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Telstra A nnual R eport 2018 Telstra Annual Report 2018 Our 2018 reporting suite We appreciate that our shareholders and other stakeholders are looking for concise and up to date information about their company and that they have many and varied options and digital platforms to enable them to access information. In 2018 our reporting suite includes our Annual Report, our Corporate Governance Statement and our Bigger Picture Sustainability Report. Our 2018 Annual Report Our Annual Report describes in a concise manner our strategy, our financial performance and our remuneration practices. The sections of our Annual Report titled Chairman and CEO message, Strategy and performance, Our material risks, Outlook and Full year results and operations review comprise our operating and financial review (OFR) and form part of the Directors’ Report. Our OFR, Directors’ Report and Financial Report were released to the ASX on 16 August 2018 in the document titled ‘Financial results for the year ended 30 June 2018’ which is available on our website at telstra.com/investor. Our 2018 Corporate Governance Statement Our 2018 Corporate Governance Statement (CGS) provides detailed information about governance at Telstra. Our CGS, together with our ASX Appendix 4G which cross references the ASX Corporate Governance Principles & Recommendations to information in our CGS and on our website, is available online at telstra.com/governance. Our 2018 Bigger Picture Sustainability Report Our 2018 Bigger Picture Sustainability Report provides an in-depth look at Telstra’s approach and performance in relation to our most material social and environmental topics, is available online at telstra.com/sustainability/report. Telstra Corporation Limited ABN 33 051 775 556 Our business 2 FY18 highlights 2 Governance at Telstra 3 Sustainability 3 Chairman and CEO message 4 Strategy and performance 8 Our material risks 12 Outlook 14 Full year results and operations review 16 Board of Directors 26 Senior management team 28 Directors’ report 30 • Remuneration report 34 Financial report 58 • Financial statements 59 • Notes to the financial statements 64 • Directors’ declaration 140 Shareholder information 146 Reference tables 149 Glossary 152 Contact details and Indicative financial calendar 156 22 FY18 highlights Total income up by 3% to $29.0 billion Reported EBITDA down by 5.2% to $10.1 billion FY18 total dividend of 22 cents per share Net profit after tax down by 8.9% to $3.5 billion Financial performance Added 342,000 retail mobile customers, 88,000 retail fixed broadband customers and 135,000 retail bundles Our customers Added 67,000 Belong mobile customers in the price-conscious market segment Launched second generation of Telstra TV, bringing together free-to-air, pay TV and on-demand streaming 2.3 million Sports Live Pass users – up by 73% year on year Almost 4 million active 24/7 App users – up by 22% year on year Reduced truck rolls in 2H18 by 7,000 with NBN Get Help platform 307 new mobile base stations under the Federal Government’s Mobile Black Spot Program, bringing our total to more than 450 First Australian carrier to offer both Narrowband and Cat M1 IoT technologies Opened 5G Innovation Centre and launched world first precinct of 5G-enabled Wi-Fi hotspots World class technology Helped around 1 million vulnerable customers stay connected 24% reduction in greenhouse gas emissions intensity from FY17 Sustainable engagement score of 74 in Employee Engagement Survey Sustainability Our business Our purpose To create a brilliant connected future for everyone. Our vision To be a world class technology company that empowers people to connect. Our brand To create better ways to empower everyone to thrive in a connected world. 3 Governance at Telstra Our governance framework plays an integral role in supporting our business and helping us deliver on our strategy. It provides the structure through which our strategy and business objectives are set, our performance is monitored, and the risks we face are managed. It includes a clear framework for decision making and accountability across our business and provides guidance on the standards of behaviour we expect of each other. We comply with the third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. Sustainability Our goal is to embed social and environmental considerations into our business in ways that create value for the company and our stakeholders. Our Sustainability Strategy responds to the topics that are most material for our business, the areas in which we have the expertise to make a meaningful impact, and where we see opportunities to use innovative, tech-based solutions to help address major societal challenges and opportunities. Our 2018 Corporate Governance Statement, which provides detailed information about governance at Telstra, is available on our website at telstra.com/governance Our 2018 Bigger Picture Sustainability Report, available online at telstra.com/ sustainability/report, provides a transparent overview of our progress and performance in relation to our Sustainability Strategy over FY18. The report also details the work we are undertaking in support of the United Nations’ Sustainable Development Goals (SDGs). Our governance framework includes: • open, clear and timely communications with our shareholders • a skilled, experienced, diverse and independent Board, with a Board Committee structure suited to our needs • clear delegation, decision making and accountability frameworks • robust systems of risk management and assurance • Telstra Values, Code of Conduct and policy framework which explain what we stand for as an organisation and how we will conduct ourselves as we work together to deliver our strategy. Telstra Board Audit & Risk Committee Remuneration Committee Nomination Committee Chief Executive Officer Our People Shareholders We are committed to excellence in corporate governance, transparency and accountability. This is essential for the long term performance and sustainability of our company, and to protect and enhance the interests of our shareholders and other stakeholders. Everyone connected Networks Cl im at e ch an ge an d en er gy En vir on me nt a nd re so urc e e f c iency Ethics and governance Digital futures En vi ro nm en ta l s olu tio ns Thriving in a digital world Responsible business Tec h f or go od 4 Our financial results Despite the challenges in the market in FY18 our results are in line with guidance and show strong subscriber growth in both fixed and mobile. The Board announced a fully franked final dividend of 11 cents per share bringing the total dividend for the financial year to 22 cents per share, comprising an ordinary dividend of 15 cents and a special dividend of 7 cents, in accordance with the dividend policy announced in August 2017. On a reported basis our Total Income grew by 3.0 per cent, Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) reduced by 5.2 per cent, and Net Profit after Tax (NPAT) reduced by 8.9 per cent. We saw strong customer growth for the year and good progress on our productivity program, but the continued downward pressure on EBITDA and NPAT caused by the further rollout of the nbn and lower Average Revenue Per User (ARPU) reinforced the importance of our T22 strategy. During the year we added 342,000 retail mobile customers, 88,000 retail fixed broadband customers and 135,000 retail bundles. However, challenging trading conditions are expected to continue in FY19, including ongoing pressure on ARPU and further negative impact of the nbn network rollout on our underlying earnings. Choosing to lead – T22 On 20 June 2018 we announced our new T22 strategy to lead the Australian market by simplifying our operations and product set, improving customer experience and reducing our cost base. T22 will deliver six key outcomes covering customer experience, simplification, network superiority, employees, cost reduction and strengthening the balance sheet. We have already made strong early progress on the new strategy, launching new mobile plans with no excess data charges, announcing a new organisational structure, leadership team and operating model. Telstra InfraCo has also been established as a standalone business unit with pro-forma financials provided as part of the financial results. For more information on T22, please refer to the Strategy and performance section of our Annual Report. Andrew Penn (CEO), John Mullen (Chairman) Chairman and CEO message Dear Shareholders, Companies are defined by how they respond in challenging times and there is no doubt Telstra, and the telecommunications industry globally, is operating in times of enormous challenge and change. On one hand demand for our core products and services continues to grow. Telecommunications networks have become some of the most important pieces of infrastructure in the world today. On the other hand, competition has never been more intense, our market dynamics are shifting rapidly, and customer expectations are changing. These challenges are not unique to Australia or to Telstra. However, a unique challenge we do have is the nbn™ network. This is having an enormous impact on our business – wholesale prices have risen, meaning we and other industry participants are facing a fixed-line market where reseller margins are rapidly reducing. At the same time, competition in the mobile market is increasing with the expected entrance of a fourth mobile network operator. These factors have influenced our performance this year and underpinned our decision to take bolder steps to transform the business through our new Telstra2022 (T22) strategy. We are determined to meet the challenges we face, and to continue to lead in the market, just as we have always done