INTERVIEW WITH VAUGHAN BOWEN, MANAGING DIRECTOR OF M2 TELECOMMUNICATIONS GROUP LIMITED (MTU)

“MTU - 2008 Full Year Results”

http://www.brr.com.au/event/50115

TUESDAY, AUGUST 26 2008, 1:30 PM.

            BRR    Welcome to Boardroom Radio.  Today I’m speaking with Mr. Vaughan

10                    Bowen, the Chief Executive Officer of M2 Telecommunications.  Vaughan, thanks for joining us today.

            MTU     Thanks, for having me James.

            BRR    Now, M2 has today released the four year results to the ASX, can you start

15                    by giving listeners an introduction and an overview of the highlights of this results.

            MTU     Yes, certainly, James, and as I would say we’re very pleased to be able to release these results to the market. It is by far, far and a way, most successful year in financial terms in the business as nine year journey. We’ve

20                    recorded, as the relations describes, we’ve recorded a profit increase, Net Profit After Tax (NPAT) increase of over a 114% taking our profit up to $5.2 million compared something in the order of $2.4 million last year.  Our EBITDA is up, to over $9 million; our revenues, broken through the $100 million revenue level to just over a $109 million, at $43 and a half million last

25                    year. So on every key metric that our business as financial performance would be judged, M2’s had a very, very strong year. In fact, we didn’t have sector which is growing at the in the most single digits, has been the joke of sector.  Our business has grown all of its key metrics by somewhere between 114% and 115%. So it’s been a stunning year for the company of a year of

30                    great change in terms of growth in the business, obviously evidenced by the numbers but also a team of people has expanded to a nearly 3-fold to 175 individuals.  Yeah, across the board, it’s been a very, very big year. In fact, the numbers as reported are terrific but they are… in fact, we’re impacted this year by a one of non-cash charge to the account which if, even if normalized,

35                    in the very commerce, would actually improve our results somewhat as the released reports. In fact. there are in Net Profit After Tax (NPAT) normalized for that one of non-cash cost would increase to approximately $5.8 million or year-on-year in increase $75.7 million an increase of about 139% on last year.  Our EBITDA would just be….would rate to just on the $10 million,

40                    150% plus increase and earnings per share would, in fact, be up year-on-year by 83% but that normalize to just ….but even irrespective of that, it’s a fantastic year of on all rounds. So we are thrilled and certainly, I speak to the Board of Directors when I say that we’ve had a great year. 

45        BRR    Now Vaughan, you spoke that indicated that sales revenues has pushed through $109 million, how does this place you amongst your tier or your sector.

            MTU     With our revenues at the level of they’re at now, the way the telco industry works is basically network owners and there’s partial network owners and then there is a network reseller both but that our network….have used the network infrastructure of the carriers such as Telstra and (inaudible) (00:03:14) , we fall into that third tier or third category and as it stands right now, our business is quite substantially the largest by quite a substantial

5                      margin, the largest in that tier, in that third tier. We have, as you mentioned, reported revenues of $109 million plus but our annualized revenues of the business on a run rate basis today are well in excess of that so, yes we do hold that number one position within our tier and we have no aspirations to become a network owner. Our business is finding a very successful and

10                    profitable model in the sector that we are part of, the industry that we operate and we just intend to further consolidate our position in the network reseller tier.

            BRR    And, Vaughan, how did your acquisitions throughout the fiscal year impact

15                    upon the results?

            MTU     They certainly contributed. We made two notable acquisitions during the year.  We purchased another small publicly listed company by the name of Orion Telecommunications in October last year and we bought the whole sale network gaskets of Commander Communications Company called Unitel

20                    Australia in February this year.  So, both of those business have contributed only in a per rata sense about nine months and four months, respectively, so they haven’t contributed for the full year. Hence, the run rate earnings of the business are at a higher level going into the new financial year. They contributed something approaching half of our growth to the year so that’s

25                    obviously from a converse evidences that the business’ organic growth has been very, very strong during the year.  We’ve grown our top line by something in excess of $66 million for the year and less than $30 million of that was a ….half of that was coming from the acquisitions. So we’ve shown that the underlying business has grown by nearly 8%. So that’s irrelevant to

30                    point that out, James, because business is obviously grown by acquisition, by doing transactions, up on transactions, but if the underlying business isn’t growing on advance steam that potentially creates (inaudible) (00:05:23) within the business but we can. We’re pleased that we’ve achieved both acquisition and organic growth successfully during the year.

35

            BRR    Vaughn, looking specifically at your wholesale division, you’ve indicated growth of over 400% for this year.  Things work, you know, are very strong…strong results, what do you attribute this to?

            MTU     First and foremost, wholesale at wholesale division of our business is strong

40                    in every regard.  It is by far our most strategic arm of the business. We only started the wholesale division two years and two months ago,  I think, as of today. In the business, it’s approaching $90/$95 million in annualized revenues standing in today so from the standing start, it’s just been a fantastic arm or extension to our business. The strength of the wholesale

45                    comes from the fact that we are able to service the smaller and medium sized telecommunications companies and Internet service providers in a manner which the major carriers or they’re called T1 network owners are not able to. They either elect not to because they would prefer to deal with a larger base, a larger sized customers such as ourselves or there are other impediments to dealing directly with the larger carriers.  So we fill a void within the telecommunications wholesaling market that has just delivered us fantastic growth year-on-year. It’s been a terrific balance to our business because we’ve had a successful retail business focused on the small enterprise based

5                      for several years, but to have brought the wholesale business seem now to be, in the last financial year, in fact larger than our retail business is greater than a nice portfolio balance to our business whereas before we were just focused in one market segment.  So, the business has a two pillars of earnings and growth at the moment which is good from a security and a

10                    forward stability perspective,

            BRR    Now Vaughan, looking at M2’s retail division, it’s also showing significant, strong revenue growth following the acquisition of Orion Telecommunications is obviously a pleasing result on the retail side as well?

15        MTU     Yes, absolutely.  Our retail business had been reasonably flat for the couple of years prior to the acquisition of Orion. We were on somewhat starved of growth capacity in physical terms, in terms of our call center capabilities and the management marketing team that we were…that we needed to work up in order to grow that business positively again. The Orion acquisition, which

20                    incorporate Southern Cross Telco, which is a network recently telco that’s been running in Australia for about 12 or 13 years very successfully in that segments. That brought in that missing talents, that brought in the additional capacity we’ve inherited through that acquisition, a large call center facility in Hobart in Tasmania, which has given us that scope of growth.  It obviously

25                    added  large based customers, as well, we’ve added something in the order of $25 million annualized in new revenues, but more as importantly gave us that capability to generate further growth to cross sale and up sale to our existing customers to show them up and sell them more products. Compared with…as our industry refers to a greater share of wallet, we’ve got

30                    our capabilities now that we didn’t have 12 months ago.  So, the Orion acquisition, in particular the Southern Cross subsidiary of that Orion acquisition has been a terrific shot on the arm for our retail business and we’re expecting 2009 to deliver net growth once again in that area over and above the new customers that we’ve come… that we’ve inherited through the

35                    acquisition.

            BRR    Now, your team has grown substantially to support the business growth, how have they added up to the changes within the business?

            MTU     Yes, as I mentioned at the outset, our business chain this time last year

40                    was… numbered 66 people in this. Standing here now, it numbers in excess of 175 people so yes, it’s been …our business had a steep change in almost every area but on the team front, it has been a dramatic change nearly a tripling of our personnel.  How they adapted unbelievably a team that we had within the business before a year of growth and the couple of acquisitions are

45                    mentioned. The core group of that team are still together and united, have adapted to what is now much bigger business incredibly well and probably most as pleasingly. The change, the core management and senior and middle and junior management team as within the businesses of the we’ve acquired have all embraced the acquisition volumes to and have become a key part of our overall business. The level of integration between the managers of the Southern Cross   operation, the managers of the Unitel operation and the M2 business itself is quite phenomenal.  We’ve been very, very focused on culture as a core strength of our business for many years

5                      and we’ve done our very best to maintain a loyal group of people but acquisitions can upset that apple cart. Standing here now, I’m thrilled to say that we have not lost a co-member of our management team.  Those within the business, prior team managers, and operatives of the businesses we’ve acquired with the business  are paid up and passionate so we have …I have

10                    got much gratitude to the team and the much enlarged team of M2 and it certainly as a business that does not have a network infrastructure, intentionally does not have a network infrastructure. Our core asset  undeniably is our team of people. Well it has a busy year and has just done fantastically.  

15

            BRR    Now, Vaughan, say some good news for shareholders, M2 has declared an eighth consecutive dividend, this is coming at more than 70% of NPAT, quite remarkable particularly given the growth orientation of the company.

            MTU     Yes, it is something that we are very proud of, it is our eighth consecutive

20                    dividend and it’s the dividend year on year is up some 67% from the time period last, over the full year last year.  I thought we will declare a 5 cent fully franked dividend compared with 3 cents the year before. So, yeah, our business has always prided itself on being able to generate free cash flows and being able  to return those free cash flows to our shareholders. We’ve

25                    been able to find this, in excess of four years at balance, between strong growth. We certainly have achieved…we’ve grown by 80% compound annually on the top line of the business capital last 4 or 5 years  but we’ve been able to manage that balance, that growth with good growth in earnings and very strong cash flows and evidenced by, I think we’ve averaged 73% or

30                    74% of Net Profit After Tax (NPAT) as what we’ve paid out period on period for eight consecutive periods. So a consecutive half for four years. So, yeah, it’s certainly put us in a unique category in our sector and generally in small cap growth companies to be able to balance a strong tough long growth with strong bottom line growth and dividend yield is something that we’re very

35                    proud of. We have every intention for that to continue about basically by forecasting on the quality of our customers so that we have good credit quality customers and we’re still managing our cash flows on a day-to-day basis.

40        BRR    Just to finish up, Vaughan, I understand M2 has given some guidance for FY09, could you give us some insight into what this guidance is?

            MTU     Yes, we’ve touched on our expectations further for the 2008-09 financial year within the relations within our result presentation that we’ve released today.  In summary, we’re expecting the business to have another year of fairly

45                    dramatic, double digit growth.  We’re expecting something in excess of 40% growth across all of the key metrics of the business whether it be the top line or the… most importantly, the net profit after tax line and also in our earnings per share and potentially also our dividends capability will work from that as well. So subject to board approval, that’s normal, but here we have another year of big (inaudible) (00:14:06) in store and that growth is very much focused to run our organic business.  We’re not factoring in any other acquisitions or any bought on earnings. We’re looking at the underlying strength of our business now as a much larger enterprise.  We have our

5                      wholesale and retail arms, as I’ve mentioned, both fully resourced and strong forward, as mentioned, so we don’t  believe we’ve been too heavy by suggesting that the business can deliver another year of fairly dramatic growth. As I touched on earlier,  change is relative to the sector.  We’re talking about a year of 40 something percent growth within our sector that is

10                    growing, in terms of who you speak to. They call it 4 or 5% so it’s a ….we’re, we have an understanding ahead of the curve.

            BRR    Well, Vaughan, congratulations on a very solid result and thank you very much for taking the time to speak with Boardroomradio and update shareholders and potential investors and interested parties on the

15                    performance of M2 Telecommunications.

            MTU     Thanks,James, and thanks for taking time.

INTERVIEW CONCLUDED

Contact brr@brr.com.au for more information

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