiencies in our overall proceeds. So, all of those things, when you sit back and think about mobile margins, will continue to exist again. We also touched on the fact that we have returning as well, and so that will have an improvement on margins as well.
Stef, I don’t know, if you wanted to add some.
Stefan Knight
No, I think probably just the only other thing we’ve done is around to manage margin, we’re also mindful of how we manage our value-added services and making sure that the events that we support we have the capabilities that our customers are using. So, nothing to add other than that.
Brian Han
Just secondly, on mobile, can you please talk about the drivers behind the specifically pre-paid ARPU increase? I mean this is the second consecutive year of double-digit ARPU growth in pre-paid.
Jolie Hodson
We’re seeing that broadening of people pitching for data in the same way that we see it in our pay-monthly base as well. So, in pre-paid it’s greater data usage, which is leading to that increase in ARPU there. That’s the main driver.
Brian Han
And finally, Stefan, just a little work question for you. Did you change how you calculate the contribution margin for cloud and security?
Stefan Knight
No. Maybe we can take offline, if you want to go through it in more detail. But no, we haven’t changed anything in terms of contribution margin.
Brian Han
It just seems 400 basis points higher, but yes, I’ll take it offline.
Operator
Your next question comes from Phil Campbell with UBS.
Philip Campbell
Just a few questions from me. The first one, Stefan, was just — I think it’s one of the slides talks about the possibility of relaxing the credit rating to BBB+. So, just wondering if you can give us a bit more detail around when you think that would happen and what would kind of cause that to happen? And maybe some of the thinking about why? Because you have been — we did obviously to an A- credit rating for quite a while.
Stefan Knight
Yes. So look, you’re right, we have had A- for quite some time. You’ll see that obviously our new policy is based around financial strength and flexibility. And so we noted that the option to move to that. But if you look at the reality of where we are today, we obviously just — once the TowerCo transaction completes, we’ll obviously have a significant amount of proceeds. So, it’s really more around creating flexibility but also being clear that at this point in time, there’s nothing on the horizon that would see us moving away from that in the current for us [ph].
Philip Campbell
Just another question just on mobile just in terms of 5G. So, I’d just be interested in I suppose a couple of things on 5G. One is when are we expecting an update from the government in terms of the 5G spectrum allocation? And then the second one is just the 90% population target by the end of next year. And that should be achieved on 3500 spectrum? Or does that assume that you’re refarming some of the 700 megahertz spectrum?
Jolie Hodson
So, I’ll answer on both of those questions, we don’t have a definitive date when we can seek announcement from the government. They understand it’s very important for us in terms of continuing the rollout. To the point of, can you do it all on the 3500, 600 megahertz and other of those [indiscernible] are important to re-farm but when you think about rural, particularly capacity and coverage. So, those are important considerations in terms of achieving that 90% range.
Philip Campbell
And I suppose, just obviously, one of the key products with that 5G rollout is going to be wireless broadband. Obviously, it sounds like the modem prices are still pretty high. Like do you — what’s your kind of expectation in terms of those modem prices and when you can be a bit more aggressive in terms of that 5G wireless broadband rollout?
Jolie Hodson
I think of the old technology, what you see is that reduces over time is take up less than, of course, globally, we will be more component of the global outlook on that. So, it isn’t holding us back to save, probably more linked to the role and launch in different markets and keep moving on that and the locations, and we’ve talked about what we’re doing there on acceleration we’re already seeing in this year. So, we’re looking at driving that through. And like any time you add any sentiment to the marketplace, too, is about turning out and making sure it’s in that outlook in the right way. So, that’s been a bit of balance and leading over the last 12 months. But you can see we’re also starting to try to understand the line as well. So, we did that in rural with PPG [ph] license. So, it’s much borrowing millimeter wave picture. So, for us, it’s just a continuation of the growth behaving opportunities that exists, particularly, the enterprise, if you think about that.
Philip Campbell
And sorry, just 1 last question, just for Stefan is, in terms of — in terms of coming up with the NZD350 million in terms of the share buyback, can you just kind of walk us through the thinking around kind of how you come up with that number? Because obviously, it looks as though the other NZD350 million is earmarked for growth. Obviously, you’ve got NZD50 million to NZD60 million earmarked this year. But yes, I’d just be curious to see whether we could see any changes in that NZD350 million depending on what the growth CapEx profile is like over the next few years?
Stefan Knight
So, when we look at the proceeds of broadly the NZD900 million and as I mentioned early, we recognized early on that we need to retain a bit about NZD200 million to offset the lease liability, which then left us with broadly NZD700 million of seedless proceeds I used to call it. And so within that based on the new capital management framework, we looked at how do we make sure that we maximize value for shareholders. We’re also retaining funds to invest for growth. We looked at precedent transactions. We got some external advice and we felt that a 50-50 ratio represented a fair balance between meeting the needs of all of those objectives. So, that was kind of the thought process we went through around aligning as to how we put those funds, so to speak.
Philip Campbell
And maybe just following on from the earlier question, because again, I suppose it’s quite interesting around the credit rating changes and because based on these metrics, basically, the net debt-to-EBITDA ratio is actually going down in the short term. So, yes, I suppose it’s interesting that you are potentially related to BBB+ when you’re going to be well within A-, so…
Jolie Hodson
I think maybe to the expectation, so what we’ve said is a set of principles and policies as we look to get that should service plus more for 1 or 2 years. And I think all we’ve indicated here that investment-grade rating will always be important to us. What we are saying there is if there were growth opportunities or other things that we saw that we felt we could get an appropriate return, then we will consider a movement. It’s not an indication that we are moving today or next year. So, I think that’s probably just the differentiation I’d make. It’s just more that we will be open with a lot of growth options.
Operator
Your next question comes from Lance Reynolds with Aspiring.
Lance Reynolds
Just had a question on top line. Historically, the company at various forms, has always talked about that kind of real, maybe maybe a little bit backwards in real terms at the top line. I see now inflation is up the other day and your revenues are up 4%. When you look forward, the has strategy changed, given that payout ratio? Or you still targeting to try and hold inflation or just — towards just come below the top line?
Stefan Knight
Lance, I don’t want to give — we’re trying to give revenue guidance or what you think for FY ’23. I think what we’ve previously seen is that we still see good opportunities for revenue growth across our key markets and our future markets. And as our voice business becomes a smaller component and those headwinds become a bit less. So,our aspiration has been always around what we call small g kind of growth so difficult still to keep that top line growth.
Lance Reynolds
But the last time you guys mentioned long-term targets, and I’m assuming they haven’t changed because you haven’t restated them. Wast is like you alluded to nominal revenue growth. Am I wrong there? Because you’re real.
Stefan Knight
That’s right, that’s right. Yes.
Operator
There are no further questions at this time. I’ll now hand back for closing remarks.
Jolie Hodson
That’s all. Thank you, everyone, for the call.
Stefan Knight
Thanks, everyone.
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